##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K





|(MARK ONE) |  |                                                                                                                              
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002

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: 000-26541

GADZOOX NETWORKS, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                       |  | 77-0308899                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)

STEPHEN DALTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5850 HELLYER AVENUE
SAN JOSE, CA 95138(Address of principal executive offices including Zip Code)

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 360-4950

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.005 PAR VALUE

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

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $6,146,909 as of June 26, 2002, based upon the
closing price on the NASDAQ National Market reported for such date. This
calculation does not reflect a determination that certain persons are
affiliates of the Registrant for any other purpose. The number of shares
outstanding of the Registrants common stock on June 26, 2002 was 47,283,920
shares.

***In accordance with Temporary Note 2T to Article 3 of Regulation S-X, this
filing includes unaudited financial statements in lieu of audited financial
statements for the year ended March 31, 2002 because the issuer was unable to
obtain from Arthur Andersen LLP a manually signed audit report in the timeframe
agreed upon at the commencement of the annual audit engagement. Please see
page F-1 of this annual report for more information regarding the inclusion of
unaudited financial statements in this report.***

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for its 2002 Annual Meeting of
Stockholders (the Proxy Statement) to be filed with the Securities and Exchange
Commission are incorporated by reference to Part III of this Annual Report on
Form 10-K.





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TABLE OF CONTENTS



|              |                                                                                               |                                    |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | ---------------------------------- |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                         
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              |                                                                                               | CONDENSED BALANCE SHEETS          
|              |                                                                                               | STATEMENTS OF OPERATIONS          
|              |                                                                                               | STATEMENTS OF STOCKHOLDERS EQUITY
|              |                                                                                               | STATEMENTS OF CASH FLOWS          
|              |                                                                                               | NOTES TO FINANCIAL STATEMENTS     
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT 10.9 
|EXHIBIT 10.10
|EXHIBIT 10.11
|EXHIBIT 10.12
|EXHIBIT 10.13
|EXHIBIT 10.14
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 10.20



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##### Table of Contents



GADZOOX NETWORKS, INC.

FORM 10-K

INDEX

|         |  |          |  |                                                                                       |  |  |     |  |  |      |    | 
|-------- |  | -------- |  | ------------------------------------------------------------------------------------- |  |  | --- |  |  | ---- | -- | 
|         |  |          |  |                                                                                       |  |  |     |  |  | PAGE
|         |  |          |  |                                                                                       |  |  |     |  |  |     
|PART I   |  |          |  |                                                                                       |  |  |     |  |  |      | 1  | 
|         |  | Item 1.  |  | Business                                                                              |  |  | 1   | 
|         |  | Item 2.  |  | Properties                                                                            |  |  | 7   | 
|         |  | Item 3.  |  | Legal Proceedings                                                                     |  |  | 7   | 
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 7   | 
|PART II  |  |          |  |                                                                                       |  |  |     |  |  |      | 8  | 
|         |  | Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  |  | 8   | 
|         |  | Item 6.  |  | Selected Financial Data                                                               |  |  | 11  | 
|         |  | Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  | 13  | 
|         |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risks                           |  |  | 33  | 
|         |  | Item 8.  |  | Financial Statements And Supplementary Data                                           |  |  | F-1 | 
|         |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |  | 34  | 
|PART III |  |          |  |                                                                                       |  |  |     |  |  |      | 35 | 
|         |  | Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |  | 35  | 
|         |  | Item 11. |  | Executive Compensation                                                                |  |  | 35  | 
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 35  | 
|         |  | Item 13. |  | Certain Relationships and Related Transactions                                        |  |  | 35  | 
|PART IV  |  |          |  |                                                                                       |  |  |     |  |  |      | 35 | 
|         |  | Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |  | 35  | 





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PART I

In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that relate to future events or future performance
such as the sufficiency of our capital resources to fund continuing operations;
statements relating to the transition of the storage area network, or SAN,
industry to 2 gigabit speeds; our commitment to continue to devote substantial
resources to product research and development and to develop new products with
greater capabilities that support new industry protocol standards; our
commitment to continue to work with industry leaders to promote SAN
architecture and develop new products; our intentions to enter into additional
distributor and reseller agreements in the U.S. and internationally; our
intentions to continue to develop reusable elements; our intentions to continue
sponsoring educational seminars; the percentage of our fiscal 2003 sales that
will be derived from new products; our intentions to expand our sales and
marketing operations; anticipated future levels of general and administrative
expenses; and the evolution of SAN capabilities and the market for SAN
products. In certain cases you can identify forward-looking statements by
terminology such as may, will, should, expects, plans, anticipates, believes,
estimates, predicts, intends, potential or continue or the negative of such
terms or other comparable terminology. These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including but not limited to our ability to raise
sufficient capital to enable us to continue to operate our business; market
acceptance of the Companys products and the speed at which customers adopt
current and new products for SANs; the ability and willingness of our original
equipment manufacturer customers and distribution channel partners to buy and
sell our products; our ability to develop, introduce, ship and support new
products and product enhancements; growth rates of the market segment within
which the Company participates; competition in the Companys industry and the
timing of new technology and product introductions; the ability to retain and
hire skilled personnel and the risks outlined under Part II  Risk Factors and
elsewhere in this Form 10-K. All forward-looking statements included in this
document are based on information available to us on the date hereof and we
assume no obligation to update any such forward-looking statements.




ITEM 1. BUSINESS

OVERVIEW

We were founded in April 1992 and initially developed electronic test
equipment. Since October 1995, we have focused on being a provider of hardware
and software products for storage area networks, or SANs. We were incorporated
in April 1992 in California as Gadzoox Microsystems, Inc. In May 1997, we
changed our name to Gadzoox Networks, Inc., and in August 1997, we
reincorporated in Delaware. In July 1999, we sold 3,500,000 shares of common
stock to the public in our initial public offering.

We are a provider of hardware and software products that enable the creation of
networks made up of computers and data storage devices which have become known
as storage area networks, or SANs. We developed some of the first SAN devices
and introduced products that are designed to manage data from within a SAN
without relying on servers. To address limitations of traditional captive
storage architecture, we pioneered the development of the SAN by leveraging the
capabilities of Fibre Channel technology, a highly reliable, gigabit
interconnect technology that enables rapid exchange of large amounts of data
among workstations, mainframes, servers and data storage systems. Fibre
Channel technology is the prevailing technology used for switches, hubs,
storage systems, storage devices and adaptor products in the SAN market today.
We deploy products to provide new ways of clustering storage devices, making
the management of data and the addition of new storage devices more efficient.
Additionally, we provide advanced management capabilities to make storage
easier to manage and protect.

We believe that the SAN infrastructure created by our network products forms
the foundation for a new data management architecture. Just as the
infrastructure created by local area networks, or LANs, formed a platform for
the development of client-server computing, we believe that the SAN
infrastructure has the potential to enable the development of distributed data
management architecture. We plan to leverage our technological expertise, our
market knowledge and the strength of our partnerships to drive the development
of this architecture and create new opportunities for our business.

Our SAN products include (1) the FabriCore Technology Suite which enables
customers to develop innovative FC products ranging from ASICs to blades to
complete systems in 1Gb and 2Gb solutions; (2) the Slingshot 4210 switch, a 2
gigabit (Gb) 10-port Fibre Channel Fabric switch; (3) the Slingshot 4218
switch, a 2Gb 18-port Fibre Channel Fabric switch; (4) the Capellix 2000 Fibre
Channel Arbitrated Loop switch, an 8-port switch that is extendable to 11
ports, designed for the entry-level switch market; (5) the Capellix 3000 Fibre
Channel Arbitrated Loop switch, a switch chassis that can be configured to
perform multiple functions by adding hardware that is scalable from 6 to 32
ports; (6) the Gibraltar managed hub designed to provide centralized management
of a SAN; and (7) the Ventana SAN management software application which
provides monitoring and control of SAN devices.

We began shipments of our SAN products, in commercial quantities, in October
1995. Our primary customers include original equipment manufacturers (OEM
customers) and distribution channel partners. Our current OEM customers
include Hewlett-Packard Company (HP) and Compaq Computer Corporation
(Compaq), which have recently completed a merger and formed The New HP. We
have a two-tier distribution channel comprised of distributors and resellers.
Our major distribution customers currently include Bell Microproducts, Inc. and Consan (a Gates/Arrow Company).

-1-



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PRODUCTS

We currently derive substantially all of our revenue from sales of a limited
number of products within two product lines: switches and hubs. We anticipate
that net revenues from hub products will decline although, revenue from our
switch products including the Slingshot 2Gb Fibre Channel family of products
(the Fabric Switch 6, a 6 port embedded option for Compaqs MSA 1000, and the
Slingshot 4210 and 4218) and the FabriCore Engines Technology Suite will
account for a substantial portion of our total net revenues for the foreseeable
future. The fiscal quarter ended March 31, 2002 was our second quarter during
which we shipped the Slingshot 2Gb Fabric Switch 6 to Compaq and the fourth
quarter we shipped our 2Gb Slingshot 4210 and 4218 products.

|                                       |  |                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PRODUCT                                |  | DESCRIPTION                                                                                                                                                                                                                                               |  | FEATURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                       |  |                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|FabriCore Engines
Technology Suite     |  | There are three
different product
offerings including,
FC-MAC (Media Access
Controller) Soft Core,
Open SAN OS and ASSPs
(Application Specific
Standard Products)                                                                                         |  | The FabriCore Engines
Technology Suite
enables customers to
develop innovative FC
products ranging from
ASICs to blades to
complete systems in 1Gb
and 2Gb solutions.
Customers benefit by
having immediate access
to Fibre Channel
technology, faster time
to market, and reduced
development costs & risks. Proven
interoperability with
FC switches and other
devices, as well as
conformance to industry
standards allows for
easy integration and
implementation.          
|                                      
|Slingshot-ES
Embedded FC Fabric
Switch |  | Embedded Fibre Channel
Fabric Switch.
Available in a
semi-custom 6 or 8
port, 1u, half-rack, or
customizable footprint.
1Gb or 2Gb speed,
auto-negotiated
port-by-port. Open
standards-based
(FC-SW-2)                                                    |  | The Slingshot-ESis an
embedded, full-featured
2Gb Open Fabric FC
switch that
dramatically lowers the
cost and complexity of
storage area networks
by enabling storage
system vendors to
create differentiated
and compelling storage
solutions. With the
Slingshot-ESplatform
customers can reduce
the total cost of
ownership (TCO) of
storage through
solutions that are
easier to install,
manage, and support
while also reducing
rack space, cabling and
power consumption.
|                                      
|Slingshot 4210
SC Fabric Switch        |  | 10-port Fibre Channel Fabric
Switch 1Gb or 2Gb speed, auto-
negotiated port-by-port. Open
standards-based (FC-SW-2)                                                                                                                                       |  | 10 ports in 1U,
half-rack chassis for high density, low footprint and high
availability. Enables heterogeneous SAN fabrics and interoperability
with existing 1Gb devices. Load sharing trunks to enable bandwidth
between switches. Management via Ventana SANtools FX.                                                                                                                                                                                                        
|                                      
|Slingshot 4218
FC Fabric Switch        |  | 18-port Fibre Channel
Fabric Switch 1Gb or
2Gb speed,
auto-negotiated
port-by-port. Open
standards-based
(FC-SW-2)                                                                                                                                        |  | 18 ports in 1U chassis
for high density, low
footprint. Enables
heterogeneous SAN
fabrics and
interoperability with
existing 1Gb devices.
Load sharing trunks to
enable bandwidth
between switches.
Management via Ventana
SANtools FX                                                                                                                                                                                                                                          
|                                      
|Capellix 2000
FC-Al Switch             |  | Stackable 8-port switch
extends to 11-ports
with plug-in module                                                                                                                                                                                           |  | Plug-in module for port
expansion. Modular
hardware and agent
design offers
upgradability and
extensibility.
Management via Ventana
communicates with most
other vendors
commercially available
hubs and switches.                                                                                                                                                                                                                                                             
|                                      
|Capellix 3000
FC-AL Switch             |  | Multi-protocol chassis
switch. Modular
chassis-based design.
Scalable from 6 ports
to 32 ports. 28Gb
switching backplane.
Innovative storage
switch technology.
Supports multiple Fibre
Channel and networking
protocols through
protocol plug-in
modules |  | High bandwidth
backplane enables more
effective scalability
than 8-port or 16-port
switches. Designed to
be integrated without
reengineering or
changes to existing
devices. Plug-in
modules provide
configuration
flexibility. Modular
hardware and agent
design offers
upgradability and
extensibility.
Management via Ventana
communicates with most
other vendors
commercially available
hubs and switches,
fully FC-AL standards
compliant.                               
|                                      
|Gibraltar C/XM
High-end managed HUB    |  | 10-port managed hub                                                                                                                                                                                                                                       |  | Enables efficient
scalability for
enterprise environments
Management via Ventana.
Fully FC-AL standards
compliant.                                                                                                                                                                                                                                                                                                                                                              

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SALES, MARKETING AND CUSTOMER SERVICE

Our sales and marketing strategy is focused on the development of the SAN
market through relationships with OEM customers and distribution channel
partners. OEM customers have demonstrated the ability to resell our SAN
products due, in part, to the length of time they have been involved in the SAN
marketplace and the strength of their internal technical, sales and marketing
structures. OEM customers are able to sell full SAN solutions including
servers, storage and SAN switches. Traditional distribution organizations have
participated in the SAN market for a shorter period of time and have not had
fully trained technical, sales and marketing staff focused on SAN products. As
a result, they are not as well positioned as our OEM customers to provide full
solution sales or to effectively compete with OEMs. However, in the past year
distribution organizations have begun to develop enterprise storage specific
sales and technical teams to effectively perform in this marketplace.
Arrow/Consan has announced its ESS program which includes the establishment of
strong technical, sales and marketing capabilities focused on enterprise
storage solutions and we believe other distributors will follow soon. We
believe that selling through both OEM and distribution channel customers will
help the SAN market evolve and ultimately enhance our ability to address a
large end-user base. Gadzoox Networks current distribution partners include
Arrow/ Consan and Bell Microproducts.

As of the date of this filing, our sales and marketing organization consisted
of a total of 11 people, including field sales representatives, product and
channel marketing, and marketing communications. Our field sales personnel are
based in various locations throughout the United States. We closed our
international sales offices during the quarter ended March 31, 2002, however we
continue to sell our products internationally through our distributors,
resellers and independent field sales representatives.

We provide product and technical support to our OEM customers and distribution
channel partners as well as warranty repair or replacement services. Through
our indirect sales model and our partner training programs, we minimize the
need for a large end user support organization. We provide direct self service
support for our products through our website. In addition in April 2002, we
engaged in an agreement with Anacomp, Inc., to offer a broad and in-depth
technical services and support program to Gadzoox Networks customers. Anacomp
offers a full range of personalized solutions to meet end user document
presentation, retrieval and archive requirements, as well as computer room and
networking equipment services, systems and supplies needs. Current outsourcing
offerings include digital and analog document services, disaster recovery,
multi-vendor equipment maintenance, and digital imaging systems maintenance,
sales and supplies. Anacomp will offer Gadzoox Networks customers in North
America and Europe round the clock product support and immediate on site
service for 2Gb Fibre Channel Slingshot switches and Capellix Fibre Channel
switches. Service offerings from Anacomp include on site technical support,
typically within four hours from the call, and advanced parts replacement
within 24 hours.

COMPETITION

The competitive environment in the SAN market is still developing. We
anticipate that the market for our products will continue to be highly
competitive, continually evolving and subject to rapid technological change.
New SAN products are being introduced by various server and storage providers
as well as our current and future competitors, and existing products will be
continually enhanced. We face competition primarily from other sellers of SAN
hub and switch products, including but not limited to, Brocade, QLogic and
Vixel, in the SAN switch market, and Vixel Corporation in the SAN hub market.
Furthermore, although we currently offer products that are complimentary to SAN
software products offered by companies such as Legato Systems, Inc, Computer
Associates, BMC and Veritas Software Corporation, they and other enterprise
software developers may in the future compete with us.

In addition, as the market for SAN products grows, we may face competition from
traditional networking companies and other manufacturers of networking
equipment. These networking companies may enter the SAN market by introducing
their own products, acquiring an existing SAN infrastructure provider or by
entering into alliances with an existing SAN provider. It is also possible that
OEM customers could develop and introduce products competitive with our product
offerings. We believe the competitive factors in the SAN market include the
following: product performance and features; product reliability and
interoperability; price; strength of customer relationships, including OEM
customers and distribution channel partners; ability to meet delivery
schedules; and customer service and technical support.

Some of our current and potential competitors have longer operating histories,
significantly greater resources and name recognition and a larger installed
base of customers than we have. As a result, these competitors may have greater
credibility with our existing and potential customers. They also may be able to
adopt more aggressive pricing policies and devote greater resources to the
development, promotion and sale of their products than we can to ours, which
allows them to respond more quickly to new or emerging technologies and changes
in customer requirements. In addition, some of our current and potential
competitors have already established supplier or joint development
relationships with divisions of our current or potential customers. These
competitors may be able to leverage their existing relationships to discourage
these customers from purchasing additional products from us or persuade them to
replace our products with their products. Increased competition could result in
pricing pressures, reduced sales, reduced margins, reduced profits, reduced
market share or the failure of our products to achieve or maintain market
acceptance. We may not have the financial resources, technical expertise or
marketing, manufacturing, distribution and support capabilities to compete
successfully in the future.

Additionally, we may not be able to compete successfully against current or
future competitors and competitive pressures may materially harm our business.

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TECHNOLOGY

We possess considerable experience in a wide variety of technologies, including
Fibre Channel technology, local area network and wide area network
technologies, routing technologies, core ASIC design, systems design and
software design, which we utilize in designing and developing our products.

Fibre Channel And Other Networking Technologies

Fibre Channel technology has been adopted by and is being supported by most
major computer and storage device manufacturers, including International
Business Machines Corporation, Sun Microsystems, Inc., Hewlett-Packard Company,
Compaq Computer Corporation, Dell Computer Corporation, Seagate Technology,
Inc. and EMC Corporation.

There are two main industry standards for the Fibre Channel protocol; FC-AL and
FC-SW2. Based on the cost-effective nature and wide industry deployment of the
FC-AL protocol, we developed our first hub and switch products based on that
standard. As the needs of the market evolved to include FC-SW2 protocol, we
introduced products and modular enhancements that supported these protocol
standards. Fibre Channel standards continue to be enhanced and new industry
standards are being developed. We intend to fully employ standards and
introduce products and modular enhancements that support new protocol standards
in areas such as SCSI technology, Infiniband, Ethernet, Gigabit Ethernet,
asynchronous transfer mode (ATM), Fibre Channel FC-SW, DWDM and transmission
control protocol/Internet protocol (TCP/IP).

We believe that knowledge in Fibre Channel technology is critical in achieving
and maintaining a leading market position. A number of our engineers have
contributed to the development and standardization of Fibre Channel. Based on
this experience, we believe we possess insight and understanding with respect
to the capabilities and limitations of this technology.

Core ASIC Design

We design our own core ASICs and employ personnel with expertise in
semiconductor process and design methods. Our proprietary ASICs are
manufactured using .25u and .18u complementary metal-oxide semiconductor (CMOS)
processes. We have successfully designed proprietary ASICs with speeds up to 2
gigahertz. We discontinued our business relationship with Vitesse
Semiconductor, Inc. in December 2000, our previous ASIC supplier, and have
formed a strategic business partnership with LSI Logic Corporation to assist in
the design as well as manufacture of our proprietary ASICs. Our CMOS ASIC staff
possesses experience in ASIC architecture, design and testing.

System Design

We employ our own computer aided design (CAD) engineers to design our printed
circuit boards, or PCBs. We believe our systems design team has experience in
the containment of high-frequency electromagnetic interference, or EMI, which
is inherent in high-speed networking devices. We also have expertise in chassis
design, including design for manufacturability, testability, usability,
reliability and low cost.

Software

We employ software engineers with experience in embedded firmware, distributed
agents and graphical user interface technologies. The team has experience in
programming for several microprocessors and operating environments. We have
considerable experience in software implementation to support Fibre Channel
protocol standards, such as Fibre Channel Physical Layer, or FC-PH, FC-AL,
small computer system interface over Fibre Channel (FCP), Fibre Channel fabric
loop attach, or FC-FLA, Fibre Channel general services, or FX-GS, and FC-SW2.
We have also demonstrated development capabilities in proprietary and standard
SAN management protocols.

Our team also possesses experience in the area of graphical user interface
software and network management middleware. We employ personnel with expertise
in a variety of application development environments and tools. Our graphic
user interface development efforts focus on the Microsoft Windows family of
operating systems, as well as platform-independent applications, through the
Java programming environment.

Employ Reusable Elements

Our products have incorporated reusable application specific integrated
circuits, cores and firmware agents, or small software applications used to
carry out specific functions. This allows us to accelerate time-to-market,
reduce development costs and leverage interoperability with existing products.
We intend to continue developing reusable elements and leveraging them in order
to quickly respond to changes in market requirements. We recently extended
this same base technology to the open market with the introduction of our
FabriCore Engines Technology Suite which is available in three categories,
Application Specific Standard Product (ASSP), FC-MAC soft cores and Open SAN
OS.

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INTELLECTUAL PROPERTY

Our success depends on our proprietary technology. We rely on a combination of
patents, trademarks, and trade secrets, as well as confidentiality agreements
and other contractual restrictions with employees and third parties, to
establish and protect our proprietary rights. We currently hold six United
States patents with respect to our SAN related technology that expire between
2013 and 2016. We also have five pending patents in the United States with
respect to our technology and are seeking patent protection for certain aspects
of technology in selected international locations. However, it is possible that
patents may not be issued for these applications. All of our software products
are copyrighted with our banners and notices. We have been granted registration
of two trademarks in the United States. Despite precautions, third parties
could copy or otherwise obtain and use our products or technology without
authorization or develop similar technology independently. The measures we
undertake may not be adequate to protect our proprietary technology and may not
preclude competitors from independently developing products with functionality
or features similar to our products. There can be no assurances that such
precautions we take will prevent misappropriation or infringement of our
technology. Failure to protect our intellectual property could materially harm
our business.

It is possible that litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of our resources and could materially harm
our business. From time to time, we have received, and may receive in the
future, notice of claims of infringement of other parties proprietary rights.
Infringement or other claims could be asserted or prosecuted against us in the
future, and it is possible that past or future assertions or prosecutions could
harm our business. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause delays in the development and release of our
products, or require us to develop non-infringing technology or enter into
royalty or licensing arrangements. Such royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, or at all.

The Gadzoox logo and Gadzoox® are registered trademarks of our company.
Gibraltar, Capellix, Reflex, SANtools, Slingshot,
Ventana, IntraCom, Nomad and PerfectPort are trademarks of our
company. This Form 10-K contains other trademarks and tradenames of other
entities.

RESEARCH AND DEVELOPMENT

Our research and development expenses were $21.1 million in fiscal 2002, $29.4
million in fiscal 2001, and $18.2 million in fiscal 2000. We believe that our
research and development efforts are essential to our ability to develop and
deliver innovative products that address the needs of the market and help
evolve the capabilities of SANs. As of the date of this filing, we had 21 full
time employees engaged in research and development.

We recognize the need to integrate new and enhanced technologies into our
products and to continue to extend the open SAN architecture. Research and
development programs that we are currently involved in include 2Gb ASIC cores
and transceivers, high availability clustering architectures, SAN management
application programming interfaces (APIs), distributed SAN management agents
and the integration of SAN, local area network and wide area network
technologies. In addition to the development of proprietary core technologies,
we plan to continue partnerships with other leading providers of SAN
technologies, products and services to jointly develop architectures and
industry standards.

Our product development efforts may not result in commercially viable products,
and our products may be made obsolete by changing technology or new product
announcements by other companies.

MANUFACTURING

Contract Manufacturing

Our manufacturing strategy focuses on the use of contract manufacturing for the
material procurement, assembly, test, packaging, warehousing and shipment of
our products to our customers. Based on its strength in the volume manufacture
of high-speed data networking equipment, we selected Sanmina Corporation as our
contract manufacturing partner. Using a contract manufacturer allows us to
reduce costly investment in manufacturing capital and inventory warehousing.

While our contract manufacturer manages material procurement for the majority
of the components that are incorporated in our products, we continue to manage
the evaluation and selection of certain key components. These components
primarily include our proprietary ASICs and optical transceivers. In addition
to the management of key components, our internal manufacturing expertise is
focused on product testability, manufacturability and the transfer of products
from development to manufacturing.

Although we use standard parts and components for our products where possible,
we currently purchase several key components used in the manufacture of our
products from single or limited sources. Our principal single source components
include ASICs and optical transceivers.

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ISO 9001

In June 1999, we received ISO 9001 registration from SGS International
Certification Services, Inc. ISO 9001 is an international set of quality
assurance standards for companies involved in the design, development,
manufacturing, installation and servicing of products or services. These
standards are set by the International Organization for Standardization (ISO),
an international federation of national standards bodies. To be recommended for
ISO 9001 certification, a company must be audited by an ISO accredited auditing
company and must meet or surpass the ISO standards. We believe that our
customers value the processes, control and traceability that are required to
achieve ISO 9001 certification.

EMPLOYEES

As of the date of this filing, we had 47 full time employees, of whom 21 were
engaged in research and development, 11 were in sales and marketing, 4 were in
operations and 11 were in finance, administration and information services.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be good.

Since the beginning of 2001, our total headcount has declined from 234
employees to 47 employees as of the date of this filing, due to our
restructuring efforts and reductions in force. The reductions in force may make
it difficult for us to retain and recruit necessary personnel in the future.
In addition, during fiscal 2002 and continuing in fiscal 2003 in connection with our restructuring efforts several of
our executive officers resigned. If we are unable to retain the necessary
personnel, by reason of the reductions in force and the departure of executive
officers or otherwise, this would adversely affect our business.

Our future performance depends in significant part upon the continued service
of our key technical, sales and senior management personnel, none of whom is
bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could have a
material adverse effect on our business, financial condition and results of
operations. Our future success also depends on our continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding our executive
officers as of July 1, 2002:

|                |  |     |    |          |  |                                                      
|--------------- |  | --- | -- | -------- |  | -----------------------------------------------------
|NAME            |  | AGE |    | POSITION
|                |  |     |    |         
|Stephen Dalton  |  |     | 43 |          |  | President, Chief Executive Officer, and Director     
|Barbara Velline |  |     | 37 |          |  | Vice President of Finance and Chief Financial Officer

Stephen Dalton has served as our President and Chief Executive Officer and as a
director since May 2002. Mr. Dalton joined us in January 2000 as Vice
President of Development. From 1998 to 2000, Mr. Dalton served as the Vice
President of Engineering, Americas for Force Computers, Inc. From 1997 to 1998
Mr. Dalton was Vice President of Product Development for Auspex Systems, Inc.,
or Auspex, a developer and manufacturer of network attached storage devices.
From 1995 to 1996, Mr. Dalton served as Vice President of Engineering of Auspex
and in 1996 he was promoted to President and Chief Technical Officer, in which
capacity he served until 1997. Mr. Dalton holds a BSET degree from California
Polytechnic State University and is currently enrolled in the MBA program at
Golden Gate University.

Barbara Velline has served as our Vice President of Finance and Chief Financial
Officer since March 2002. From 1998 to 1999 and from 2001 to 2002, Ms. Velline
was a senior finance consultant for David Powell, Inc., a Silicon Valley based
financial services firm. From 1999 to 2000, Ms. Velline was Director of
Project Management and Controller for Creditland, Inc., a technology company
providing real-time decisioning to financial institutions. Ms. Velline served
as Chief Financial Officer of Syncronys Softcorp, a software company, from 1995
to 1997. Previously, Ms. Velline also held a number of senior financial
management positions with Pioneer Electronics USA, Inc., a consumer electronics
manufacturer and distributor. Ms. Velline began her career as an auditor with
Price Waterhouse. Ms. Velline holds a BS in Business Administration/Accounting
from the University of Southern California and is a certified public
accountant.

As a result of our restructuring during fiscal 2002
and continuing in fiscal 2003, many of our executive
officers are no longer employed by us. These now former executives include
Michael Parides, CEO and President; David Eichler, Vice President of Finance
and CFO; Wayne Rickard, Senior Vice President and CTO; Ron vonTrapp, Vice
President of Sales; Clark Foy, Vice President of Sales and Marketing; Erik
Ottem, Vice President of Sales and Marketing; William Hubbard, Vice President
of Operations; Eddie Streeter, Vice President of Operations; Ed Turner, Vice
President of Strategic Alliances and Solutions; and Kristin Strout, Vice
President of Human Resources. Wayne Rickard, our former Senior Vice
President and CTO continues to serve us in an advisory capacity.

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ITEM 2. PROPERTIES

Our corporate headquarters and engineering facility of 64,805 square feet is
located in San Jose, California. We lease this facility pursuant to a lease
agreement that originally expired in November 2005. In May 2000, we entered
into an agreement for a term of seven years to lease an additional 73,312
square feet in a new building adjacent to our existing corporate headquarters
beginning August 2001 and, under which agreement, the lease of the original
headquarters building was extended 2 years to November of 2007. In March 2001
we entered into an amendment of that new building lease pursuant to which the
landlord of the building agreed to seek a replacement tenant for the premises
at equal or higher rent and similar terms. If the landlord is successful in
doing so, or we are able to find a replacement tenant on terms acceptable to
the landlord, the landlord will release us of our obligation with respect to
this new building effective as of the commencement of the replacement lease,
and, additionally, the lease expiration on the original headquarters building
will revert to November 2005. In connection with the amendment, we issued to
the landlord warrants to purchase 50,000 shares of our common stock at a price
of $3.00 per share. In addition, we are seeking to sublease up to 26,800 square feet
of our corporate headquarters building.

Our international sales offices and Southern California development office were
vacated in the fiscal fourth quarter ended March 31, 2002 as part of our
restructuring efforts. There are no continuing obligations related to these
vacated facilities.




ITEM 3. LEGAL PROCEEDINGS

On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., was filed against us, three former officers,
and two underwriters in our initial public offering (IPO), in the United States
District Court for the Southern District of New York. The complaint alleges
violations of Section 11 of the Securities Act of 1933 (the Securities Act)
against all defendants, a violation of Section 15 of the Securities Act against
the individual defendants, and violations of Section 12(a)(2) of the Securities
Act and Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5,
promulgated thereunder; collectively, the Exchange Act) against the
underwriters. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of our common stock between July 19, 1999 and December 6,
2000 (the class period).

On June 25, 2001, a similar complaint, captioned Goldgrab v. Gadzoox Networks,
Inc., et al., Civil Action No. 1-01-CV-5798, was filed against us, the
individual defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Cooper
complaint, except in that it alleges violations of Section 10(b) of the
Exchange Act of 1934 (and Rule 10b-5, promulgated there under) against all
defendants, including us and the individual defendants. There have been
additional lawsuits filed containing allegations substantially identical to
those in the Cooper and Goldgrab complaints.

On May 8, 2002, plaintiffs filed a consolidated amended complaint. The
allegations of the amended complaint focus on purported actions of our
underwriters in our 1999 IPO. The plaintiffs claim that the underwriters
solicited and received excessive commissions from investors in exchange for
favorable allocations of IPO shares. The plaintiffs also claim that the
underwriters entered into agreements with their customers whereby, in exchange
for favorable allocations of shares in the offering, the customers would commit
to purchase additional shares in the aftermarket at predetermined prices. The
plaintiffs contend that we are liable under Section 11 of the Securities Act
because our registration statement in the IPO did not disclose the purported
actions by the underwriters. The amended complaint also brings claims under
Section 10 (b) of the Exchange Act and Rule 10b-5 promulgated thereunder,
contending that we and the individual defendants knew of, participated in or
acted with reckless disregard to the alleged misconduct of the underwriters.

Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 300 other companies. The lawsuits against us and
all of these other related lawsuits have been coordinated for pretrial purposes
as In re Initial Public Offering Securities Litigation, Civil Action No.
21-MC-92, and are presently being overseen by Judge Shira A. Scheindlin. We
believe we have meritorious defenses to these securities lawsuits and will
defend the lawsuits vigorously.




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

Not applicable.

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PART II




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

Our common stock has been quoted on the Nasdaq National Market under the symbol
ZOOX since our initial public offering on July 19, 1999. Prior to this time,
there was no public market for our stock. We have received notification from
The Nasdaq Stock Market that we are out of compliance with the minimum bid
price requirement of $1.00 per share set forth in Marketplace Rule 4450(a)(5).
Therefore, our securities are subject to delisting from The Nasdaq National
Market. Additionally, we currently do not meet the $1.00 per share
minimum bid price and shareholders' equity requirements to maintain a
listing on The Nasdaq SmallCap Market. We have requested a hearing with Nasdaq, and our stock will remain
listed on The Nasdaq National Market at least until the date of the hearing,
which will occur on July 12, 2002. There can be no assurance the Nasdaq
Listing Qualifications Panel will grant our request for continued listing after
the hearing.

The following table sets forth the high and low closing sales prices per share
of our common stock as reported on the Nasdaq National Market for the periods
indicated:

|             |                |  |            |        |     |  |   |        | 
|------------ | -------------- |  | ---------- | ------ | --- |  | - | ------ | 
|             |                |  | SALE PRICE
|             |                |  |           
|             |                |  | HIGH       |        | LOW
|             |                |  |            |        |    
|Fiscal 2002: |                |  |            |        |     |  |   |       
|             | Fourth Quarter |  | $          | 0.870  |     |  | $ | 0.380  | 
|             | Third Quarter  |  | $          | 1.240  |     |  | $ | 0.630  | 
|             | Second Quarter |  | $          | 3.190  |     |  | $ | 0.990  | 
|             | First Quarter  |  | $          | 3.650  |     |  | $ | 1.500  | 
|Fiscal 2001: |                |  |            |        |     |  |   |       
|             | Fourth Quarter |  | $          | 5.062  |     |  | $ | 1.468  | 
|             | Third Quarter  |  | $          | 6.750  |     |  | $ | 2.093  | 
|             | Second Quarter |  | $          | 14.125 |     |  | $ | 6.968  | 
|             | First Quarter  |  | $          | 46.750 |     |  | $ | 13.687 | 

As of June 26, 2002 there were 301 holders of record of our common stock. We
have never paid dividends on our capital stock. We currently expect to retain
future earnings, if any, for use in the operation and expansion of our business
and do not anticipate paying any cash dividends in the foreseeable future.

Warrants

In March 2001, we entered into an amendment agreement for a leased facility. In
connection with the amendment, we issued the landlord a warrant to purchase
50,000 shares of our common stock at a price of $3.00 per share. The warrants
are immediately exercisable, are nonforfeitable and expire three years from the
date of grant. Additionally, in connection with the May 2001 equity financing
transaction, we issued a warrant to purchase 168,000 shares of our common stock
to a financial advisor for their assistance in the investor search. The
warrants are immediately exercisable at $4.14 per share, are nonforfeitable,
and expire three years from the date of grant. Lastly, in connection with the
September 2001 accounts receivable financing transaction, we issued the lender
a warrant to purchase 71,942 shares of our common stock at a price of $1.39 per
share. The warrants are immediately exercisable, are nonforfeitable, and expire
five years from the date of grant. Each warrant issuance was exempt from the
registration pursuant to Section 4(2) of the Securities Act based upon
representation of each of the warrant holders that it was an accredited
investor as defined under Regulation D and that it would be purchasing such
securities without a present view towards a distribution of the securities. In
addition, there was no general advertisement conducted in connection with
either warrant issuance. We filed registration statements covering the resale
of these shares and the SEC has declared these registration statements
effective.

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Senior Secured Convertible Debt

On January 23, 2002, we entered into a 2.5% Senior Secured Convertible
Debenture with Berg & Berg Enterprises, LLC, a California limited liability
company, pursuant to which we borrowed the principle sum of $5.0 million from
Berg & Berg. The debenture bears interest at the rate of 2.5% per annum,
compounded quarterly. The principle and accrued interest under the debenture
become due on January 23, 2005. The funds received under the debenture will be
used for working capital in the ordinary course of our business. According to
the terms of the debenture, Berg & Berg has the option to convert the principle
amount outstanding under the debenture into shares of our common stock at the
conversion price of $0.759 per share. Accordingly, the maximum number of
shares of common stock issuable upon conversion of the proposed indebtedness
under the debenture is 6,587,615 shares. The sale and issuance of the debenture
was exempt from registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated there under
based upon the representations of Berg & Berg that it was an accredited
investor as defined under Regulation D and that it was purchasing the
debenture and the underlying shares without a present view toward a
distribution of the debenture or the underlying shares. In addition, there was
no general advertisement conducted in connection with the sale of the
debenture. We filed a registration statement covering the resale of these
shares and the SEC has declared the registration statement effective.

Equity Compensation Plans

We grant stock options to purchase our common stock under various stock option
plans (the Plans) to our employees, directors and consultants. With the
exception of the 2000 Non-Statutory Stock Option Plan, the Plans listed below
were approved by our Board of Directors and by our shareholders. In June
2000, our Board of Directors approved and adopted the 2000 Non-Statutory Stock
Option Plan (the NSO Plan). The number of shares reserved for issuance under
this Plan was 1,600,000. In August 2000 and October 2000, the Board approved
an additional 700,000 and 1,000,000 shares, respectively, for issuance under
this Plan. In April 2001 and February 2002, the Board approved an additional
3,000,000 and 4,500,00 shares, respectively, for issuance under this Plan.

In accordance with the Plans, unless specifically approved by our Board of
Directors on an exception basis, all incentive and non-statutory stock option
grants must be at prices of at least 100% to 85%, respectively, of the fair
value of the stock on the date of the grant, as determined by our Board of
Directors. The options are exercisable as determined by the Board of Directors.
Generally, stock options granted vest ratably on a monthly basis over a
four-year period. However, as part of efforts to retain valuable employees in
the wake of the reductions in staff that have taken place beginning in March of
2001, stock options granted subsequent to November 2001 have vested on a
monthly basis over six to twelve month periods. The options expire upon the
earlier of ten years from the date of grant or ninety days following
termination of employment. Stock purchase rights granted under the Plans must
be exercised within ninety days from the date of grant. Shares purchased
pursuant to the grant of a stock purchase right shall be subject to repurchase,
and the repurchase option shall lapse at a minimum rate of 20% per year.

At March 31, 2002 (unaudited), shares of common stock under the Plans were
reserved for future issuances as follows:

|                                      |                                |  |            |           | 
|------------------------------------- | ------------------------------ |  | ---------- | --------- | 
|1999 Employee Stock Purchase Plan     |                                |  | 369,806    |          
|1993 Stock Option Plan:               |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 5,740,544 | 
|                                      | Reserved for future grants     |  |            | 957,225   | 
|2000 Non-Statutory Stock Option Plan: |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 7,466,986 | 
|                                      | Reserved for future grants     |  |            | 3,297,263 | 
|1999 Director Stock Option Plan:      |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 117,500   | 
|                                      | Reserved for future grants     |  |            | 228,020   | 
|SmartSAN 1998 Equity Incentive Plan:  |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 2,220     | 
|                                      |                                |  |            |          
|                                      |                                |  | 18,179,564 |          
|                                      |                                |  |            |          

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The following table summarizes the stock options outstanding and exercisable at
March 31, 2002 (unaudited) under the Plans with the exception of the 2000
Non-Statutory Stock Option Plan which is shown separately:

|                    |            |        |           |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 
|------------------- | ---------- | ------ | --------- | ---- |  | ------------------- | ---- | ------------------- |  | ----- | ------ |  |  | --------- | --------- |  |  | - | ------ | 
|                    |            |        |           |      |  | OPTIONS OUTSTANDING |      | OPTIONS EXERCISABLE
|                    |            |        |           |      |  |                     |      |                    
|                    |            |        |           |      |  | WEIGHTED-           |      |                     |  |       |        |  |  |           |           |  |  |  
|                    |            |        |           |      |  | AVERAGE             |      | WEIGHTED-           |  |       |        |  |  | WEIGHTED-
|                    |            |        |           |      |  | REMAINING           |      | AVERAGE             |  |       |        |  |  | AVERAGE  
|RANGE OF            |            |        |           |      |  | CONTRACTUAL         |      | EXERCISE            |  |       |        |  |  | EXERCISE 
|EXERCISE PRICE      |            | NUMBER |           | LIFE |  | PRICE               |      | NUMBER              |  | PRICE
|                    |            |        |           |      |  |                     |      |                     |  |      
|                    | (IN YEARS) |       
|$  0.075 - $  0.075 |            |        | 142,333   |      |  |                     | 3.97 |                     |  | $     | 0.075  |  |  |           | 142,333   |  |  | $ | 0.075  | 
|$  0.270 - $  0.500 |            |        | 247,125   |      |  |                     | 8.02 |                     |  | $     | 0.41   |  |  |           | 97,125    |  |  | $ | 0.270  | 
|$  0.630 - $  0.630 |            |        | 796,844   |      |  |                     | 9.72 |                     |  | $     | 0.630  |  |  |           | 0         |  |  | $ | 0.000  | 
|$  0.720 - $  1.590 |            |        | 413,339   |      |  |                     | 6.84 |                     |  | $     | 1.286  |  |  |           | 161,630   |  |  | $ | 1.065  | 
|$  1.760 - $  1.760 |            |        | 1,416,666 |      |  |                     | 9.08 |                     |  | $     | 1.760  |  |  |           | 322,918   |  |  | $ | 1.760  | 
|$  1.875 - $  4.125 |            |        | 1,524,407 |      |  |                     | 7.54 |                     |  | $     | 2.817  |  |  |           | 681,620   |  |  | $ | 3.448  | 
|$  4.563 - $23.625  |            |        | 731,080   |      |  |                     | 8.14 |                     |  | $     | 13.10  |  |  |           | 411,297   |  |  | $ | 12.756 | 
|$28.625 - $44.250   |            |        | 515,398   |      |  |                     | 7.87 |                     |  | $     | 37.468 |  |  |           | 297,936   |  |  | $ | 37.327 | 
|$60.750 - $60.750   |            |        | 73,072    |      |  |                     | 7.57 |                     |  | $     | 60.750 |  |  |           | 51,748    |  |  | $ | 60.750 | 
|                    |            |        |           |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 
|$  0.075 - $60.750  |            |        | 5,860,264 |      |  |                     | 8.20 |                     |  | $     | 7.041  |  |  |           | 2,166,607 |  |  | $ | 10.449 | 
|                    |            |        |           |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 

The following table summarizes the stock options outstanding and exercisable at
March 31, 2002 (unaudited) under the 2000 Non-Statutory Stock Option Plan:

|                  |            |        |           |      |  |                     |      |                     |  |       |       |  |  |           |           |  |  |   |       | 
|----------------- | ---------- | ------ | --------- | ---- |  | ------------------- | ---- | ------------------- |  | ----- | ----- |  |  | --------- | --------- |  |  | - | ----- | 
|                  |            |        |           |      |  | OPTIONS OUTSTANDING |      | OPTIONS EXERCISABLE
|                  |            |        |           |      |  |                     |      |                    
|                  |            |        |           |      |  | WEIGHTED-           |      |                     |  |       |       |  |  |           |           |  |  |  
|                  |            |        |           |      |  | AVERAGE             |      | WEIGHTED-           |  |       |       |  |  | WEIGHTED-
|                  |            |        |           |      |  | REMAINING           |      | AVERAGE             |  |       |       |  |  | AVERAGE  
|RANGE OF          |            |        |           |      |  | CONTRACTUAL         |      | EXERCISE            |  |       |       |  |  | EXERCISE 
|EXERCISE PRICE    |            | NUMBER |           | LIFE |  | PRICE               |      | NUMBER              |  | PRICE
|                  |            |        |           |      |  |                     |      |                     |  |      
|                  | (IN YEARS) |       
|$0.250 - $  0.250 |            |        | 2,721,599 |      |  |                     | 9.72 |                     |  | $     | 0.250 |  |  |           | 1,359,099 |  |  | $ | 0.250 | 
|$0.270 - $  0.320 |            |        | 127,500   |      |  |                     | 9.82 |                     |  | $     | 0.314 |  |  |           | 42,500    |  |  | $ | 0.310 | 
|$0.630 - $  0.630 |            |        | 1,961,750 |      |  |                     | 9.72 |                     |  | $     | 0.630 |  |  |           | 0         |  |  | $ | 0.000 | 
|$0.670 - $  1.450 |            |        | 249,750   |      |  |                     | 9.67 |                     |  | $     | 0.940 |  |  |           | 17,750    |  |  | $ | 1.120 | 
|$1.760 - $  1.760 |            |        | 1,186,778 |      |  |                     | 9.08 |                     |  | $     | 1.760 |  |  |           | 364,950   |  |  | $ | 1.760 | 
|$2.500 - $  4.125 |            |        | 527,093   |      |  |                     | 8.58 |                     |  | $     | 3.993 |  |  |           | 241,910   |  |  | $ | 4.023 | 
|$4.563 - $11.812  |            |        | 692,516   |      |  |                     | 8.37 |                     |  | $     | 9.888 |  |  |           | 363,562   |  |  | $ | 9.901 | 
|                  |            |        |           |      |  |                     |      |                     |  |       |       |  |  |           |           |  |  |   |       | 
|$0.250 - $11.812  |            |        | 7,466,986 |      |  |                     | 9.41 |                     |  | $     | 1.772 |  |  |           | 2,389,771 |  |  | $ | 2.339 | 
|                  |            |        |           |      |  |                     |      |                     |  |       |       |  |  |           |           |  |  |   |       | 

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ITEM 6. SELECTED FINANCIAL DATA

You should read the selected financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our Financial Statements and the Notes thereto included
elsewhere in this report. The statements of operations data for the years ended
March 31, 2002 (unaudited), 2001, and 2000, and the balance sheet data at March
31, 2002 (unaudited) and 2001, are derived from, and are qualified by reference
to, the Financial Statements and Notes thereto appearing elsewhere in this
report. The statements of operations data for the years ended March 31, 1999
and 1998, and the balance sheet data as of March 31, 2000, 1999, and 1998, are
derived from, and are qualified by reference to financial statements not
appearing in this report. Historical results are not necessarily indicative of
results that may be expected for any future period. The change in accounting
policy relating to sales to distributors that was adopted in fiscal 2001, has
impacted the year over year comparability of the selected financial data shown
below for years prior to 2001.

***In accordance with Temporary Note 2T to Article 3 of Regulation S-X, this
filing includes unaudited financial statements in lieu of audited financial
statements for the year ended March 31, 2002 because we were unable to obtain
from Arthur Andersen LLP a manually signed audit report in the timeframe agreed
upon at the commencement of the annual audit engagement. No auditor has opined
that the unaudited financial statements present fairly, in all material
respects, our financial position, results of operations, cash flows and changes
in shareholders equity for our year ended March 31, 2002 in accordance with
generally accepted accounting principles. The report of independent public
accountants included with the financial statements and the notes thereto
included elsewhere in this report is a copy of a previously issued report by
Arthur Andersen LLP related to our financial statements for the years ended
March 31, 2001 and 2000, and such report has not been reissued. We intend to
provide the audited financial statements and a report of independent public
accountants in an amended filing within 60 days of the date of this report.***

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|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------- | ------------------------------------- | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                                                                                   |                                            |                          |         | YEAR ENDED MARCH 31,                 
|                                                                                                   |                                            |                          |         |                                      
|                                                                                                   |                                            |                          |         | 2002                                  |        | 2001 |         | 2000   |        | 1999 |         | 1998   
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |        
|                                                                                                   |                                            |                          |         | (unaudited)                           |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|                                                                                                   |                                            |                          |         | (IN THOUSANDS, EXCEPT PER SHARE DATA)
|STATEMENT OF OPERATIONS DATA:                                                                      |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Net revenues                                                                                       |                                            | $                        | 21,820  |                                       |        | $    | 33,290  |        |        | $    | 47,931  |         |        | $ | 24,821  |         |        | $ | 9,811   |       
|Cost of revenues                                                                                   |                                            |                          | 12,065  |                                       |        |      | 27,768  |        |        |      | 26,257  |         |        |   | 18,693  |         |        |   | 7,898   |       
|Cost of revenues  inventory write-downs                                                           |                                            |                          | 4,972   |                                       |        |      | 4,424   |        |        |      |        |         |        |   |        |         |        |   |        |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|                                                                                                   | Gross margin                               |                          |         | 4,783                                 |        |      |         | 1,098  |        |      |         | 21,674  |        |   |         | 6,128   |        |   |         | 1,913  |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Operating expenses:                                                                                |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|                                                                                                   | Research and development                   |                          |         | 21,078                                |        |      |         | 29,368 |        |      |         | 18,223  |        |   |         | 13,928  |        |   |         | 7,178  |       
|                                                                                                   | Sales and marketing                        |                          |         | 12,943                                |        |      |         | 23,982 |        |      |         | 11,638  |        |   |         | 5,765   |        |   |         | 2,974  |       
|                                                                                                   | General and administrative                 |                          |         | 7,175                                 |        |      |         | 7,992  |        |      |         | 4,285   |        |   |         | 1,649   |        |   |         | 1,774  |       
|                                                                                                   | Amortization of acquired intangible assets |                          |         |                                      |        |      |         | 3,842  |        |      |         |        |        |   |         |        |        |   |         |       |       
|                                                                                                   | In-process research and development costs  |                          |         |                                      |        |      |         | 4,900  |        |      |         |        |        |   |         |        |        |   |         |       |       
|                                                                                                   | Impairment of long lived assets            |                          |         |                                      |        |      |         | 17,829 |        |      |         |        |        |   |         |        |        |   |         |       |       
|                                                                                                   | Write-down of abandoned long-lived assets  |                          |         | 3,306                                 |        |      |         |       |        |      |         |        |        |   |         |        |        |   |         |       |       
|                                                                                                   | Restructuring and other expenses           |                          |         | 5,747                                 |        |      |         | 2,513  |        |      |         |        |        |   |         |        |        |   |         |       |       
|                                                                                                   | Amortization of deferred compensation      |                          |         | 903                                   |        |      |         | 547    |        |      |         | 1,156   |        |   |         | 492     |        |   |         |       |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|                                                                                                   |                                            | Total operating expenses |         |                                       | 51,152 |      |         |        | 90,973 |      |         |         | 35,302 |   |         |         | 21,834 |   |         |        | 11,926 | 
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Loss from operations                                                                               |                                            |                          | (46,369 | )                                     |        |      | (89,875 | )      |        |      | (13,628 | )       |        |   | (15,706 | )       |        |   | (10,013 | )     
|Interest and other income (expense), net                                                           |                                            |                          | (253    | )                                     |        |      | 2,332   |        |        |      | 3,267   |         |        |   | (226    | )       |        |   | 373     |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Net loss before cumulative effect of accounting
change                                             |                                            | $                        | (46,622 | )                                     |        | $    | (87,543 | )      |        | $    | (10,361 | )       |        | $ | (15,932 | )       |        | $ | (9,640  | )     
|Cumulative effect of accounting change                                                             |                                            |                          |        |                                       |        |      | (5,300  | )      |        |      |        |         |        |   |        |         |        |   |        |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Net loss                                                                                           |                                            | $                        | (46,622 | )                                     |        | $    | (92,843 | )      |        | $    | (10,361 | )       |        | $ | (15,932 | )       |        | $ | (9,640  | )     
|Dividend related to common stock                                                                   |                                            |                          | (371    | )                                     |        |      |        |        |        |      |        |         |        |   |        |         |        |   |        |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Net Loss attributable to common stockholders                                                       |                                            | $                        | (46,993 | )                                     |        | $    | (92,843 | )      |        | $    | (10,361 | )       |        | $ | (15,932 | )       |        | $ | (9,640  | )     
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Basic net loss per share before cumulative effect
of change in accounting principle                |                                            | $                        | (1.25   | )                                     |        | $    | (3.13   | )      |        | $    | (0.53   | )       |        | $ | (3.33   | )       |        | $ | (2.41   | )     
|Cumulative effect of change in accounting
principle                                                |                                            |                          |        |                                       |        |      | (0.19   | )      |        |      |        |         |        |   |        |         |        |   |        |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Basic net loss per share                                                                           |                                            | $                        | (1.25   | )                                     |        | $    | (3.32   | )      |        | $    | (0.53   | )       |        | $ | (3.33   | )       |        | $ | (2.41   | )     
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Weighted average shares used in computing basic
loss per share(1)                                  |                                            |                          | 37,743  |                                       |        |      | 28,006  |        |        |      | 19,731  |         |        |   | 4,789   |         |        |   | 3,995   |       
|                                                                                                   |                                            |                          |         |                                       |        |      |         |        |        |      |         |         |        |   |         |         |        |   |         |       
|Pro forma amounts with the change in accounting
principle related to revenue applied retroactively
|                                                                                                   | Net revenues                               |                          |         | N/A                                   |        |      |         | N/A    |        |      |         | 39,823  |        |   |         | 24,568  |        |   |         | 9,811  |       
|                                                                                                   | Net loss                                   |                          |         | N/A                                   |        |      |         | N/A    |        |      |         | (13,169 | )      |   |         | (15,988 | )      |   |         | (9,640 | )     
|                                                                                                   | Basic net loss per share                   |                          |         | N/A                                   |        |      |         | N/A    |        |      |         | (0.67   | )      |   |         | (3.34   | )      |   |         | (2.41  | )     

|                                                   |  |   |        |                |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        |  |  | 
|-------------------------------------------------- |  | - | ------ | -------------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ |  |  | 
|                                                   |  |   |        | MARCH 31,     
|                                                   |  |   |        |               
|                                                   |  |   |        | 2002           |  | 2001 |        | 2000 |  | 1999 |         | 1998
|                                                   |  |   |        |                |  |      |        |      |  |      |         |     
|                                                   |  |   |        | (unaudited)    |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        | 
|                                                   |  |   |        | (IN THOUSANDS)
|BALANCE SHEET DATA:                                |  |   |        |                |  |      |        |      |  |      |         |      |  |   |        |  |  |   |        | 
|Cash, cash equivalents, and short-term
investments |  | $ | 6,334  |                |  | $    | 10,939 |      |  | $    | 73,449  |      |  | $ | 12,202 |  |  | $ | 4,624  | 
|Working capital                                    |  |   | 1,750  |                |  |      | 11,785 |      |  |      | 81,295  |      |  |   | 15,912 |  |  |   | 6,385  | 
|Total assets                                       |  |   | 14,738 |                |  |      | 37,648 |      |  |      | 103,496 |      |  |   | 28,598 |  |  |   | 14,942 | 
|Long-term obligations, less current portion        |  |   | 5,000  |                |  |      | 403    |      |  |      | 1,292   |      |  |   | 15,057 |  |  |   | 1,426  | 
|Total stockholders equity (deficit)               |  |   | (6     | )              |  |      | 20,421 |      |  |      | 86,790  |      |  |   | 5,659  |  |  |   | 8,169  | 



---

|(1) |  | See Note 1 of Notes to the Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

You should read the following discussion in conjunction with our Financial
Statements and the Notes thereto included elsewhere in this Form 10-K.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this discussion contains forward-looking
statements that relate to future events or our future performance such as
statements relating to the sufficiency of our capital resources to fund
continuing operations; our commitment to continue to devote substantial
resources to product research and development; our intentions to expand our
sales and marketing operations; the percentage of our fiscal 2003 sales that
will be derived from new products and anticipated future levels of general and
administrative expenses. In certain cases you can identify forward-looking
statements by terminology such as may, will, should, expects, plans,
anticipates, believes, estimates, predicts, intends, potential or continue or
the negative of such terms or other comparable terminology. These statements
are only predictions. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including but not limited to our
ability to raise sufficient capital to enable us to continue to operate our
business; market acceptance of the our products and the speed at which
customers adopt current and new products for SANs; the ability and willingness
of our OEM and distribution channel partners to buy and sell our products; our
ability to develop, introduce, ship and support new products and product
enhancements; growth rates of the market segment within which we participate;
competition in our industry and the timing of new technology and product
introductions; the ability to retain and hire skilled personnel and the risks
outlined under Risk Factors and elsewhere in this Form 10-K. All
forward-looking statements included in this document are based on information
available to us on the date hereof and we assume no obligation to update any
such forward-looking statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, net revenues and expenses, and related disclosure or contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to uncollectable accounts, intangible assets, and
restructuring. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about amounts and
timing of revenue costs and expenses, the carrying values of assets and the
recorded amount of liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition

During the fourth quarter of fiscal 2001, we changed our accounting method for
recognizing revenue net of appropriate reserves for sales returns when
merchandise is shipped to distribution channel partners, to recognize revenue
and related gross margin when the product is shipped by the distributor to an
end-user. The cumulative effect of this change in accounting policy in fiscal
2001 was an increase in our net loss by $5.3 million. This change in accounting
policy was made effective April 1, 2000. We believe this change is preferable
as it better recognizes the substance of demand for our products due to changes
in the marketplace during fiscal year 2001, and will accordingly better focus
us on, and allow investors to better understand, end user demand trends for our
products.

Our contracts with our distribution channel partners generally contain
additional provisions for stock rotation, which provide for a right of return
for 10% to 15% of the value of purchases during the prior three months, to be
offset with an immediately deliverable order in an amount equal to or greater
than the stock to be rotated. Following our change in revenue recognition for
distribution channel partners, revenue is only recognized when product is sold
by the distributor to an end user, and stock rotation rights are not expected
to materially impair future net revenues.

We continue to record revenue from product sales to OEM customers upon shipment
and we provide an allowance for product returns based on our managements
estimates. Allowances for estimated sales returns are provided at the time of
revenue recognition. Our past product return experience may not be indicative
of future product return rates.

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Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

Inventory Reserves

We establish inventory reserves when we believe our products are not saleable
during the next 12 months based on projected current demand. We believe that
reserving for excess inventory that we do not expect to use or sell within a
normal operating cycle of 12 months is reasonable given product life cycles,
historical experience and the current economic environment. While we have
established excess inventory reserves for the majority of our hub product
inventory and Capellix Fibre Channel switch inventory, we have been able to
continue to sell certain of these products despite low forecasted demand and,
consequently, to date we have not scrapped or liquidated this inventory.

Goodwill and Other Intangible or Long Lived Assets

In assessing the recoverability of our goodwill and other intangible or long
lived assets we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the assets. During fiscal 2001 and
2002, we identified indicators of possible impairment of goodwill and other
intangible and long lived assets. Such indicators included, but were not
limited to, the abandonment of the related product lines and technologies
related to goodwill and other intangible assets, and the impact of the current
economic environment on our equity investment valuation and managements view
that the change in valuation was less than temporary. Consequently, we have
estimated the value of goodwill and other intangible assets to zero and have
written off the balance in these accounts.

Restructuring

We have recorded restructuring charges, some of which are based on estimates
regarding the sublease of excess space at our facilities. If actual market
conditions are less favorable than those projected by management, and we are
unable to sublease the excess space as soon as estimated, or for the estimated
rate, then additional restructuring charges may be required in the future.

OVERVIEW

We were founded in April 1992 and initially developed electronic test
equipment. Since October 1995, we have focused on developing Fibre Channel
switch products that address the needs of the SAN market. Since our inception,
we have incurred significant losses; for the fiscal year ended March 31, 2002,
our net loss was $47.0 million; and as of March 31, 2002, we had an accumulated
deficit of $179.3 million. We have not, and may never, achieve profitability on
a quarterly or annual basis and anticipate that we will incur net losses for
the foreseeable future. We expect to continue to incur significant sales and
marketing, product development and administrative expenses, and as a result, we
will need to generate significant net revenues to achieve and maintain
profitability.

We currently derive substantially all of our net revenues from sales of a
limited number of products within the same product line. During fiscal 2002,
37% of our net revenues came from sales of hub products, 38% from Capellix
Fibre Channel switch products, and 25% from sales of our 2Gb Slingshot Fibre
Channel family of products. During fiscal 2001, 74% of our net revenues came
from sales of hub products and 26% from Capellix Fibre Channel switch products.

We expect that net revenues from our Fibre Channel switch products will
account for a substantial majority of our total net revenues for the
foreseeable future. The percentage of our net revenues derived from Fibre
Channel switch sales may vary significantly from quarter to quarter. We may not
be successful in the adoption of our new products, in particular our Capellix
Fibre Channel switch product and 2Gb Slingshot Fibre Channel family of
products, or the adoption of other products currently under development.
Additionally, even if our customers adopt the 2Gb Slingshot Fibre Channel
family of products or other future products, we cannot assure you that our net
revenues will increase. If sales from new products are lower than expected or
if we are unable to raise additional capital we will be required to make a
significant reduction in operating expenses and capital expenditures in fiscal
2003 to ensure that we will have adequate cash reserves to fund operations
through the end of fiscal 2003.

We depend on a few key customers. In fiscal 2002, 83% of our net revenues came
from HP, Compaq and Bell Microproducts, Inc., with HP and Compaq each
accounting for 10% or more of our net revenues. In fiscal 2001, 81% of our net
revenues came from HP, Compaq and Bell Microproducts, Inc., with HP and Compaq
each accounting for 10% or more of our net revenues. In fiscal 2000, 72% of our
net revenues came from four customers with sales to HP, Compaq , Bell
Microproducts, Inc. and Tokyo Electron Limited

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each accounting for more than 10% of our net revenues. While we are seeking to
diversify our customer base and expand the portion of our net revenues which
are derived from sales through various channels, we anticipate that our
operating results will continue to depend on volume sales to a relatively small
number of OEM customers and distribution channel partners. We may not be
successful in our efforts to diversify our customer base.

We believe net revenues derived from OEM customers and distribution channel
partners will continue to fluctuate for the foreseeable future. During fiscal
2002, 22% of our net revenues were derived from distribution channel partners
and resellers. During fiscal 2001, 19% of our net revenues were derived from
distribution channel partners and resellers. During fiscal 2002 and 2001, net
revenues derived from distribution channel partners were significantly lower
than net revenues derived from OEM customers. Although we have taken several
actions to improve our distribution channel partners abilities to sell our
products to end users, we cannot assure you that demand for our products
through the distribution channel will increase. If we are unable to increase
sales through our distribution channel partners, our net revenues may continue
to decline, and our business could be harmed.

Our gross margins are affected by, among other factors, fluctuations in demand
for our products, the mix of products sold, the mix of sales channels through
which our products are sold, the timing and size of customer orders and product
implementations, new product introductions both by us and by our competitors,
product obsolescence, warranty and repair costs, changes in our pricing
policies and those of our competitors, component costs, and the volume
manufacturing pricing we are able to obtain from our contract manufacturer. We
recognize higher gross margins from sales to distribution channel partners. As
a result, a decrease in sales to these customers will have a greater impact on
gross margins than a decrease in sales to other customers.

Although we enter into general sales contracts with our customers, none of our
customers are obligated to purchase any amount of our products pursuant to
these contracts. We rely on our customers to submit purchase orders for
specific quantities of our products. All of our sales contracts contain
provisions regarding the following: products and pricing; order dates,
rescheduling and cancellations; warranties and repair procedures; and marketing
and/or sales support and training obligations.

Our OEM contracts generally contain additional provisions regarding product
technical specifications, labeling and boxing instructions and other
customization instructions. Certain of our OEM sales contracts contain favored
pricing provisions, as well as confidentiality provisions. Two of our OEM sales
contracts provide the OEM the right to manufacture our product in the event of
a material default we are unable to cure within a specified time period.

We currently outsource all of our manufacturing to Sanmina Corporation, a
third-party manufacturer. Our agreement with Sanmina Corporation provides for
two months of rolling purchase orders and rolling forecasts for the nine months
immediately following the purchase order period. Purchase prices are negotiable
throughout the three-year contract period. We are liable for materials that
Sanmina Corporation purchases on our behalf that we cannot use, cannot be
cancelled before receipt or are unique parts otherwise unusable by Sanmina
Corporation. The agreement restricts our ability to reschedule orders and
allows us to cancel existing orders subject to penalties of up to the total
purchase price. Sanmina Corporation provides warranties on workmanship and
pass-through warranties on component parts. Sanmina Corporation purchases most
of the key components used to manufacture our products. We obtain some of these
key components, such as our application specific integrated circuits, or ASICs,
from sole sources, and other components, such as optical tranceivers, from
limited sources. If we inaccurately forecast demand for our products, Sanmina
Corporation may be unable to provide us with adequate manufacturing capacity.
In addition, Sanmina Corporation may not be able to obtain adequate supplies of
components to meet our customers delivery requirements. Alternatively, excess
inventories may be accumulated by Sanmina Corporation for our account. In order
to reduce the costs of sales, we relocated our manufacturing operations from
Sanmina Corporations manufacturing facility in Santa Clara, California to its
manufacturing facility in Guntersville, Alabama during the second half of
fiscal 2000.

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RESULTS OF OPERATIONS

The following table sets forth financial data for the fiscal years indicated as
a percentage of net revenues:

|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|------------------------------------------------------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ | -- |  |  | ----- | --
|                                                                    |  | YEAR ENDED MARCH 31,
|                                                                    |  |                     
|                                                                    |  | 2002                 |        | 2001 |  | 2000
|                                                                    |  |                      |        |      |  |     
|                                                                    |  | (unaudited)          |        |      |  |      |        |    |  | 
|SUMMARY OF OPERATIONS DATA:                                         |  |                      |        |      |  |      |        |    |  |  |       |   
|Net revenues                                                        |  |                      | 100.0  | %    |  |      | 100.0  | %  |  |  | 100.0 | % 
|Cost of revenues                                                    |  |                      | 55.3   |      |  |      | 83.4   |    |  |  | 54.8  |   
|Cost of revenues  inventory write-downs                            |  |                      | 22.8   |      |  |      | 13.3   |    |  |  |      |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Gross margin                                                        |  |                      | 21.9   |      |  |      | 3.3    |    |  |  | 45.2  |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Operating expenses:                                                 |  |                      |        |      |  |      |        |    |  |  |       |   
|Research and development                                            |  |                      | 96.6   |      |  |      | 88.2   |    |  |  | 38.0  |   
|Sales and marketing                                                 |  |                      | 59.3   |      |  |      | 72.1   |    |  |  | 24.3  |   
|General and administrative                                          |  |                      | 32.9   |      |  |      | 24.0   |    |  |  | 8.9   |   
|Amortization of acquired intangible assets                          |  |                      |       |      |  |      | 11.5   |    |  |  |      |   
|In-process research and development costs                           |  |                      |       |      |  |      | 14.7   |    |  |  |      |   
|Impairment of long lived assets                                     |  |                      |       |      |  |      | 53.6   |    |  |  |      |   
|Write-down of abandoned long lived assets                           |  |                      | 15.2   |      |  |      |       |    |  |  |      |   
|Restructuring and other expenses                                    |  |                      | 26.3   |      |  |      | 7.6    |    |  |  |      |   
|Amortization of deferred compensation                               |  |                      | 4.1    |      |  |      | 1.6    |    |  |  | 2.4   |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Total operating expenses                                            |  |                      | 234.4  |      |  |      | 273.3  |    |  |  | 73.6  |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Loss from operations                                                |  |                      | (212.5 | )    |  |      | (270.0 | )  |  |  | (28.4 | ) 
|Interest income, net of interest expense                            |  |                      | (1.2   | )    |  |      | 7.0    |    |  |  | 6.8   |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Net loss before cumulative effect of change in accounting
principle |  |                      | (213.7 | )    |  |      | (263.0 | )  |  |  | (21.6 | ) 
|Cumulative effect of change in accounting principle                 |  |                      |       |      |  |      | (15.9  | )  |  |  |      |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Net loss                                                            |  |                      | (213.7 | )    |  |      | (278.9 | )  |  |  | (21.6 | ) 
|Dividend related to common stock                                    |  |                      | (1.7   | )    |  |      |       |    |  |  |      |   
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   
|Net loss attributable to common shareholders                        |  |                      | (215.4 | )%   |  |      | (278.9 | )% |  |  | (21.6 | )%
|                                                                    |  |                      |        |      |  |      |        |    |  |  |       |   

Net Revenues

Net revenues declined by $11.5 million or 35% to $21.8 million in fiscal 2002,
from $33.3 million in fiscal 2001. The decrease in net revenues during fiscal
2002 is primarily due to a $12.5 million reduction in sales of our older
Gibraltar hub products which are in the process of being phased out. This
reduction in hub product sales was partially offset by $5.4 million in net
revenues from sales of our new 2Gb Slingshot Fibre Channel family of products
(the Fabric Switch 6, a 6 port embedded option for Compaqs new MSA 1000
product and the Slingshot 4210 and 4218). Sales of our Capellix 2000 and 3000
switch products for fiscal 2002 as compared to fiscal 2001 were approximately
the same for both comparative period ends. During fiscal 2002, 38% of our net
revenues were generated by the sales of our Capellix Fibre Channel switch
products, 37% from the sale of our older hub products and 25% from our newer
2Gb Slingshot Fibre Channel family of products. The Company continues to phase
out the sale of hub products in favor of the Capellix and Slingshot switch
products which is reflected in the sales mix. During fiscal 2001, 26% of our
revenue was generated by the sale of our Capellix Fibre Channel switch products
and 74% from the sale of hub products compared to 25% and 75%, respectively, in
fiscal 2000, respectively. Net revenues declined by
$14.6 million or 31% to
$33.3 million in fiscal 2001, from $47.9 million in fiscal 2000. The decrease
in net revenues during fiscal 2001 was primarily due to lower sales of our
Gibraltar hub product line due to decreased demand for hub products generally
and slower than anticipated adoption of our Capellix Fibre Channel switch
products. In fiscal 2000, we began commercial shipments of our Capellix 3000
and Capellix 2000 switch products, however as noted above the majority of our
net revenues during fiscal 2002 were generated from sales of older hub
products.

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Sales to OEM customers during fiscal 2002 represented 78% of our net revenues
and sales to distribution channel partners and resellers represented 22% of our
net revenues, with sales to HP and Compaq accounting for 77% of our net
revenues. Sales to OEM customers during fiscal 2001 represented 81% of our net
revenues and sales to distribution channel partners and resellers represented
19% of our revenue, with sales to HP and Compaq accounting for 75% of our net
revenue. Sales to OEM customers and distributors during fiscal 2000 represented
59% and 41% of our net revenues, respectively, with sales to HP, Compaq, Bell
Microproducts, Inc. and Tokyo Electron Limited, accounting for 72% of our net
revenues. The significant increase in the percentage of our revenue derived
from sales to OEM customers in fiscal 2002 and 2001 as compared to fiscal 2000
resulted primarily from our decision to focus on sales to OEM customers because
we believe OEM customers will order higher volumes than distributors; sales to
OEM customers tend not to be subject to return pressures; we experience less
collectibility issues with respect to our accounts receivables with OEM
customers; sales to OEM customers require less time and effort on the part of
our sales force as compared to sales to distribution channel partners; and
sales to OEM customers require little or no specialized support or training.

Net revenues by geographic area during fiscal 2002 were 72% from North America,
23% from Europe and 5% from Asia. Net revenues by geographic area during
fiscal 2001 were 72% from North America, 25% from Europe and 3% from Asia.
During fiscal 2000, these percentages were 70% from North America, 19% from
Europe and 11% from Asia.

Net revenues during fiscal years 2002, 2001 and 2000 may not be indicative of
future results. In fiscal 2003, we expect that a substantial majority of our
net revenues will come from the sale of new products, including our 2Gb
Slingshot Fibre Channel family of products. In May 2002 our two OEM customers,
HP and Compaq, completed a merger of the two companies. The combined company
may buy fewer of our products than if HP and Compaq were purchasing storage
area network products as separate companies.

Gross Margins

Gross margins increased in by $3.7 million or 336% during fiscal 2002 as
compared to fiscal 2001. Furthermore, gross margins excluding the impact of
inventory write-downs, increased in by $4.2 million or 77% during fiscal 2002
as compared to fiscal 2001. As a percentage of net revenues, gross margins
increased 19% in fiscal 2002 to 22% as compared to 3% in fiscal 2001. As a
percentage of net revenues, gross margins excluding the impact of inventory
write-downs, increased 28% in fiscal 2002 to 45% as compared to 17% in fiscal 2001.
The increase in gross margin during fiscal 2002 as compared to fiscal 2001 was
primarily due to charges taken during fiscal 2001 of $10.6 million to the
inventory reserves for excess and obsolete products. This is compared to charges taken during fiscal 2002 of $5.0
million to the inventory reserves for excess and obsolete products. The gross
margin for fiscal 2002 was also impacted by a favorable settlement of certain
outstanding amounts due to suppliers. During fiscal 2002, we settled a $1.2
million purchase commitment dispute with a supplier for $450,000. In the
previous fiscal year, we had entered into a purchase order commitment for
material which we later attempted to cancel. In fiscal 2001, we accrued $1.2
million as part of cost of sales as we had no use for this material and were in
negotiations with the supplier as to the ultimate amount to be paid. In June
2001, when the favorable settlement agreement was signed, the remaining
$750,000 accrual was reversed into cost of sales and we subsequently paid the
balance of $450,000 in early July 2001. The original accrual was based on
managements estimate of the likely outcome of the settlement negotiations with
the suppliers and was originally recorded in fiscal year 2001.

Gross margins decreased by $20.6 million or 95%, during fiscal 2001 compared to
fiscal 2000. As a percentage of net revenues, gross margins declined from 45%
in fiscal 2000 to 3% in fiscal 2001. The decrease in gross margin during fiscal
2001 as compared to fiscal 2000 was primarily due to the following factors.
First, we wrote off $2.5 million of unsellable material and increased our
reserves for excess and obsolete inventory by $10.6 million based on the
forecasted demand for the next 12 months during fiscal 2001. Second, we
recorded production cancellation penalties of $1 million as a result of lower
than expected net revenues in fiscal 2001. Last, we experienced lower sales
volumes to distribution channel partners, for which gross margins are typically
higher than OEM customers during fiscal 2001 as compared to fiscal 2000. 19%
of our net revenues were derived from sales to distributors and resellers
during fiscal 2001 as compared with 30% in fiscal 2000.

Gross margins during fiscal years 2002, 2001 and 2000 may not be indicative of
future results. In fiscal 2003, we expect that a substantial majority of our
net revenues will come from the sale of new products, including our 2Gb
Slingshot Fibre Channel family of products. In May 2002 our two OEM customers,
HP and Compaq, completed a merger of the two companies. The combined company
may buy fewer of our products than if HP and Compaq were purchasing storage
area network products as separate companies.

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Research And Development Expenses

Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
material costs for prototypes and test units and other expenses related to the
design, development, testing and enhancements of our products. We expense our
research and development costs as they are incurred. Research and development
expenses decreased to $21.1 million in fiscal 2002, from $29.4 million in
fiscal 2001. Research and development expenses in fiscal 2000 were $18.2
million. In fiscal 2002 research and development expenses were 97% of net
revenues as compared to 88% of net revenues in fiscal 2001 and 38% of net
revenues in fiscal 2000. The decrease in research and development expenses in
fiscal 2002 in absolute dollars as compared to fiscal 2001 was due to the
implementation of managements plans to reduce expenses and streamline
operations, which included reductions in force in research and development
areas. The increase in fiscal 2001 as compared to fiscal 2000 in absolute
dollars was primarily due to additional research and development personnel,
including the addition of our strategic research and development team and our
two ASIC development teams primarily devoted to our development of new products
including the Capellix Fibre Channel products and the 2Gb Slingshot Fibre
Channel family of products.

As a result of the reductions in force and other expense reduction efforts that
have occurred from March 2001 to June 2002 we expect future levels of product
research and development expenses will be reduced in absolute dollars.

Sales And Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. Sales and marketing expenses
decreased by 46% to $12.9 million in fiscal 2002 from $24.0 million in fiscal
2001, and increased by 107% to $24.0 million in fiscal 2001 from $11.6 million
fiscal 2000. In fiscal 2002 sales and marketing expenses were 59% of net
revenues as compared to 72% of net revenues in fiscal 2001 and 24% of net
revenues in fiscal 2000. The decreased spending in fiscal 2002 as compared to
fiscal 2001 in absolute dollars was due to the implementation of managements
plans to reduce expenses and streamline operations, which included reduction s
in force in sales and marketing areas. The increased spending in fiscal 2001
as compared to fiscal 2000 in absolute dollars was primarily due to the hiring
of additional sales and marketing personnel and the expansion of our sales and
marketing efforts to support the launch of new products including the Capellix
Fibre Channel products and the 2Gb Slingshot Fibre Channel family of products.

As a result of the reductions in force and other expense reduction efforts that
have occurred from March 2001 to January 2002 we expect that future levels of
sales and marketing expenses will be reduced in absolute dollars.

General And Administrative Expenses

General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, accounting, information technology, facilities
and human resources personnel, recruiting expenses, professional fees and costs
associated with expanding our information systems. General and administrative
expenses decreased by 10% to $7.2 million during fiscal 2002 from $8.0 million
in fiscal 2001, and increased 86% to $8.0 million during fiscal 2001 from $4.3
million in fiscal 2000. In fiscal 2002 general and administrative expenses were
33% of net revenues as compared to 24% of net revenues in fiscal 2001 and 9%
of net revenues in fiscal 2000. The decrease in absolute dollars during fiscal
2002 as compared to fiscal 2001 was due to the implementation of managements
plans to reduce expenses and streamline operations, which included reductions
in force in general and administrative areas. The increase during fiscal 2001
in a absolute dollars was primarily attributable to increased personnel,
additional expenses incurred related to the anticipated growth of our business,
expansion of our facilities and information infrastructure and our operation as
a public company.

As a result of the reductions in force and other expense reduction efforts that
have occurred from March 2001 to June 2002 we expect that future levels of
general and administrative expenses will be reduced in absolute dollars.

Amortization Of Deferred Compensation

Amortization of deferred compensation of $973,000 was recorded in fiscal 2002
compared to $608,000 in fiscal 2001.

In December 2001, in an effort to provide added incentive and retention of
valuable employees, we granted options to purchase 5.8 million shares of common
stock to all employees (including executives) that were expected to remain
employed by us after our January 2002 reduction in force. Fifty percent of the
5.8 million shares were granted at the fair market value of the common stock at
the date of grant. The other fifty percent of the 5.8 million shares were
granted at prices below the market closing price on the date of grant and will
vest over the six month period from December 17, 2001 through June
17, 2002. The difference between the fair market value of the common stock and
the option exercise price at the date of grant of $1.1 million was recorded as
deferred compensation in stockholders equity on the Condensed Balance Sheet at
December 31, 2001. In January, while there was a net

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reduction in force of staff of 100 employees, 4 employees were hired in key
areas and were awarded stock options both at the fair market value as well as
at a discount, respectively, from the closing price on the dates of their
grant. The deferred compensation generated by the discounted priced stock
options of these January 2002 hired employees will be amortized through July,
2002. Thus, amortization to compensation expense of the stock options granted
at a discount in December, 2001 and January 2002 commenced in December 2001 and
will continue over the seven month period ending July 2002.

In connection with the grant of stock options to employees during the year
ended March 31, 1999, we recorded deferred compensation within stockholders
equity of $3.0 million for stock options prior to our initial public offering
in July 1999. This represents the difference between the estimated fair value
of the common stock for accounting purposes and the option exercise price of
these options at the date of grant.

The remaining deferred compensation at
March 31, 2002 is $541,000 and will be
amortized to compensation expense during the quarter
ended June 30, 2002.

Amortization Of Acquired Intangible Assets

In connection with the acquisition of SmartSAN Systems, Inc. (SmartSAN) in
April 2000, we amortized acquired intangible assets, including goodwill,
developed technology and other intangible assets of $20.7 million over their
estimated useful lives of five years on a straight-line basis. For fiscal 2001,
we amortized $3.8 million of goodwill and acquired intangible assets. During
the fourth quarter of fiscal 2001, we wrote off the remaining $16.8 million of
goodwill and reported this as a separate line item on our Statement of
Operations.

In-Process Research And Development Costs

In connection with the acquisition of SmartSAN, we expensed $4.9 million of
in-process research and development costs which represented 20% of the purchase
price. This amount represented the estimated fair value based on risk-adjusted
cash flows related to the incomplete research and development projects. At the
date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition dated.

At the acquisition date, SmartSAN was conducting design, development,
engineering and testing activities associated with the development of next
generation Geminix products: SDM3000, RDM4000, and DDM5000, valued at $800,000,
$1.1 million, and $3.0 million, respectively. The SDM3000 was a next
generation Fibre Channel to Fibre Channel router; the RDM4000 was being
developed as a Fibre Channel to LAN/WAN remote domain manager; and the DDM5000
was scheduled to be the flagship distributed domain manager incorporating
advanced storage virtualization. SmartSAN engineers had made significant
progress on the projects as of the acquisition date, including design of the
overall architecture, and in some cases, much of the development work. However,
substantial integration and testing activities remained to develop the
technologies into commercially viable products. At the acquisition date, the
technologies under development were approximately 80%, 65% and 25% complete,
based on engineering man-month data and technological progress. SmartSAN had
spent $700,000 on the in-progress projects, and expected to spend $2.5 million
to complete all phases of the R&D projects. Anticipated completion dates ranged
from 2 months for the SDM3000 to 12 months for the DDM5000, at which times we
expected to benefit, and generate cashflows, from the developed technologies.

In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchase in-progress technology was determined by
estimating the costs to develop the acquired technology into commercially
viable products, estimating the resulting net cashflows 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 us and our
competitors. The resulting net cash flows from such projects are based on
managements estimates of costs of sales, operating expenses, and income taxes
from such projects. The rates utilized to discount the net cash flows to their
present value were based on estimated cost of capital calculations. Due to the
nature of the forecast and the risks associated with the projected growth and
profitability of the development projects, discount rates of 40% to 45% were
used in the analysis. These discount rates were commensurate with the projects
stage of development and the uncertainties in the economic estimates described
above.

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Restructuring And Impairment Charges

During the fourth quarter of fiscal 2001, we implemented our plan to focus our
resources on the development of open fabric switch technology products and to
restructure our business operations. This resulted in the termination and
abandonment of the Axxess and Geminix product lines, reduction of personnel
and consolidation of all San Jose, California operations in one building. In
connection with this restructuring, we recorded expenses of $2.5 million and an
additional expense of $17.8 million relating to the impairment of long term
assets, primarily relating to the write-off of the remaining goodwill and
acquired intangible assets that resulted from the SmartSAN acquisition which
was completed in April 2000. After completing the SmartSAN acquisition, we
realized that the IP router market was extremely competitive and would require
significant additional funding to develop products and provide support. In
March 2001, we changed our product strategy and refocused our efforts
exclusively on the higher margin, open fabric switch market. Consequently, the
product lines and technologies acquired in the SmartSAN acquisition were
abandoned because they did not support open-fabric switch technology. As a
result of this write-down of goodwill and acquired intangibles related to the
Axxess and Geminix product lines, we eliminated $350,000 of goodwill
amortization in fiscal 2001.

During fiscal 2002, in response to new challenges in the business environment
we began to implement a restructuring program in an effort to reduce operating
expenses. In August 2001, we reduced our headcount by 16 employees, or 7% of
our work force, and paid $300,000 in severance costs in the quarter ended
September 30, 2001. These costs were included in research and development,
sales and marketing and general and administrative expenses. In October 2001,
we reduced our headcount by 30 employees, or 15% of our work force, and paid
$700,000 in severance and other personnel related costs. The $700,000 of
severance and other personnel costs paid were included in restructuring charges
in the period ended December 31, 2001.

In December 2001, the Board approved a restructuring plan to further reduce
operating expenses in response to expected reduced short term demand for our
products. In connection with the restructuring plan, we recorded a
restructuring charge of $2.3 million in the quarter ended December 31, 2001,
related to the shutdown of the Irvine, California satellite engineering office,
the shutdown of all overseas sales offices and costs associated with a vacant
office building in San Jose, California which we have been trying to sub-lease
for the past year. These facility charges are net of estimated sub-lease income
that we expect to generate from the vacated facilities. The December 2001
restructuring plan also included an additional 54% reduction in overall
headcount, completed in January 2002, consisting of 91 employees. During the
quarter ended March 31, 2002, we recorded additional restructuring expenses of
$2.7 million related to severance and personnel related costs in connection
with the January 2002 reduction in force and $3.3 million related to the
write-off of abandoned computer equipment, software, engineering material and
leasehold improvements.

In April and June of 2002, we reduced our headcount by a total of 33 employees.
We expect restructuring costs for the quarter ended June 30, 2002, associated
with the payment of severance and other personnel related costs to be
approximately $1.0 million.

Inventory and Accounts Receivable Charges and Reserves

In the fourth quarter ended March 31, 2002, we booked a $4.4 million increase
to the inventory reserve by evaluating March 31, 2002 inventory levels along
with the projected prospective 12 month sales and any locked purchase
commitments. Included in the $4.4 million inventory reserve, was $900,000 of
raw materials that we were required to buy from our contract manufacturer since
those raw materials related to products that we no longer were requiring for
manufacture on our behalf. Additionally, we wrote off $600,000 of inventory
associated with the introduction of new products and development of prototypes
and production builds (comprised of raw materials as well as finished goods).
These write-downs were determined by management to be outside of normal cost of
sales charges and thus, were separately disclosed on the face of our Statements
of Operations.

In the quarter ended September 30, 2000, our inventory balance began to
increase. During the same quarter we implemented a policy to create a reserve
for inventory items determined to be excess or obsolete. Excess inventory is
determined to be any on hand inventory item at a given reporting date in excess
of anticipated 12 month demand. In the quarters ended September 30, 2000,
December 31, 2000 and March 31, 2001, we recorded inventory reserves of $6.8
million, $1.5 million and $2.3 million, respectively, for excess and obsolete
inventory. These reserves were primarily related to our excess Capellix 3000
and hub products. Of this total, $4.4 million was determined by management to
be outside of our normal course of business, and therefore, was separately
disclosed on the face of our Statements of Operations. During fiscal 2001, we
scrapped $2.5 million of inventory that had been reserved as excess or obsolete
inventory.

In addition, because of a deterioration in general economic conditions and, in
particular, problems experienced by our distribution channel partners, during
fiscal 2002 and 2001 we wrote off $464,000 and $420,000,
respectively, of uncollectable accounts receivable and
increased our reserve for doubtful accounts by $383,000 and $172,000,
respectively.

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Interest and other income, net

Interest and other income, net, is comprised of income from our cash
investments and expenses related to our financing obligations. Interest and
other income, net, totaled $253,000 net expense in fiscal 2002, compared to
$2.3 million net income in fiscal 2001 and $3.3 million net income in fiscal
2000. The decrease in interest and other income, net, is primarily the result
of lower interest income earned due to cash usage to support operating
activities, working capital and capital spending.

Income Taxes

As of March 31, 2002, we had $159 million of federal and $42 million of state
net operating loss carryforwards for tax purposes available to offset future
taxable income. We also had federal and state research and development tax
credit carryforwards of $3.1 million and $2.0 million respectively. Such net
operating and research credit loss carryforwards expire at various dates
beginning in 2002 through 2022. We have not recognized any benefit from the
future use of loss carryforwards for these periods or for any other periods
since inception because managements estimate of the realizability of the tax
benefits of the loss carryforwards indicates that the underlying assumptions of
future profitable operations contain risks that do not provide sufficient
assurance for us to recognize such benefits currently.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, we had $6.3 million in cash and cash equivalents and $1.8
in net working capital, a decrease of $4.6 million in cash and cash equivalents
and a decrease of $10.0 million in net working capital from the prior fiscal
year. As of March 31, 2001, we had $10.9 million in cash and cash equivalents
and $11.8 in net working capital. We incurred a net loss in the year ended March 31, 2002 of
$47.0 million and have an accumulated deficit of $179.3 million as of March 31,
2002. We have continuously incurred net losses from operations and used $33.7
million of cash in operations for the year ended March 31, 2002, and have
working capital of $1.8 million as of March 31, 2002. Since inception, we have
financed our operations primarily through private sales of common stock,
convertible preferred stock, the issuance of a convertible note, equipment
lease financings and an initial public offering of common stock.

In fiscal 2002, we used $33.7 million in cash for operating needs. Non-cash
items in fiscal 2002 included depreciation of $4.3 million, amortization of
deferred compensation of $973,000, a $3.6 million increase in inventory
reserves for excess and obsolete inventory, a $3.3 million write-down of
impaired long-lived assets and non-cash restructuring charges of $1.4 million.
Net working capital was reduced by $10.0 million from the prior
fiscal year, which was largely the result of lower accounts payable and accrued
expenses and deferred revenue levels. Additionally, in fiscal 2002, we used
$2.1 million in cash for investing activities primarily due to the $2.5 million
of cash was used to acquire equipment. Lastly, in fiscal 2002, cash provided
by financing activities was $31.2 million. Net proceeds from the issuance of
our common stock provided $25.6 million during fiscal 2002 as we sold
18,425,000 shares of our common stock in private placement transactions during
May 2001, August 2001, January 2002 and through employee stock sales and stock
option exercises. Additionally, in January 2002 we borrowed $5.0 million under
our convertible debt financing agreement and in March 2002, we borrowed $1.6
million against our eligible accounts receivables.

Our cash needs depend on numerous factors, including market acceptance of and
demand for our switch products, particularly new products currently being sold,
under evaluation by customers or under development including the 2Gb Slingshot
Fibre Channel family of products; our ability to develop and introduce new
products and product enhancements, and at prices at which we can sell our
products; the resources we devote to developing, marketing, selling and
supporting our products; the timing and expense associated with expanding our
distribution channels; increases in manufacturing costs and the prices of the
components we purchase; and other factors. In fiscal 2003, a substantial
portion of our net revenues are expected to be derived from the sale of new
products currently being sold or under evaluation, including the FabriCore
Engines Technology Suite and the 2Gb Slingshot Fibre Channel family of
products. We cannot assure you that we will be able to develop, introduce and
sell our products (including FabriCore Engines Technology Suite or the 2Gb
Slingshot Fibre Channel family of products or any other new products)
successfully and in the timeframe we expect or that these products will be
adopted by OEM customers and distribution channel partners, or that significant
net revenues would be derived if so adopted. In addition, we are attempting to
reduce our financial commitments and reduce future cash outflows by negotiating
alternative terms with our suppliers. Cost cutting measures could also include
additional reductions in force. Further, we are working with our channel
partners to increase net revenues through new marketing programs and
promotions, and are exploring potential additional sources of revenue.

Based on our current revenue projections and cost cutting measures, we believe
that our cash reserves, working capital and accounts receivable financing lines
will be adequate to fund our operations during the next twelve months. However,
there is no assurance that additional financing will not be required to fund
operations in the future. Additional financing may not be available to us on
favorable terms if at all. Even if additional financing is available, we may be
required to obtain the consent of our stockholders, which we may not be able to
obtain. If additional financing is not available, we may need to dramatically
change our business plan, sell or merge our business, or file for bankruptcy.
In addition, the issuance of equity or equity-related securities will dilute
the ownership interest of our stockholders and the issuance of debt securities
could increase the risk or perceived risk of our company to our investors,
customers

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and others. If we are unable to raise additional capital or if net revenues
from the sale of new products are lower than expected in fiscal 2003, we will
be required to make additional reductions in operating expenses and capital
expenditures to ensure that we will have adequate cash reserves to fund
operations through the end of fiscal 2003. Additionally, we may do one or more
of the following: engage a financial advisor to explore strategic
alternatives, which may include a merger, asset sale, or another comparable
transaction; raise additional capital to fund continuing operations by private
placements of equity and/or debt securities; or form a joint venture with a
strategic partner or partners to provide additional capital resources to fund
operations.

We are obligated under operating leases for our facilities for payments
totaling $2.7 million during fiscal 2003, and a large part of these payments
relate to excess facilities. The expense associated with excess facilities
charges of $1.5 million through March 31, 2003 have been expensed as
restructuring charges in fiscal 2002 and are accrued on our balance sheet as of
March 31, 2002. The following table outlines the timing for future payments
of our operating lease obligations along with other contractual obligations.
Our Long-Term Debt and Capital Lease Obligations are recorded on our balance
sheet.

|                          |  |                        |        |        |  |           |       |           |  |           |        |  |  |  |       |  |  |         |       | 
|------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | --------- |  | --------- | ------ |  |  |  | ----- |  |  | ------- | ----- | 
|                          |  | Payments Due by Period
|                          |  |                       
|                          |  |                        |        |        |  |           |       |           |  |           |        |  |  |  |       |  |  | Years 6
|                          |  | Total                  |        | Year 1 |  | Years 2-3 |       | Years 4-5 |  | and above
|                          |  |                        |        |        |  |           |       |           |  |          
|Long-Term Debt            |  |                        | 5,360  |        |  |           |      |           |  |           | 5,360  |  |  |  |      |  |  |         |      | 
|Capital Lease Obligations |  |                        | 408    |        |  |           | 408   |           |  |           |       |  |  |  |      |  |  |         |      | 
|Operating Leases          |  |                        | 17,057 |        |  |           | 2,741 |           |  |           | 5,632  |  |  |  | 5,846 |  |  |         | 2,838 | 
|Total                     |  |                        | 22,825 |        |  |           | 3,149 |           |  |           | 10,992 |  |  |  | 5,846 |  |  |         | 2,838 | 

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144 Accounting for the Impairment or Disposal of Long Lived Assets. SFAS No.
144 addresses financial accounting and reporting for the long-lived assets to
be held, used and disposed of. The statement will be effective for the
financial statements issued for fiscal years beginning after December 15, 2001.
We have not yet determined what impact the adoption of SFAS No. 144 will have
on our financial position or results of operations.

In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. SFAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. SFAS 142 will have no affect on our financial statements in that all
goodwill and intangible assets have been written off due to impairment during
2001.

In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, Accounting for Certain
Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133,
which is effective for all fiscal years beginning after June 15, 2000. SFAS No.
138 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivatives fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Because we do not currently hold
any derivative instruments and do not currently engage in any material hedging
activities, we believe that the application of SFAS No. 138 will not have a
material impact on our financial position or results of operations.

RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this Form 10-K for the year ended March 31, 2002.
Risks and uncertainties, in addition to those we describe below, that are not
presently known to us, or that we currently believe are immaterial may also
impair our business operations. If any of the following risks occurs, our
business, operating results and financial condition could be seriously harmed.
In addition, the trading price of our common stock could decline due to the
occurrence of any of these risks. You should read the following discussion in
conjunction with our discussion of forward-looking statements included
elsewhere in this Form 10-K.

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RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION

WE HAVE INCURRED NET LOSSES IN EVERY FISCAL QUARTER SINCE OUR INCEPTION IN 1992
AND WE MAY NEVER BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.

We have incurred net losses in every fiscal quarter since our inception in
1992, most recently a net loss of $16.9 million in our quarter ended March 31,
2002. We incurred a net loss in fiscal 2002 of $47.0 million and we had an
accumulated deficit of $179.3 million as of March 31, 2002. If we are unable to
increase revenue so that we achieve profitability, our operating results will
suffer and the price of our common stock may fall. We expect to incur
significant product development, sales and marketing and general and
administrative expenses as we focus our business on the design, development,
manufacturing and sales of Fibre Channel switching products, in particular our
2Gb Slingshot Fibre Channel family of products. Our first 2Gb Slingshot product
became commercially available in July 2001. Because we have directed the focus
of our business to our switch products and continue to phase out our hub
product line, we do not expect to generate substantial revenue in the future
from the sales of our hub products. In fiscal 2002, of our $21.8 million in
revenue, $13.7 million, or 63%, was attributable to sales of our switch
products and $8.1 million, or 37%, was attributable to our hub products. For
fiscal 2002, $5.4 million or 25% or our net revenues came from sales of our new
2 Gb Slingshot family of products. In fiscal 2001, of our $33.3 million in
total revenue, $24.6 million, or 74%, was attributable to sales of our hub
products, and $8.7 million, or 26%, was derived from sales of our switch
products. Our future operating results will depend on many factors, including
the growth of the Fibre Channel switch market and market acceptance of our
FabriCore Engines Technology Suite and Fibre Channel switch products. We may
never be able to achieve or sustain profitability.

WE HAVE LIMITED WORKING CAPITAL AND WE WILL NEED TO RAISE ADDITIONAL FINANCING
TO SUSTAIN OUR BUSINESS.

We had only $1.8 million in working capital available as of March 31, 2002. We
have never been profitable and we used $33.7 million of cash for operating
activities in fiscal 2002, and $51.0 million in fiscal 2001. If we are unable
to raise additional financing or if sales of our storage area network products
are lower than we expect, we may be unable to sustain our business. Additional
financing may not be available to us when and as required on commercially
reasonable terms, if at all. In the event we are able to obtain additional
financing, the issuance of equity or equity-related securities will dilute the
ownership interest of our existing stockholders and the issuance of debt
securities could increase the risk or perceived risk of our business. Issuance
of debt securities could also impair our financial condition and interest
payments could have an adverse effect on our results of operation. In
connection with our January 2002 issuance of a convertible debenture to Berg &
Berg Enterprises, evidencing $5.0 million in principal indebtedness, we granted
Berg & Berg a security interest in all of our assets. The terms of the Berg &
Berg debenture and the security agreement governing the security interest,
including restrictions on our ability to joint security interests in our
assets, may impair our ability to raise additional financing, whether debt or
equity. Additionally, if our common stock does not continue to be listed on
The Nasdaq National Market, this would also impair our ability to raise
additional financing. If we are unable to raise additional capital or if sales
from our switching products are lower than expected, we will be required to
make further reductions in operating expenses and capital expenditures in 2002
to ensure that we will have adequate cash reserves to fund operations through
the end of fiscal 2003 and beyond. Additionally, we would be required to
explore strategic alternatives, which may include a merger, asset sale or
another comparable transaction or form a joint venture with a strategic partner
or partners to provide additional capital resources to fund operations. If
additional financing is not available, we may need to dramatically change our
business plan, sell or merge our business or face bankruptcy.

IF WE ARE UNABLE TO RAISE ADDITIONAL FINANCING, IF WE CONTINUE TO EXPERIENCE
SIGNIFICANT LOSSES, AND IF OUR TRADING PRICE DOES NOT INCREASE TO THE MINUMUM
BID PRICE REQUIRED BY NASDAQ, WE MAY NOT MEET THE CONTINUED LISTING CRITERIA
FOR THE NASDAQ NATIONAL MARKET OR THE NASDAQ SMALLCAP MARKET, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS AND FINANCIAL CONDITION.

If we are unable to continue to list our common stock for trading on The Nasdaq
National Market, this could materially adversely affect business, including,
among other things: our ability to raise additional financing to fund our
operations; our ability to attract and retain customers and distributors; and
our ability to attract and retain personnel, including management personnel.
In addition, if we were unable to list our common stock for trading on The
Nasdaq National Market, many institutional investors would no longer be able to
retain their interests in and/or make further investments in our common stock
because of their internal rules and protocols. If institutional shareholders
liquidated their holdings in our common stock and/or did not continue to make
investments in our common stock, this would decrease the trading volume of our
shares and would likely result in a lower price for our common stock.

Continued listing on The Nasdaq National Market requires that the minimum bid
price of our common stock not fall below $1.00 for 30 consecutive trading days.
However, in September 2001, The Nasdaq National Market announced that it was
suspending the minimum bid requirement until January 2, 2002. We received
notification from The Nasdaq Stock Market that we are out of compliance with
the minimum bid price requirement of $1.00 per share set forth in Marketplace
Rule 4450(a)(5). Therefore, our securities are subject to delisting from The
Nasdaq National Market. We have requested a hearing with Nasdaq, and our stock
will remain listed on The Nasdaq National Market at least until the date of the
hearing, which will occur on July 12, 2002. There can be no assurance the
Nasdaq Listing Qualifications Panel will grant our request for continued
listing after the hearing.

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Furthermore, eligibility for continued listing on The Nasdaq National Market
currently requires, among other things, that we have either stockholders
equity in excess of $10.0 million or that our net tangible assets exceed $4.0
million. The Nasdaq National Market is in the process of phasing out the net
tangible assets test and, after November 1, 2002, we must meet the $10.0
million stockholders equity requirement. As of March 31, 2002, our
stockholders equity and net tangible assets were each ($6,000). Consequently,
as of March 31, 2002 we did not meet this aspect of The Nasdaq National Market
continued listing requirements. Additionally, we currently do not
meet the $1.00 per share minimum bid price and shareholders' equity
requirements to maintain a listing on The Nasdaq SmallCap Market.

Furthermore, under the terms of our equity and debt
financings completed in May 2001, August 2001 and January 2002, we
made covenants to our investors that we would use our best efforts to
maintain the listing of our common stock on The Nasdaq National
Market or The Nasdaq SmallCap Market. If we fail to maintain the
listing of our stock on such markets, our investor may assert claims
that we have failed to comply with these covenants. In addition,
under the terms of the registration rights agreements we entered into
with our equity investors in May 2001, August 2001 and January 2002,
if our stock is not listed on The Nasdaq National Market or The
Nasdaq SmallCap Market, we are obligated to pay penalties to our
investors as provided in such registration rights agreements.

WE HAVE EXPERIENCED SIGNIFICANT TURNOVER IN OUR MANAGEMENT TEAM AND OUR ABILITY
TO SUSTAIN AND GROW OUR BUSINESS IS DEPENDENT UPON OUR NEW MANAGEMENT TO
EXECUTE OUR BUSINESS PLAN.

Our ability to sustain and grow our business will depend to a significant
extent on the ability of our new management team to execute our business plan.
During fiscal 2002 and continuing in fiscal 2003, several members of our prior
management team left the company. In May 2002, Stephen Dalton was appointed
our President and Chief Executive Officer. Mr. Dalton previously served as our
Vice President, Engineering. Barbara Velline, our Vice President of Finance
and Chief Financial Officer, joined us in early 2002. None of our employees,
including our executive officers, is bound by a term employment agreement, and
we do not maintain key man life insurance on any employee. The loss of one or
more of our executive officers or key employees, including the decision of one
or more of such officers or employees to join a competitor or otherwise compete
directly or indirectly with us could have a material adverse effect on our
business, financial condition and prospects. Our current executive officers
have been employed by us in their current capacities only for a relatively
short period of time. Our new management team has devoted substantial effort in
refocusing our product, sales and marketing strategies. Our future success is
dependent upon the ability of our management team to, among other matters,
increase revenue, recruit and retain additional executives, complete
prospective financing activities and reduce our expenses. If we fail to do
this, our business and prospects will be impaired.

WE MAY NOT BE ABLE TO REDUCE OUR OPERATING EXPENSES SUFFICIENTLY TO REDUCE OUR
NET LOSSES AND SUSTAIN OUR BUSINESS. THIS MAY IMPAIR OUR ABILITY TO ATTRACT
ADDITIONAL FINANCING.

We incurred $51.2 million in operating expenses in fiscal 2002, and in $91.0
million fiscal 2001. We may not be able to reduce our operating expenses
sufficiently to reduce our net losses which were $47.0 million in fiscal 2002
and $92.8 million in fiscal 2001. In 2001, management approved and we adopted
and began to implement a restructuring program in an effort to reduce operating
expenses.

In March 2001 we implemented a reduction of force decreasing our headcount by
27 employees. In August 2001, we implemented a second reduction in force
decreasing our headcount by 16 employees. In October 2001, we implemented a
third reduction in force decreasing our headcount by a further 30 employees. In
January 2002, we implemented a fourth reduction in force decreasing total
headcount by 91 employees. Again in April and June 2002, we implemented
reductions in force decreasing total headcount by 33 employees. For the most
part, each of the reductions in force was implemented on an across-the-board
basis throughout our various departments. In the March 2001 reduction in
force, 7 of the affected employees were terminated as a direct result of our
decision to discontinue the Axxess product line. However, aside from the March
2001 reduction with respect to the Axxess product line, no reduction in force
was targeted to a specific product line. We incurred $300,000 in severance
costs related to our March 2001 reduction in force; $300,000 related to our
August 2001 reduction in force; $700,000 related to our October 2001 reduction
in force; and $2.7 million related to our January 2002 reduction in force, all
of which have been paid in full. We expect to incur approximately $1.0 million
in severance costs related to our April 2002 and June 2002 reductions in force
of which approximately $550,000 have been paid to date. Future cost cutting
measures could include additional reductions in force.

In addition, we are also attempting to reduce our financial commitments and
reduce future cash outflows by negotiating alternative terms with our
suppliers. If we are unable to reduce our operating expenses sufficiently, we
may not be able to reduce our net losses or sustain our business. If we fail
to reduce our operating costs sufficiently, this could materially affect our
quarterly and annual operating results. This may also impair our ability to
attract additional financing on commercially reasonable terms or at all. Our
ability to successfully reduce our operating costs could materially affect our
quarterly and annual operating results.

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OUR PROSPECTS ARE DEPENDENT UPON THE SALES OF OUR FIBRE CHANNEL SWITCH
PRODUCTS, WHICH BECAME COMMERCIALLY AVAILABLE IN MAY 2001, AND OUR ABILITY TO
SUCCESSFULLY SELL OUR FIBRE CHANNEL SWITCH PRODUCTS IS DIFFICULT TO EVALUATE.
CONSEQUENTLY, OUR OPERATING RESULTS WILL BE DIFFICULT TO FORECAST.

In March 2001, we decided to focus our business on selling Fibre Channel switch
products, a segment of the storage area network market in which we have not
historically competed. In particular, we decided to focus our business on our
2Gb Slingshot Fibre Channel family of switch products, which became
commercially available in May 2001. We expect substantially all of our future
revenue to come from sales of our 2Gb Slingshot Fibre Channel family of switch
products. In fiscal 2002, of our $21.8 million in net revenues, $8.3 million,
or 38%, was attributable to our Capellix Fibre Channel switch products, $5.4
million or 25% was attributable to our new 2Gb Slingshot Fibre Channel family
of switch products and $8.1 million, or 37%, was attributable to our older hub
products. In fiscal 2001, of our $33.3 million in net revenues, $24.6 million,
or 74%, was attributable to sales of our hub products and $8.7 million, or 26%
was attributable to our Capellix Fibre Channel switch products. We plan to
phase out our hub product line, and focus our efforts on sales of our Capellix
Fibre Channel switch products, our 2Gb Slingshot Fibre Channel family of switch
products and our FabriCore Engines Technology Suite. The quarter ended June 30,
2001 was the first quarter during which we had our 2Gb Slingshot Fibre Channel
family of switch products commercially available and we recognized $300,000 or
4% of our $6.6 million in net revenues that quarter from sales of the. Sales
of our 2Gb Slingshot Fibre Channel family of switch products increased to
$800,000 or 16% of our $5.1 million in net revenues in the quarter ended
September 30, 2001; $1.1 million or 21% of our $5.1 million in net revenues for
the quarter ended December 31, 2001; and $3.2 million or 63% of our $5.1 in net
revenues for the quarter ended March 31, 2002. We cannot assure you that we
will be able to maintain current revenue volumes or increase future revenue
volumes of our 2Gb Slingshot Fibre Channel family of switch products.

Because we do not have a substantial history of selling switch products and
because of the rapidly evolving nature of the storage area network market
generally, there is limited financial and operating data with which to evaluate
our performance and prospects. Further, we plan our operating expenses based
primarily on our revenue projections. Because most of our expenses are fixed
in the short term or incurred in advance of anticipated revenue, we may not be
able to decrease our expenses in a timely manner to offset any unexpected
shortfall in revenue. The revenue and income potential of our switch products
is unproven and our historical performance is not likely to be indicative of
future performance. If we do not achieve our expected revenue growth, our
operating results will be below our expectations and the expectations of
investors and market analysts, which could cause the price of our common stock
to decline. We may not be able to successfully penetrate the market for
storage area network switch products, attract and retain OEM customers and
distributors for these products or achieve or sustain profitability. You
should consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company that is focusing its
business on selling products in a segment of the market different from its
historical operations, a market segment that is rapidly evolving and intensely
competitive. We also expect sales of our switch products to have lower
margins, at least for the foreseeable future, than we have recently experienced
with our hub products, which could materially adversely affect our quarterly
and annual operating results. We have been able to increase our margins on
sales of our hub products as our costs to produce these products have decreased
over time. In order to compete in the switch market, we have had to reduce
prices while our costs to manufacture these products have remained fixed.

IF WE ARE UNABLE TO SUCCESSFULLY MARKET AND SELL OUR FIBRE CHANNEL SWITCH
PRODUCTS, OUR ABILITY TO SUSTAIN AND GROW OUR BUSINESS WILL BE SIGNIFICANTLY
REDUCED AND OUR STOCK PRICE WILL LIKELY DECLINE.

If we are unable to successfully penetrate the Fibre Channel switch market, our
revenue will continue to decline, our net losses will increase, we will need to
raise additional funding and we may not be able to sustain our business. In
fiscal 2002, we recorded $21.8 million in total revenue compared to $33.3
million in total revenue in fiscal 2001, a decrease of 35%. The quarter ended
March 31, 2002 was our fourth quarter during which we had our 2Gb Slingshot
Fibre Channel family of switch products available and we recognized $3.2
million of our $5.1 million in total revenue that quarter from sales of the 2Gb
Slingshot Fibre Channel family of switch products. We do not have significant
experience in developing, marketing, selling and supporting switch products. In
contrast, many of our competitors do have this experience and many of our
competitors have significantly greater financial, technical, marketing and
administrative resources than we do. In addition, many of these competitors
have pre-existing relationships with the primary OEMs that we expect to sell
our switch products to. Other factors that may affect the market acceptance of
our switch products, many of which are beyond our control, include the
following: growth and changing requirements of the storage area networks
product markets; availability, price, quality and performance of competing
products and technologies; performance, quality, price and total cost of
ownership of our products; and successful development of our relationships with
existing and potential OEM customers and distribution channel partners.

We may not be able to compete successfully in the market for Fibre Channel
switch storage area network products. OEMs and other distribution partners may
not adopt our Fibre Channel switch products, and even if they do, we may not be
able to generate significant revenue from the sale of these products to sustain
our business.

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OUR KEY OEM CUSTOMERS HAVE MERGED AND WE DEPEND ON SALES OF OUR STORAGE AREA
NETWORK PRODUCTS TO THESE KEY OEM CUSTOMERS TO GENERATE SUBSTANTIALLY ALL OF
OUR REVENUE. IF WE WERE TO LOSE THESE CUSTOMERS OR SALES OF OUR PRODUCTS TO
THESE CUSTOMERS WERE TO DECREASE SIGNIFICANTLY, OUR OPERATING RESULTS WOULD
SUFFER AND OUR ABILITY TO SUSTAIN OUR BUSINESS COULD BE SIGNIFICANTLY IMPAIRED.

We depend on key OEM customers for substantially all of our revenue. In fiscal
2002, of our $21.8 million in total revenue, $7.9 million or 36% was due to
sales to HP and $8.8 million or 41% was due to sales to Compaq. In fiscal 2001,
of our $33.3 million in total revenue, $14.1 million or 42% was due to sales to
HP and $11.1 million or 33% was due to sales to Compaq. In May 2002, HP and
Compaq completed a merger of the two companies. The combined company may buy
fewer of our products than if HP and Compaq were purchasing storage area
network products as separate companies. In fact, we have experienced a
shortfall in projected net revenues for the first fiscal quarter of 2003 due to
a reduction in the purchase commitment by Compaq (now the new HP) for the
embedded Fabric Switch 6, due to their lower than forecasted sales for the MSA
1000 product. We cannot assure you that our OEM customers will accurately
forecast their purchase commitment in future quarters or that sales of the MSA
1000 will continue or increase in the future.

Although we intend to expand our OEM customer base, we anticipate that our
operating results will continue to depend on sales to a relatively small number
of OEMs. We also expect that our decision to focus on sales of switching
products will not change our historical pattern of selling only to a relatively
small number of OEMs. The loss of any of our key customers, or a significant
reduction in sales to those customers, could significantly reduce our expected
future revenue. Our agreements with our customers do not provide any assurance
of future sales to those customers. For example: our OEM and reseller
agreements are not exclusive and contain no renewal obligation; our OEMs and
resellers can stop purchasing and marketing our products at any time; and our
OEM and reseller agreements do not require minimum purchases.

We cannot be certain that we will retain our current OEM customers or that we
will be able to recruit additional or replacement customers. Many of our OEM
customers carry or utilize competing product lines. If we were to lose one or
more OEM customer to a competitor, our business, results of operations and
financial condition could be significantly materially adversely affected and
our ability to sustain our business could be significantly impaired. Any
fluctuations in demand for our products from one or more OEM customer could
materially affect our quarterly and annual operating results.

IF WE ARE UNABLE TO INCREASE SALES OF OUR STORAGE AREA NETWORKS PRODUCTS
THROUGH OUR DISTRIBUTION CHANNEL PARTNERS AND RESELLERS, OUR OPERATING RESULTS
WILL SUFFER.

Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through OEMs, distribution partners and
resellers. We believe that expanding our sales through distribution partners
and resellers is an important part of our strategy to increase sales of our
switch products. The ability and willingness of our distribution partners and
resellers to sell our products could materially affect our quarterly and annual
operating results. Our failure to execute this strategy successfully could
limit our ability to grow or sustain revenue. In fiscal 2002, $4.9 million, or
22% of our net revenues were derived from sales to distribution partners and
resellers. During fiscal 2001, $6.3 million, or 19% of our net revenues were
derived through these channels. As we attempt to expand our sales to
distribution partners and resellers, we may increase our selling costs, as
these parties generally require a higher level of customer support than our OEM
customers. If we fail to develop and cultivate relationships with significant
resellers, or if these resellers are not successful in their sales efforts,
sales of our products may decrease and our operating results would suffer.
Even where we are successful in establishing a distribution or reseller
relationship, our agreements with the third party will likely not be exclusive,
and as a result, many of our distribution partners and resellers will carry
competing product lines. We believe that distribution partners and resellers
are extremely important influencers of end user purchase decisions. Our
distribution partners and resellers may not market our products effectively or
continue to devote the resources necessary to provide us with effective sales,
marketing and technical support. Our failure to successfully develop or manage
our relationships with distribution partners and resellers could materially
adversely affect our operating results.

Historically, we have experienced difficulties in selling our products through
distribution partners as compared to OEM customers. Our OEM customers have
demonstrated the ability to resell our storage area network products due, in
part, to the length of time they have been involved in this marketplace and the
strength of their internal technical, sales and marketing structures. Our
distribution channel partners have participated in this market for a shorter
period of time and often do not typically have fully trained technical, sales
and marketing staffs. As a result, they are not as well positioned as our OEM
customers to sell our products effectively. We may never be able to increase
the sales of our products through distribution partners and resellers. If we
are unable to effectively sell our products through our distribution channel
partners and resellers, our net revenues may continue to decline and our
business would be harmed.

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THE LENGTHY PROCESS REQUIRED TO MAKE SALES TO OR DEVELOP RELATIONSHIPS WITH OEM
CUSTOMERS AND DISTRIBUTION CHANNEL PARTNERS MAY IMPEDE OUR ABILITY TO INCREASE
SALES OF OUR PRODUCTS.

We rely on OEM customers and distribution channel partners to distribute and
sell our products. As a result, our success is dependent on our ability to
initiate, manage and expand our relationships with significant OEM customers
and our ability to attract distribution channel partners that are able and
willing to sell our products, as well as the sales efforts of these OEM
customers and distribution channel partners. Our OEM customers typically
conduct significant evaluation, testing, implementation and acceptance
procedures before they begin to market and sell new technologies, including our
products. Based on our experience with our larger OEM customers, this
evaluation process is lengthy and has historically been as long as nine months.
During the slowdown of the U.S. economy in general and the market for storage
area network products in particular, in 2001 and 2002, the sales process has
lengthened to some extent, in some cases as long as 12 months. Our sales
process is complex and requires significant sales, marketing and management
efforts on our part. The complexity of this process increases if we must
qualify our products with multiple customers at the same time. In addition,
once our products have been qualified, the length of the sales cycle of each of
our OEM customers may vary depending upon whether our products are being
bundled with another product or are being sold as an option or add-on. Sales
to distribution channel partners may also require lengthy sales and marketing
cycles. Additionally, to increase sales through the distribution channel, we
have made significant investments in activities designed to improve
sell-through at the end user level and we may never see significant revenue
resulting from these efforts. Any delay in the sales cycle could have an
adverse effect on our operating results and financial condition.

OUR OEM CUSTOMERS HAVE UNPREDICTABLE ORDER PATTERNS, WHICH MAY CAUSE OUR
REVENUE TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.

Our OEM customers tend to order sporadically, and their purchases can vary
significantly from quarter to quarter. Our OEM customers generally forecast
expected purchases in advance, but frequently do not order as expected and tend
to place purchase orders only shortly before the scheduled delivery date. We
plan our operating expenses based in part on revenue projections derived from
our OEM customers forecasts. Because most of our expenses are fixed in the
short term or incurred in advance of anticipated revenue, we may not be able to
decrease our expenses in a timely manner to offset any unexpected shortfall in
revenue. None of our current OEM customers have any minimum purchase
obligations, and they may stop placing orders with us at any time, regardless
of any forecast they may have previously provided. In the past, OEM customers
have unexpectedly reduced or cancelled orders for our products as orders are
subject to cancellation or delay by our OEM customers with limited or no
penalty. In June 2002, the New HP unexpectedly reduced orders for the Embedded
Switch 6 product, and in 2000 and 2001 orders for our products by OEM customers
declined significantly due to a decline in sell-through to end users. We
expect that, given the overall weak general economic condition and the weakness
in the market for storage area network products in particular that began in
2000 and continued throughout 2001, our OEM customers may continue to be slow
to place orders for our products.

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE IF OUR RESULTS FAIL TO MEET INVESTORS AND ANALYSTS
EXPECTATIONS.

We have experienced, and expect to continue to experience, fluctuations in
sales and operating results from quarter to quarter. As a result, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful, and that such comparisons cannot be relied upon as indicators of
future performance. During the past three years, our operating results have
varied significantly. Additionally, we began focusing our business on selling
our switch products, which has not traditionally been our core business, only
in the first half of calendar 2001, and we expect that our operating results
may vary significantly in the future as we attempt to penetrate this market
segment. We expect to derive substantially all of our future revenue from the
sale of our 2Gb Slingshot Fibre Channel family of products, which only became
commercially available in May 2001. Our quarterly and annual operating results
are likely to continue to vary significantly in the future due to a number of
factors described below and elsewhere in this risk factors section, many of
which are outside of our control. The primary factors that may cause our
quarterly net revenues and operating results to fluctuate include the
following: changes in general economic conditions and specific economic
conditions in the computer storage and networking industry; increases in the
prices of the components we purchase; our ability to maintain quality
manufacturing standards for our products; our ability to maintain, increase or
quickly decrease the contract production of our products at expected prices;
and the mix of distribution channels through which our products are sold.

Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future
periods, our operating results may be below expectations of public market
analysts or investors. If this occurs, our stock price may decline.

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RISKS RELATED TO OUR INDUSTRY

THE STORAGE AREA NETWORK MARKET IN WHICH WE COMPETE IS RELATIVELY NEW AND STILL
EVOLVING, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR
BUSINESS WILL SUFFER.

Fibre Channel based storage area networks were first deployed in 1997. As a
result, the market for storage area network and related storage router products
has only recently begun to develop and continues to rapidly evolve. Because
this market is new, it is difficult to predict its potential size or future
growth rate. Our products are used exclusively in storage area networks.
Accordingly, widespread adoption of storage area networks as an integral part
of data-intensive enterprise computing environments is critical to our future
success. Most of the organizations that potentially may purchase our products
from our OEM customers have invested substantial resources in their existing
computing and data storage systems and, as a result, potential end users may be
reluctant or slow to adopt a new approach like storage area networks. Storage
area networks are often implemented in connection with the deployment of new
storage systems and servers. Therefore, our future success is also
substantially dependent on the market for new storage systems and servers.
Furthermore, the ability of the different components used in a storage area
network to function effectively, or interoperate, with each other when placed
in a computing system has not yet been achieved on a widespread basis. Until
greater interoperability is achieved, customers may be reluctant to deploy
storage area networks. The speed at which customers adopt current and new
products for storage area networks is highly unpredictable. The rate of
adoption of storage area networks as an alternative to existing data storage
and management systems will materially affect our quarterly and annual
operating results and the success of our business. Our success in generating
revenue in this emerging market will depend on, among other things, our ability
to: educate potential OEM customers, distribution channel partners and end
users about the benefits of storage area networks switch technology; maintain
and enhance our relationships with OEM customers and channel partners; predict
and base our products on standards which ultimately become industry standards;
and predict and deliver new and innovative products demanded by the storage
area marketplace.

OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF OUR CUSTOMERS.

Our future success depends upon our ability to address the rapidly evolving
storage area networks market, including changes in relevant industry standards
and the changing needs of our customers by developing and introducing high
quality, technologically progressive and cost effective products, product
enhancements and services on a timely basis. For example, the technology being
deployed today in most storage area networks products is FC-AL or FC-SW, while
the development of competing technologies such as Ethernet IP has been
discussed by the technical community. If we are unable to design, develop and
manufacture products that anticipate or incorporate new technologies that are
used in storage area networks in a timely manner and efficiently utilize such
new technologies in our product developments, the demand for our current
products may decrease significantly, which would harm our operating results.
In addition, our ability to develop, introduce, ship and support new products
and product enhancements could materially affect our quarterly and annual
operating results.

OUR OPERATING RESULTS MAY SUFFER BECAUSE THE COMPETITION IN THE STORAGE AREA
NETWORKS MARKET IS INTENSE. WE ALSO FACE SIGNIFICANT COMPETITION FROM DATA
NETWORKING COMPANIES AND ENTERPRISE SOFTWARE DEVELOPERS.

Competition in the storage area network market is intense. In addition, the
adoption of new technology in our market will likely intensify the competition
for improved storage area network products. New SAN products are being
introduced by various server and storage providers as well as our current and
future competitors, and existing products will be continually enhanced. We face
competition primarily from other sellers of SAN hub and switch products,
including but not limited to, Brocade, QLogic and Vixel, in the SAN switch
market, and Vixel Corporation in the SAN hub market. Furthermore, although we
currently offer products that are complimentary to SAN software products
offered by companies such as Legato Systems, Inc, Computer Associates, BMC and
Veritas Software Corporation, they and other enterprise software developers may
in the future compete with us. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources may enter those markets, thereby further intensifying competition.
Many of our current and potential competitors, in comparison to us, have:
longer operating histories; greater name recognition; greater financial
resources; larger customer bases; more established distribution channels; and
significantly greater financial, technical, sales, marketing, manufacturing and
other resources.

Moreover, our competitors may foresee the course of market developments more
accurately and could in the future develop new technologies that compete with
our products or even render our products obsolete. Increased competition could
also result in pricing pressures, reduced sales, reduced margins, reduced
market share or the failure of our products to achieve or sustain market
acceptance. Competitive pressures, including competitive technology and
pricing pressures, could materially adversely affect our quarterly and annual
operating results. In addition, we have limited experience competing in the
market for storage area network switch products as we only began selling our
Capellix Fibre Channel switch products in September 1999 and our first 2Gb
Slingshot Fibre Channel switch product became commercially available in May
2001.

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IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET REDUCTIONS IN THE AVERAGE UNIT PRICE OF OUR PRODUCTS,
OUR OPERATING RESULTS WILL SUFFER.

We anticipate that as products in the storage area market become more
commoditized, the average unit price of our products will continue to decline
in the future in response to changes in product mix, competitive pricing
pressures, new product introductions by us or our competitors or other factors.
If we are unable to offset the anticipated decrease in our average selling
prices by increasing our sales volumes, our net revenue will decline. In
addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products. Further, as average unit prices of our
current products decline, we must develop and introduce new products and
product enhancements with higher margins. If we cannot maintain our gross
margins, our business could be seriously harmed, particularly if the average
selling price of our products decreases significantly.

IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE EVOLVING INDUSTRY
STANDARDS AND GOVERNMENT REGULATIONS, OUR ABILITY TO SELL OUR PRODUCTS WILL BE
MATERIALLY ADVERSELY AFFECTED.

Our products must comply with industry standards. For example, in the United
States, our products must comply with various regulations and standards defined
by the Federal Communications Commission. Internationally, our products are
also required to comply with standards established by authorities in various
countries. Any new products and product enhancements that we introduce in the
future must also meet industry standards at the time they are introduced.
Failure to comply with existing or evolving industry standards or to obtain
timely domestic or foreign regulatory approvals or certificates could
materially harm our business. Our products comprise only a part of the entire
storage area networks market. All components of the storage area networks must
comply with the same standards in order to operate efficiently together. We
depend on companies that provide other components of the storage area networks
to support the industry standards as they evolve. Many of these companies are
significantly larger and more influential in effecting industry standards than
we are. Some industry standards may not be widely adopted or they may not be
implemented uniformly, and competing standards may emerge that may be preferred
by OEM customers or end users. If other companies do not support the same
industry standards that we do, or if competing standards emerge, market
acceptance of our products could suffer.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, OUR ABILITY
TO COMPETE IN THE STORAGE AREA NETWORK MARKET WOULD BE MATERIALLY ADVERSELY
AFFECTED.

Our products rely on proprietary technology and will likely continue to rely on
technological advancements for market acceptance, and the protection of our
intellectual property rights is critical to the success of our business. To
protect our intellectual property rights, we rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure. We
currently hold six patents which expire between 2013 and 2016, we have five
patent applications pending in the United States with respect to our storage
area network technology and we are also seeking patent protection for our
technology in selected international locations. The patents for our pending
patent applications may never be issued. In addition, with respect to our
current patents and any patent applications that are approved in the future,
these patents may not provide sufficiently broad protection or they may not
prove enforceable in actions against alleged infringement. We also enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and control access to, and distribution of, our software,
documentation and other proprietary information. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult and the steps we have taken may not prevent unauthorized
use of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. If we are
unable to protect our intellectual property from infringement, other companies
may be able to use our intellectual property to offer competitive products at
lower prices.

WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, AND EFFORTS TO PROTECT IT MAY
CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH WOULD
SERIOUSLY HARM OUR BUSINESS.

We rely heavily on our intellectual property, and efforts to protect it may
cause us to become involved in costly and lengthy litigation which would
seriously harm our business. Although we are not currently involved in any
intellectual property litigation, we may be a party to intellectual property
litigation in the future either to protect our intellectual property or as a
result of an alleged infringement of others intellectual property. These
claims and any resulting litigation could subject us to significant liability
for damages and could cause our proprietary rights to be invalidated.
Litigation, regardless of the merits of the claim or outcome, would likely be
time consuming and expensive to resolve and would divert managements time and
attention. Any potential intellectual property litigation could also force us
to do one or more of the following: stop using the challenged intellectual
property or selling our products or services that incorporate it; obtain a
license to use the challenged intellectual property or to sell products or
services that incorporate it, which license may not be available on
commercially reasonable terms, if at all; and redesign those products or
services that are based on or incorporate the challenged intellectual property.

If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, our net revenues would be substantially
reduced and we may be unable to sustain our business.

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RISKS ASSOCIATED WITH MANUFACTURING OUR PRODUCTS

WE ARE DEPENDENT ON OUR MANUFACTURING RELATIONSHIP WITH SANMINA TO MANUFACTURE
OUR STORAGE AREA NETWORK PRODUCTS. IF WE ARE UNABLE THROUGH OUR RELATIONSHIP
WITH SANMINA, OR OTHERWISE, TO DEVELOP AND MAINTAIN MANUFACTURING CAPABILITIES
THAT ENABLE US TO MEET OUR CUSTOMERS REQUIREMENTS, OUR BUSINESS AND PROSPECTS
WILL BE MATERIALLY ADVERSELY AFFECTED.

We have limited internal manufacturing capabilities and have entered into a
manufacturing relationship with Sanmina to manufacture our storage area
networking products. Our ability to manufacture and deliver our products is
dependent on our relationship with Sanmina and our ability to, together with
Sanmina, develop manufacturing processes that will allow us to produce
sufficient quantities of products at competitive prices. We only have limited
means to internally manufacture our products and do not have alternate
outsourcing relationships with other contract manufacturers that will enable us
to meet our manufacturing requirements. Many of the potential manufacturers
who could manufacture our products have existing relationships with our
competitors or potential competitors and may be unwilling to enter into
agreements with us. If our relationship with Sanmina, or any relationship we
may enter in the future with other manufacturers, is impaired, this could
prevent us from being able to deliver our products, damage our customer
relationships and materially adversely affect our operating results and
financial condition.

WE MAY EXPERIENCE DELAYS OR DISRUPTIONS IN MANUFACTURING OUR PRODUCTS WHICH
COULD IMPAIR OUR ABILITY TO DELIVER OUR PRODUCTS TO CUSTOMERS.

Our business would be harmed if we fail to effectively manage the manufacture
of our products. If Sanmina experiences delays, disruptions, capacity
constraints or quality control problems in its manufacturing operations, then
product shipments to our customers could be delayed, which would negatively
impact our customer relations, operating results, competitive position and
reputation. We generally place orders with Sanmina at least two months prior
to scheduled delivery of products to our customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from Sanmina or adequate quantities of
components to meet our customers delivery requirements or we may accumulate
excess inventories. In contrast, our usage of Sanminas facilities and our
related capital expenditures assume a level of customer orders that we may not
realize or, if we do realize, may not be sustained. Many of our manufacturing
expenses are fixed, and if we do not receive anticipated levels of customer
orders, our expected profit margin will decline and we may not be able to
reduce our operating expenses quickly enough to prevent a decline in our
operating results.

In the future, we intend to work with Sanmina and additional manufacturers that
could potentially manufacture our higher volume products at lower costs in
foreign locations. We may experience difficulties and disruptions in the
manufacture of our products while we transition to new manufacturing
facilities. Manufacturing disruptions could prevent us from achieving timely
delivery of products and could result in lost revenue. Additionally, we must
coordinate our efforts with those of our suppliers, Sanmina or other third
party manufacturers to rapidly achieve volume production. We have experienced
delays in the past in product deliveries from one of our former contract
manufacturers. Any delays in the manufacturing of our products could adversely
affect our operating results or impair our customer relationships.

BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR MANY KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD IMPAIR OUR
ABILITY TO MANUFACTURE OUR PRODUCTS AND COULD MATERIALLY ADVERSELY AFFECT OUR
OPERATING RESULTS.

We depend upon a single source for each type of our application-specific
integrated circuits and limited sources of supply for several key components,
including, but not limited to, power supplies, chassis and optical
transceivers. We have in the past experienced and may in the future experience
shortages of, or difficulties in acquiring, these components. Our only
agreement for the supply of components of sole or limited sources is with LSI
Logic for application specific integrated chips. We may not be able to enter
into other agreements on commercially reasonable terms, if at all, with other
providers of sole or limited source components. The failure to do so may
adversely affect our ability to manufacture our products and harm our operating
results. Qualifying a new component manufacturer and commencing volume
production is expensive and time consuming and could significantly interrupt
the supply of our products. If we are required or choose to change component
manufacturers, we may damage our customer relationships, which could materially
adversely affect our ability to sell our products. In addition, we rely on
Sanmina to procure components required for the manufacture of our products. If
for any reason these component manufacturers were to stop satisfying our needs
without providing us or Sanmina with sufficient warning to procure an alternate
source, our ability to manufacture and sell our products could be harmed. In
addition, any failure by our component manufacturers to supply us or Sanmina
with their products on a timely basis could result in late deliveries of our
products to our customers. Our inability to meet our delivery deadlines could
adversely affect our customer relationships and, in some instances, result in
termination of these relationships or potentially subject us to litigation.
Our ability to obtain sufficient supplies of components, including sole or
limited source components, could materially adversely affect our quarterly and
annual operating results.

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DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR BUSINESS.

We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles
in the markets for our products, any delay or unanticipated difficulty
associated with new product introductions or product enhancements could have a
material adverse effect on our business, quarterly and annual results of
operations and financial condition. Prior delays have resulted from numerous
factors, such as: changing OEM customer product specifications; difficulties
in hiring and retaining necessary personnel; difficulties in reallocating
engineering resources and other resource limitations; changing market or
competitive product requirements; unanticipated engineering complexity; and
undetected errors or failures in software and hardware.

Our operating results will be materially adversely affected if we fail to
timely develop product enhancements, if we fail to introduce new products or if
any new products or product enhancements that we develop and introduce are not
broadly accepted. In addition, we must successfully manage the introduction of
new or enhanced products to minimize disruption in our customers ordering
patterns, avoid excessive levels of older product inventories and ensure that
adequate supplies of new products can be delivered to meet our customers
demands. As discussed above, our product development is also dependent upon
obtaining product components, including components from sole or limited
sources, in a timely manner.

BECAUSE WE ORDER COMPONENTS AND MATERIALS BASED ON ROLLING FORECASTS, WE MAY
OVERESTIMATE OR UNDERESTIMATE OUR COMPONENT AND MATERIAL REQUIREMENTS, WHICH
COULD INCREASE OUR COSTS AND THEREBY PREVENT US FROM MEETING CUSTOMER DEMAND
AND MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

We use rolling forecasts based on anticipated product orders to determine our
component requirements. Lead times for materials and components that we order
vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As
a result, component requirement forecasts made by us or Sanmina may not be
accurate. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. We are
liable for materials that Sanmina purchases on our behalf that we do not use.
Any of these occurrences would negatively impact our business and quarterly and
annual operating results. In the past we have overestimated the demand for
certain products which has resulted in inventory write-downs and reserves for
excess and obsolete inventory. For example during fiscal 2002 we wrote off $1.7
million of inventory and increased our inventory reserves by $4.4 million and
during fiscal 2001 we wrote off $2.5 million of inventory and increased our
inventory reserves by $10.6 million.

OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE
ERRORS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR NET
REVENUES.

Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. Our products are
complex and we have found errors in existing products. In the future we may
find errors in our existing, new or enhanced products. In addition, our
products are usually integrated with products from other vendors. As a result,
should problems occur, it may be difficult to identify the source of the
problem. The occurrence of hardware and software errors, whether caused by our
or other vendors storage area networks products, could adversely affect sales
of our products, cause us to incur significant warranty and repair costs,
divert the attention of our engineering personnel from our product development
efforts and cause significant customer relationship problems.

ADDITIONAL RISKS ASSOCIATED WITH OUR BUSINESS

IF WE ARE UNABLE TO HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL,
ENGINEERING, SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS
MAY SUFFER. OUR REDUCTIONS IN FORCE IN 2001 AND 2002 MAY HURT OUR ABILITY TO
RETAIN PERSONNEL WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

Our ability to successfully develop, market, sell and support our products
depends to a significant degree upon the continued contributions of our key
personnel in engineering, sales, marketing, finance and operations, many of
whom would be difficult to replace. The loss of the services of any of our key
personnel could adversely affect our ability to implement our business plan.
We believe our future success will also depend in large part upon our ability
to attract and retain highly skilled managerial, engineering, sales, marketing,
finance and operations personnel, including executive officers. In addition,
our products and services require a sophisticated selling effort targeted at
several key people within a prospective customers organization. This process
requires the efforts of experienced sales personnel as well as specialized
consulting professionals. Competition for these people is intense, especially
in the San Francisco Bay area where our operations are headquartered. In
particular, in the past we have experienced difficulty in hiring and retaining
qualified application-specific integrated circuits, software, system, test and
customer support engineers and executive staff, and we may not be successful in
attracting and retaining individuals to fill these positions. If we
are unable to attract or retain qualified personnel in the future, or if we
experience delays in hiring required personnel, particularly qualified
engineers and sales personnel, our ability to develop, introduce and sell our
products could be harmed.

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In March 2001, we implemented a reduction of force decreasing our headcount by
27 employees. In August 2001, we implemented a second reduction in force
decreasing our headcount by 16 employees. In October 2001, we implemented a
third reduction in force decreasing our headcount by a further 30 employees. In
January 2002, we implemented a fourth reduction in force decreasing total
headcount by 91 employees. In April 2002 and June 2002, we implemented further
reductions in force decreasing total headcount by 33 employees. For the most
part, each of the reductions in force were implemented on an across the board
basis throughout our various departments. In the March 2001 reduction in
force, 7 of the affected employees were terminated as a direct result of our
decision to discontinue the Axxess product line. However, aside from the March
2001 reduction with respect to the Axxess product line, no reduction in force
was targeted to a specific product line. The reductions in force may make it
difficult for us to retain and recruit necessary personnel in the future.
Since the beginning of 2001, our total headcount has declined from 234
employees to 47 employees as of the date of this filing. In addition, in
fiscal 2002 in connection with our restructuring efforts several of our
executive officers resigned, including our former CEO & President. If we are
unable to retain the necessary personnel, by reason of the reductions in force
and the departure of executive officers or otherwise, this would adversely
affect our business.

WE ANTICIPATE THAT INTERNATIONAL SALES WILL CONTINUE TO BE AN IMPORTANT PART OF
OUR BUSINESS STRATEGY AND WE FACE MANY RISKS ASSOCIATED WITHOUT INTERNATIONAL
SALES ACTIVITIES, INCLUDING THE CLOSURE OF OUR INTERNATIONAL SALES OFFICES
DURING FISCAL 2002.

During fiscal 2002, international sales were $6.2 million, or 28% of our total
revenue. During fiscal 2001, 28% of our total revenue was derived from
international sales activities, and during fiscal 2000, international sales
represented 30% of our net revenues. In January 2002, we decided to close our
foreign sales offices as means of reducing our operating expenses. Of the $6.2
million in fiscal 2002 foreign sourced net revenues, $4.3 million or 69% was
derived from combined sales to HP and Compaq (which customers are managed on a
global basis and, thus, may not be negatively impacted by the announced office
closures). Nonetheless, our international sales will be limited if we cannot
establish, maintain and expand relationships with international distributors,
expand international sales channel management and develop relationships with
international service providers. We may not be able to maintain or increase
international market demand for our products, which could materially affect our
quarterly and annual operating results. Our international operations are
subject to a number of risks, including: multiple, protectionist, adverse and
changing governmental laws and regulations; reduced or limited protections of
intellectual property rights; potentially adverse tax consequences resulting
from changes in tax laws; and political and economic instability.

To date, none of our international net revenues and costs have been denominated
in foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and thus
less competitive in foreign markets. In the future, a portion of our
international net revenues may be denominated in foreign currencies, which
would subject us to risks associated with fluctuations in those foreign
currencies.

OUR BUSINESS MAY BE HARMED BY PENDING CLASS ACTION LITIGATION.

On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., was filed against us, three former officers,
and two underwriters in our initial public offering (IPO), in the United States
District Court for the Southern District of New York. The complaint alleges
violations of Section 11 of the Securities Act of 1933 (the Securities Act)
against all defendants, a violation of Section 15 of the Securities Act against
the individual defendants, and violations of Section 12(a)(2) of the Securities
Act and Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5,
promulgated thereunder; collectively, the Exchange Act) against the
underwriters. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of our common stock between July 19, 1999 and December 6,
2000 (the class period).

On June 25, 2001, a similar complaint, captioned Goldgrab v. Gadzoox Networks,
Inc., et al., Civil Action No. 1-01-CV-5798, was filed against us, the
individual defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Cooper
complaint, except in that it alleges violations of Section 10(b) of the
Exchange Act of 1934 (and Rule 10b-5, promulgated there under) against all
defendants, including us and the individual defendants. There have been
additional lawsuits filed containing allegations substantially identical to
those in the Cooper and Goldgrab complaints.

On May 8, 2002, plaintiffs filed a consolidated amended complaint. The
allegations of the amended complaint focus on purported actions of our
underwriters in our 1999 IPO. The plaintiffs claim that the underwriters
solicited and received excessive commissions from investors in exchange for
favorable allocations of IPO shares. The plaintiffs also claim that the
underwriters entered into agreements with their customers whereby, in exchange
for favorable allocations of shares in the offering, the customers would commit
to purchase additional shares in the aftermarket at predetermined prices. The
plaintiffs contend that we are liable under Section 11 of the Securities Act
because our registration statement in the IPO did not disclose the purported
actions by the underwriters. The amended complaint also brings claims under
Section 10 (b) of the Exchange Act and Rule 10b-5 promulgated thereunder,
contending that we and the individual defendants knew of, participated in or
acted with reckless disregard to the alleged misconduct of the underwriters.

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Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 300 other companies. The lawsuits against us and
all of these other related lawsuits have been coordinated for pretrial purposes
as In re Initial Public Offering Securities Litigation, Civil Action No.
21-MC-92, and are presently being overseen by Judge Shira A. Scheindlin. We
believe we have meritorious defenses to these securities lawsuits and will
defend the lawsuits vigorously. We do not believe that these matters will have
material adverse affect on our results of operation or financial condition.
However, litigation is subject to inherent uncertainties, and the disposition
of the litigation could materially adversely affect our financial condition,
results of operation and cash flows. The uncertainty associated with
substantial unresolved litigation may also impair our relationships with
existing customers and our ability to obtain new customers.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.

Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or acquisition that a stockholder may consider favorable.
These provisions include: authorizing our board of directors to issue
preferred stock without stockholder approval; providing for a classified board
of directors with staggered, three-year terms; prohibiting cumulative voting in
the election of directors; requiring super-majority voting to effect
significant amendments to our certificate of incorporation and bylaws; limiting
the ability of stockholders to call special meetings; prohibiting stockholder
actions by written consent; and establishing advance notice requirements for
nominations for election to the board of directors or for proposing matters
that can be acted on by stockholders at stockholder meetings.

We are subject to the antitakeover provisions of Delaware law that regulate
corporate acquisitions. Delaware law prevents certain Delaware corporations,
including Gadzoox, from engaging, under certain circumstances, in a business
combination with any interested stockholder for three years following the date
that such stockholder became an interested stockholder. This provision of
Delaware law may discourage, delay or prevent someone from acquiring or merging
with us, which may cause the market price of our common stock to decline.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has fluctuated substantially, and there
can be no assurance that such volatility will not continue. From July 19, 1999
through June 20, 2002, the market price has ranged from a high of $97.13 per
share to a low of $0.12 per share. Several factors could impact our stock price
including, but not limited to: announcements concerning us, our competitors or
customers; quarterly fluctuations in our operating results; introduction of new
products or changes in product pricing policies by us or our competitors;
conditions in the storage area network industry; changes in earnings estimates
by industry analysts; or market conditions for high technology equities in
general.

In addition, stock markets have experienced extreme price and volume volatility
in recent years and stock prices of technology companies have been especially
volatile. This volatility has had a substantial effect on the market prices of
securities of many smaller public companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations could adversely affect the market price of our common stock.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We maintain all of our cash in commercial bank demand deposit accounts and/or
investments in highly liquid money market funds. We consider our money market
investments to be cash equivalents. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate and, therefore, the carrying value of these
investments approximates their fair value. As of March 31, 2002 and March 31,
2001, all of our investments were in cash and cash equivalents. See Note 1 of
the Notes to the Financial Statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

***In accordance with Temporary Note 2T to Article 3 of Regulation S-X, this
filing includes unaudited financial statements in lieu of audited financial
statements for the year ended March 31, 2002 because the Company was unable to
obtain from Arthur Andersen LLP a manually signed audit report in the timeframe
agreed upon at the commencement of the annual audit engagement. No auditor has
opined that the Companys unaudited financial statements present fairly, in all
material respects, the financial position, the results of operations, cash
flows and the changes in shareholders equity of the Company for the year ended
March 31, 2002 in accordance with generally accepted accounting principles.
The report of independent public accountants included with these financial
statements is a copy of a previously issued report by Arthur Andersen LLP
relating to the Companys financial statements for the years ended March 31,
2001 and 2000, and such report has not been reissued. The Company intends to
provide the audited financial statements and a report of independent public
accountants in an amended filing within 60 days of the date of this report.***

INDEX TO FINANCIAL STATEMENTS

|                                                                                                 |  |      |      | 
|------------------------------------------------------------------------------------------------ |  | ---- | ---- | 
|                                                                                                 |  | PAGE
|                                                                                                 |  |     
|Copy of Previously Issued Report of Independent
Public Accountants                               |  |      | F-2  | 
|Balance Sheets as of March 31, 2002 (unaudited) and
2001                                         |  |      | F-3  | 
|Statements of Operations for the years ended March 31, 2002
(unaudited), 2001 and 2000           |  |      | F-4  | 
|Statements of Stockholders Equity for the years ended March
31, 2002 (unaudited), 2001 and 2000 |  |      | F-5  | 
|Statements of Cash Flows for the years ended March 31, 2002
(unaudited), 2001 and 2000           |  |      | F-6  | 
|Notes to Financial Statements (unaudited)                                                        |  |      | F-7  | 
|Schedule II  Valuation and Qualifying Accounts
(unaudited)                                      |  |      | F-26 | 

F-1



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##### Table of Contents



***In accordance with Temporary Note 2T to Article 3 of Regulation S-X, the
report of independent public accountants included below is a copy of a
previously issued report by Arthur Andersen LLP relating to the Companys
financial statements for the years ended March 31, 2001 and 2000, and such
report has not been reissued.

In accordance with Securities Act Rule 437a, Arthur Andersen LLPs consent has
not been filed as an exhibit to this annual report. The Company was unable to
obtain an updated written consent from Arthur Andersen LLP relating to this
previously issued report, and the Company has been advised that it will be
unable to obtain written consents in the future relating to the incorporation
of this report into our previously filed Registration Statements.

Certain limitations on recovery by investors may exist as a result of the lack
of consent by Arthur Andersen LLP.***

COPY OF PREVIOUSLY ISSUED
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Gadzoox Networks, Inc.

We have audited the accompanying balance sheets of Gadzoox Networks, Inc., a
Delaware corporation, as of March 31, 2001 and 2000, and the related statements
of operations, stockholders equity and cash flows for each of the three years
in the period ended March 31, 2001. These financial statements and the schedule
referred to below are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gadzoox Networks, Inc. as of
March 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 2001, in conformity
with accounting principles generally accepted in the United States.

As explained in Note 1 to the financial statements, effective April 1, 2000,
the Company changed its method of accounting for revenue recognition for sales
to distributors.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California
June 29, 2001

F-2



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##### Table of Contents






GADZOOX NETWORKS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)

|                                                  |                                                                                                             |   |                                      |          |             |        |        |          |   |        | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | - | ------------------------------------ | -------- | ----------- | ------ | ------ | -------- | - | ------ | 
|                                                  |                                                                                                             |   |                                      |          | MARCH 31,  
|                                                  |                                                                                                             |   |                                      |          |            
|                                                  |                                                                                                             |   |                                      |          | 2002        |        | 2001  
|                                                  |                                                                                                             |   |                                      |          |             |        |       
|                                                  |                                                                                                             |   |                                      |          | (unaudited) |        |        |          |  
|ASSETS                                           
|Current assets:                                   |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  | Cash and cash equivalents                                                                                   |   | $                                    | 6,334    |             |        | $      | 10,939   |  
|                                                  | Accounts receivable, net of allowance for doubtful
accounts of $271 and $352 in 2002 and 2001,
respectively |   |                                      | 2,517    |             |        |        | 6,083    |  
|                                                  | Inventories                                                                                                 |   |                                      | 2,215    |             |        |        | 10,626   |  
|                                                  | Prepaid expenses and other current assets                                                                   |   |                                      | 428      |             |        |        | 961      |  
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             |   | Total current assets                 |          |             | 11,494 |        |          |   | 28,609 | 
|Property and equipment, net                       |                                                                                                             |   | 2,835                                |          |             |        | 8,244  |         
|Other assets                                      |                                                                                                             |   | 409                                  |          |             |        | 795    |         
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             | $ | 14,738                               |          |             | $      | 37,648 |         
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)   
|Current liabilities:                              |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  | Current portion of capital lease obligations                                                                |   |                                      | 366      |             |        |        | 924      |  
|                                                  | Accounts payable                                                                                            |   |                                      | 2,626    |             |        |        | 6,176    |  
|                                                  | Loan payable                                                                                                |   |                                      | 1,563    |             |        |        | 0        |  
|                                                  | Accrued restructuring costs                                                                                 |   |                                      | 1,726    |             |        |        | 687      |  
|                                                  | Compensation related accruals                                                                               |   |                                      | 700      |             |        |        | 1,331    |  
|                                                  | Deferred revenues                                                                                           |   |                                      | 680      |             |        |        | 3,161    |  
|                                                  | Other accrued liabilities                                                                                   |   |                                      | 2,083    |             |        |        | 4,545    |  
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             |   | Total current liabilities            |          |             | 9,744  |        |          |   | 16,824 | 
|Capital lease obligations, net of current portion |                                                                                                             |   |                                     |          |             |        | 403    |         
|Senior Secured Convertible Debt                   |                                                                                                             |   | 5,000                                |          |             |        |       |         
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             |   | Total liabilities                    |          |             | 14,744 |        |          |   | 17,227 | 
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|Stockholders equity (deficit):                   |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  | Common stock                                                                                                |   |                                      | 236      |             |        |        | 142      |  
|                                                  | Additional paid-in capital                                                                                  |   |                                      | 179,589  |             |        |        | 153,003  |  
|                                                  | Deferred compensation                                                                                       |   |                                      | (540     | )           |        |        | (426     | )
|                                                  | Accumulated deficit                                                                                         |   |                                      | (179,291 | )           |        |        | (132,298 | )
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             |   | Total stockholders equity (deficit) |          |             | (6     | )      |          |   | 20,421 | 
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         
|                                                  |                                                                                                             | $ | 14,738                               |          |             | $      | 37,648 |         
|                                                  |                                                                                                             |   |                                      |          |             |        |        |         

The accompanying notes are an integral part of these financial statements.

F-3



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##### Table of Contents






GADZOOX NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |         |        | 
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ------- | --------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------- | ------ | 
|                                                                                                               |                                            |                                   |         | YEARS ENDED MARCH 31,
|                                                                                                               |                                            |                                   |         |                      
|                                                                                                               |                                            |                                   |         | 2002                  |        | 2001 |         | 2000  
|                                                                                                               |                                            |                                   |         |                       |        |      |         |       
|                                                                                                               |                                            |                                   |         | (unaudited)           |        |      |         |        |        |   |         |        
|Net revenues                                                                                                   |                                            | $                                 | 21,820  |                       |        | $    | 33,290  |        |        | $ | 47,931  |        
|Cost of revenues                                                                                               |                                            |                                   | 12,065  |                       |        |      | 27,768  |        |        |   | 26,257  |        
|Cost of revenues  inventory write-downs                                                                       |                                            |                                   | 4,972   |                       |        |      | 4,424   |        |        |   |        |        
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               |                                            | Gross margin                      |         |                       | 4,783  |      |         |        | 1,098  |   |         |         | 21,674 | 
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Operating expenses:                                                                                            |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               | Research and development                   |                                   |         | 21,078                |        |      |         | 29,368 |        |   |         | 18,223  |       
|                                                                                                               | Sales and marketing                        |                                   |         | 12,943                |        |      |         | 23,982 |        |   |         | 11,638  |       
|                                                                                                               | General and administrative                 |                                   |         | 7,175                 |        |      |         | 7,992  |        |   |         | 4,285   |       
|                                                                                                               | Amortization of acquired intangible assets |                                   |         |                      |        |      |         | 3,842  |        |   |         |        |       
|                                                                                                               | In-process research and development        |                                   |         |                      |        |      |         | 4,900  |        |   |         |        |       
|                                                                                                               | Impairment of long lived assets            |                                   |         |                      |        |      |         | 17,829 |        |   |         |        |       
|                                                                                                               | Write-down of abandoned long-lived assets  |                                   |         | 3,306                 |        |      |         |       |        |   |         |        |       
|                                                                                                               | Restructuring and other expenses           |                                   |         | 5,747                 |        |      |         | 2,513  |        |   |         |        |       
|                                                                                                               | Amortization of deferred compensation      |                                   |         | 903                   |        |      |         | 547    |        |   |         | 1,156   |       
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               |                                            | Total operating expenses          |         |                       | 51,152 |      |         |        | 90,973 |   |         |         | 35,302 | 
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Loss from operations                                                                                           |                                            |                                   | (46,369 | )                     |        |      | (89,875 | )      |        |   | (13,628 | )      
|Other income (expense), net:                                                                                   |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               | Interest income                            |                                   |         | 223                   |        |      |         | 2,593  |        |   |         | 4,002   |       
|                                                                                                               | Interest and other expense                 |                                   |         | (476                  | )      |      |         | (261   | )      |   |         | (735    | )     
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               |                                            | Total other income (expense), net |         |                       | (253   | )    |         |        | 2,332  |   |         |         | 3,267  | 
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Loss before cumulative effect of change in accounting
principle                                                |                                            | $                                 | (46,622 | )                     |        | $    | (87,543 | )      |        | $ | (10,361 | )      
|Cumulative effect of change in accounting principle                                                            |                                            |                                   |        |                       |        |      | (5,300  | )      |        |   |        |        
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Net loss                                                                                                       |                                            | $                                 | (46,622 | )                     |        | $    | (92,843 | )      |        | $ | (10,361 | )      
|Dividend related to common stock                                                                               |                                            |                                   | (371    | )                     |        |      |        |        |        |   |        |        
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Net Loss attributable to common shareholders                                                                   |                                            | $                                 | (46,993 | )                     |        | $    | (92,843 | )      |        | $ | (10,361 | )      
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Basic net loss per share before cumulative effect of change
in accounting principle                            |                                            | $                                 | (1.25   | )                     |        | $    | (3.13   | )      |        | $ | (0.53   | )      
|Cumulative effect of change in accounting principle                                                            |                                            |                                   |        |                       |        |      | (0.19   | )      |        |   |        |        
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Basic net loss per share                                                                                       |                                            | $                                 | (1.25   | )                     |        | $    | (3.32   | )      |        | $ | (0.53   | )      
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Weighted average shares used in computing basic net loss per
share                                             |                                            |                                   | 37,743  |                       |        |      | 28,006  |        |        |   | 19,731  |        
|                                                                                                               |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|Pro forma amounts with the change in accounting principle
related to revenue applied retroactively (unaudited) |                                            |                                   |         |                       |        |      |         |        |        |   |         |        
|                                                                                                               | Net revenues                               |                                   |         | N/A                   |        |      |         | N/A    |        |   | $       | 39,823  |       
|                                                                                                               | Net loss                                   |                                   |         | N/A                   |        |      |         | N/A    |        |   |         | (13,169 | )     
|                                                                                                               | Basic net loss per share                   |                                   |         | N/A                   |        |      |         | N/A    |        |   |         | (0.67   | )     

For the year ended March 31, 2002, the amortization of deferred compensation
amounts shown include $489 related to research and development, $218 related to
sales and marketing, and $196 related to general and administrative expenses.
In addition, included in the cost of revenues of $12,065 is $70 of reclassified
amortization of deferred compensation. For the year ended March 31, 2001, the
amortization of deferred compensation amounts shown include $316 related to
research and development, $152 related to sales and marketing, and $79 related
to general and administrative expenses. In addition, included in the cost of
revenues of $27,768 is $61 of reclassified amortization of deferred
compensation. For the year ended March 31, 2000, the amortization of deferred
compensation amounts shown include $668 related to research and development,
$321 related to sales and marketing, and $167 related to general and
administrative expenses. In addition, included in the cost of revenues of
$26,257 is $129 of reclassified amortization of deferred compensation.

The accompanying notes are an integral part of these financial statements.

F-4



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##### Table of Contents






GADZOOX NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |            |            |  |   |     |    |  |   |         |        |  
|------------------------------------- | -------------------------------------------------------------------------- |  | --------------- | ----------- | ------------ | - | ---------- | --- | ------ |  | ---------- | ---------- |  | - | --- | -- |  | - | ------- | ------ | -
|                                      |                                                                            |  | CONVERTIBLE     |             |              |   |            |     |        |  |            |            |  |   |    
|                                      |                                                                            |  | PREFERRED STOCK |             | COMMON STOCK |   | ADDITIONAL
|                                      |                                                                            |  |                 |             |              |   | PAID-IN   
|                                      |                                                                            |  | SHARES          |             | AMOUNT       |   | SHARES     |     | AMOUNT |  | CAPITAL   
|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |           
|BALANCE AT MARCH 31, 1999             |                                                                            |  | 13,907,399      |             |              | $ | 69         |     |        |  | 5,589,729  |            |  | $ | 28  |    |  | $ | 37,081  |       
|                                      | Issuance of common stock
for cash, net of
offering costs of $7,030         |  |                 |            |              |   |            |    |        |  |            | 5,835,439  |  |   |     | 30 |  |   |         | 78,574 |  
|                                      | Amortization of deferred
compensation                                      |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |  |                 |            |              |   |            |    |        |  |            | 38,879     |  |   |     |   |  |   |         | 693    |  
|                                      | Conversion of warrant to
common stock                                      |  |                 |            |              |   |            |    |        |  |            | 44,370     |  |   |     |   |  |   |         |       |  
|                                      | Conversion of note payable
to common stock                                 |  |                 |            |              |   |            |    |        |  |            | 1,426,028  |  |   |     | 7  |  |   |         | 10,903 |  
|                                      | Conversion of preferred
stock to common stock                              |  |                 | (13,907,399 | )            |   |            | (69 | )      |  |            | 13,907,399 |  |   |     | 69 |  |   |         |       |  
|                                      | Net loss                                                                   |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |            |            |  |   |     |    |  |   |         |       
|BALANCE AT MARCH 31, 2000             |                                                                            |  |                |             |              |   |           |     |        |  | 26,841,844 |            |  |   | 134 |    |  |   | 127,251 |       
|                                      | Issuance of common stock
for cash                                          |  |                 |            |              |   |            |    |        |  |            | 1,182,861  |  |   |     | 6  |  |   |         | 989    |  
|                                      | Acceleration of employee
options                                           |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         | 456    |  
|                                      | Amortization of deferred
compensation                                      |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |  |                 |            |              |   |            |    |        |  |            | 112,062    |  |   |     |   |  |   |         | 675    |  
|                                      | Issuance common stock for
acquisition of
SmartSAN                          |  |                 |            |              |   |            |    |        |  |            | 239,433    |  |   |     | 2  |  |   |         | 23,625 |  
|                                      | Issuance of warrant to
acquire common stock                                |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         | 113    |  
|                                      | Reversal of deferred
compensation related to
cancellation of stock
options |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         | (106   | )
|                                      | Net loss                                                                   |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |            |            |  |   |     |    |  |   |         |       
|BALANCE AT MARCH 31, 2001             |                                                                            |  |                |             |              |   |           |     |        |  | 28,376,200 |            |  |   | 142 |    |  |   | 153,003 |       
|                                      | Issuance of common stock
for cash, net of
offering costs of $1,118         |  |                 |            |              |   |            |    |        |  |            | 18,750,531 |  |   |     | 94 |  |   |         | 25,324 |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |  |                 |            |              |   |            |    |        |  |            | 129,253    |  |   |     |   |  |   |         | 175    |  
|                                      | Deferred compensation                                                      |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         | 1,087  |  
|                                      | Amortization of deferred
compensation                                      |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      | Net loss                                                                   |  |                 |            |              |   |            |    |        |  |            |           |  |   |     |   |  |   |         |       |  
|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |            |            |  |   |     |    |  |   |         |       
|BALANCE AT MARCH 31, 2002
(unaudited) |                                                                            |  |                |             |              | $ |           |     |        |  | 47,255,984 |            |  | $ | 236 |    |  | $ | 179,589 |       
|                                      |                                                                            |  |                 |             |              |   |            |     |        |  |            |            |  |   |     |    |  |   |         |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                      |                                                                            |   |              |        |             |   |               |         |   |   |        |         |  
|------------------------------------- | -------------------------------------------------------------------------- | - | ------------ | ------ | ----------- | - | ------------- | ------- | - | - | ------ | ------- | -
|                                      |                                                                            |   |              |        |             |   |               |         |   |   | TOTAL 
|                                      |                                                                            |   | DEFERRED     |        | ACCUMULATED |   | STOCKHOLDERS'
|                                      |                                                                            |   | COMPENSATION |        | DEFICIT     |   | EQUITY       
|                                      |                                                                            |   |              |        |             |   |              
|BALANCE AT MARCH 31, 1999             |                                                                            | $ | (2,425       | )      |             | $ | (29,094       | )       |   | $ | 5,659  |        
|                                      | Issuance of common stock
for cash, net of
offering costs of $7,030         |   |              |       |             |   |               |        |   |   |        | 78,604  |  
|                                      | Amortization of deferred
compensation                                      |   |              | 1,285  |             |   |               |        |   |   |        | 1,285   |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |   |              |       |             |   |               |        |   |   |        | 693     |  
|                                      | Conversion of warrant to
common stock                                      |   |              |       |             |   |               |        |   |   |        |        |  
|                                      | Conversion of note payable
to common stock                                 |   |              |       |             |   |               |        |   |   |        | 10,910  |  
|                                      | Conversion of preferred
stock to common stock                              |   |              |       |             |   |               |        |   |   |        |        |  
|                                      | Net loss                                                                   |   |              |       |             |   |               | (10,361 | ) |   |        | (10,361 | )
|                                      |                                                                            |   |              |        |             |   |               |         |   |   |        |        
|BALANCE AT MARCH 31, 2000             |                                                                            |   | (1,140       | )      |             |   | (39,455       | )       |   |   | 86,790 |        
|                                      | Issuance of common stock
for cash                                          |   |              |       |             |   |               |        |   |   |        | 995     |  
|                                      | Acceleration of employee
options                                           |   |              |       |             |   |               |        |   |   |        | 456     |  
|                                      | Amortization of deferred
compensation                                      |   |              | 608    |             |   |               |        |   |   |        | 608     |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |   |              |       |             |   |               |        |   |   |        | 675     |  
|                                      | Issuance common stock for
acquisition of
SmartSAN                          |   |              |       |             |   |               |        |   |   |        | 23,627  |  
|                                      | Issuance of warrant to
acquire common stock                                |   |              |       |             |   |               |        |   |   |        | 113     |  
|                                      | Reversal of deferred
compensation related to
cancellation of stock
options |   |              | 106    |             |   |               |        |   |   |        |        |  
|                                      | Net loss                                                                   |   |              |       |             |   |               | (92,843 | ) |   |        | (92,843 | )
|                                      |                                                                            |   |              |        |             |   |               |         |   |   |        |        
|BALANCE AT MARCH 31, 2001             |                                                                            |   | (426         | )      |             |   | (132,298      | )       |   |   | 20,421 |        
|                                      | Issuance of common stock
for cash, net of
offering costs of $1,118         |   |              |       |             |   |               |        |   |   |        | 25,418  |  
|                                      | Issuance of common stock
for employee stock
purchase plan                  |   |              |       |             |   |               |        |   |   |        | 175     |  
|                                      | Deferred compensation                                                      |   |              | (1,087 | )           |   |               |        |   |   |        |        |  
|                                      | Amortization of deferred
compensation                                      |   |              | 973    |             |   |               |        |   |   |        | 973     |  
|                                      | Net loss                                                                   |   |              |       |             |   |               | (46,993 | ) |   |        | (46,993 | )
|                                      |                                                                            |   |              |        |             |   |               |         |   |   |        |        
|BALANCE AT MARCH 31, 2002
(unaudited) |                                                                            | $ | (540         | )      |             | $ | (179,291      | )       |   | $ | (6     | )      
|                                      |                                                                            |   |              |        |             |   |               |         |   |   |        |        

The accompanying notes are an integral part of these financial statements.

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##### Table of Contents






GADZOOX NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |         |       |        |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ----- | --------------------- | ------- | ------- | ------ | ------- | ------- | ------- | ----- | ------ | ------- | -
|                                                     |                                                                             |                                                                |                                          |                                                     |       | YEARS ENDED MARCH 31,
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                      
|                                                     |                                                                             |                                                                |                                          |                                                     |       | 2002                  |         | 2001    |        | 2000   
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |        
|                                                     |                                                                             |                                                                |                                          |                                                     |       | (unaudited)           |         |         |        |         |         |         |       |       
|Cash flows from operating activities:                |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Net loss                                                                    |                                                                | $                                        | (46,993                                             | )     |                       | $       | (92,843 | )      |         | $       | (10,361 | )    
|                                                     | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |         |      
|                                                     |                                                                             | Adjustment for change in accounting principle                  |                                          |                                                     |      |                       |         |         | 5,300  |         |         |         |      |       
|                                                     |                                                                             | Depreciation and amortization                                  |                                          |                                                     | 4,310 |                       |         |         | 3,668  |         |         |         | 2,599 |       
|                                                     |                                                                             | Amortization of deferred compensation                          |                                          |                                                     | 973   |                       |         |         | 608    |         |         |         | 1,285 |       
|                                                     |                                                                             | Change in allowance for doubtful accounts                      |                                          |                                                     | (81   | )                     |         |         | 172    |         |         |         | 450   |       
|                                                     |                                                                             | Change in inventory reserve                                    |                                          |                                                     | 3,553 |                       |         |         | 8,115  |         |         |         |      |       
|                                                     |                                                                             | Amortization of acquired intangible assets                     |                                          |                                                     |      |                       |         |         | 3,842  |         |         |         |      |       
|                                                     |                                                                             | Write-down/impairment of long-lived assets                     |                                          |                                                     | 3,306 |                       |         |         | 17,829 |         |         |         |      |       
|                                                     |                                                                             | Write-off of in-process research and development               |                                          |                                                     |      |                       |         |         | 4,900  |         |         |         |      |       
|                                                     |                                                                             | Non-cash restructuring and impairment charges                  |                                          |                                                     | 1,391 |                       |         |         | 1,529  |         |         |         |      |       
|                                                     |                                                                             | Non-cash stock compensation                                    |                                          |                                                     |      |                       |         |         | 456    |         |         |         |      |       
|                                                     |                                                                             | Changes in current assets and liabilities, net of
acquisition: |                                          |                                                     |       |                       |         |         |        |         |         |         |       |       
|                                                     |                                                                             |                                                                | Accounts receivable                      |                                                     |       | 3,647                 |         |         |        | 7,482   |         |         |       | (8,600 | )      
|                                                     |                                                                             |                                                                | Inventories                              |                                                     |       | 4,858                 |         |         |        | (12,075 | )       |         |       | (1,359 | )      
|                                                     |                                                                             |                                                                | Prepaid expenses and other assets        |                                                     |       | 444                   |         |         |        | 138     |         |         |       | (2,201 | )      
|                                                     |                                                                             |                                                                | Accounts payable and accrued liabilities |                                                     |       | (6,643                | )       |         |        | (169    | )       |         |       | 4,598  |        
|                                                     |                                                                             |                                                                | Deferred revenue                         |                                                     |       | (2,481                | )       |         |        |        |         |         |       |       |        
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     |                                                                             |                                                                |                                          | Net cash used in operating activities               |       |                       | (33,716 | )       |        |         | (51,048 | )       |       |        | (13,589 | )
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|Cash flows from investing activities:                |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Purchases of property and equipment                                         |                                                                |                                          | (2,470                                              | )     |                       |         | (5,286  | )      |         |         | (2,771  | )    
|                                                     | Proceeds from sale of short term investments                                |                                                                |                                          |                                                    |       |                       |         | 39,767  |        |         |         |        |      
|                                                     | Purchase of short term investments                                          |                                                                |                                          |                                                    |       |                       |         | (9,148  | )      |         |         | (30,619 | )    
|                                                     | Purchase of long term investments                                           |                                                                |                                          |                                                    |       |                       |         | (1,000  | )      |         |         |        |      
|                                                     | Net cash used in SmartSAN acquisition                                       |                                                                |                                          |                                                    |       |                       |         | (1,167  | )      |         |         |        |      
|                                                     | Cash used for long term deposits                                            |                                                                |                                          | 387                                                 |       |                       |         | (46     | )      |         |         |        |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     |                                                                             |                                                                |                                          | Net cash provided by (used in) investing
activities |       |                       | (2,083  | )       |        |         | 23,120  |         |       |        | (33,390 | )
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|Cash flows from financing activities:                |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Proceeds from convertible debt                                              |                                                                |                                          | 5,000                                               |       |                       |         |        |        |         |         |        |      
|                                                     | Repayment of notes payable                                                  |                                                                |                                          |                                                    |       |                       |         | (3,555  | )      |         |         | (371    | )    
|                                                     | Repayment of capital lease obligations                                      |                                                                |                                          | (962                                                | )     |                       |         | (1,543  | )      |         |         | (1,318  | )    
|                                                     | Loans to officers                                                           |                                                                |                                          |                                                    |       |                       |         | (535    | )      |         |         |        |      
|                                                     | Proceeds from issuance of common stock, net                                 |                                                                |                                          | 25,593                                              |       |                       |         | 1,670   |        |         |         | 79,296  |      
|                                                     | Proceeds from loan payable                                                  |                                                                |                                          | 4,542                                               |       |                       |         |        |        |         |         |        |      
|                                                     | Payments on loan payable                                                    |                                                                |                                          | (2,979                                              | )     |                       |         |        |        |         |         |        |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     |                                                                             |                                                                |                                          | Net cash (used in) provided by financing
activities |       |                       | 31,194  |         |        |         | (3,963  | )       |       |        | 77,607  |  
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|Net (decrease) increase in cash and cash equivalents |                                                                             |                                                                | (4,605                                   | )                                                   |       |                       | (31,891 | )       |        |         | 30,628  |        
|Cash and cash equivalents at beginning of year       |                                                                             |                                                                | 10,939                                   |                                                     |       |                       | 42,830  |         |        |         | 12,202  |        
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|Cash and cash equivalents at end of year             |                                                                             | $                                                              | 6,334                                    |                                                     |       | $                     | 10,939  |         |        | $       | 42,830  |        
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|Supplemental cash flow information:                  |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Cash paid for interest                                                      |                                                                | $                                        | 140                                                 |       |                       | $       | 261     |        |         | $       | 274     |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Property and equipment acquired under capital lease
obligations             |                                                                | $                                        |                                                    |       |                       | $       |        |        |         | $       | 1,770   |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Conversion of preferred stock into common stock                             |                                                                | $                                        |                                                    |       |                       | $       |        |        |         | $       | 34,129  |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Conversion of convertible notes to common stock                             |                                                                | $                                        |                                                    |       |                       | $       |        |        |         | $       | 10,910  |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Issuance of common stock for the acquisition of
SmartSAN                    |                                                                | $                                        |                                                    |       |                       | $       | 23,635  |        |         | $       |        |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        
|                                                     | Issuance of warrant for common stock                                        |                                                                | $                                        |                                                    |       |                       | $       | 113     |        |         | $       |        |      
|                                                     |                                                                             |                                                                |                                          |                                                     |       |                       |         |         |        |         |         |        

The accompanying notes are an integral part of these financial statements.

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##### Table of Contents






GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Gadzoox Networks, Inc. (Gadzoox or the Company), formerly Gadzoox Microsystems,
Inc., was incorporated in the state of California on April 2, 1992 and was
reincorporated in Delaware on January 6, 1998.

The Company is a provider of hardware and software products that enable the
creation of networks made up of computers and data storage devices which have
become known as storage area networks, or SANs. The Companys SAN products are
based on Fibre Channel technology, a highly reliable, gigabit interconnect
technology that enables rapid exchange of large amounts of data among
workstations, mainframes, servers and data storage systems. Fibre Channel
technology is the prevailing technology used for switches, hubs storage
systems, storage devices and adaptor products in the SAN market today.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 net revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include
inventory reserves, allowance for doubtful accounts, and income tax valuation
allowances.

Cash and Cash Equivalents and Short-Term Investments

The Company maintains all of its cash in commercial bank demand deposit
accounts and/or invests in highly liquid money market funds. The Company
considers all highly liquid investments with an original maturity of 90 days or
less to be cash equivalents. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate and, therefore, the carrying value of these
investments approximates their fair value.

Concentration of Credit Risk

As of March 31, 2002, financial instruments that potentially subject the
Company to concentration of credit risk consist principally of bank deposits
and trade accounts receivable. The Company places its cash and cash equivalents
in checking and money market accounts in high credit quality financial
institutions. The Companys trade accounts receivable are derived primarily
from sales to OEMs and distributors located primarily in the U.S. who are
generally large, well established companies. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
credit losses.

Customers that account for greater than 10% of trade accounts receivable are as
follows:

|          |  |             |    |   |  |  |  |      |  |  |    |  
|--------- |  | ----------- | -- | - |  |  |  | ---- |  |  | -- | -
|          |  | MARCH 31,  
|          |  |            
|          |  | 2002        |    |   |  |  |  | 2001
|          |  |             |    |   |  |  |  |     
|          |  | (unaudited) |    |   |  |  |  |     
|Company A |  |             | 71 | % |  |  |  |      |  |  | 33 | %
|Company B |  |             | 16 | % |  |  |  |      |  |  | 35 | %

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GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. It is possible that
estimates of net realizable value can change in the near future. The components
of inventory are as follows (in thousands):

|                |       |   |             |       |  |  |  |  |      |   |       |        | 
|--------------- | ----- | - | ----------- | ----- |  |  |  |  | ---- | - | ----- | ------ | 
|                |       |   | MARCH 31,  
|                |       |   |            
|                |       |   | 2002        |       |  |  |  |  | 2001
|                |       |   |             |       |  |  |  |  |     
|                |       |   | (unaudited) |       |  |  |  |  |     
|Raw materials   |       | $ | 805         |       |  |  |  |  |      | $ | 5,157 |       
|Work-in-process |       |   |            |       |  |  |  |  |      |   | 26    |       
|Finished goods  |       |   | 1,410       |       |  |  |  |  |      |   | 5,443 |       
|                |       |   |             |       |  |  |  |  |      |   |       |       
|                | Total |   | $           | 2,215 |  |  |  |  |      |   | $     | 10,626 | 
|                |       |   |             |       |  |  |  |  |      |   |       |       

Property and Equipment

Property and equipment are stated at cost, and depreciation and amortization
are provided using the straight-line method based upon the estimated useful
lives of the related assets as follows:

|                                  |  |                                                                                              |  | 
|--------------------------------- |  | -------------------------------------------------------------------------------------------- |  | 
|Computer and laboratory equipment |  | 3 years                                                                                     
|Software                          |  | 3 to 5 years                                                                                
|Furniture and equipment           |  | 5 years                                                                                     
|Leasehold Improvement             |  | over the shorter of the remaining lease term or the estimated useful life of the improvement

The components of property and equipment are as follows (in thousands):

|                                          |  |             |         |   |  |  |  |      |  |   |        |  
|----------------------------------------- |  | ----------- | ------- | - |  |  |  | ---- |  | - | ------ | -
|                                          |  | MARCH 31,  
|                                          |  |            
|                                          |  | 2002        |         |   |  |  |  | 2001
|                                          |  |             |         |   |  |  |  |     
|                                          |  | (unaudited) |         |   |  |  |  |     
|Computer and laboratory equipment         |  | $           | 9,704   |   |  |  |  |      |  | $ | 8,700  |  
|Software                                  |  |             | 4,240   |   |  |  |  |      |  |   | 3,407  |  
|Furniture and equipment                   |  |             | 4,429   |   |  |  |  |      |  |   | 3,945  |  
|Leasehold improvements                    |  |             | 1,260   |   |  |  |  |      |  |   | 1,111  |  
|                                          |  |             |         |   |  |  |  |      |  |   |        |  
|                                          |  |             | 19,633  |   |  |  |  |      |  |   | 17,163 |  
|Accumulated depreciation and amortization |  |             | (16,798 | ) |  |  |  |      |  |   | (8,919 | )
|                                          |  |             |         |   |  |  |  |      |  |   |        |  
|Property and equipment, net               |  | $           | 2,835   |   |  |  |  |      |  | $ | 8,244  |  
|                                          |  |             |         |   |  |  |  |      |  |   |        |  

Depreciation and amortization expense of $4.3 million, $3.7 million, and $2.6
million, was recognized during the fiscal years ended March 31, 2002, 2001, and
2000, respectively. Included in property and equipment are assets acquired
under capital lease obligations with an original cost of $5.1 million, as of
March 31, 2002 and 2001, respectively. Related accumulated amortization of
these leased assets was $4.8 million and $4.0 million as of March 31, 2002 and
2001, respectively.

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Impairment of Long-Lived Assets

The Company assesses the realizable value of long-lived and intangible assets
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of Under SFAS No. 121, the Company is required to assess the
valuation of its long-lived assets, including intangible assets, based on the
estimated cash flows to be generated by such assets. The realizable value of
intangible assets, including goodwill, is evaluated periodically as events or
circumstances indicate a possible inability to recover the net carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact of recent
business combinations. The analyses involve a significant level of management
judgment in order to evaluate the ability of the Company to perform within
projections (See Note 9).

Revenue Recognition

Revenues consist of sales to OEMs and distributors. Revenues from sales to OEMs
are recognized upon shipment from the Company. The Company provides for
estimated sales returns and allowances and warranty costs related to such sales
at the time of shipment. Net revenues consist of product revenues reduced by
estimated sales returns and allowances. The Companys terms of sale to its
customers do not include any formal customer acceptance provisions or
installation requirements.

As of April 1, 2000, the Company changed its accounting method for recognizing
revenue net of appropriate reserves for sales returns when merchandise is
shipped to distributors, to recognizing revenue when the product is shipped by
the distributors to end users. According to the management of the Company, this
change was made as it better recognizes the substance of demand for its
products due to changes in the marketplace during the year ended March 31,
2001, and will accordingly better focus the Company on, and allow investors to
better understand end user demand trends for its products. The cumulative
effect of this change in accounting principle for the year ended March 31, 2001
was a charge of $5.3 million or $0.19 per basic share.

Warranty

The Company warrants its products against defects in materials and workmanship
for one to three year periods. The estimated cost of warranty obligations is
recognized at the time of revenue recognition.

Comprehensive Income (Loss)

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income, which established standards for reporting
and presentation of comprehensive income and its components. This standard
defines comprehensive income as the changes in equity of an enterprise except
those resulting from stockholder transactions. The Company had no such
transactions that were material to the financial statements for the periods
ended March 31, 2002, 2001, and 2000. For each of these years, comprehensive
loss approximated the net loss.

Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

|                           |       |  |             |       |  |  |  |  |      |  |       |       | 
|-------------------------- | ----- |  | ----------- | ----- |  |  |  |  | ---- |  | ----- | ----- | 
|                           |       |  | MARCH 31,  
|                           |       |  |            
|                           |       |  | 2002        |       |  |  |  |  | 2001
|                           |       |  |             |       |  |  |  |  |     
|                           |       |  | (unaudited) |       |  |  |  |  |      |  |      
|Purchase commitments       |       |  | 1,063       |       |  |  |  |  |      |  | 1,655 |      
|Accrued warranty costs     |       |  | 25          |       |  |  |  |  |      |  | 266   |      
|Sales return reserve       |       |  |            |       |  |  |  |  |      |  | 315   |      
|Accrued professional fees  |       |  | 129         |       |  |  |  |  |      |  | 525   |      
|Accrued marketing expenses |       |  | 138         |       |  |  |  |  |      |  | 569   |      
|Other accrued liabilities  |       |  | 728         |       |  |  |  |  |      |  | 1,215 |      
|                           |       |  |             |       |  |  |  |  |      |  |       |      
|                           | Total |  | $           | 2,083 |  |  |  |  |      |  | $     | 4,545 | 
|                           |       |  |             |       |  |  |  |  |      |  |       |      

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Stock-Based Compensation

The Company complies with SFAS No. 123, Accounting for Stock-Based
Compensation. This standard permits the use of either a fair value based method
or the method defined in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) to account for stock-based compensation
arrangements. Companies that elect to employ the valuation method provided in
APB 25 are required to disclose the pro forma net income (loss) that would have
resulted from the use of the fair value based method. The Company has elected
to continue to determine the value of stock-based compensation arrangements
under the provisions of APB 25, and accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 7.

Software Development Costs

Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility in the form
of a working model has been established, in accordance with SFAS No. 86,
Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed. To date, the Companys software development has been completed
concurrent with the establishment of technological feasibility and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying statements of operations.

Sales and Marketing Costs

Sales and marketing costs are expensed as incurred. These expenses consist
primarily of salaries, commissions and other related expenses for personnel
engaged in marketing, sales and customer engineering support functions, as well
as, costs associated with trade shows, promotional activities, travel expenses
and other related expenses.

Reclassifications

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

Net Loss Per Share

Historical net loss per share has been calculated under SFAS No. 128, Earnings
Per Share. Basic net loss per share on a historical basis is computed using the
weighted average number of shares of common stock outstanding. No diluted loss
per share information has been presented in the accompanying statements of
operations since potential common shares from conversion of the convertible
debenture, preferred stock, stock options, and warrants are antidilutive. The
total number of shares excluded from diluted loss per share relating to these
securities was 20,204,807; 4,724,751; and 20,256,699 for fiscal 2002, 2001, and
2000 respectively. The following table presents the calculation of basic net
loss per common share (in thousands, except per share data):

|                                                                          |  |                      |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                          |  | YEAR ENDED MARCH 31,
|                                                                          |  |                     
|                                                                          |  | 2002                 |         | 2001 |  | 2000
|                                                                          |  |                      |         |      |  |     
|                                                                          |  | (unaudited)          |         |      |  |      |         |   |  |  
|Net loss                                                                  |  | $                    | (46,993 | )    |  | $    | (92,843 | ) |  | $ | (10,361 | )
|                                                                          |  |                      |         |      |  |      |         |   |  |   |         |  
|Basic:                                                                    |  |                      |         |      |  |      |         |   |  |   |         |  
|Weighted average shares of common stock
outstanding                       |  |                      | 37,743  |      |  |      | 28,006  |   |  |   | 19,930  |  
|Less: Weighted average shares subject to
repurchase                       |  |                      |        |      |  |      |        |   |  |   | (199    | )
|                                                                          |  |                      |         |      |  |      |         |   |  |   |         |  
|Weighted average shares used in computing basic net
loss per common share |  |                      | 37,743  |      |  |      | 28,006  |   |  |   | 19,731  |  
|                                                                          |  |                      |         |      |  |      |         |   |  |   |         |  
|Basic net loss per common share                                           |  | $                    | (1.25   | )    |  | $    | (3.32   | ) |  | $ | (0.53   | )
|                                                                          |  |                      |         |      |  |      |         |   |  |   |         |  

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144 Accounting for the Impairment or Disposal of Long Lived Assets. SFAS No.
144 addresses financial accounting and reporting for the long-lived assets to
be held, used and disposed of. The statement will be effective for the
financial statements issued for fiscal years beginning after December 15, 2001.
The Company has not yet determined what impact the adoption of SFAS No. 144
will have on its financial position or results of operations.

In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. SFAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. SFAS 142 will have no affect on the Companys financial statements in
that all goodwill and intangible assets have been written off due to impairment
during 2001.

In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133, which is
effective for all fiscal years beginning after June 15, 2000. SFAS No. 138
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivatives fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Because the Company does not currently hold
any derivative instruments and does not currently engage in any material
hedging activities, management believes that the application of SFAS No. 138
will not have a material impact on the Companys financial position or results
of operations.

2. COMMITMENTS AND CONTINGENCIES

Lease Agreements

During the year ended March 31, 2000 and 1999, the Company acquired certain
equipment under capital leases. Additionally, the Company leases two facilities
under non-cancelable operating leases, which expire between November 2007 and
July 2008. Future minimum lease payments under all capital and operating lease
agreements as of March 31, 2002 (unaudited) are as follows (in thousands):

|                                                                             |  |         |     |           |  |   |        | 
|---------------------------------------------------------------------------- |  | ------- | --- | --------- |  | - | ------ | 
|                                                                             |  | CAPITAL |     | OPERATING
|YEAR ENDED MARCH 31,                                                         |  | LEASES  |     | LEASES   
|                                                                             |  |         |     |          
|2003                                                                         |  |         | 408 |           |  |   | 2,741  | 
|2004                                                                         |  |         |    |           |  |   | 2,790  | 
|2005                                                                         |  |         |    |           |  |   | 2,842  | 
|2006                                                                         |  |         |    |           |  |   | 2,895  | 
|2007                                                                         |  |         |    |           |  |   | 2,951  | 
|2008 and thereafter                                                          |  |         |    |           |  |   | 2,838  | 
|                                                                             |  |         |     |           |  |   |        | 
|                                                                             |  |         | 408 |           |  | $ | 17,057 | 
|                                                                             |  |         |     |           |  |   |        | 
|Less amounts representing interest
(Weighted average interest rate of 7.50%) |  |         | (42 | )         |  |   |        | 
|                                                                             |  |         |     |           |  |   |        | 
|Present value of minimum lease payments (all current)                        |  | $       | 366 |           |  |   |        | 
|                                                                             |  |         |     |           |  |   |        | 

Rent expense under non-cancelable operating lease agreements for the years
ended March 31, 2002, 2001, and 2000 was $2.0 million, $1.9 million, and $1.1
million, respectively. See also footnote 9 for discussion of restructuring
rent expense.

F-11



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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Legal Proceedings

On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., was filed against the Company, three former
officers, and two underwriters in the Companys initial public offering (IPO),
in the United States District Court for the Southern District of New York. The
complaint alleges violations of Section 11 of the Securities Act of 1933 (the
Securities Act) against all defendants, a violation of Section 15 of the
Securities Act against the individual defendants, and violations of Section
12(a)(2) of the Securities Act and Section 10(b) of the Securities Exchange Act
of 1934 (and Rule 10b-5, promulgated there under; collectively, the Exchange
Act) against the underwriters. The complaint seeks unspecified damages on
behalf of a purported class of purchasers of common stock between July 19, 1999
and December 6, 2000 (the class period).

On June 25, 2001, a similar complaint, captioned Goldgrab v. Gadzoox Networks,
Inc., et al., Civil Action No. 1-01-CV-5798, was filed against the Company, the
individual defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Cooper
complaint, except in that it alleges violations of Section 10(b) of the
Exchange Act of 1934 (and Rule 10b-5, promulgated there under) against all
defendants, including the Company and the individual defendants. There have
been additional lawsuits filed containing allegations substantially identical
to those in the Cooper and Goldgrab complaints.

On May 8,2002, plaintiffs filed a consolidated amended complaint. The
allegations of the amended complaint focus on purported actions of the
Companys underwriters in its 1999 IPO. The plaintiffs claim that the
underwriters solicited and received excessive commissions from investors in
exchange for favorable allocations of IPO shares. The plaintiffs also claim
that the underwriters entered into agreements with their customers whereby, in
exchange for favorable allocations of shares in the offering, the customers
would commit to purchase additional shares in the aftermarket at pre-determined
prices. The complaints filed against the Company, however, do not contain any
particular allegations of any specific tie-in agreement or excessive commission
received in connection with the offering specifically. The plaintiffs contend
that the Company is liable under Section 11 of the Securities Act because its
registration statement in the IPO did not disclose the purported actions by the
underwriters. Two of the complaints also bring claims under Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder, contending that the
Company knew of, participated in or acted with reckless disregard to the
alleged misconduct of the underwriters.

Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 300 other companies. The lawsuits against the
Company and all of these other related lawsuits have been coordinated for
pretrial purposes as In re Initial Public Offering Securities
Litigation, Civil
Action No. 21-MC-92, and are presently being overseen by Judge Shira A.
Scheindlin. As of June 20, 2002, no schedule has been established regarding
the lawsuits against the Company. The Company believes it has meritorious
defenses to these securities lawsuits and will defend the lawsuits vigorously.

3. LOAN PAYABLE  ACCOUNTS RECEIVABLE FINANCING

In September 2001, the Company entered into a one year accounts receivable
financing agreement with Pacific Business Funding (PBF), a division of
Cupertino National Bank, which provides the Company with a line of credit for
up to $5.0 million based on eligible accounts receivable. The amount of
eligible accounts receivable is based on an advance formula whereby the Company
can borrow an amount equivalent to not more than 80 percent of all accounts
receivable that are less than 90 days old. The financing rate is set at an
annual percentage rate of 9.5% on the average daily balance outstanding under
the receivables financing agreement, plus 1/2% of the face amount of each
invoice. At March 31, 2002, the amount outstanding under the receivables
financing agreement was $1.6 million and is presented on the accompanying
Condensed Balance Sheet as a Loan Payable.

In connection with the accounts receivable financing agreement, the Company
issued to the lender a warrant to purchase 71,942 shares of its common stock at
a price of $1.39 per share. The warrants are immediately exercisable, are
nonforfeitable, and expire five years from the date of grant.

F-12



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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

4. SENIOR SECURED CONVERTIBLE DEBT

On January 23, 2002, the Company entered into a 2.5% Senior Secured Convertible
Debenture with Berg & Berg Enterprises, LLC, a California limited liability
company, pursuant to which the Company borrowed the principle sum of $5.0
million from Berg & Berg. The debenture bears interest at the rate of 2.5% per
annum, compounded quarterly. The principle and accrued interest under the
debenture shall become due on January 23, 2005. The funds received under the
debenture will be used for working capital in the ordinary course of the
Companys business.

According to the terms of the debenture, Berg & Berg has the option to convert
the principle amount outstanding under such debenture into shares of the
Companys common stock at the conversion price of $0.759 per share.
Accordingly, the maximum number of shares of common stock issuable upon
conversion of the proposed indebtedness under the debenture is 6,587,615
shares.

5. ACQUISITION OF SMARTSAN SYSTEMS, INC.

On March 2, 2000, the Company entered into a definitive agreement to acquire
SmartSAN Systems, Inc. (SmartSAN), a California company. The acquisition was
completed in April 2000 and was accounted for under the purchase method of
accounting. The Company acquired all of the outstanding shares of SmartSAN by
issuing 239,433 shares of its common stock and assuming options to purchase
108,376 additional shares (which share number reflects the effect of the
exchange ratio applied to the outstanding SmartSAN stock options at the time of
the acquisition). Total consideration was as follows (in thousands):

|                                                      |  |   |        | 
|----------------------------------------------------- |  | - | ------ | 
|Fair value of common stock issued and options assumed |  | $ | 23,625 | 
|Merger and other related costs paid in cash           |  |   | 1,169  | 
|                                                      |  |   |        | 
|Total consideration                                   |  | $ | 24,794 | 
|                                                      |  |   |        | 

The fair value of the Companys common stock was determined using the average
closing market price over several days on either side of the acquisition
announcement on March 2, 2000. The fair value of the SmartSAN options assumed
was estimated using the Black-Scholes pricing model and assumptions consistent
with those used to value options issued to employees in accordance
with the consensus reached by the Financial Accounting Standards Boards (FASB) Emerging
Issues Task Force (EITF) in EITF Issue 90-9 Changes to Fixed Employee Stock
Option Plan as a result of Equity Restructuring.

The allocation of the total consideration to the fair value of acquired assets
and liabilities assumed is as follows (in thousands):

|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Fair value of net assets acquired and liabilities assumed |  | $ | (778   | )
|Acquired intangibles                                      |  |   | 20,672 |  
|In-process research and development                       |  |   | 4,900  |  
|                                                          |  |   |        |  
|                                                          |  | $ | 24,794 |  
|                                                          |  |   |        |  

At the time of the acquisition, the Company allocated $4.9 million of the
purchase price to in-process research and development products. This amount
represented 20% of the purchase price. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility, and the
research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.

At the acquisition date, SmartSAN was conducting design, development,
engineering and testing activities associated with the development of
next-generation Geminix products: SDM3000, RDM4000, and DDM5000, valued at $0.8
million, $1.1 million, and $3.0 million, respectively.

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GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

The SDM3000 was a next-generation Fibre Channel to Fibre Channel router; the
RDM4000 was being developed as a Fibre Channel to LAN/WAN remote domain
manager; and the DDM5000 was scheduled to be the flagship distributed domain
manager incorporating advanced storage virtualization. SmartSAN engineers had
made significant progress on the projects as of the acquisition date, including
design of the overall architecture, and in some cases, much of the development
work. However, substantial integration and testing activities remained to
develop the technologies into commercially viable products.

At the acquisition date, the technologies under development were approximately
80% (SDM3000), 65% (RDM4000) and 25% (DDM5000) complete, based on engineering
man-month data and technological progress. SmartSAN had spent $700,000 on the
in-process projects, and expected to spend $2.5 million to complete all phases
of the R&D projects. Anticipated completion dates ranged from 2 months for the
SDM3000 to 12 months for the DDM5000, at which times the Company expected to
begin benefiting, and generating cash flows, from the developed technologies.

In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially
viable projects, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and
the nature and expected timing of new product introductions by the Company and
its competitors. The resulting net cash flows from such projects are based on
managements estimates of cost of sales, operating expenses, and income taxes
from such projects.

The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability
of the developmental projects, discount rates of 40% to 45% were used in the
analysis. These discount rates were commensurate with the projects stage of
development and the uncertainties in the economic estimates described above.

Other acquired intangible assets, including goodwill, developed technology and
other intangible assets of $20.7 million were being amortized over their
estimated useful lives of five years on a straight-line basis. Accordingly, for
the three and nine months ended December 31, 2000, the Company amortized
respectively, $1.0 million and $3.1 million of goodwill and intangible assets.

The amount allocated to developed technology was $4.4 million. The developed
technology consists of the SR2001/SDM2001 platforms. Both are based on the same
hardware platform and have the same estimated remaining life. SR2001 is a
family of Fibre to SCSI Subnet Domain Managers that provide high-performance
data routing between Fibre Channel SANs and SCSI devices with advanced
management features and the SmartCafe graphical user interface. SR2001 is
primarily a proof of concept evaluation vehicle. The SR2001 contains a 64-bit
RISC processor, which enables it to provide sophisticated management of the
storage resources in the subnet beneath it. Such management features are
essential to meeting the business needs for data availability, data integrity,
and data security, and to realizing the full benefit potential of SAN
technology. The SDM2001 Subnet Domain Manager is based on the same hardware
platform as the SR2001, but adds a sophisticated suite of subnet management
software.

The Company acquired SmartSAN with the intent that SmartSAN would provide the
Company with a full range of products to address the storage area networking
market including hubs and switches, which the Company was already selling, and
IP routers which SmartSAN was in the process of developing. Subsequent to the
acquisition, the Company realized that it could not effectively compete in the
IP Router market without significant additional investment in new products and
other financial support. As a result, in March 2001, the Company changed its
product strategy and refocused its efforts exclusively on the higher margin
Fibre Channel fabric switch market. Consequently, the product lines and
technologies acquired in the SmartSAN acquisition were abandoned because they
did not support open fabric switch technology. At this time, the former
SmartSAN products were estimated to be 100% (SDM3000), 65% (RDM4000) and 25%
(DDM5000) complete.

As a result of the abandonment of the related product lines and technologies,
management determined that, based on an updated analysis of the SmartSAN
acquisition, remaining goodwill and intangible assets totaling $16.8 million
had become impaired and were written off in the fourth quarter of fiscal 2001.

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GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

6. COMMON STOCK

Private Placements

In May 2001, the Company sold 5.6 million shares of its common stock in a
private placement transaction and received net proceeds from this sale of $14.5
million. The registration rights agreement that the Company entered into with
its May 2001 investors contain provisions requiring the Company to pay
penalties unless a registration statement covering the resale of these shares
was declared effective by the SEC no later than 90 days after the Companys
sale of the common stock to the investors. The Company filed a registration
statement covering the resale of these shares on July 9, 2001 and the SEC
declared this registration statement effective on November 9, 2001. As a result
of the delay in having the registration statement declared effective by the
SEC, the Company incurred $370,000 in penalties as of October 23, 2001 (the
last relevant penalty assessment date). The $370,000 in penalties was paid out
in November 2001 to investors and is recorded as a dividend related to common
stock and shown on the Condensed Statement of Operations in determining the Net
Loss attributable to common stockholders.

In August 2001, the Company sold 5.0 million shares of its common stock in a
private placement transaction and received net proceeds from this sale of $7.3
million.

On January 23, 2002, the Company sold 7,825,000 shares of its common
stock in a private placement transaction at a per share purchase price of
$0.50, resulting in gross proceeds to the Company of $3.9 million.

The
proceeds received from the sale of the shares will be used for working capital
purposes.

Equity Line

On October 17, 2001, the Company entered into an amended and restated equity
line financing agreement with Societe Generale, a bank organized under the laws
of France, which provided the Company the right to sell to Societe Generale up
to $20 million worth of shares of its common stock on a private placement basis
on the terms and subject to the conditions set forth in the equity line
agreement. However, the terms of the equity line agreement prohibits the
Company from delivering a draw down notice if the Companys common stock traded
below $1.00 for a period of 30 consecutive trading days. As of the close of
market on January 15, 2002, the number of consecutive trading days the closing
sales price of the common stock as reported by The Nasdaq National Market had
been below the $1.00 threshold had reached 30 days and the Company can no
longer deliver a draw down notice to Societe Generale under the equity line.
Furthermore, because the Company had not sold any common stock to Societe
General under the equity line prior to the termination of its ability to
deliver a draw down notice, as of January 15, 2002, a $300,000 fee has become
due and payable to Societe Generale, which represents the minimum commitment
fee payable to Societe General under the equity line agreement.

Warrants

In March 2001, the Company entered into an amendment agreement for a leased
facility. In connection with the amendment, the Company issued to the landlord
a warrant to purchase 50,000 shares of its common stock at a price of $3.00 per
share. The warrants are immediately exercisable, are nonforfeitable and expire
three years from the date of grant.

In connection with the May 2001 equity financing transaction, the Company
issued a warrant to purchase 168,000 shares of common stock to a financial
advisor for their assistance in the investor search. The warrants are
immediately exercisable at $4.14 per share, are nonforfeitable, and expire
three years from the date of grant.

In connection with the September 2001 accounts receivable financing
transaction, the Company issued to the lender a warrant to purchase 71,942
shares of its common stock at a price of $1.39 per share. The warrants are
immediately exercisable, are nonforfeitable, and expire five years from the
date of grant.

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

7. STOCK OPTIONS

The Company under the various stock option plans (the Plans) discussed below,
grants stock options for shares of common stock to employees, directors and
consultants. In accordance with the Plans, unless specifically approved by the
Board of Directors on an exception basis, all incentive and non-statutory stock
option grants must be at prices of at least 100% to 85%, respectively, of the
fair value of the stock on the date of the grant, as determined by the Board of
Directors. The options are exercisable as determined by the Board of Directors.
Generally, stock options granted vest ratably on a monthly basis over a
four-year period. However, as part of efforts to retain valuable employees in
the wake of the reductions in staff that have taken place beginning in March of
2001, stock options granted subsequent to November 2001 have vested on a
monthly basis over six to twelve month periods. The options expire upon the
earlier of ten years from the date of grant or ninety days following
termination of employment. Stock purchase rights granted under the Plan must be
exercised within ninety days from the date of grant. Shares purchased pursuant
to the grant of a stock purchase right shall be subject to repurchase, and the
repurchase option shall lapse at a minimum rate of 20% per year.

1999 Employee Stock Purchase Plan

In May 1999, the Board of Directors approved the adoption of the Companys 1999
Employee Stock Purchase Plan (the Stock Purchase Plan). The Stock Purchase Plan
allows eligible employees to purchase shares of common stock through payroll
deductions at 85% of the fair market value of the common stock. A total of
150,000 shares of common stock were reserved for issuance under the Stock
Purchase Plan. Initially, the Stock Purchase Plan called for an automatic
annual increase in the number of Common Stock shares reserved for issuance as
the lesser of: (i) 250,000 shares, (ii) 1.0% of the outstanding shares of the
Company, or (iii) a lesser amount determined by the Board of Directors.
However, in June, 2001, the Board approved an amendment to the Stock Purchase
Plan, which was approved by stockholders in September 2001, whereby the number
of shares reserved for issuance will automatically increase at the start of
each fiscal year by the lesser of (a) 750,000 shares, (b) 1.5 % of the
outstanding shares on such date, or (c) a lesser amount determined by the Board
of Directors. Accordingly, in April 2002, April 2001 and April 2000, an
additional 708,840 shares, 250,000 shares, and 250,000 respectively, were added
to the Stock Purchase Plan. During fiscal 2002, 2001 and 2000, 129,253 shares,
112,044 and 38,897 shares, respectively, were issued through employee stock
purchases under the Stock Purchase Plan.

1993 Stock Option Plan

In May 1999, the Board of Directors approved and adopted an Amended and
Restated 1993 Stock Option Plan (the 1993 Plan). The maximum number of shares
available for sale under the 1993 Plan was increased effective April, 2002 to
13,840,883 shares. Beginning in the year ended March 31, 2001, the number of
shares reserved for issuance under the Plan is subject to an annual increase to
be added on the first day of the Companys fiscal year, equal to the lesser of
(a) 1,500,000 shares, (b) 1.5% of the outstanding shares on such date, or (c) a
lesser amount determined by the Board of Directors. Accordingly on April 1,
2002, April 1, 2001 and April 1, 2000, 1,500,000, 1,418,791 and 1,342,092
additional shares, respectively, were added to the 1993 plan. Additionally in
April 2000, the Board of Directors authorized an increase in the number of
shares reserved for issuance under the amended Plan by 1,400,000 shares and in
October 2000, the stockholders of the Company approved this increase.

2000 Non-Statutory Stock Option Plan

In June 2000, the Board of Directors approved and adopted the 2000
Non-Statutory Stock Option Plan (the NSO Plan). The number of shares reserved
for issuance under this Plan was 1,600,000. In August 2000 and October 2000,
the Board approved an additional 700,000 and 1,000,000 shares, respectively,
for issuance under this Plan. In April 2001 and February 2002, the Board
approved an additional 3,000,000 and 4,500,00 shares, respectively, for
issuance under this Plan.

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

1999 Director Stock Option Plan

In May 1999, the Board of Directors approved the adoption of the 1999 Director
Stock Option Plan (the Director Plan). The Director Plan was approved by the
stockholders in June, 1999. The Director Plan was amended as approved by the
stockholders in September, 2001. The amended Director Plan provides for the
automatic grant of an option to purchase 70,000 shares of common stock to each
non-employee director on the later of the date of adoption of the Director Plan
or the date on which such person first becomes a director (the Initial Grant).
After the Initial Grant, the non-employee director will receive an automatic
annual grant of 30,000 shares of common stock. The Initial Grant vests on a
monthly basis over 36 months. Subsequent grants vest monthly over 12 months.
All shares granted under the Director Plan expire upon the earlier of three
years after the date of grant, or the resignation of the director from the
Board of Directors. During the year ended March 31, 2000, a total of 50,000
shares of common stock were reserved for issuance under the Director Plan.
Initially, the number of shares reserved for issuance under the Director Plan
was subject to annual increases on the first day of the Companys fiscal year,
beginning in 2001, sufficient to bring the number of shares available for
future issuance to 50,000 shares. However, the amendment approved by
stockholders in September 2001, augmented the annual increase in shares
reserved for future issuance to 350,000 shares. Accordingly, in April 2002,
April 2001 and April 2000, an additional 121,980, 12,500 and 25,000 shares,
respectively, were allocated to the Director Plan.

SMARTSAN 1998 Stock Option Plan

In April 2000, in connection with the acquisition of SmartSAN Systems, Inc.,
(SmartSAN), the Company assumed the SmartSAN 1998 Equity Incentive Plan (the
SmartSAN Plan). Only former employees of SmartSAN that became employees of the
Company upon the closing of the merger with the Company are eligible to
participate in the SmartSAN Plan. The Company reserved a total of 108,376
shares of Common Stock for issuance under the Plan. No additional shares may be
reserved thereunder.

At March 31, 2002 (unaudited), shares of common stock under the Plans were
reserved for future issuances as follows:

|                                      |                                |  |            |           | 
|------------------------------------- | ------------------------------ |  | ---------- | --------- | 
|1999 Employee Stock Purchase Plan     |                                |  | 369,806    |          
|1993 Stock Option Plan:               |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 5,740,544 | 
|                                      | Reserved for future grants     |  |            | 957,225   | 
|2000 Non-Statutory Stock Option Plan: |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 7,466,986 | 
|                                      | Reserved for future grants     |  |            | 3,297,263 | 
|1999 Director Stock Option Plan:      |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 117,500   | 
|                                      | Reserved for future grants     |  |            | 228,020   | 
|SmartSAN 1998 Equity Incentive Plan:  |                                |  |            |          
|                                      | Outstanding options and rights |  |            | 2,220     | 
|                                      |                                |  |            |          
|                                      |                                |  | 18,179,564 |          
|                                      |                                |  |            |          

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

A summary of transactions under the Plans is as follows:

|                                      |                               |  |           |            |           |  |                                |            |           |   |        |        | 
|------------------------------------- | ----------------------------- |  | --------- | ---------- | --------- |  | ------------------------------ | ---------- | --------- | - | ------ | ------ | 
|                                      |                               |  |           |            |           |  | OUTSTANDING OPTIONS AND RIGHTS
|                                      |                               |  |           |            |           |  |                               
|                                      |                               |  | SHARES    |            |           |  |                                |            | WEIGHTED-
|                                      |                               |  | AVAILABLE |            | NUMBER    |  | AVERAGE                       
|                                      |                               |  | FOR GRANT |            | OF SHARES |  | EXERCISE PRICE                
|                                      |                               |  |           |            |           |  |                               
|Balance at March 31, 1999             |                               |  | 741,478   |            |           |  | 4,529,692                      |            |           | $ | 0.969  |       
|                                      | Authorized                    |  |           | 550,000    |           |  |                                |           |           |   |        |       | 
|                                      | Granted                       |  |           | (1,403,050 | )         |  |                                | 1,403,050  |           |   | $      | 33.145 | 
|                                      | Cancelled                     |  |           | 163,420    |           |  |                                | (163,420   | )         |   | $      | 10.798 | 
|                                      | Exercised                     |  |           |           |           |  |                                | (1,810,439 | )         |   |        | 0.64   | 
|                                      |                               |  |           |            |           |  |                                |            |           |   |        |       
|Balance at March 31, 2000             |                               |  | 51,848    |            |           |  | 3,958,883                      |            |           | $ | 11.902 |       
|                                      | Authorized                    |  |           | 6,175,468  |           |  |                                |           |           |   |        |       | 
|                                      | Granted                       |  |           | (6,804,326 | )         |  |                                | 6,804,326  |           |   | $      | 9.542  | 
|                                      | Cancelled                     |  |           | 2,266,055  |           |  |                                | (2,266,055 | )         |   | $      | 15.436 | 
|                                      | Exercised                     |  |           |           |           |  |                                | (1,182,861 | )         |   | $      | 0.877  | 
|                                      | Expired                       |  |           | (59,834    | )         |  |                                |           |           |   |        |       | 
|                                      |                               |  |           |            |           |  |                                |            |           |   |        |       
|Balance at March 31, 2001             |                               |  | 1,629,211 |            |           |  | 7,314,293                      |            |           | $ | 10.467 |       
|                                      | Authorized                    |  |           | 9,268,791  |           |  |                                |           |           |   |        |       | 
|                                      | Granted at market price       |  |           | (8,272,440 | )         |  |                                | 8,272,440  |           |   | $      | 1.373  | 
|                                      | Granted at a discounted price |  |           | (2,945,000 | )         |  |                                | 2,945,000  |           |   | $      | 0.253  | 
|                                      | Cancelled                     |  |           | 4,834,097  |           |  |                                | (4,834,097 | )         |   | $      | 6.389  | 
|                                      | Exercised                     |  |           |           |           |  |                                | (370,386   | )         |   | $      | 1.047  | 
|                                      | Expired                       |  |           | (32,151    | )         |  |                                |           |           |   |        |       | 
|                                      |                               |  |           |            |           |  |                                |            |           |   |        |       
|Balance at March 31, 2002 (unaudited) |                               |  | 4,482,508 |            |           |  | 13,327,250                     |            |           | $ | 4.177  |       
|                                      |                               |  |           |            |           |  |                                |            |           |   |        |       

The following table summarizes the stock options outstanding and exercisable at
March 31, 2002 (unaudited):

|                    |  |            |            |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 
|------------------- |  | ---------- | ---------- | ---- |  | ------------------- | ---- | ------------------- |  | ----- | ------ |  |  | --------- | --------- |  |  | - | ------ | 
|                    |  |            |            |      |  | OPTIONS OUTSTANDING |      | OPTIONS EXERCISABLE
|                    |  |            |            |      |  |                     |      |                    
|                    |  |            |            |      |  | WEIGHTED-           |      |                     |  |       |        |  |  |           |           |  |  |  
|                    |  |            |            |      |  | AVERAGE             |      | WEIGHTED-           |  |       |        |  |  | WEIGHTED-
|                    |  |            |            |      |  | REMAINING           |      | AVERAGE             |  |       |        |  |  | AVERAGE  
|RANGE OF            |  |            |            |      |  | CONTRACTUAL         |      | EXERCISE            |  |       |        |  |  | EXERCISE 
|EXERCISE PRICE      |  | NUMBER     |            | LIFE |  | PRICE               |      | NUMBER              |  | PRICE
|                    |  |            |            |      |  |                     |      |                     |  |      
|                    |  | (IN YEARS) |           
|$  0.075 - $  0.075 |  |            | 142,333    |      |  |                     | 3.97 |                     |  | $     | 0.075  |  |  |           | 142,333   |  |  | $ | 0.075  | 
|$  0.250 - $  0.250 |  |            | 2,721,599  |      |  |                     | 9.72 |                     |  | $     | 0.250  |  |  |           | 1,359,099 |  |  | $ | 0.250  | 
|$  0.270 - $  0.500 |  |            | 374,625    |      |  |                     | 8.63 |                     |  | $     | 0.377  |  |  |           | 139,625   |  |  | $ | 0.283  | 
|$  0.630 - $  0.630 |  |            | 2,758,594  |      |  |                     | 9.72 |                     |  | $     | 0.630  |  |  |           | 0         |  |  | $ | 0.000  | 
|$  0.670 - $  1.590 |  |            | 663,089    |      |  |                     | 7.90 |                     |  | $     | 1.156  |  |  |           | 179,380   |  |  | $ | 1.070  | 
|$  1.760 - $  1.760 |  |            | 2,603,444  |      |  |                     | 9.08 |                     |  | $     | 1.760  |  |  |           | 687,868   |  |  | $ | 1.760  | 
|$  1.875 - $  4.125 |  |            | 2,051,500  |      |  |                     | 8.39 |                     |  | $     | 3.688  |  |  |           | 923,530   |  |  | $ | 3.597  | 
|$  4.563 - $23.625  |  |            | 1,423,596  |      |  |                     | 8.25 |                     |  | $     | 11.538 |  |  |           | 774,859   |  |  | $ | 11.416 | 
|$28.625 - $44.250   |  |            | 515,398    |      |  |                     | 7.87 |                     |  | $     | 37.468 |  |  |           | 297,936   |  |  | $ | 37.327 | 
|$60.750 - $60.750   |  |            | 73,072     |      |  |                     | 7.57 |                     |  | $     | 60.750 |  |  |           | 51,748    |  |  | $ | 60.750 | 
|                    |  |            |            |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 
|$  0.075 - $60.750  |  |            | 13,327,250 |      |  |                     | 8.97 |                     |  | $     | 4.177  |  |  |           | 4,556,378 |  |  | $ | 6.195  | 
|                    |  |            |            |      |  |                     |      |                     |  |       |        |  |  |           |           |  |  |   |        | 

F-18



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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Valuation of Stock Options

The Company applies the intrinsic value method prescribed by APB No. 25,
Accounting for Stock Issued to Employees, in accounting for its stock-based
compensation plans (See Note 2). Had compensation costs for the Companys
stock-based compensation plans been determined consistent with the fair value
approach set forth in SFAS 123, the Companys net loss and net loss per share
would have been adjusted to the pro forma amount indicated below:

|                          |             |  |                                      |         |      |  |      |          |   |  |   |         |  
|------------------------- | ----------- |  | ------------------------------------ | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                          |             |  | YEAR ENDED MARCH 31,                
|                          |             |  |                                     
|                          |             |  | 2002                                 |         | 2001 |  | 2000
|                          |             |  |                                      |         |      |  |     
|                          |             |  | (unaudited)                          |         |      |  |      |          |   |  |  
|                          |             |  | (IN THOUSANDS EXCEPT LOSS PER SHARE)
|Net loss:                 |             |  |                                      |         |      |  |      |          |   |  |   |        
|                          | As reported |  | $                                    | (46,993 | )    |  | $    | (92,843  | ) |  | $ | (10,361 | )
|                          | Pro forma   |  | $                                    | (59,185 | )    |  | $    | (108,471 | ) |  | $ | (14,219 | )
|Basic net loss per share: |             |  |                                      |         |      |  |      |          |   |  |   |        
|                          | As reported |  | $                                    | (1.25   | )    |  | $    | (3.32    | ) |  | $ | (0.53   | )
|                          | Pro forma   |  | $                                    | (1.57   | )    |  | $    | (3.87    | ) |  | $ | (0.72   | )

The fair value of each stock option grant on the date of grant and the fair
value of the shares granted under the Purchase Plan were estimated using the
Black-Scholes option pricing model with the following average assumptions:

|                                                             |  |                      |       |      |  |      |              |   |  |   |              |  
|------------------------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ------------ | - |  | - | ------------ | -
|                                                             |  | YEAR ENDED MARCH 31,
|                                                             |  |                     
|                                                             |  | 2002                 |       | 2001 |  | 2000
|                                                             |  |                      |       |      |  |     
|                                                             |  | (unaudited)          |       |      |  |      |              |   |  |  
|Volatility                                                   |  |                      | 137.1 | %    |  |      | 147.0        | % |  |   | 214.5        | %
|Risk-free interest rate                                      |  |                      | 4.52  | %(1) |  |      | 4.57% - 6.60 | % |  |   | 5.27% - 6.66 | %
|Dividend yield                                               |  |                      |      |      |  |      |             |   |  |   |             |  
|Expected lives                                               |  |                      | 0.50  |      |  |      | 4.00         |   |  |   | 4.18         |  
|Weighted average fair value of options
granted at market     |  | $                    | 0.97  |      |  | $    | 9.56         |   |  | $ | 10.63        |  
|Weighted average fair value of options
granted at a discount |  | $                    | 0.46  |      |  |      |             |   |  |   |             |  



---

|(1) |  | Due to the relatively large number of discrete grants that have been
awarded since the Companys stock has been publicly traded, for 2002, the
risk-free interest rate was calculated for all options granted collectively,
rather than by individual grant date.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The pro forma effect on net loss for the years ended March 31, 2002, 2001, and
2000 are not representative of the pro forma effect on net loss in future years
for the following reasons: (i) the number of future shares to be issued under
these plans is unknown, and (ii) the assumptions do not take into consideration
pro forma compensation expense related to grants made prior to January 1, 1995.

Deferred Compensation

In connection with the grant of stock options to employees during the year
ended March 31, 1999, the Company recorded deferred compensation within
stockholders equity of $3.0 million for stock options prior to its initial
public offering in July 1999. This represents the difference between the
estimated fair value of the common stock for accounting purposes and the option
exercise price of these options at the date of grant. The remaining deferred
compensation at March 31, 2002 of $76,000 is being amortized to compensation
expense and will be fully amortized by the quarter ended June 30, 2002.

In December 2001, in an effort to provide added incentive and retention of
valuable employees, the Company granted options to purchase 5.8 million shares
of common stock to all employees (including executives) that were expected to
remain with the Company after the January 2002 reduction in force. Fifty
percent of the 5.8 million shares were granted at the fair market value of the
common stock at the date of grant. The other fifty percent of the 5.8 million
shares were granted at prices below the market closing price on the date of
grant and will vest to employees over a six month period from December 17, 2001
through June 17, 2002. The difference between the fair market value of the
common stock and the option exercise price at the date of grant of $1.1 million
was recorded as deferred compensation in stockholders equity on the Condensed
Balance Sheet at December 31, 2001. In January, while there was a

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

net reduction in force of staff of 100 employees, 4 employees were hired in key
areas and were awarded stock options both at the fair market value as well as
at a discount, respectively, from the closing price on the dates of their
grant. The deferred compensation generated by the discounted priced stock
options of these January 2002 hired employees will be amortized through July,
2002. The net amount of deferred compensation subject to amortization at March
31, 2002 was $465,000.

The table below provides the break down of the amortization of deferred
compensation to both Cost of Sales and Operating Expense for the years ended
March 31, 2002, 2001 and 2000 (in thousands).

|                            |  |                       |     |      |  |      |     |  |  |   |       | 
|--------------------------- |  | --------------------- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|                            |  | Years Ended March 31,
|                            |  |                      
|                            |  | 2002                  |     | 2001 |  | 2000
|                            |  |                       |     |      |  |     
|                            |  | (unaudited)           |     |      |  |      |     |  |  |  
|Cost of Sales               |  | $                     | 70  |      |  | $    | 61  |  |  | $ | 129   | 
|                            |  |                       |     |      |  |      |     |  |  |   |       | 
|Operating Expenses:         |  |                       |     |      |  |      |     |  |  |   |       | 
|Research and Development    |  |                       | 489 |      |  |      | 316 |  |  |   | 668   | 
|Sales and Marketing         |  |                       | 218 |      |  |      | 152 |  |  |   | 321   | 
|General and Administrative  |  |                       | 196 |      |  |      | 79  |  |  |   | 167   | 
|                            |  |                       |     |      |  |      |     |  |  |   |       | 
|Operating Expense Sub-total |  | $                     | 903 |      |  | $    | 547 |  |  | $ | 1,156 | 
|                            |  |                       |     |      |  |      |     |  |  |   |       | 
|Total Amortization          |  | $                     | 973 |      |  | $    | 608 |  |  | $ | 1,285 | 
|                            |  |                       |     |      |  |      |     |  |  |   |       | 

8. SALES TO SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION

During the year ended March 31, 2000, the Company adopted SFAS No. 131
Disclosures About Segments of an Enterprise and Related Information which
requires a new basis for determining reportable business segments, i.e., the
management approach. This approach requires that business segment information
used by management to assess performance and manage company resources be the
source for information disclosure. On this basis, the Company is organized and
operates as one business segment, the development, manufacture, marketing and
sales of hubs, switches and managed storage systems for storage area networks.
The Companys Chief Executive Officer is the Chief Operating Decision Maker
(CODM), as defined by SFAS 131. The CODM allocates resources and assesses the
performance of Gadzoox based on revenues and overall profitability.

Revenues are attributed to geographic areas based on the location of the
customer to which product is shipped. Domestic revenues include sales to
certain OEM customers who may then distribute to their international customers.
To date, service revenues have not been significant.

Individual customers that accounted for more that 10% of net revenues are as
follows:

|           |  |             |    |      |  |      |    |   |  |  |    |  
|---------- |  | ----------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | YEAR ENDED 
|           |  | MARCH 31,  
|           |  |            
|           |  | 2002        |    | 2001 |  | 2000
|           |  |             |    |      |  |     
|           |  | (unaudited) |    |      |  |      |    |   |  | 
|Customer A |  |             | 41 | %    |  |      | 33 | % |  |  | 17 | %
|Customer B |  |             | 36 | %    |  |      | 42 | % |  |  | 29 | %
|Customer C |  |             |   |      |  |      |   |   |  |  | 33 | %
|Customer D |  |             |   |      |  |      |   |   |  |  | 12 | %

F-20



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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

Net revenues by geographic area are as follows:

|                                              |  |             |     |      |  |      |     |   |  |  |     |  
|--------------------------------------------- |  | ----------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                              |  | YEAR ENDED 
|                                              |  | MARCH 31,  
|                                              |  |            
|                                              |  | 2002        |     | 2001 |  | 2000
|                                              |  |             |     |      |  |     
|                                              |  | (unaudited) |     |      |  |      |     |   |  | 
|North
America (principally the United States) |  |             | 72  | %    |  |      | 72  | % |  |  | 70  | %
|Germany                                       |  |             | 10  | %    |  |      | 16  | % |  |  | 12  | %
|Europe
(excluding Germany)                    |  |             | 13  | %    |  |      | 9   | % |  |  | 7   | %
|Asia                                          |  |             | 5   | %    |  |      | 3   | % |  |  | 11  | %
|                                              |  |             |     |      |  |      |     |   |  |  |     |  
|Total                                         |  |             | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                              |  |             |     |      |  |      |     |   |  |  |     |  

Identifiable assets located outside the United States were not material at
March 31, 2002, 2001, and 2000.

9. RESTRUCTURING AND IMPAIRMENT CHARGES

In March 2001, the Company recorded $2.5 million in restructuring charges,
including $687,000 related to the anticipated costs to the Company of the
vacant building opened adjacent to the corporate headquarters building and an
additional $17.8 million relating to the impairment of long lived assets. These
charges reflect the Companys plan, announced in the fourth quarter, to focus
more resources on the development of open-fabric switch technology products,
and to streamline operations and reduce overall costs. This plan primarily
resulted in the termination and abandonment of the Axxess and Geminix product
lines, reduction of head count, and the implementation of a plan to consolidate
all San Jose, California operations into one building.

In March 2001, the Company made the decision to terminate and abandon the
Axxess product line. As a result, the Company incurred $300,000 of severance
costs relating to the termination of 27 employees, and incurred a further write
down of $1.5 million of other assets associated with the Axxess product line,
including property and equipment with no alternate use and licenses related to
software used in the Axxess product line. This impairment charge included a
$1.0 million prepaid royalty fee relating to a software license agreement that
the Company and DataCore Software Corporation (DataCore) entered into in 1999.
Under the terms of this license agreement, DataCore and the Company had agreed
to work collaboratively to develop products to address both the hardware and
software needs of storage area networks. The Company intended to integrate
DataCores software with the Axxess hardware and software products that were
under development at the time. Pursuant to the software license agreement, the
Company paid DataCore an upfront loyalty fee of $1.0 million during 1999 and
2000. In connection with the termination of the Axxess product line, the
Company decided to write-off the entire $1.0 million prepaid royalty fee. In
addition, the Company expensed an additional $700,000 relating to future cash
outlays that are expected to be incurred from exiting lease agreements for
office space that will no longer be used as a result of the restructuring and
consolidation into its one main facility. The Company anticipates payment of
this amount in six equal monthly payments commencing April 2001.

The Geminix product line was acquired with the acquisition of SmartSAN (see
Note 4). With the termination and abandonment of the Geminix product line, the
Company was not going to generate any future cash flows and had no future
alternative use for the intangible assets and other assets acquired that
related to the Geminix product line. Based on a value of $0 assigned by the
Company to the SmartSAN assets, using the discounted cash flow method, the
Company expensed the unamortized acquired intangible assets of SmartSAN,
totaling $16.8 million, in March 2001.

In May 2000, the Company purchased 49,164 shares of Series C Preferred Stock of
DataCore for an aggregate purchase price of $999,504. In its Series C Preferred
Stock round of financing, DataCore sold an aggregate of 1,750,000 shares of
Series C Preferred Stock to approximately 30 investors at a purchase price of
$20.33 per share for aggregate purchase price consideration of $35,577,500. The
Series C Preferred Stock were voting securities and were convertible into
common stock of DataCore. The Company owns less than one percent of DataCores
voting stock on an as converted to common stock basis. At the time of the
investment, management initially recorded its financial investment in DataCore
based on the purchase price of the shares. The Companys investment in DataCore
was not contingent upon any other contractual arrangement with DataCore nor has
the Company invested in any affiliate of DataCore. In March 2001, management
determined the fair value of the existing equity investment in DataCore to be
$0. As a result of the impact of the current economic environment on DataCores
valuation and managements view that the change in valuation was less than
temporary, the Company wrote down its investment to managements estimate of
its fair value. As a result, the Company recognized an impairment charge of
$1.0 million in March 2001.

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

During fiscal 2002, in response to new challenges in the business environment
management approved, adopted and began to implement a restructuring program in
an effort to reduce operating expenses. In August 2001, the Company reduced
its headcount by 16 employees, or 7% of its work force, and paid $300,000 in
severance costs in the quarter ended September 30, 2001. These costs were
included in research and development, sales and marketing and general and
administrative expenses. In October 2001, the Company reduced its headcount by
a further 30 employees, or 15% of its work force, and paid $700,000 in
severance and other personnel related costs. The $700,000 of severance and
other personnel costs paid were included in restructuring charges in the period
ended December 31, 2001.

In the quarter ended December 31, 2001, the Company recorded $3.0 million of
restructuring charges associated with the Companys restructuring plan to
reduce operating expenses in response to expected reduced short term demand for
the Companys products. The restructuring charges include $2.3 million related
to anticipated lease expenses associated with the shutdown of the Companys
Irvine, California satellite engineering office, the shutdown of all overseas
sales offices, and costs associated with a vacant office building in San Jose,
California, which the Company has been trying to sub-lease for the past year.
These facility charges are net of estimated sublease income that the Company
expects to generate from the vacated facilities.

The December 2001 restructuring plan also included an additional 54% reduction
in overall headcount which was completed in January 2002 and consisted of 91
employees. During the March 2002 quarter, the Company recorded additional
restructuring expenses of $2.7 million for severance and personnel related
costs in connection with the January 2002 reduction in force. Additionally, in
the March 2002 quarter, the Company wrote-down $3.3 million of abandoned excess
computer and engineering lab equipment, capitalized software and leasehold
improvements for vacated office space which is separately identified on the
Companys Statements of Operations.

The following table summarizes the Companys restructuring activities for the
years ended March 31, 2001 and 2002 (in thousands):

|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  | --------- | ------ | ---------- |  | ------ | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                                            |  |           |        |            |  | Excess |        | Other |  |   |        |  
|                                                            |  | Severance |        | Facilities |  | Assets |        | Total
|                                                            |  |           |        |            |  |        |        |      
|Accrued restructuring balance at
March 31, 2000             |  | $         |       |            |  | $      |       |       |  | $ |       |   |  | $ |       |  
|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  
|Restructuring charges                                       |  |           | 297    |            |  |        | 687    |       |  |   | 1,529  |   |  |   | 2,513  |  
|Non-cash charges                                            |  |           |       |            |  |        |       |       |  |   | (1,529 | ) |  |   | (1,529 | )
|Amounts paid                                                |  |           | (297   | )          |  |        |       |       |  |   |       |   |  |   | (297   | )
|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  
|Accrued restructuring balance
at March 31, 2001             |  |           |       |            |  |        | 687    |       |  |   |       |   |  |   | 687    |  
|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  
|Restructuring charges                                       |  |           | 3,417  |            |  |        | 2,330  |       |  |   |       |   |  |   | 5,747  |  
|Non-cash charges                                            |  |           |       |            |  |        | (397   | )     |  |   |       |   |  |   | (397   | )
|Amounts paid                                                |  |           | (3,197 | )          |  |        | (1,114 | )     |  |   |       |   |  |   | (4,311 | )
|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  
|Accrued restructuring balance
at March 31, 2002 (unaudited) |  | $         | 220    |            |  | $      | 1,506  |       |  | $ |       |   |  | $ | 1,726  |  
|                                                            |  |           |        |            |  |        |        |       |  |   |        |   |  |   |        |  

F-22



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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

10. RELATED PARTY TRANSACTIONS

During the year ended March 31, 2001, the Company extended loans in the form of
promissory notes to two executive officers totaling $535,000 to assist them in
their housing costs in California. The notes bore interest at rates of 6.0% and
6.3%, and the principal amounts plus interest, were to be forgiven over two and
four year periods, subject to certain conditions included in the terms of the
notes. As a result of the restructuring activities of the Company in October
2001 and January 2002, both executives left the employment of the Company. A
total of $410,000 of the combined loan balance was forgiven  $232,000 as part
of the provisions of the notes and another $178,000 as part of the severance
agreement of one of the two executives. The balance of the notes were repaid.

11. INCOME TAXES

Due to the Companys loss position, there was no provision for income taxes for
the years ended March 31, 2002, 2001 and 2000.

The components of the net deferred tax asset at March 31, 2002 and 2001 were as
follows (in thousands):

|                                   |  |             |         |      |  |   |         |  
|---------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | -
|                                   |  | 2002        |         | 2001
|                                   |  |             |         |     
|                                   |  | (unaudited) |         |      |  |  
|Net operating loss carryforwards   |  | $           | 57,883  |      |  | $ | 39,433  |  
|Cumulative book to tax differences |  |             | 10,578  |      |  |   | 7,475   |  
|Tax credit carryforwards           |  |             | 5,129   |      |  |   | 5,911   |  
|                                   |  |             |         |      |  |   |         |  
|                                   |  |             | 73,590  |      |  |   | 52,819  |  
|Valuation allowance                |  |             | (73,590 | )    |  |   | (52,819 | )
|                                   |  |             |         |      |  |   |         |  
|                                   |  | $           |        |      |  | $ |        |  
|                                   |  |             |         |      |  |   |         |  

A valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset balance due to
the variability of operating results.

As of March 31, 2002 the Company had net cumulative operating loss
carryforwards for federal and state income tax reporting purposes of $159
million and $42 million, respectively. The Company also had federal and state
research and development tax credit carryforwards of $3.1 million and $2.0
million, respectively. The net cumulative operating loss and credit
carryforwards will expire at various dates beginning in the years 2002 through
2022, if not utilized. Utilization of net operating losses and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses before utilization.

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GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

12. SUBSEQUENT EVENTS

Restructuring

In April and June of 2002 in response to new challenges in the business
environment, the Company reduced its headcount by 33 employees. Restructuring
costs for the quarter ended June 30, 2002, associated with the payment of
severance and other personnel related costs are expected to be approximately
$1.0 million.

Termination of Engagement of Independent Auditors

The Companys Audit Committee of the Board of Directors annually considers and
recommends to the Board of Directors the selection of the Companys independent
public accountants. As recommended by the Audit Committee, on June 11, 2002,
the Board of Directors decided to terminate the engagement of Arthur Andersen
LLP as its independent auditors.

The reports of Arthur Andersen LLP on the Companys financial statements for
the fiscal years ended March 31, 2000 and March 31, 2001 contained no adverse
opinion or disclaimer of opinion, nor were the reports qualified or modified as
to uncertainty, audit scope, or accounting principles. In connection with the
audits performed by Arthur Andersen LLP for fiscal 2000 and 2001 and during the
period from April 1, 2001 through June 11, 2002, there were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope of procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused it to make reference to the subject matter of the
disagreement(s) in its reports.

Termination of Capital Leases

On May 23, 2002, the Company made a negotiated
final payment of $30,000, released its deposit to the equipment
lessor and returned the equipment under the capital lease in order to terminate all future
capital lease obligations as outlined in Note 2 above.

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##### Table of Contents



GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(unaudited)

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth the unaudited consolidated statement of
operations data for each of the eight quarterly periods ended March 31, 2002.
The unaudited consolidated information has been prepared on a basis consistent
with the audited consolidated financial statements, reflecting all normal
recurring adjustments that are considered necessary for a fair presentation of
the financial position. The quarterly information is as follows (in thousands):

|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |       |       | 
|----------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------- | ------------------------- | ----- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ------ | ------- | ------ | - | ----- | - | ------ | - | ----- | - | ------- | - | ----- | - | ------- | ----- | ----- | 
|                                                                                    |                                           |                                            |         | QUARTER ENDED (UNAUDITED)
|                                                                                    |                                           |                                            |         |                          
|                                                                                    |                                           |                                            |         | JUN 30,                   |       | SEP 30, |         | DEC 31, |       | MAR 31, |         | JUN 30, |       | SEP 30, |         | DEC 31, |        | MAR 31,
|                                                                                    |                                           |                                            |         | 2000                      |       | 2000    |         | 2000    |       | 2001    |         | 2001    |       | 2001    |         | 2001    |        | 2002   
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |        
|CONSOLIDATED STATEMENT OF
OPERATIONS                                                |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Net sales                                                                           |                                           | $                                          | 10,858  |                           |       | $       | 8,051   |         |       | $       | 7,937   |         |       | $       | 6,444   |         |        | $       | 6,572  |   |       | $ | 5,067  |   |       | $ | 5,087   |   |       | $ | 5,094   |      
|Cost of revenues                                                                    |                                           |                                            | 5,461   |                           |       |         | 13,702  |         |       |         | 4,490   |         |       |         | 4,115   |         |        |         | 3,506  |   |       |   | 2,761  |   |       |   | 2,885   |   |       |   | 2,913   |      
|Cost of revenues  inventory valuation
charges                                      |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         | 4,424   |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   | 4,972   |      
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Gross profit (loss)                                                                 |                                           |                                            | 5,397   |                           |       |         | (5,651  | )       |       |         | 3,447   |         |       |         | (2,095  | )       |        |         | 3,066  |   |       |   | 2,306  |   |       |   | 2,202   |   |       |   | (2,791  | )    
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Operating expenses:                                                                 |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|                                                                                    |                                           | Research and development                   |         |                           | 5,519 |         |         |         | 8,641 |         |         |         | 5,836 |         |         |         | 9,372  |         |        |   | 6,626 |   |        |   | 6,109 |   |         |   | 4,932 |   |         |       | 3,411 | 
|                                                                                    |                                           | Sales and marketing                        |         |                           | 5,727 |         |         |         | 5,989 |         |         |         | 6,497 |         |         |         | 5,769  |         |        |   | 4,190 |   |        |   | 3,424 |   |         |   | 3,212 |   |         |       | 2,117 | 
|                                                                                    |                                           | General and administrative                 |         |                           | 1,484 |         |         |         | 2,344 |         |         |         | 1,885 |         |         |         | 2,279  |         |        |   | 1,661 |   |        |   | 1,918 |   |         |   | 2,025 |   |         |       | 1,571 | 
|                                                                                    |                                           | In-process research and
development        |         |                           | 4,900 |         |         |         |      |         |         |         |      |         |         |         |       |         |        |   |      |   |        |   |      |   |         |   |      |   |         |       |      | 
|                                                                                    |                                           | Amortization of acquired
intangible assets |         |                           | 1,048 |         |         |         | 1,048 |         |         |         | 1,048 |         |         |         | 698    |         |        |   |      |   |        |   |      |   |         |   |      |   |         |       |      | 
|                                                                                    |                                           | Impairment of long lived
assets            |         |                           |      |         |         |         |      |         |         |         |      |         |         |         | 17,829 |         |        |   |      |   |        |   |      |   |         |   |      |   |         |       |      | 
|                                                                                    | Write-down of abandoned long lived
assets |                                            |         |                          |       |         |         |        |       |         |         |        |       |         |         |        |        |         |        |  |       |   |        |  |       |   |         |  |       |   |         | 3,306 |      
|                                                                                    |                                           | Restructuring and other
expenses           |         |                           |      |         |         |         |      |         |         |         |      |         |         |         | 2,513  |         |        |   |      |   |        |   |      |   |         |   | 3,007 |   |         |       | 2,740 | 
|                                                                                    |                                           | Amortization of deferred
compensation      |         |                           | 168   |         |         |         | 169   |         |         |         | 163   |         |         |         | 47     |         |        |   | 78    |   |        |   | 78    |   |         |   | 163   |   |         |       | 584   | 
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Total operating expenses                                                            |                                           |                                            | 18,846  |                           |       |         | 18,191  |         |       |         | 15,429  |         |       |         | 38,507  |         |        |         | 12,555 |   |       |   | 11,529 |   |       |   | 13,339  |   |       |   | 13,729  |      
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Loss from operations                                                                |                                           |                                            | (13,449 | )                         |       |         | (23,842 | )       |       |         | (11,982 | )       |       |         | (40,602 | )       |        |         | (9,489 | ) |       |   | (9,223 | ) |       |   | (11,137 | ) |       |   | (16,520 | )    
|Interest and other income
(expense), net                                            |                                           |                                            | 885     |                           |       |         | 710     |         |       |         | 521     |         |       |         | 216     |         |        |         | 102    |   |       |   | 69     |   |       |   | 1       |   |       |   | (425    | )    
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Loss before cumulative effect of
change in accounting principle                     |                                           |                                            | (12,564 | )                         |       |         | (23,132 | )       |       |         | (11,461 | )       |       |         | (40,386 | )       |        |         | (9,387 | ) |       |   | (9,154 | ) |       |   | (11,136 | ) |       |   | (16,945 | )    
|Cumulative effect of change in
accounting principle                                 |                                           |                                            | (5,300  | )                         |       |         |        |         |       |         |        |         |       |         |        |         |        |         |       |   |       |   |       |   |       |   |        |   |       |   |        |      
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Net loss                                                                            |                                           | $                                          | (17,864 | )                         |       | $       | (23,132 | )       |       | $       | (11,461 | )       |       | $       | (40,386 | )       |        | $       | (9,387 | ) |       | $ | (9,154 | ) |       | $ | (11,136 | ) |       | $ | (16,945 | )    
|Dividend related to common stock                                                    |                                           |                                            |        |                           |       |         |        |         |       |         |        |         |       |         |        |         |        |         |       |   |       |   | (331   | ) |       |   | (40     | ) |       |   |        |      
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Net loss attributable to common
shareholders                                        |                                           | $                                          | (17,864 | )                         |       | $       | (23,132 | )       |       | $       | (11,461 | )       |       | $       | (40,386 | )       |        | $       | (9,387 | ) |       | $ | (9,485 | ) |       | $ | (11,176 | ) |       | $ | (16,945 | )    
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Net loss per basic share before
cumulative effect of change in
accounting principle |                                           | $                                          | (0.46   | )                         |       | $       | (0.83   | )       |       | $       | (0.41   | )       |       | $       | (1.42   | )       |        | $       | (0.30  | ) |       | $ | (0.26  | ) |       | $ | (0.28   | ) |       | $ | (0.37   | )    
|Cumulative effect of change in
accounting principle                                 |                                           |                                            | (0.20   | )                         |       |         |        |         |       |         |        |         |       |         |        |         |        |         |       |   |       |   |       |   |       |   |        |   |       |   |        |      
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Net loss per basic share                                                            |                                           | $                                          | (0.66   | )                         |       | $       | (0.83   | )       |       | $       | (0.41   | )       |       | $       | (1.42   | )       |        | $       | (0.30  | ) |       | $ | (0.26  | ) |       | $ | (0.28   | ) |       | $ | (0.37   | )    
|                                                                                    |                                           |                                            |         |                           |       |         |         |         |       |         |         |         |       |         |         |         |        |         |        |   |       |   |        |   |       |   |         |   |       |   |         |      
|Shares used in computing loss per
share                                             |                                           |                                            | 27,125  |                           |       |         | 27,782  |         |       |         | 27,889  |         |       |         | 28,411  |         |        |         | 30,818 |   |       |   | 35,916 |   |       |   | 39,295  |   |       |   | 45,217  |      

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GADZOOX NETWORKS, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                            |  |            |           |                  |  |            |            |               |  |            |           |  |  |   |            | 
|------------------------------------------- |  | ---------- | --------- | ---------------- |  | ---------- | ---------- | ------------- |  | ---------- | --------- |  |  | - | ---------- | 
|                                            |  | BALANCE AT |           |                  |  |            |            |               |  |            |           |  |  |  
|                                            |  | BEGINNING  |           | CHARGED TO COSTS |  |            |            |               |  | BALANCE AT
|DESCRIPTION                                 |  | OF PERIOD  |           | AND EXPENSES     |  | DEDUCTIONS |            | END OF PERIOD
|                                            |  |            |           |                  |  |            |            |              
|Year
ended March 31, 2000                   | 
|Allowance for returns and doubtful
accounts |  | $          | 150,000   |                  |  | $          | 463,667    |               |  | $          | 13,667    |  |  | $ | 600,000    | 
|Year
ended March 31, 2001                   | 
|Allowance for returns and doubtful
accounts |  | $          | 600,000   |                  |  | $          | 172,000    |               |  | $          | 420,000   |  |  | $ | 352,000    | 
|Year ended March 31, 2002 (unaudited)       | 
|Allowance for returns and doubtful
accounts |  | $          | 352,000   |                  |  | $          | 383,000    |               |  | $          | 464,000   |  |  | $ | 271,000    | 
|Year ended March 31, 2001                   | 
|Restructuring reserve                       |  | $          |          |                  |  | $          | 2,513,000  |               |  | $          | 1,826,000 |  |  | $ | 687,000    | 
|Year ended March 31, 2002 (unaudited)       | 
|Restructuring reserve                       |  | $          | 687,000   |                  |  | $          | 5,747,000  |               |  | $          | 4,708,000 |  |  | $ | 1,726,000  | 
|Inventory:                                  |  |            |           |                  |  |            |            |               |  |            |           |  |  |   |            | 
|Year ended March, 31, 2000                  | 
|Inventory reserves                          |  | $          | 150,000   |                  |  | $          | 150,000    |               |  | $          | 150,000   |  |  | $ | 150,000    | 
|Year ended March 31, 2001                   | 
|Inventory reserves                          |  | $          | 150,000   |                  |  | $          | 10,600,000 |               |  | $          | 2,485,000 |  |  | $ | 8,265,000  | 
|Year ended March 31, 2002 (unaudited)       | 
|Inventory reserves                          |  | $          | 8,265,000 |                  |  | $          | 4,439,000  |               |  | $          | 1,675,000 |  |  | $ | 11,029,000 | 

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

The Audit Committee of our Board of Directors annually considers and recommends
to the Board of Directors the selection of our independent public accountants.
As recommended by our Audit Committee, on June 11, 2002, our Board of Directors
decided to terminate the engagement of Arthur Andersen LLP as our independent
auditors.

The reports of Arthur Andersen LLP on our financial statements for our fiscal
years ended March 31, 2000 and March 31, 2001 contained no adverse opinion or
disclaimer of opinion, nor were the reports qualified or modified as to
uncertainty, audit scope, or accounting principles. In connection with the
audits performed by Arthur Andersen LLP for fiscal 2000 and 2001 and during the
period from April 1, 2001 through June 11, 2002, there have been no
disagreements with Arthur Andersen LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope of procedure,
which disagreements, if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused it to make reference to the subject matter of the
disagreement(s) in its reports, and there have been no reportable events as
listed in Item 304(a)(1)(v) of Regulation S-K.

We have provided a copy of the above disclosures to Arthur Andersen LLP and
have requested that Arthur Andersen LLP furnish us with a letter addressed to
the Securities and Exchange Commission stating whether or not it agrees with
the above statements. A copy of such letter, when received, will be filed as an
appendix to the Form 8-K filed by us on June 18, 2002.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding our directors is incorporated by reference from
Election of Directors  Directors and Nominees in our Proxy Statement for our
2002 Annual Meeting of Stockholders. The required information concerning our
executive officers is contained in the section entitled Executive Officers of
the Registrant in Part I of this Form 10-K. The required information
concerning Section 16 reporting is also incorporated by reference in our Proxy
Statement for our 2002 Annual Meeting of Stockholders.




ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from our
definitive Proxy Statement referred to in Item 10 above under the heading
Executive Compensation and Other Matters.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference from our
definitive Proxy Statement referred to in Item 10 above under the heading
Security Ownership of Certain Beneficial Owners and Management.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference from our
definitive Proxy Statement referred to in Item 10 above under the heading
Certain Relationships and Related Transactions.




PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Form 10-K:

(1)  Financial Statements:

*** In accordance with Temporary Note 2T to Article 3 of Regulation S-X, this
filing includes unaudited financial statements in lieu of audited financial
statements for the year ended March 31, 2002 because the Company was unable to
obtain from Arthur Andersen LLP a manually signed audit report in the timeframe
agreed upon at the commencement of the annual audit engagement. No auditor has
opined that the Companys unaudited financial statements present fairly, in all
material respects, the financial position, the results of operations, cash
flows and the changes in shareholders equity of the Company for the year ended
March 31, 2002 in accordance with generally accepted accounting principles.
The report of independent public accountants included with these financial
statements is a copy of a previously issued report by Arthur Andersen LLP
relating to the Companys financial statements for the years ended March 31,
2001 and 2000, and such report has not been reissued. The Company intends to
provide the audited financial statements and a report of independent public
accountants in an amended filing within 60 days of the date of this report.***

Copy of a Previously Issued Report of Independent Public Accountants
Balance Sheets as of March 31, 2002 (unaudited) and 2001
Statements of Operations for the years ended March 31, 2002 (unaudited), 2001 and 2000
Statements of Stockholders Equity for the years ended March 31, 2002 (unaudited), 2001 and 2000
Statements of Cash Flows for the years ended March 31, 2002 (unaudited), 2001 and 2000
Notes to Financial Statements (unaudited)

(2)  Financial Statement Schedules:

Schedule II  Valuation and Qualifying Accounts for the years ended March 31,
2002 (unaudited), March 31, 2001 and March 31, 2000 is filed as part of this
Annual Report and should be read in conjunction with the Financial Statements
and Notes thereto.

All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.

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(3)  Exhibits:

|        |  |                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER  |  | DESCRIPTION OF DOCUMENT                                                                                                                              
|        |  |                                                                                                                                                      
|3.1(a)  |  | Amended and Restated Certificate of Incorporation                                                                                                    
|3.2(a)  |  | Amended and Restated Bylaws                                                                                                                          
|4.1(a)  |  | Specimen Common Stock Certificate                                                                                                                    
|4.2(b)  |  | Amended and Restated 1993 Stock Plan and form of agreements
thereunder                                                                               
|4.3(c)  |  | 1999 Employee Stock Purchase Plan and form of agreements
thereunder                                                                                  
|4.4(d)  |  | Amendment to the 1999 Employee Stock Purchase Plan                                                                                                   
|4.5(e)  |  | 1999 Director Option Plan and form of agreement thereunder                                                                                           
|4.6(d)  |  | Amendment to the 1999 Employee Stock Purchase Plan                                                                                                   
|4.7(f)  |  | 2000 Nonstatutory Stock Option Plan and form of agreements
thereunder                                                                                
|4.8(g)  |  | Amendment to the 2000 Nonstatutory Stock Option Plan                                                                                                 
|4.9(h)  |  | Registration Rights Agreement between Gadzoox and purchasers
of Gadzoox common stock dated May 25, 2001                                              
|4.10(j) |  | Registration Rights Agreement between Gadzoox and purchasers
of Gadzoox common stock dated August 30, 2001                                           
|4.11(k) |  | Registration Rights Agreement, dated as of January 23, 2002,
by and among Gadzoox and the investors identified on the
signature pages thereto        
|4.12(l) |  | Registration Rights Agreement, dated as of January 23, 2002,
by and between Gadzoox and Berg & Berg Enterprises, LLC                                 
|4.13(l) |  | 2.5% Senior Secured Convertible Debenture, dated as of
January 23, 2002, by and between Gadzoox and Berg & Berg
Enterprises, LLC                     
|4.14(l) |  | Security Agreement, dated as of January 23, 2002, by and
between Gadzoox and Berg & Berg Enterprises, LLC                                            
|4.15(m) |  | Agreement and Warrant to purchase common stock issued to
Mission West Properties, L.P. II dated March 23, 2001                                       
|4.16(m) |  | Agreement and Warrant to purchase common stock issued to
Shoreline Pacific Equity dated May 25, 2001                                                 
|4.17(n) |  | Agreement and Warrant to purchase common stock issued to
Pacific Business Funding, a division of Cupertino National
Bank, dated September 28, 2001   
|10.1(a) |  | Agreement for electronic manufacturing services between
Gadzoox and Sanmina Corporation dated December 29, 1998                                      
|10.2(a) |  | Compaq Computer Corporation Purchase Agreement  JIT
Program, entered into as of June 13, 1997, by Compaq
Computer Corporation and Gadzoox           
|10.3(i) |  | Terms of Engagement between LSI Logic Corporation and
Gadzoox dated December 20, 2000                                                                
|10.4(o) |  | Lease Agreement and Lease Amendment #1 between Gadzoox and
Mission West Properties, L.P. II dated August 13, 1998 and
December 31, 1998, respectively
|10.5(o) |  | Lease Amendment #2 between Gadzoox and Mission West
Properties, L.P. II dated April 21, 2000                                                         
|10.6(h) |  | Lease Amendment Agreement #3 between Gadzoox and Mission
West Properties, L.P. II dated as of March 23, 2001                                         
|10.7(n) |  | Accounts Receivable Financing Agreement between Gadzoox and
Pacific Business Funding, a division of Cupertino National
Bank, dated September 28, 2001
|10.8(a) |  | Form of Indemnification Agreement between Gadzoox and each
of its directors and officers                                                             
|10.9    |  | Employment, Change of Control and Severance Agreement
between Gadzoox and Steve Dalton dated as of May 30, 2002                                      
|10.10   |  | Employment, Change of Control and Severance Agreement
between Gadzoox and Barbara Velline dated as of June 1,
2002                                   

-36-



---



##### Table of Contents



|        |  |                                                                                           
|------- |  | ------------------------------------------------------------------------------------------
|NUMBER  |  | DESCRIPTION OF DOCUMENT                                                                   
|        |  |                                                                                           
|10.11   |  | Severance Agreement between Gadzoox and Michael Parides
effective as of May 30, 2002      
|10.12   |  | Severance Agreement between Gadzoox and David Eichler
effective as of March 31, 2002      
|10.13   |  | Severance Agreement between Gadzoox and Wayne Rickard
effective as of January 31, 2002    
|10.14   |  | Severance Agreement between Gadzoox and Ronald G. vonTrapp
effective as of October 4, 2001
|10.15   |  | Severance Agreement between Gadzoox and Clark Foy effective
as of January 25, 2002        
|10.16   |  | Severance Agreement between Gadzoox and Erik Ottem effective
as of June 25, 2002          
|10.17   |  | Severance Agreement between Gadzoox and William Hubbard
effective as of August 31, 2001   
|10.18   |  | Severance Agreement between Gadzoox and Eddie Streeter
effective as of April 5, 2002      
|10.19   |  | Severance Agreement between Gadzoox and Ed Turner effective
as of December 31, 2001       
|10.20   |  | Severance Agreement between Gadzoox and Kristin Strout
effective as of May 21, 2002       
|18.1(h) |  | Letter regarding change in accounting principles                                          
|24.1(p) |  | Power of Attorney                                                                         



---

|(a) |  | Incorporated by reference from Gadzooxs Registration Statement on
Form S-1 (Reg. No. 333-78029), as amended.                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Incorporated by reference to Exhibit 4.1 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(c) |  | Incorporated by reference to Exhibit 4.2 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(d) |  | Incorporated by reference from Gadzooxs Proxy Statement on Form
DEF-14A filed on July 27, 2001.                                               
|   
|   
|   
|   
|(e) |  | Incorporated by reference to Exhibit 4.3 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(f) |  | Incorporated by reference to Exhibit 4.4 of Gadzooxs Registration
Statement on Form S-8 dated October 5, 2000 (Reg. No. 333-47362).           
|   
|   
|   
|   
|(g) |  | Incorporated by reference to Exhibit 4.2 of Gadzooxs Registration
Statement on Form S-8 dated February 7, 2002 (File No. 333-82338).          
|   
|   
|   
|   
|(h) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2001 on Form 10-K filed on June 29, 2001.                  
|   
|   
|   
|   
|(i) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2001 on Form 10-K/A filed on October 26, 2001.             
|   
|   
|   
|   
|(j) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on September 6, 2001.                                                
|   
|   
|   
|   
|(k) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on January 31, 2002 (relating to the sale of shares of common
stock).
|   
|   
|   
|   
|(l) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on January 31, 2002 (relating to the sale of convertible
debenture). 
|   
|   
|   
|   
|(m) |  | Incorporated by reference from Gadzooxs Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 filed on August 14, 2001.           
|   
|   
|   
|   
|(n) |  | Incorporated by reference from Gadzooxs Quarterly Report on Form
10-Q for the quarter ended September 30, 2001 filed on November 14,
2001.    
|   
|   
|   
|   
|(o) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2000 on Form 10-K filed on June 29, 2000.                  
|   
|   
|   
|   
|(p) |  | Incorporated by reference to the signature page of this Annual Report
for the year ended March 31, 2002 on Form 10-K filed on July 1, 2002.    

-37-



---



##### Table of Contents





|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| | (1) |  | We filed a Current Report on Form 8-K dated May 28, 2002
(Item 5. Other Events  announcing our anticipated delisting
notification from Nasdaq).                                                                
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | We filed a Current Report on Form 8-K dated May 30, 2002
(Item 5. Other Events  announcing our appointment of a new CEO
and President and Board members).                                                      
|
| | (3) |  | We filed a Current Report on Form 8-K dated June 11, 2002
(Item 4. Changes in Registrants Certifying Accountant -
announcing our termination of the engagement of Arthur Andersen as
our independent auditors).
|
| | (4) |  | We filed a Current Report on Form 8-K dated June 25, 2002
(Item 5. Other Events  announcing our updated guidance for the
first quarter of fiscal 2003).                                                        

-38-



---



##### Table of Contents






SIGNATURES

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

| |                                                                                    |                   
| | ---------------------------------------------------------------------------------- | ------------------
| | GADZOOX NETWORKS, INC                                                             
|
| | By:                                                                                | /s/ STEPHEN DALTON
| |                                                                                   
| | Stephen Dalton
President and Chief Executive Officer
(Principal Executive Officer)

Dated: July 1, 2002

POWER OF ATTORNEY:KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Stephen Dalton, as his
or her attorney-in-fact, each with full power of substitution, for him or her
in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.

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

|                                      |  |                                                                                                  |  |             
|------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ------------
|NAME                                  |  | TITLE                                                                                            |  | DATE        
|                                      |  |                                                                                                  |  |             
|                                     
|/s/ STEPHEN DALTON

Stephen Dalton    |  | President, Chief Executive
Officer and Director
(Principal Executive Officer)                    |  | July 1, 2002
|                                     
|/s/ BARBARA VELLINE*

Barbara Velline |  | Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |  | July 1, 2002
|                                     
|/s/ ROBERT KUHLING*

Robert Kuhling   |  | Director                                                                                         |  | July 1, 2002
|
|                                     
|                                     
|/s/ SYLVIA SUMMERS*

Sylvia Summers   |  | Director                                                                                         |  | July 1, 2002
|                                     
|/s/ GARY KENNEDY*

Gary Kennedy       |  | Director                                                                                         |  | July 1, 2002
|                                     
|*By: /s/ STEPHEN DALTON               |  |                                                                                                  |  | July 1, 2002
|                                      |  |                                                                                                  |  |             
|Stephen Dalton
Attorney-in-fact       |  |                                                                                                  |  |             

-39-



---



##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER  |  | DESCRIPTION OF DOCUMENT                                                                                                                              
|        |  |                                                                                                                                                      
|3.1(a)  |  | Amended and Restated Certificate of Incorporation                                                                                                    
|3.2(a)  |  | Amended and Restated Bylaws                                                                                                                          
|4.1(a)  |  | Specimen Common Stock Certificate                                                                                                                    
|4.2(b)  |  | Amended and Restated 1993 Stock Plan and form of agreements
thereunder                                                                               
|4.3(c)  |  | 1999 Employee Stock Purchase Plan and form of agreements
thereunder                                                                                  
|4.4(d)  |  | Amendment to the 1999 Employee Stock Purchase Plan                                                                                                   
|4.5(e)  |  | 1999 Director Option Plan and form of agreement thereunder                                                                                           
|4.6(d)  |  | Amendment to the 1999 Employee Stock Purchase Plan                                                                                                   
|4.7(f)  |  | 2000 Nonstatutory Stock Option Plan and form of agreements
thereunder                                                                                
|4.8(g)  |  | Amendment to the 2000 Nonstatutory Stock Option Plan                                                                                                 
|4.9(h)  |  | Registration Rights Agreement between Gadzoox and purchasers
of Gadzoox common stock dated May 25, 2001                                              
|4.10(j) |  | Registration Rights Agreement between Gadzoox and purchasers
of Gadzoox common stock dated August 30, 2001                                           
|4.11(k) |  | Registration Rights Agreement, dated as of January 23, 2002,
by and among Gadzoox and the investors identified on the
signature pages thereto        
|4.12(l) |  | Registration Rights Agreement, dated as of January 23, 2002,
by and between Gadzoox and Berg & Berg Enterprises, LLC                                 
|4.13(l) |  | 2.5% Senior Secured Convertible Debenture, dated as of
January 23, 2002, by and between Gadzoox and Berg & Berg
Enterprises, LLC                     
|4.14(l) |  | Security Agreement, dated as of January 23, 2002, by and
between Gadzoox and Berg & Berg Enterprises, LLC                                            
|4.15(m) |  | Agreement and Warrant to purchase common stock issued to
Mission West Properties, L.P. II dated March 23, 2001                                       
|4.16(m) |  | Agreement and Warrant to purchase common stock issued to
Shoreline Pacific Equity dated May 25, 2001                                                 
|4.17(n) |  | Agreement and Warrant to purchase common stock issued to
Pacific Business Funding, a division of Cupertino National
Bank, dated September 28, 2001   
|10.1(a) |  | Agreement for electronic manufacturing services between
Gadzoox and Sanmina Corporation dated December 29, 1998                                      
|10.2(a) |  | Compaq Computer Corporation Purchase Agreement  JIT
Program, entered into as of June 13, 1997, by Compaq
Computer Corporation and Gadzoox           
|10.3(i) |  | Terms of Engagement between LSI Logic Corporation and
Gadzoox dated December 20, 2000                                                                
|10.4(o) |  | Lease Agreement and Lease Amendment #1 between Gadzoox and
Mission West Properties, L.P. II dated August 13, 1998 and
December 31, 1998, respectively
|10.5(o) |  | Lease Amendment #2 between Gadzoox and Mission West
Properties, L.P. II dated April 21, 2000                                                         
|10.6(h) |  | Lease Amendment Agreement #3 between Gadzoox and Mission
West Properties, L.P. II dated as of March 23, 2001                                         
|10.7(n) |  | Accounts Receivable Financing Agreement between Gadzoox and
Pacific Business Funding, a division of Cupertino National
Bank, dated September 28, 2001
|10.8(a) |  | Form of Indemnification Agreement between Gadzoox and each
of its directors and officers                                                             
|10.9    |  | Employment, Change of Control and Severance Agreement
between Gadzoox and Steve Dalton dated as of May 30, 2002                                      
|10.10   |  | Employment, Change of Control and Severance Agreement
between Gadzoox and Barbara Velline dated as of June 1, 2002                                   





---



##### Table of Contents



|        |  |                                                                                           
|------- |  | ------------------------------------------------------------------------------------------
|NUMBER  |  | DESCRIPTION OF DOCUMENT                                                                   
|        |  |                                                                                           
|10.11   |  | Severance Agreement between Gadzoox and Michael Parides
effective as of May 30, 2002      
|10.12   |  | Severance Agreement between Gadzoox and David Eichler
effective as of March 31, 2002      
|10.13   |  | Severance Agreement between Gadzoox and Wayne Rickard
effective as of January 31, 2002    
|10.14   |  | Severance Agreement between Gadzoox and Ronald G. vonTrapp
effective as of October 4, 2001
|10.15   |  | Severance Agreement between Gadzoox and Clark Foy effective
as of January 25, 2002        
|10.16   |  | Severance Agreement between Gadzoox and Erik Ottem effective
as of June 25, 2002          
|10.17   |  | Severance Agreement between Gadzoox and William Hubbard
effective as of August 31, 2001   
|10.18   |  | Severance Agreement between Gadzoox and Eddie Streeter
effective as of April 5, 2002      
|10.19   |  | Severance Agreement between Gadzoox and Ed Turner effective
as of December 31, 2001       
|10.20   |  | Severance Agreement between Gadzoox and Kristin Strout
effective as of May 21, 2002       
|18.1(h) |  | Letter regarding change in accounting principles                                          
|24.1(p) |  | Power of Attorney                                                                         



---

|(a) |  | Incorporated by reference from Gadzooxs Registration Statement on
Form S-1 (Reg. No. 333-78029), as amended.                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Incorporated by reference to Exhibit 4.1 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(c) |  | Incorporated by reference to Exhibit 4.2 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(d) |  | Incorporated by reference from Gadzooxs Proxy Statement on Form
DEF-14A filed on July 27, 2001.                                               
|   
|   
|   
|   
|(e) |  | Incorporated by reference to Exhibit 4.3 of Gadzooxs Registration
Statement on Form S-8 dated January 11, 2000 (Reg. No. 333-94377).          
|   
|   
|   
|   
|(f) |  | Incorporated by reference to Exhibit 4.4 of Gadzooxs Registration
Statement on Form S-8 dated October 5, 2000 (Reg. No. 333-47362).           
|   
|   
|   
|   
|(g) |  | Incorporated by reference to Exhibit 4.2 of Gadzooxs Registration
Statement on Form S-8 dated February 7, 2002 (File No. 333-82338).          
|   
|   
|   
|   
|(h) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2001 on Form 10-K filed on June 29, 2001.                  
|   
|   
|   
|   
|(i) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2001 on Form 10-K/A filed on October 26, 2001.             
|   
|   
|   
|   
|(j) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on September 6, 2001.                                                
|   
|   
|   
|   
|(k) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on January 31, 2002 (relating to the sale of shares of common
stock).
|   
|   
|   
|   
|(l) |  | Incorporated by reference from Gadzooxs Current Report on Form 8-K
filed on January 31, 2002 (relating to the sale of convertible
debenture). 
|   
|   
|   
|   
|(m) |  | Incorporated by reference from Gadzooxs Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 filed on August 14, 2001.           
|   
|   
|   
|   
|(n) |  | Incorporated by reference from Gadzooxs Quarterly Report on Form
10-Q for the quarter ended September 30, 2001 filed on November 14,
2001.    
|   
|   
|   
|   
|(o) |  | Incorporated by reference from Gadzooxs Annual Report for the year
ended March 31, 2000 on Form 10-K filed on June 29, 2000.                  
|   
|   
|   
|   
|(p) |  | Incorporated by reference to the signature page of this Annual Report
for the year ended March 31, 2002 on Form 10-K filed on July 1, 2002.