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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-
EXCHANGE ACT OF 1934

For the quarter ended September 30, 2001 OR

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

For the transition period from __________ to __________

Commission file number 0-25711

EXTREME NETWORKS, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 77-0430270
------------------------ ------------------------------------
[State of other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]

3585 Monroe Street
Santa Clara. California 95051
---------------------------------------- -------------
[Address of principal executive offices] [Zip Code]

Registrant's telephone number, including area code: (408) 579-2800

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
-

The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at November 1, 2001 was 114,173,331

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

EXTREME NETWORKS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

INDEX

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets
September 30, 2001 and June 30, 2001 3

Condensed Consolidated Statements of Operations
Three months ended September 30, 2001 and September 30, 2000 4

Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 2001 and September 30, 2000 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk 30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 31

Item 2. Changes in Securities 31

Item 3. Defaults Upon Senior Securities 31

Item 4. Submission of Matters to a Vote of Security Holders 31

Item 5. Other Information 31

Item 6. Exhibits and Reports on Form 8-K 31

Signatures 32

Part I. Financial Information
Item 1. Financial Statements

EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

September 30, June 30,
2001 2001
------------- -----------
(Unaudited) (Note 1)

Assets
Current assets:
Cash and cash equivalents $ 123,334 $ 87,722
Short-term investments 36,931 69,374
Accounts receivable, net 52,077 63,211
Inventories 51,584 60,529
Deferred taxes 25,883 35,855
Other current assets 414 2,235
--------- ---------
Total current assets 290,223 318,926
Property and equipment, net 57,966 57,251
Restricted investments 80,000 80,000
Investments 45,145 34,406
Goodwill and purchased intangible assets, net 102,034 113,886
Deferred taxes 69,857 40,028
Other assets 6,243 12,025
--------- ---------

$ 651,468 $ 656,522
========= =========

Liabilities and stockholders' equity

Current liabilities:
Accounts payable $ 50,230 $ 35,890
Accrued compensation and benefits 11,526 13,309
Accrued purchase commitments 9,500 9,926
Deferred revenue 30,860 25,537
Other accrued liabilities 28,530 22,832
--------- ---------
Total current liabilities 130,646 107,494
Long-term deposit 266 266
Commitments and contingencies (Note 4)
Stockholders' equity:

Common stock and capital in excess of par value 644,735 640,655
Deferred stock compensation (17,478) (20,351)
Accumulated other comprehensive income 1,618 769
Accumulated deficit (108,319) (72,311)
--------- ---------
Total stockholders' equity 520,556 548,762
--------- ---------

$ 651,468 $ 656,522
========= =========

See accompanying notes to the unaudited condensed consolidated financial
statements.

EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended September 30,
-------------------------------------------
2001 2000
----------------- --------------

Net revenue $ 108,289 $ 119,342

Cost and expenses:
Cost of revenue 83,312 58,090
Research and development 16,411 11,743
Sales and marketing 36,985 35,115
General and administrative 8,113 4,279
Amortization of goodwill, purchased intangible assets
and deferred stock compensation 14,726 6,850
----------------- --------------
Total costs and expenses 159,547 116,077

Operating income (loss) (51,258) 3,265

Loss on investments (6,000) -
Other income, net 2,422 3,709
----------------- --------------

Income (loss) before income taxes (54,836) 6,974

Provision (benefit) for income taxes (18,828) 2,441
----------------- --------------

Net income (loss) $ (36,008) $ 4,533
================= ==============

Net income (loss) per share - basic $ (0.32) $ 0.04
================= ==============
Net income (loss) per share - diluted $ (0.32) $ 0.04
================= ==============

Shares used in per share calculation - basic 111,953 105,990
================= ==============
Shares used in per share calculation - diluted 111,953 118,892
================= ==============

See accompanying notes to the unaudited condensed consolidated financial
statements.

EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months Ended September 30,
-----------------------------------------
2001 2000
--------------- -------------

Operating activities:
Net income (loss) $ (36,008) $ 4,533
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 7,747 2,984
Amortization of goodwill and purchased intangible assets 11,852 6,955
Provision for doubtful accounts 2,700 -
Provision for inventory reserves 5,000 -
Deferred income taxes (19,857) -
Amortization of deferred stock compensation 2,873 21
Equity share of affiliate losses and write-down of investments 6,000 750
Compensation expense for options granted to consultants 210 210
Changes in operating assets and liabilities:
Accounts receivable 8,434 (13,190)
Inventories 3,945 (35,427)
Other current and noncurrent assets 1,604 525
Accounts payable 14,340 (5,961)
Accrued compensation and benefits (1,783) (765)
Accrued purchase commitments (426) -
Deferred revenue 5,323 4,092
Other accrued liabilities 5,698 1,845
--------------- ------------
Net cash provided by (used in) operating activities 17,652 (33,428)
--------------- ------------

Investing activities:
Capital expenditures (8,462) (13,819)
Purchases and maturities of investments, net 22,558 (11,418)
Minority investments - (3,000)
--------------- ------------
Net cash provided by (used in) investing activities 14,096 (28,237)
--------------- ------------

Financing activities:
Proceeds from issuance of common stock 3,864 8,450
--------------- ------------
Net cash provided by financing activities 3,864 8,450
--------------- ------------

Net increase (decrease) in cash and cash equivalents 35,612 (53,215)
Cash and cash equivalents at beginning of period 87,722 116,721
--------------- ------------
Cash and cash equivalents at end of period $ 123,334 $ 63,506
=============== ============

See accompanying notes to the unaudited condensed consolidated financial
statements.

EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared by Extreme Networks, Inc., pursuant to the rules and regulations
of the Securities and Exchange Commission and include the accounts of Extreme
Networks, Inc. and its wholly-owned subsidiaries ("Extreme" or collectively, the
"Company"). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the unaudited financial statements
reflect all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the financial position at September 30, 2001 and the
operating results and cash flows for the three months ended September 30, 2001
and September 30, 2000. The condensed balance sheet at June 30, 2001 has been
derived from audited financial statements as of that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements and
notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the year ended June 30, 2001,
included in the Company's Form 10-K filed with the Securities and Exchange
Commission.

The results of operations for the three months ended September 30, 2001 are
not necessarily indicative of the results that may be expected for the future
quarters or the fiscal year ending June 30, 2002. Certain items previously
reported in specific financial statement captions have been reclassified to
conform to the 2002 presentation. Such reclassifications have not impacted
previously reported operating income (loss) or net income (loss) amounts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Extreme was incorporated in California on May 8, 1996 and was
reincorporated in Delaware on March 31, 1999. Extreme is a leading provider of
network infrastructure equipment for business applications and services.

Fiscal Year

The Company's fiscal year is a 52/53-week fiscal accounting year. Fiscal
2002 and 2001 are 52-week fiscal years. The September 30, 2001 quarter closed on
September 30, 2001 and comprised 13 weeks of revenue and expense activity. All
references herein to "fiscal 2001" or "2001" represent the year ended July 1,
2001.

Principles of Consolidation

The consolidated financial statements include the accounts of Extreme and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated. Investments in which management intends to
maintain more than a temporary 20% to 50% interest, or otherwise has the ability
to exercise significant influence, are accounted for under the equity method.
Investments in which we have less than a 20% interest and/or do not have the
ability to exercise significant influence are carried at the lower of cost or
estimated realizable value.

Assets and liabilities of foreign operations are translated to U.S. dollars
at current rates of exchange, and revenues and expenses are translated using
weighted average rates. Foreign currency transaction gains and losses have not
been significant. Gains and losses from foreign currency translation are
included as a separate component of other comprehensive income (loss).

Accounting Estimates

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Estimates are used
for, but are not limited to, the accounting for the allowance for doubtful
accounts, inventory reserves, depreciation and amortization, sales returns,
warranty costs and income taxes. Actual results could differ materially from
these estimates.

Accounting Reclassification

Effective September 30, 2001, Extreme no longer reports deferred revenue
associated with inventory at distributors in its deferred revenue account or
accounts receivable account in its condensed consolidated balance sheet.
Deferred revenue and accounts receivable balances for all previous periods have
been reclassified to conform to the current year presentation. The
reclassification made to the balance sheet at June 30, 2001, was a decrease in
accounts receivable of $12.5 million, a decrease in other current assets of
$19.3 million and a decrease in deferred revenue of $31.8 million. This
reclassification had no impact on working capital or results of operations.

Cash Equivalents and Short-Term and Long Term Investments

Extreme considers cash and all highly liquid investment securities
purchased with an original or remaining maturity of less than three months at
date of purchase to be cash equivalents. Extreme's investments comprise U.S.,
state and municipal government obligations and corporate securities. Investments
with maturities of less than one year are considered short term and investments
with maturities greater than one year are considered long term.

To date, all marketable securities have been classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, when material, reported net-of-tax as a separate component of
stockholders' equity. Realized gains and losses on available-for-sale securities
are included in interest income. The cost of securities sold is based on
specific identification. Premiums and discounts are amortized over the period
from acquisition to maturity and are included in investment income, along with
interest and dividends.

Extreme also has certain other minority investments in privately held
companies. These investments are included in other long term assets on our
balance sheet and are generally carried at cost. We monitor these investments
for other than temporary impairment and make appropriate reductions in carrying
values when necessary. Extreme recorded write-downs of $6.0 million related to
impairments of its privately held investments for the three months ended
September 30, 2001. A total of $3.9 million of carrying value remained as of
September 30, 2001. Extreme did not record any write-downs of its privately held
investments for the three months ended September 30, 2000.

Fair Value of Financial Instruments

The carrying amounts of certain of Extreme's financial instruments,
including cash and equivalents, approximate fair value because of their short
maturities. The fair values of investments are determined using quoted market
prices for those securities or similar financial instruments.

Derivatives

Extreme adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
for the year ending June 30, 2001. We enter into foreign exchange forward
contracts to offset the impact of currency fluctuations on certain nonfunctional
operating expenses, denominated in Japanese Yen, the Euro, Swedish Krona and the
British pound. The foreign

exchange forward contracts we enter into have original maturities ranging from
one to three months. We do not enter into foreign exchange forward contracts for
trading purposes. See Note 5.

Inventories

Inventories consist of raw materials and finished goods and are stated at
the lower of cost or market (on a first-in, first-out basis).

Inventories consist of (in thousands):
September 30, 2001 June 30, 2001
------------------ -------------
Raw materials $ 14,229 $ 20,671
Finished goods 37,355 39,858
------------------ -------------
Total $ 51,584 $ 60,529
================== =============

Restricted Investments

Extreme restricted $80.0 million of its investment securities as collateral
for specified obligations of Extreme, as the lessee, under two operating leases
for its campus facility. These investment securities are restricted as to the
terms of withdrawal and are managed by a third party subject to certain
limitations under our investment policy. (See Note 4)

Concentration of Credit Risk, Product and Significant Customers and Supplier
Information

Extreme may be subject to concentration of credit risk as a result of
certain financial instruments consisting principally of marketable investments
and accounts receivable. Extreme has placed its investments with high-credit
quality issuers. Extreme will not invest an amount exceeding 10% of the
corporation's combined cash, cash equivalents, short-term and long-term
investments, in the securities of any one obligor or maker, except for
obligations of the United States, obligations of United States agencies and
money market accounts. Extreme performs ongoing credit evaluations of its
customers and generally does not require collateral. Two customers accounted for
18% and 11% of our revenue for the three months ended September 30, 2001 and one
customer accounted for 13% of our revenue for the three months ended September
30, 2000.

One supplier currently manufacturers all of Extreme's ASICs which are used
in all of Extreme's networking products. Any interruption or delay in the supply
of any of these components, or the inability to procure these components from
alternate sources at acceptable prices and within a reasonable time, would
materially adversely affect Extreme's business, operating results and financial
condition. In addition, qualifying additional suppliers can be time-consuming
and expensive and may increase the likelihood of errors. Extreme attempts to
mitigate these risks by working closely with its ASIC supplier regarding
production planning and product introduction timing.

Extreme currently derives substantially all of its revenue from sales of
our Summit, BlackDiamond and Alpine products. Extreme expects that revenue from
these products will account for a substantial portion of our revenue for the
foreseeable future. Accordingly, widespread market acceptance of Extreme's
products is critical to our future success.

Goodwill and Purchased Intangible Assets

We record goodwill when the cost of net assets we acquire exceeds their
fair value. Goodwill is amortized on a straight-line basis over lives ranging
from 2 to 5 years. The cost of identified intangible assets is generally
amortized on a straight-line basis over periods ranging from 2 to 5 years.
Goodwill and purchased intangible assets consists of the following (in
thousands):

September 30, 2001 June 30, 2001
------------------ -------------
Goodwill $ 143,325 $ 143,325

Purchased intangible assets 11,158 11,158
------------ -----------
154,483 154,483
Less: accumulated amortization (52,449) (40,597)
------------ -----------
$ 102,034 $ 113,886
============ ===========

Income Taxes

Income tax expense (benefit) is based on pre-tax financial accounting
income (loss). Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts.

Valuation of Long-Lived Assets, Certain Identifiable Intangibles and Goodwill

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," we regularly
perform reviews of the carrying value of long-lived assets and certain
identifiable intangibles for impairment. The reviews look for the existence of
facts or circumstances, either internal or external, which indicate that the
carrying value of the asset cannot be recovered. No such impairment has been
indicated to date. If, in the future, management determines the existence of
impairment indicators, we would use undiscounted cash flows to initially
determine whether impairment should be recognized. If necessary, we would
perform a subsequent calculation to measure the amount of the impairment loss
based on the excess of the carrying value over the fair value of the impaired
assets. If quoted market prices for the assets are not available, the fair value
would be calculated using the present value of estimated expected future cash
flows. The cash flow calculations would be based on management's best estimates,
using appropriate assumptions and projections at the time.

Revenue Recognition

Extreme generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless we have future obligations such
as installation or are required to obtain customer acceptance. When significant
obligations remain after products are delivered, revenue and related costs are
deferred until such obligations are fulfilled. Amounts billed in excess of
revenue recognized are included as deferred revenue and accounts receivable in
the accompanying consolidated balance sheets. Revenue from service obligations
under maintenance contracts, is deferred and recognized on a straight-line basis
over the contractual period, which is typically 12 months.

Extreme makes certain sales to partners in two-tier distribution channels.
The first tier consists of a limited number of third-party distributors that
sell primarily to resellers and on occasion to end-user customers. Distributors
are generally given privileges to return a portion of inventory. Under specified
conditions, we grant the right to distributors to return unsold products to us.
The distributors are contractually limited in terms of the value of products
that can be returned to Extreme (up to 15% of net purchases in the immediately
preceding calendar quarter to be credited against future purchases). We defer
recognition of revenue on sales to distributors until the distributors sell the
product. Extreme no longer reports deferred revenue associated with inventory at
distributors in its deferred revenue account or accounts receivable account in
its condensed consolidated balance sheet. Deferred revenue and accounts
receivable balances for all previous periods have been reclassified to conform
to the current year presentation. The second tier of the distribution channel
consists of a large number of third-party resellers that sell directly to
end-users and are not granted return privileges. Extreme generally records
revenue to resellers upon shipment net of returns allowances based on its
experience.

Warranty Reserves

Extreme's hardware warranty period is typically 12 months from the date of
shipment to the end user. Upon shipment of products to its customers, Extreme
estimates expenses for the cost to repair or replace products that may be
returned under warranty and accrues the amount as revenue is recognized.

Advertising

Cooperative advertising obligations are accrued and the costs expensed at
the same time the related revenue is recognized. All other advertising costs are
expensed as incurred. Advertising expenses for the quarters ended September 30,
2001 and September 30, 2000 were approximately $2.0 million and $2.2 million,
respectively.

Net Income (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the period,
less shares subject to repurchase, and excludes any dilutive effects of options,
warrants and convertible securities. Dilutive earnings per common share is
calculated by dividing net income (loss) by the weighted average number of
common shares used in the basic earnings per common share calculation plus the
dilutive effect of options, warrants and convertible securities. Diluted net
loss per share is the same as basic net loss per share for the three months
ended September 30, 2001 because Extreme had a net loss for this period. Had
Extreme been profitable during this period, diluted earnings per share would
have been impacted by the calculated effect of outstanding stock options of
4,701,000.

The following table presents the calculation of basic and diluted net
income (loss) per share (unaudited in thousands, except per share data):

Three Months Ended
------------------
September 30,
------------
2001 2000
---- ----

Net income (loss) $ (36,008) $ 4,533
=========== ===========

Weighted-average shares of common stock outstanding 113,714 107,151
Less: Weighted-average shares subject to repurchase (1,761) (1,161)
----------- -----------
Weighted-average shares used in per share calculation - basic 111,953 105,990
Incremental shares using the treasury stock method - 12,902
----------- -----------
Weighted-average shares used in per share calculation - diluted 111,953 118,892
=========== ===========

Net income (loss) per share - basic $ (0.32) $ 0.04
=========== ===========
Net income (loss) per share - diluted $ (0.32) $ 0.04
=========== ===========

Recently Issued Accounting Standards

In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125" ("FAS
140"). SFAS 140 revises certain standards for accounting for securitization and
other transfers of financial assets and collateral. In addition, FAS 140
requires certain additional disclosures that were not previously required. The
additional disclosure requirements were effective for financial statements for
fiscal years ending after December 15, 2000 and have been adopted for the year
ended June 30, 2001. The revised accounting standards of FAS 140 are effective
for transactions occurring after March 31, 2001. The application of the revised
accounting standards of FAS 140 has not had a material impact on the business,
results of operations or financial condition of Extreme.

In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" ("FAS 141"). FAS 141 establishes new
standards for accounting and reporting for business combinations and requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. We adopted this statement effective July 2001.
The adoption of FAS 141 had no impact on our financial position or results of
operations.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"), which establishes new standards for goodwill and other
intangible assets. Under the new rules, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions of
FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company will apply the new accounting rules beginning fiscal year 2003. We
are currently assessing the financial impact FAS 142 will have on our
Consolidated Financial Statements. Goodwill and intangible assets from business
combinations before July 1, 2001 will continue to be amortized prior to the
adoption of FAS 142. Upon the adoption of FAS 142, we are required to evaluate
our existing goodwill and intangible assets from business combinations completed
before July 1, 2001 and make any necessary reclassifications in order to comply
with the new criteria in FAS 141 for recognition of intangible assets.
Application of the nonamortization provisions of FAS 142 will eliminate
approximately $23.2 million in amortization of goodwill and intangibles with
indefinite lives for fiscal 2003.

In October 2001, the FASB issued the Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 addresses financial accounting and reporting for
the disposal of long-lived assets. FAS 144 becomes effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Extreme is currently evaluating the potential
impact, if any, the adoption of FAS 144 will have its financial position and
results of operation.

3. BUSINESS COMBINATIONS AND INVESTMENTS

Acquisitions in Fiscal Year 2001

During fiscal year 2001, Extreme acquired privately-held Optranet, Inc.
("Optranet"), a developer of broadband access equipment in which Extreme
previously held a minority interest. In addition, a related party of Extreme was
a significant investor of Optranet at the time of Extreme's initial investment.
Also during fiscal year 2001, Extreme acquired privately-held Webstacks, Inc.
("Webstacks"), a developer of broadband access equipment in which Extreme
previously held a minority interest. In addition, a related party of Extreme was
a significant investor of Webstacks at the time of Extreme's initial investment.
In connection with these acquisitions, Extreme acquired all outstanding stock
and assumed all outstanding stock options of the respective acquirees. All
acquisitions were accounted for as purchase business combinations. Accordingly,
the results of operations of the acquired companies have been included with
those of Extreme for periods subsequent to the respective dates of acquisition.
The fair value of the intangible assets was determined based upon a valuation
using a combination of methods, including an income approach for the technology
and a cost approach for the assembled workforce.

The value of the acquired in-process technology for the acquired companies
was computed using a discounted cash flow analysis rate of 30% on the
anticipated income stream of the related product revenue. The discounted cash
flow analysis was based on management's forecast of future revenue, cost of
revenue and operating expenses related to the products and technologies
purchased from these companies. The calculation of value was then adjusted to
reflect only the value creation efforts of these companies prior to the close of
the acquisition. The acquired intangible assets and goodwill are being amortized
using the straight-line method over their estimated useful lives of five years.
Amortization of acquired intangibles and goodwill associated with the
acquisitions of Optranet and Webstacks totaled $2.1 million and $2.7 million,
respectively, for the three months ended September 30, 2001. Extreme recognized
deferred stock compensation associated with unvested stock options issued to
employees that were assumed in conjunction with these acquisitions. This amount
is included as a component of stockholders' equity and is being amortized
ratably by charges to operations over the vesting period of the options.
Amortization of stock-based compensation associated with the acquisitions of
Optranet and Webstacks totaled $2.6 million and $0.3 million, respectively, for
the three months ended September 30, 2001 and relates to options awarded to
employees in research and development.

The following table presents the purchase price allocation of these
acquisitions during fiscal year 2001 (in millions):

Optranet Webstacks
-------- ---------

In-process research and development $ 13.4 $ 16.8
Assembled workforce 1.5 0.9
Deferred compensation 21.9 2.5
Net fair value of tangible assets acquired
and liabilities assumed 2.6 1.4
Deferred tax liabilities (7.4) --
Excess of cost over fair value of net assets acquired
41.2 53.1
------- -------
Purchase price $ 73.2 $ 74.7
======= =======

Acquisition date January 2001 March 2001
Shares of Company stock issued 1.4 2.9
Employee stock options assumed 0.6 0.1
------- -------
Total shares of Company stock issued and assumed
2.0 3.0
======= =======

Cash received in the acquisition $ 1.6 $ 0.7
======= =======

Pursuant to the terms of the merger agreement with Webstacks, Extreme
paid $13.2 million of additional cash consideration to the former
shareholders of Webstacks in October 2001 as a result of the
accomplishments of certain technology milestones. This amount has been
recorded as additional goodwill.

As of January 31, 2001, Optranet had in-process research and
development efforts under way for the design and development of printed
circuit boards ("PCB"). These PCBs will deliver networking solutions that
allow for high speed Ethernet Layer 3 switching and IP services over wide
area T-1 and DS-3 network technologies, and VDSL modules over voice grade
cabling. The development efforts for the products were at varying levels of
completion estimated to be between 20% and 85% complete, had a fair value
of $13.4 million as of January 31, 2001 and are expected to be complete
during the first six months of fiscal 2002.

As of March 7, 2001, Webstacks had in-process research and development
efforts under way for the design and development of both stand alone proxy
switches and PCBs. These switches and PCBs will extend Extreme's IP
services to provide robust Layer 4 - 7 switching solutions required for
building today's high-performance content aware networks. The development
efforts for the products were at varying levels of completion estimated to
be between 45% and 60% complete, had a fair value of $16.8 million as of
March 7, 2001 and are expected to be complete by January 2002.

Pro forma results of operations have not been presented for Optranet
or Webstacks because the prior operating results of these entities were not
material on either an individual or an aggregate basis.

4. COMMITMENTS AND CONTINGENCIES

Leases

In June 2000, we entered into two operating lease agreements for
approximately 16 acres of land and the accompanying 275,000 square feet of
buildings to house our primary facility in Santa Clara, California. Our
lease payments will vary based on LIBOR which was 2.6% at September 30,
2001, plus a spread. Our combined lease payments are estimated to be
approximately $2.5 million on an annual basis over the lease terms. The
leases are for five years and can be renewed for two five-year periods,
subject to the approval of the lessor. At the expiration or termination of
the leases, we have the option to either purchase these properties for
$31.4 million and $48.6 million, respectively, or arrange for the sale of
the properties to a third party for at least $31.4 million

and $48.6 million, respectively, with a contingent liability for any
deficiency. If the properties under these leases are not purchased or sold
as described above, we will be obligated for additional lease payments of
approximately $30.5 million and $41.3 million, respectively.

As part of the above lease transactions, Extreme restricted $80.0
million of its investment securities as collateral for specified
obligations as the lessor under the leases. These investment securities are
restricted as to withdrawal and are managed by a third party subject to
certain limitations under Extreme's investment policy. The leases also
require us to maintain specified financial covenants with which we were in
compliance as of September 30, 2001.

As part of our business relationship with MCMS, one of our contract
manufacturers, we have entered into a $9.0 million equipment lease for
manufacturing equipment with a third party financing company; we in turn
sublease the equipment to MCMS. Due to the liquidity problems at MCMS and
their voluntary filing for protection under Chapter 11 on September 18,
2001 (See "Risk Factors") we have recorded a charge of $9.0 million related
to the equipment lease in the quarter ended September 30, 2001.

Legal Proceedings

On March 14, 2001, Nortel Networks, Inc. and Nortel Networks Limited
(collectively, "Nortel") filed suit against us in the United States
District Court for the District of Massachusetts, Civil Action No.
01-10443EFH. The complaint alleges willful infringement of U.S. Patent Nos.
5,790,554 (the "554 Patent") ; 5,490,252; 5,408,469; 5,398,245; 5,159,595
and 4,736,363, and seeks a judgment: (a) determining that the Company has
infringed each of the six patents; (b) permanently enjoining and
restraining the Company from further infringement of each of the six
patents; and (c) awarding unspecified amounts of trebled damages, together
with interest, costs and attorneys' fees. We answered Nortel's complaint on
May 17, 2001, denying that we have infringed any of the six patents and
also asserting various affirmative defenses and counterclaims that seek
judgment: (a) that Nortel's complaint be dismissed; (b) that each of the
six patents be declared invalid; (c) declaring that we are not infringing
any of the six patents; and (d) that Nortel pay our attorneys' fees and
costs. On May 17, 2001, we also sought transfer of the action to the United
States District Court for the Northern District of California. On June 28,
2001, the court denied our motion to transfer, and the action will thus
proceed in Massachusetts. On July 9, 2001, the court granted a motion by F5
Networks, Inc. ("F5") to intervene in the action. F5 contends that it is
the designer, developer, and manufacturer of the product accused of
infringing the 554 Patent of Count VI of Nortel's complaint. F5 had also
sought to sever and transfer Count VI in favor of an action concerning the
554 Patent pending between F5 and Nortel in the United States District
Court for the Western District of Washington, but that motion was denied on
July 9, 2001 without opinion. On July 13, 2001, Nortel demanded $150
million in settlement of alleged past damages. Discovery is proceeding. As
set forth above, we have denied Nortel's allegations and intend to defend
the action vigorously. We cannot assure you, however, that we will prevail
in this litigation. Our failure to prevail in this litigation could have a
material adverse effect on our consolidated financial position, results of
operations and cash flows in the future.

Beginning on July 6, 2001, multiple purported securities fraud class
action complaints were filed in the United States District Court for the
Southern District of New York. We are aware of at least two such
complaints, Capuano v. Morgan Stanley & Co., Inc., et al, No. 01 CV 6148
(S.D.N.Y. July 6, 2001) (which does not name us or our officers or
directors as defendants) and Hui v. Extreme Networks, Inc., et al., No. 01
CV 6700 (S.D.N.Y. July 23, 2001). The complaints are brought purportedly on
behalf of all persons who purchased our common stock from November 17, 1999
through December 6, 2000. The Hui complaint names as defendants Extreme
Networks and certain of our present and former officers, as well as several
investment banking firms that served as underwriters of our initial public
offering. It alleges liability under Sections 11and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, on the grounds that the registration statement for the offering did
not disclose that: (1) the underwriters had agreed to allow certain
customers to purchase shares in the offering in exchange for excess
commissions paid to the underwriters; and (2) the underwriters had arranged
for certain customers to purchase additional shares in the aftermarket at
pre-determined prices. We are aware that similar allegations have been made
in lawsuits challenging over 140 other

initial public offerings conducted in 1999 and 2000. No specific damages
are claimed. We believe that the allegations against us and the officers
are without merit, and intend to contest them vigorously. We cannot assure
you, however, that we will prevail in this litigation. Failure to prevail
could have a material adverse effect on our consolidated financial
position, results of operations and cash flows in the future.

Extreme is subject to other legal proceedings, claims and litigation
arising in the ordinary course of business. While the outcome of these
matters is currently not determinable, management does not expect that the
ultimate costs to resolve these matters will have a material adverse effect
on our consolidated financial position, results of operations or cash
flows.

5. FOREIGN EXCHANGE FORWARD CONTRACTS

On July 2, 2000, Extreme adopted FAS 133, which requires that all
derivatives be recorded on the balance sheet at fair value. Changes in the
fair value of derivatives that do not qualify, or are not effective as
hedges must be recognized currently in earnings. Upon adoption, we did not
hold any derivative instruments.

Extreme sells product around the globe in US dollars but has
international operations with expenses in foreign currencies which are paid
from Extreme's US dollar cash flows. Extreme has a foreign currency cash
flow hedging program to minimize the foreign currency risk associated with
the forecasted cash flows using forward contracts with a maximum term of 90
days. If the US dollar weakens against the foreign currencies (primarily
Japanese Yen, the Euro, Swedish Krona and British pound), the increase in
the cost of the forecasted foreign currency denominated expenses is offset
by the increase in value of the forward contracts designated as hedges.
Conversely, when the US dollar strengthens, the decline in cost of the
forecasted foreign currency cash flows offsets the losses in the value of
the forward contracts. As the critical terms of the forward contract and
the underlying exposure are matched at inception, forward contract
effectiveness is calculated by comparing the change in the fair value of
the contract to the change in fair value of the anticipated expense, with
the effective portion of the hedge recorded in accumulated other
comprehensive income (loss). Any residual change in fair value of the
instruments is recognized immediately in other income (expense), net.

At September 30, 2001, Extreme had forward foreign exchange contracts
of less than three months duration, to exchange principally Japanese Yen,
British pounds, Swedish Krona and Euros for U.S. dollars in the net amount
of $7.1 million. Of these amounts, forward contracts to purchase foreign
currency represented $7.3 million and forward contracts to sell foreign
currency represented $0.2 million.

6. INCOME TAXES

The Company has recorded a tax benefit of $18.8 million for the three
months ended September 30, 2001. The benefit for the three months ended
September 30, 2001 results in an effective tax rate of 34% which consists
primarily of federal and state income tax benefits, offset by foreign taxes
and nondeductible goodwill.

7. COMPREHENSIVE INCOME (LOSS)

The following are the components of accumulated other comprehensive
income, net of tax (in thousands):

September 30, 2001 June 30, 2001
------------------ -------------

Unrealized gain on investments $ 1,467 $ 710
Change in fair value of derivatives (1) -
Foreign currency translation adjustments 152 59
----------------- -------------
Accumulated other comprehensive income $ 1,618 $ 769
================= =============

The following schedule of other comprehensive income (loss) shows the
gross current-period gain (loss) and the reclassification adjustment
(unaudited, in thousands):

Three Months Ended
---------------------------------
September 30, September 30,
--------------- -------------
2001 2000
--------------- -------------

Net income (loss) $ (36,008) $ 4,533
Other comprehensive income (loss):
Change in unrealized gain on investments, net 757 628
Change in unrealized loss on derivatives (1) -
Change in accumulated translation adjustments 93 (73)
---------------------------------
Total comprehensive income (loss) $ (35,159) $ 5,088
=================================

8. SUBSEQUENT EVENT

On October 31, 2001, Extreme filed a Tender Offer Statement on
Schedule TO with the Securities and Exchange Commission related to a
voluntary stock option exchange program for its employees. The Company's
executive officers, directors and vice presidents are not eligible to
participate in this program. Under the program, Extreme employees will be
given the opportunity to voluntarily cancel unexercised vested and unvested
stock options previously granted to them that have an exercise price of
$10.00 or more. The cancelled options will be exchanged for replacement
stock options to be granted at a future date. The replacement options will
be for the same number of shares as the cancelled options. The replacement
stock options will be granted with an exercise price equal to the fair
market value of Extreme stock on the date of grant, which will be at least
six months plus one day after the option cancellation date of December 4,
2001. The program will be open for at least twenty business days after the
formal offering documents are filed with the Securities and Exchange
Commission. Employees may change or withdraw their election to exchange
options at any time prior to the end of the offering period. In order to
receive new options, an employee must remain employed with Extreme or one
of its subsidiaries until the date when the replacement options are
granted.

Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations

When used in this discussion and elsewhere in this Form 10-Q, the words
"may," "should," "believes," "expects," "anticipates," "estimates" and
similar expressions identify forward-looking statements. Such statements,
which include statements concerning operating expenses, anticipated growth,
potential expansion of research and development and sales and support
staff, working capital, product mix, pricing trends and the mix of export
sales are subject to risks and uncertainties, including those set forth
below under "Risk Factors." Our actual results could differ materially from
those projected in these forward-looking statements which could have a
material adverse effect on our business, operating results and financial
condition. These forward-looking statements speak only as of the date
hereof and there may be events in the future that would alter our
expectations but which we are not able to predict accurately or over which
we have no control. We have no obligation, and expressly disclaim any such
obligation, to update or alter any such forward looking statements whether
as a result of new information, future events or otherwise.

This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with "Risk Factors" set
forth on page 19 and in our other filings with the U.S. Securities and
Exchange Commission. All dollar amounts in this Management's Discussion and
Analysis are in millions.

Results of Operations

Net revenue. Net revenue decreased from $119.3 million for the three
months ended September 30, 2000 to $108.3 million for the three months
ended September 30, 2001, a decrease of $11.0 million. This decrease was
due primarily to a decline in revenue from customers in North America, as
our business was negatively impacted by the cautious purchasing behavior of
customers in the current economic environment partially offset by an
increase in revenues from customers in Japan.

Our revenue is derived from sales of our Summit, BlackDiamond and
Alpine product families and fees for services relating to our products,
including maintenance and training. The level of sales to any customer may
vary from period to period; however, we expect that significant customer
concentration will continue for the foreseeable future. See "Risk Factors
--If a Key Reseller, Distributor or Other Significant Customer Cancels or
Delays a Large Purchase, Our Net Revenue May Decline and the Price of Our
Stock May Fall." Two customers accounted for 18% and 11% of our revenue for
the three months ended September 30, 2001 and one customer accounted for
13% of our revenue for the three months ended September 30, 2000.

We market and sell our products primarily through resellers,
distributors and, to a lesser extent, original equipment manufacturers and
our field sales organization. We sell our products through more than 250
resellers in approximately 50 countries. For the three months ended
September 30, 2001 and September 30, 2000, sales to customers outside of
North America accounted for approximately 70% and 51% of our net revenue,
respectively. We expect that export sales will continue to represent a
significant portion of net revenue, although we cannot assure you that
export sales as a percentage of net revenue will remain at current levels.
Currently, all of our international sales are denominated in U.S. dollars.

We have experienced a rapid and increasingly severe downturn in the
economy. This downturn has adversely affected demand for our products and
services and made it increasingly difficult to accurately forecast future
production requirements. We expect this economic downturn to continue for
at least the remainder of calendar year 2001 and we do not know the extent,
severity or length of this economic downturn in the United States or in the
other geographic regions where we currently sell our products.

Gross profit. Gross profit decreased from $61.3 million for the three
months ended September 30, 2000 to $25.0 million for the three months ended
September 30, 2001, a decrease of $36.3 million. Gross margins

decreased from 51.3% for the three months ended September 30, 2000 to 23.1%
for the three months ended September 30, 2001. This decrease was primarily
due to $31.4 million in charges related to our outsourced manufacturing
activities including a charge for leased equipment with one contract
manufacturer, the stocking of our service depots with inventory worldwide
to meet customer support demands under contract and excess and obsolete
inventory due to an aggressive product introduction cycle that we expect to
roll-out over the next 12 months.

Research and development expenses. Research and development expenses
consist principally of salaries and related personnel expenses, consultant
fees and prototype expenses related to the design, development, testing and
enhancement of our products. Research and development expenses increased
from $11.7 million for the three months ended September 30, 2000 to $16.4
million for the three months ended September 30, 2001, an increase of $4.7
million. The increase was primarily due to higher payroll and related
personnel expenses due to the addition of new personnel, partly through
acquisitions, to support our multiple product development efforts as well
as prototype costs. We expense all research and development expenses as
incurred. We believe that continued investment in research and development
is critical to attaining our strategic objectives and, as a result, we
expect these expenses to not change significantly in the near term.

Sales and marketing expenses. Sales and marketing expenses consist of
salaries, commissions and related expenses for personnel engaged in
marketing, sales and field service support functions, as well as trade
shows and promotional expenses. Sales and marketing expenses increased from
$35.1 million for the three months ended September 30, 2000 to $37.0
million for the three months ended September 30, 2001, an increase of $1.9
million. This increase was primarily due to the hiring of additional
personnel and marketing programs. We do not expect that sales and marketing
expenses will change significantly in the near term.

General and administrative expenses. General and administrative
expenses consist primarily of salaries and related expenses for executive,
finance and administrative personnel, professional fees and other general
corporate expenses. General and administrative expenses increased from $4.3
million for the three months ended September 30, 2000 to $8.1 million for
the three months ended September 30, 2001, an increase of $3.8 million.
This increase was primarily due to a $2.7 million charge for bad debt
expense and increases in professional fees. We do not expect that general
and administrative expenses will change significantly in the near term.

Amortization of goodwill, purchased intangible assets and deferred
stock compensation. Amortization of goodwill, purchased intangible assets
and deferred stock compensation increased from $6.9 million for the three
months ended September 30, 2000 to $14.7 million for the three months ended
September 30, 2001, an increase of $7.8 million. This increase was due to
the amortization related to the Optranet and Webstacks acquisitions (see
Note 3 of Notes to Condensed Consolidated Financial Statements) that
occurred in fiscal 2001. We are required under generally accepted
accounting principles to review our intangibles assets for impairment when
events or changes in circumstances indicate the carrying value may not be
recoverable. This review could result in a significant charge to earnings
in the period any impairment is determined.

Loss on investments. Loss on investments increased to $6.0 million for
the three months ended September 30, 2001. Extreme monitors its minority
equity investments for impairment and makes appropriate reductions in
carrying values when necessary. No impairment write-downs were made during
the three months ended September 30, 2000.

Other income, net. Other income, net decreased from $3.7 million for
the three months ended September 30, 2000 to $2.4 million for the three
months ended September 30, 2001, a decrease of $1.3 million. This decrease
was due to decreased interest income earned on investments due to lower
interest rates.

Income taxes. We recorded a tax benefit of $18.8 million for the three
months ended September 30, 2001. The benefit for the three months ended
September 30, 2001 results in an effective tax rate of 34% which consists
primarily of federal and state income tax benefits, offset by foreign taxes
and nondeductible goodwill. FASB Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. We intend to evaluate the realizability of the deferred
tax assets on a quarterly basis.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments increased from
$157.1 million at June 30, 2001 to $160.3 million at September 30, 2001, an
increase of $3.2 million. This increase is primarily due to a decrease in
accounts receivable and an increase in accounts payable; partially offset
by a net loss. Extreme no longer reports deferred revenue associated with
inventory at distributors in its deferred revenue account or accounts
receivable account in its condensed consolidated balance sheet. Deferred
revenue and accounts receivable balances for all previous periods have been
reclassified to conform to the current year presentation.

Inventory management remains an area of focus as we balance the need
to maintain strategic inventory levels to ensure competitive lead times and
avoid stock-outs with the risk of inventory excess or obsolescence because
of recent declining demand, rapidly changing technology and customer
requirements. Any significant increase in our inventory levels, can be
expected to reduce cash, cash equivalents, short-term investments and
long-term investments.

In June 2000, we entered into two operating lease agreements for
approximately 16 acres of land and the accompanying 275,000 square feet of
buildings to house our primary facility in Santa Clara, California. Our
lease payments vary based on LIBOR which was 2.6% at September 30, 2001,
plus a spread. We estimate that our combined lease payments will be
approximately $2.5 million on an annual basis over the lease terms. The
leases are for five years and can be renewed for two five-year periods,
subject to the approval of the lessor. At the expiration or termination of
the leases, we have the option to either purchase these properties for
$31.4 million and $48.6 million, respectively, or arrange for the sale of
the properties to a third party for at least $31.4 million and $48.6
million, respectively, with a contingent liability for any deficiency. If
the properties under these leases are not purchased or sold as described
above, we will be obligated for additional lease payments of approximately
$30.5 million and $41.3 million, respectively.

We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures.
As a result, we could be required to raise substantial additional capital.
To the extent that we raise additional capital through the sale of equity
or convertible debt securities, the issuance of such securities could
result in dilution to existing stockholders. If additional funds are raised
through the issuance of debt securities, these securities may have rights,
preferences and privileges senior to holders of common stock and the terms
of such debt could impose restrictions on our operations. We cannot assure
you that such additional capital, if required, will be available on
acceptable terms, or at all. If we are unable to obtain such additional
capital, we may be required to reduce the scope of our planned product
development and marketing efforts, which would materially adversely affect
our business, financial condition and operating results.

We believe that our current cash and cash equivalents, short-term
investments, long-term investments and cash available from credit
facilities and future operations will enable us to meet our working capital
requirements for at least the next 12 months.

Risk Factors

We Have a Limited History of Profitability, We Are Not Currently Profitable
and We Cannot Assure You That We Will Return to Profitability in the Future

Fiscal 2000 was the first year in which Extreme achieved
profitability. We reported a loss for fiscal 2001 and the quarter ended
September 30, 2001. In the foreseeable future, we anticipate continuing to
incur significant sales and marketing, product development and general and
administrative expenses and, as a result, we will need to generate and
sustain significantly higher revenue to return to and sustain
profitability. In addition, the amortization of purchased goodwill and
intangibles, and deferred compensation associated with acquisitions, will
result in material charges that will reduce our profitability. Further, the
impact of the current economic slowdown could result in additional one-time
charges.

A Number of Factors Could Cause Our Quarterly Financial Results to Be Worse
Than Expected, Resulting in a Decline in Our Stock Price

Our failure to control our operating expenses at a level that is
consistent with anticipated revenues may cause our financial results to be
worse than expected. A high percentage of our expenses are fixed in the
short term, so any delay in generating or recognizing revenue, as occurred
in the quarter ended September 30, 2001, could cause our quarterly
operating results to fall below the expectations of public market analysts
or investors, which could cause the price of our stock to fall.

We may experience a delay in generating or recognizing revenue for a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenue for that quarter and are generally cancelable at any
time. Accordingly, we are dependent upon obtaining orders during a quarter
for shipment in that quarter to achieve our revenue objectives. In
addition, the timing of product releases, purchase orders and product
availability could result in a majority of our product shipments to be
scheduled for the end of a quarter. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Our customer
agreements generally allow customers to delay scheduled delivery dates or
to cancel orders within specified timeframes without significant charges to
the customers. Furthermore, some of our customer agreements include
acceptance provisions that delay our ability to recognize revenue upon
shipment.

Our quarterly revenue and operating results have varied significantly
in the past and may vary significantly in the future due to a number of
factors, including, but not limited to, the following:

. changes in general and/or specific economic conditions in the
networking industry;
. seasonal fluctuations in demand for our products and services,
particularly in Asia and Europe;
. our ability to accurately forecast demand for our products, which
in the case of lower-than-expected sales may result in excess
and/or obsolete inventory on hand or under non-cancelable
purchase commitments;
. unexpected product returns or the cancellation or rescheduling of
orders;
. our ability to develop, introduce, ship and support new products
and product enhancements and manage product transitions;
. announcements and new product introductions by our competitors;
. our ability to develop and support relationships with enterprise
customers, service providers and other potential large customers;
. our ability to achieve targeted cost reductions;
. our ability to obtain sufficient supplies of sole or
limited-source components for our products on a timely basis;
. increases in the prices of the components that we purchase;

. decreases in the prices of the products that we sell;
. our ability to achieve and maintain desired production volumes
and quality levels for our products;
. the mix of products sold and the mix of distribution channels
through which products are sold;
. costs relating to possible acquisitions and the integration of
technologies or businesses; and
. the effect of amortization of goodwill, deferred compensation,
and purchased intangibles resulting from existing or new
transactions.

Due to the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an
indicator of our future performance.

As a result of the September 11, 2001 events in New York City and
Washington, D.C., the United States and global economies have weakened and
may continue to deteriorate, which may result in further decreases in our
revenues and cause our stock price to decline. In addition, it is
anticipated that in the wake of these events, the United States and global
capital markets will experience a period of continuing volatility. These
events contributed to a decline in revenue from our customers in North
America for the quarter ended September 30, 2001, and they may continue to
have a negative impact on our business as a result of the cautious
purchasing behavior of customers.

Intense Competition in the Market for Networking Equipment Could Prevent Us
from Increasing Revenue and Sustaining Profitability

The market for networking equipment is intensely competitive. Our
principal competitors include Cisco Systems, Enterasys Networks, Foundry
Networks, Nortel Networks and Riverstone Networks. In addition, a number of
private companies have announced plans for new products that may compete
with our own products. Some of our current and potential competitors have
superior market leverage, longer operating histories and substantially
greater financial, technical, sales, and marketing resources, in addition
to wider name recognition and larger installed customer bases. These
competitors may have developed, or may in the future develop, new competing
products based on technologies that compete with our own products or render
our products obsolete. Furthermore, a number of these competitors may merge
or form strategic partnerships that enable them to offer or bring to market
competitive products.

To remain competitive, we believe that we must, among other
things, invest significant resources in developing new products, improve
our current products and maintain customer satisfaction. If we fail to do
so, we may not compete successfully with our competitors, which could have
a material adverse effect on our revenue and future profitability.

We Expect the Average Selling Prices of Our Products to Decrease Which May
Reduce Gross Margins or Revenue

The network equipment industry has experienced rapid erosion of
average selling prices due to a number of factors, including competitive
pricing pressures, promotional pricing, rapid technological change and a
slowdown in the economy that has resulted in excess inventory and lower
prices as companies attempt to liquidate this inventory. We may experience
substantial decreases in future operating results due to the erosion of our
average selling prices. We anticipate that the average selling prices of
our products will decrease in the future in response to competitive pricing
pressures, increased sales discounts and new product introductions by us or
our competitors, including, for example, competitive products manufactured
with low-cost merchant silicon. Competitive pressures are expected to
increase as a result of the industry slowdown that occurred in the first
half of 2001 coupled with the recent downturn in the broader economy. To
maintain our gross margins, we must develop and introduce on a timely basis
new products and product enhancements and continually reduce our product
costs. Our failure to do so would cause our revenue and gross margins to
decline, which could have a material adverse effect on our operating
results and cause the price of our common stock to decline.

Some of Our Customers May Not Have the Resources to Pay for Our Products as
a Result of the Current Economic Environment

With the recent economic slowdown, some of our customers are
forecasting that their revenue for the foreseeable future will generally be
lower than anticipated. Some of these customers are experiencing, or are
likely to experience, serious cash flow problems and as a result find it
increasingly difficult to obtain financing on attractive terms, if at all.
As a result, if some of these customers are not successful in generating
sufficient revenue or securing alternate financing arrangements, they may
not be able to pay, or may delay payment for the amounts that they owe us.
Furthermore, they may not order as many products from us as originally
forecast. The inability of some of our potential customers to pay us for
our products may adversely affect our cash flow and the timing of our
revenue recognition, which may cause our stock price to decline.

The Market in Which We Compete is Subject to Rapid Technological Change and
to Compete We Must Continually Introduce New Products that Achieve Broad
Market Acceptance

The network equipment market is characterized by rapid
technological change, frequent new product introductions, changes in
customer requirements and evolving industry standards. If we do not address
these changes by regularly introducing new products, our product line will
become obsolete. Developments in routers and routing software could also
significantly reduce demand for our products. Alternative technologies
could achieve widespread market acceptance and displace the Ethernet
technology on which we have based our product architecture. We cannot
assure you that our technological approach will achieve broad market
acceptance or that other technologies or devices will not supplant our own
products and technology.

When we announce new products or product enhancements that have
the potential to replace or shorten the life cycle of our existing
products, customers may defer purchasing our existing products. These
actions could have a material adverse effect on our operating results by
unexpectedly decreasing sales, increasing inventory levels of older
products and exposing us to greater risk of product obsolescence. The
market for switching products is evolving and we believe our ability to
compete successfully in this market is dependent upon the continued
compatibility and interoperability of our products with products and
architectures offered by other vendors. In particular, the networking
industry has been characterized by the successive introduction of new
technologies or standards that have dramatically reduced the price and
increased the performance of switching equipment. To remain competitive we
need to introduce products in a timely manner that incorporate or are
compatible with these emerging technologies. We cannot assure you that new
products will be commercially successful. We have experienced delays in
releasing new products and product enhancements in the past that resulted
in lower quarterly revenue than anticipated. We may experience similar
delays in product development and releases in the future, and any delay in
product introduction could adversely affect our ability to compete, causing
our operating results to be below our expectations or the expectations of
public market analysts or investors.

Adjustments to the Size of Our Operations May Require Us to Incur
Unanticipated Costs

Prior to the quarter ended March 31, 2001, we experienced rapid
growth and expansion that placed, and may in the future place, a
significant strain on our resources. Subsequent to the quarter ended March
31, 2001, we incurred unanticipated costs to downsize our operations to a
level consistent with the downward forecast in sales. Even if we manage
periods of expansion and contraction effectively, we may make mistakes in
operating our business such as inaccurate sales forecasting, incorrect
material planning or inaccurate financial reporting. This may lead to
unanticipated fluctuations in our operating results. Our net revenue
increased significantly during the last fiscal year. Furthermore, from
September 30, 2000 to September 30, 2001, the number of our employees
increased from 792 to 999, notwithstanding a reduction in workforce of
approximately 10% of our employees conducted in April 2001. We cannot
assure you that we will continue to achieve a similar pattern of growth or
that we will be able to size our operations in accordance with the
potential growth or decline of our business in the future.

Delays in the Implementation of New Management Information Systems May
Cause a Significant Burden on Our Operations

We are implementing additional management information systems and
developing further operating, administrative, financial and accounting
systems and controls to maintain close coordination among our executive,
engineering, accounting, finance, marketing, sales and operations
organizations. In addition, we plan to transition to a new enterprise
resource planning system. We may be unable to install adequate control
systems in an efficient and timely manner, and our current or planned
personnel systems, procedures, and controls may not be adequate to support
our future operations. The difficulties associated with installing and
implementing these new systems, procedures, and controls may place a
significant burden on our management and our internal resources. In
addition, as we grow internationally, we need to expand our worldwide
operations and enhance our communications infrastructure. Any delay in the
implementation of such new or enhanced systems, procedures or controls, or
any disruption in the transition to such new or enhanced systems,
procedures or controls, could adversely affect our ability to accurately
forecast sales demand, manage our supply chain, and record and report
financial and management information on a timely and accurate basis.

We Must Continue to Develop and Increase Our Productivity Of Our Indirect
Distribution Channels to Increase Net Revenue and Improve Our Operating
Results

Our distribution strategy focuses primarily on developing and
increasing our productivity of our indirect distribution channels through
resellers and distributors. 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. Many of our resellers also sell
products that compete with our products. We are developing a two-tier
distribution structure in Europe and the United States that has required,
and will in the future require, us to enter into agreements with a number
of stocking distributors. We have entered into two-tier distribution
agreements; however, we cannot assure you that we will be able to enter
into additional distribution agreements or that we will be able to
successfully manage the transition of resellers to a two-tier distribution
channel. Our failure to do any of these could limit our ability to grow or
sustain revenue. In addition, our operating results will likely fluctuate
significantly depending on the timing and amount of orders from our
resellers. We cannot assure you that our resellers will market our products
effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support.

Most of Our Revenue is Derived From Sales of Three Product Families, So We
are Dependent on Widespread Market Acceptance of These Products

In the year ended June 30, 2001, we derived substantially all of
our revenue from sales of our Summit, BlackDiamond and Alpine products. We
expect that revenue from these product families will account for a
substantial portion of our revenue for the foreseeable future. Accordingly,
widespread market acceptance of our product families is vital to our future
success. Factors that may affect the sales of our products, some of which
are beyond our control, include:

. the demand for switching products (Gigabit Ethernet and Layer 3
switching technologies in particular) in the enterprise, service
provider and MAN markets;
. the performance, price and total cost of ownership of our
products;
. the availability and price of competing products and
technologies;
. our ability to match supply with demand for certain products; and
. the success and development of our resellers, distributors and
field sales channels.

Future Performance will Depend on the Introduction and Acceptance of New
Products

Our future performance will also depend on the successful
development, introduction, and market acceptance of new and enhanced
products that address customer requirements in a cost-effective manner. In
the past, we have experienced delays in product development and such delays
may occur in the future. We are currently engaged in development of a
third-generation chipset planned for use in future products. The
introduction of new and enhanced products may cause our customers to defer
or cancel orders for existing products. Therefore, to the extent customers
defer or cancel orders in the expectation of new product releases,

any delay in the development or introduction of new products could cause
our operating results to suffer. The risk that we will be unable to achieve
and maintain widespread levels of market acceptance for our current and
future products may significantly impair our revenue growth.

If a Key Reseller, Distributor, or Other Significant Customer Cancels or
Delays a Large Purchase, Our Net Revenue May Decline and the Price of Our
Stock May Fall

To date, a limited number of resellers, distributors and other
customers have accounted for a significant portion of our revenue. If any
of our large customers stop or delay purchases, our revenue and
profitability would be adversely affected. For example, in the quarter
ended September 30, 2001, two customers accounted for 18% and 11% of our
net revenue. Our expense levels are based on our expectations as to future
revenue and to a large extent are fixed in the short term, so a substantial
reduction or delay in sales of our products to a significant reseller,
distributor or other customer could harm our business, operating results
and financial condition. Although our largest customers may vary from
period-to-period, we anticipate that our operating results for any given
period will continue to depend to a significant extent on large orders from
a relatively small number of customers, particularly in view of the high
per unit sales price of our products and the length of our sales cycles.

While our financial performance depends on large orders from a
limited number of key resellers, distributors and other significant
customers, we do not have binding purchase commitments from any of them.
For example:

. our service provider and enterprise customers can stop purchasing
and our resellers and distributors can stop marketing our
products at any time;
. our reseller agreements are non-exclusive and are for one-year
terms, with no obligation upon the resellers to renew the
agreements; and
. our reseller, distributor and end-user customer agreements
generally do not require minimum purchases.

Under specified conditions, some third-party distributors are
allowed to return products to us. We defer recognition of revenue on sales
to distributors until the distributors sell the product.

The Sales Cycle for Our Products is Long and We May Incur Substantial
Non-Recoverable Expenses or Devote Significant Resources to Sales that Do
Not Occur When Anticipated

The timing of our revenue is difficult to predict because of our
reliance on indirect sales channels and the length and variability of our
sales cycle. Our products have a relatively high per unit sales price, and
the purchase of our products often constitutes a significant strategic
decision by an enterprise regarding its communications infrastructure. The
decision by customers to purchase our products is often based on the
results of a variety of internal procedures associated with the evaluation,
testing, implementation and acceptance of new technologies. Accordingly,
the product evaluation process frequently results in a lengthy sales cycle,
typically ranging from three months to longer than a year, and as a result,
our ability to sell products is subject to a number of significant risks,
including:

. the risk that budgetary constraints and internal acceptance
reviews by customers will result in the loss of potential sales;
. the risk of substantial variation in the length of the sales
cycle from customer to customer, making decisions on the
expenditure of resources difficult to assess;
. the risk that we may incur substantial sales and marketing
expenses and expend significant management time in an attempt to
initiate or increase the sale of products to customers, but not
succeed; and
. the risk that, if a sales forecast from a specific customer for a
particular quarter is not achieved in that quarter, we may be
unable to compensate for the shortfall, which could harm our
operating results.

We Purchase Several Key Components for Products From Single or Limited
Sources and Could Lose Sales if These Suppliers Fail to Meet Our Needs

We currently purchase several key components used in the manufacture
of our products from single or limited sources and are dependent upon
supply from these sources to meet our needs. Certain components such as
tantalum capacitors, static random access memory, or SRAM, and printed
circuit boards have been, and may be in the future, in short supply. While
we have been able to meet our needs to date, we have in the past, and are
likely in the future, to encounter shortages and delays in obtaining these
or other components and this could have a material adverse effect on our
ability to meet customer orders. Our principal sole-source components
include:

. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables;
. custom power supplies; and
. custom-tooled sheet metal.

Our principal limited-source components include:

. flash memories;
. dynamic and static random access memories, or DRAMs and SRAMs,
respectively; and
. printed circuit boards.

We use our forecast of expected demand to determine our material
requirements. Lead times for materials and components we order vary
significantly, and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. If forecasts
exceed orders, we may have excess and/or obsolete inventory on hand or
under non-cancelable purchase commitments which could have a material
adverse effect on our operating results and financial condition. If orders
exceed forecasts, we may have inadequate inventory of certain materials and
components, which could have a material adverse effect on our operating
results and financial condition. We do not have agreements fixing long-term
prices or minimum volume requirements from these suppliers. From time to
time we have experienced shortages and allocations of certain components,
resulting in delays in filling orders. In addition, during the development
of our products, we have experienced delays in the prototyping of our
ASICs, which in turn has led to delays in product introductions. We cannot
assure you that such delays will not occur in the future. Furthermore, we
cannot assure you that the performance of the components as incorporated in
our products will meet the quality requirements of our customers.

Our Dependence on Contract Manufacturers for Substantially All of Our
Manufacturing Requirements Could Harm Our Operating Results

If the demand for our products grows, we will need to increase our
material purchases, contract manufacturing capacity, and internal test and
quality functions. Any disruptions in product flow could limit our revenue,
adversely affect our competitive position and reputation, and result in
additional costs or cancellation of orders under agreements with our
customers.

We rely on independent contractors to manufacture our products. We do
not have long-term contracts with any of these manufacturers. We currently
utilize three companies - Flextronics International, Ltd., located in San
Jose, California, Solectron Corporation, located in Milpitas, California,
and MCMS, Inc., located in Nampa, Idaho. We have experienced delays in
product shipments from contract manufacturers in the past, which in turn
delayed product shipments to our customers. Similar or other problems may
arise in the future, such as inferior quality, insufficient quantity of
products, or the interruption or discontinuance of operations of any
manufacturer, any of which could have a material adverse effect on our
business and operating results.

Specifically, as stated in their Form 10-Q filed with the Securities
and Exchange Commission on July 16, 2001, MCMS faces severe near-term
liquidity problems. In addition, on September 18, 2001, as a result of
severe liquidity problems, MCMS announced that it had reached an agreement
to sell substantially all of its operating

assets to Manufacturers' Services Limited. Simultaneously, MCMS announced
that it, and its two U.S. subsidiaries, have voluntarily filed for
protection under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware in Wilmington to
implement the sale. In response to this situation, we have perfected
security interests in our personal property located on the premises of
MCMS, obtained a written acknowledgement from MCMS in regard to
manufacturing equipment, products and materials owned and/or leased by us
that are located on the premises of MCMS, and are managing the orderly
transition of production processes to other manufacturers. Our inability to
execute this plan may cause a delay in our ability to fulfill orders and
may have a material adverse effect on our business, operating results and
financial condition.

We do not know whether we will effectively manage our contract
manufacturers or that these manufacturers will meet our future requirements
for timely delivery of products of sufficient quality and quantity. We
intend to regularly introduce new products and product enhancements, which
will require that we rapidly achieve a critical mass of volume production
by coordinating our efforts with those of our suppliers and contract
manufacturers. The inability of our contract manufacturers to provide us
with adequate supplies of high-quality products or the loss of any of our
contract manufacturers may cause a delay in our ability to fulfill orders
and may have a material adverse effect on our business, operating results
and financial condition.

As part of our cost-reduction efforts, we will need to realize
lower per unit product costs from our contract manufacturers by means of
volume efficiencies. However, we cannot be certain when or if such price
reductions will occur. The failure to obtain such price reductions would
adversely affect our gross margins and operating results.

Our Limited Ability to Protect Our Intellectual Property and Defend Against
Claims May Adversely Affect Our Ability to Compete

We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our
intellectual property rights. However, we cannot assure you that the
actions we have taken will adequately protect our intellectual property
rights or that other parties will not independently develop similar or
competing products that do not infringe on our patents. Our industry is
characterized by the existence of a large number of patents and frequent
claims and related litigation regarding patent and other intellectual
property rights. We are actively involved in disputes and licensing
discussions with others regarding their claimed proprietary rights. If we
infringe the proprietary rights of others, we could be compelled to either
obtain a license to those intellectual property rights or alter our
products so that these no longer infringe upon such proprietary rights. Any
license could be very expensive to obtain or may not be available at all.
Similarly, changing our products or processes to avoid infringing the
rights of others may be costly or impractical. Litigation resulting from
claims that we are infringing the propriety rights of others could result
in substantial costs and a diversion of resources, and could have a
material adverse effect on our business, financial condition and results of
operations.

The networking industry in which we operate is prone to
intellectual property claims by and among competing parties. We cannot
assure you that we will always successfully defend ourselves against such
claims.

We 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 attempt to copy or otherwise misappropriate or use
our products or technology.

We Are Engaged in Litigation Regarding Intellectual Property Rights, and an
Adverse Outcome Could Harm Our Business and Require Us to Incur Significant
Costs

We have received notice from three major companies alleging that
we are infringing their patents. One of these companies, Nortel Networks,
filed a claim against us alleging patent infringement and we are in
litigation as of the date of this filing. Following examination of this
claim, we have denied Nortel's allegations and intend to defend the action
vigorously. Without regard to the merits of this or any other claim, if
judgments by a court

of law on this or any other claim received in the future were to be upheld,
the consequences to us may be severe and could require us to, among other
actions:

. stop selling our products that incorporate the challenged
intellectual property;
. obtain a license to sell or use the relevant technology, which
license may not be available on reasonable terms or available
at all;
. pay damages; or
. redesign those products that use the disputed technology.

If we are compelled to take any of the foregoing actions, our
business could be severely harmed.

We and Manufacturers of Our Products Rely on a Continuous Power Supply to
Conduct Operations, and an Energy Crisis Could Disrupt Our Business and
Increase Our Expenses

California is in the midst of an energy crisis that could disrupt
our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for California fall below 1.5%,
electricity providers have on some occasions implemented, and may in the
future continue to implement, rolling blackouts. Two of the three
manufacturers of our products, Flextronics and Solectron, are located in
California. As a result of this crisis, these contractors may be unable to
manufacture sufficient quantities of our products to meet our needs, or
they may increase the fees charged for their services. We do not have
long-term contracts with either Flextronics or Solectron. The inability of
our contract manufacturers to provide us with adequate supplies of products
would cause a delay in our ability to fulfill our orders, which could harm
our business, and any increase in their fees could adversely affect our
financial condition.

In addition, the majority of our operations are located in
California. We currently do not have backup generators or alternate sources
of power in the event of a blackout. If blackouts interrupt our power
supply, we would temporarily be unable to continue operations at our
facilities. Any such interruption in our ability to continue operations at
these facilities could damage our reputation, harm our ability to retain
existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operation.

Our Headquarters Are Located in Northern California Where Disasters May
Occur That Could Disrupt Our Operations and Harm Our Business

Our corporate headquarters are located in Silicon Valley in
Northern California. Northern California historically has been vulnerable
to natural disasters and other risks, such as earthquakes, fires and
floods, which at times have disrupted the local economy and posed physical
risks to our and our manufacturers' property.

In addition, terrorist acts or acts of war targeted at the United
States, and specifically Silicon Valley, could cause damage or disruption
to Extreme, our employees, facilities, partners, suppliers, distributors
and resellers, and customers which could have a material adverse effect on
our operations and financial results.

We currently do not have redundant, multiple site capacity in the
event of a natural disaster or catastrophic event. In the event of such an
occurrence, our business would suffer.

If We Lose Key Personnel or are Unable to Hire Additional Qualified
Personnel as Necessary, We May Not Be Able to Successfully Manage Our
Business or Achieve Our Objectives

Our success depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing and
operations personnel, many of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on
Gordon Stitt, chairman, president and chief executive officer; Stephen
Haddock, vice president and chief technical officer; and Herb Schneider,
vice president of engineering. We do not have employment contracts with
these personnel nor do we carry life insurance on any of our key personnel.

We believe our future success will also depend in large part upon
our ability to attract and retain highly skilled managerial, engineering,
sales and marketing, finance and operations personnel. The market for these
personnel is competitive, especially in the San Francisco Bay Area, and we
have had difficulty-hiring employees, particularly software engineers, in
the timeframe we desire. In addition, retention has become more difficult
for us and other public technology companies as a result of the recent
stock market decline, which has caused many of our employees' options to be
"under water." There can be no assurance that we will be successful in
attracting and retaining such personnel. The loss of the services of any of
our key personnel, the inability to attract or retain qualified personnel
in the future or delays in hiring desired personnel, particularly engineers
and sales personnel, could make it difficult for us to manage our business
and meet key objectives, such as new product introductions. In addition,
companies in the networking industry whose employees accept positions with
competitors frequently claim that competitors have engaged in unfair hiring
practices. We have from time to time received claims like this from other
companies and, although to date they have not resulted in material
litigation, we do not know whether we will receive additional claims in the
future as we seek to hire qualified personnel or that such claims will not
result in material litigation. We could incur substantial costs in
defending against any such claims, regardless of the merits of such claims.

Our Products Must Comply With Evolving Industry Standards and Complex
Government Regulations or Else Our Products May Not Be Widely Accepted,
Which May Prevent Us From Growing Our Net Revenue or Achieving
Profitability

The market for network equipment products is characterized by the
need to support industry standards as different standards emerge, evolve
and achieve acceptance. We will not be competitive unless we continually
introduce new products and product enhancements that meet these emerging
standards. In the past, we have introduced new products that were not
compatible with certain technological changes, and in the future we may not
be able to effectively address the compatibility and interoperability
issues that arise as a result of technological changes and evolving
industry standards. Our products must comply with various United States
federal government regulations and standards defined by agencies such as
the Federal Communications Commission, in addition to standards established
by governmental authorities in various foreign countries and
recommendations of the International Telecommunication Union. If we do not
comply with existing or evolving industry standards or if we fail to obtain
timely domestic or foreign regulatory approvals or certificates we will not
be able to sell our products where these standards or regulations apply,
which may prevent us from sustaining our net revenue or achieving
profitability.

Failure to Successfully Expand Our Sales and Support Organizations or
Educate Them About Our Product Families May Harm Our Operating Results

The sale of our products and services requires a concerted effort
targeted at several levels within a prospective customer's organization. We
may not be able to increase net revenue unless we expand our sales force.
We cannot assure you that we will be able to successfully integrate new
employees into our company or to educate our employees about our rapidly
evolving product families. A failure to do so may hurt our revenue growth
and consequently hurt our operating results.

We Depend Upon International Sales for a Significant Portion of Our Revenue
and Our Ability to Increase Our International Sales Depends on Successfully
Expanding Our International Operations

International sales constitute a significant portion of our
sales. Our ability to grow will depend in part on the continued expansion
of international sales. Sales to customers outside of North America
accounted for approximately 70% and 55% of our net revenue for the three
months ended September 30, 2001 and in fiscal 2001, respectively. Our
international sales primarily depend on our resellers and distributors. The
failure of our resellers and distributors to sell our products
internationally would limit our ability to sustain and grow our revenue. In
addition, there are a number of risks arising from our international
business, including:

. longer accounts receivable collection cycles;

. difficulties in managing operations across disparate geographic
areas;
. difficulties associated with enforcing agreements through
foreign legal systems;
. the payment of operating expenses in local currencies, which
exposes us to risks of currency fluctuations;
. import or export licensing requirements;
. difficulty in safeguarding intellectual property;
. political and economic turbulence;
. potential adverse tax consequences; and
. unexpected changes in regulatory requirements, including export
restrictions.

Our international sales currently are U.S. dollar-denominated. As
a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international
markets. In the future, we may elect to invoice some of our international
customers in local currency which will expose us to fluctuations in
exchange rates between the U.S. dollar and the particular local currency.
If we do so, we may decide to engage in hedging transactions to minimize
the risk of such fluctuations. We have entered into foreign exchange
forward contracts to offset the impact of payment of operating expenses in
local currencies to some of our operating foreign subsidiaries. However, if
we are not successful in managing these hedging transactions, we could
incur losses from hedging activities.

We May Engage in Future Acquisitions that Dilute the Ownership Interests of
Our Stockholders, Cause Us to Incur Debt and Assume Contingent Liabilities

As part of our business strategy, we review acquisition and
strategic investment prospects that would complement our current product
offerings, augment our market coverage or enhance our technical
capabilities, or that may otherwise offer growth opportunities. We are
reviewing investments in new businesses and we expect to make investments
in, and to acquire, businesses, products, or technologies in the future. In
the event of any future acquisitions, we could:

. issue equity securities which would dilute current
stockholders' percentage ownership;
. incur substantial debt;
. assume contingent liabilities; or
. expend significant cash.

These actions by us could have a material adverse effect on our
operating results and/or the price of our common stock. In addition, with
any acquisition, we may be required to absorb the costs associated with the
acquisition long before we are able to realize any benefits from the
acquisition.

Acquisitions and investment activities also entail numerous
risks, including:

. difficulties in the assimilation of acquired operations,
technologies or products;
. unanticipated costs associated with the acquisition or
investment transaction;
. the diversion of management's attention from other business
concerns;
. adverse effects on existing business relationships with
suppliers and customers;
. risks associated with entering markets in which we have no or
limited prior experience;
. the potential loss of key employees of acquired organizations;
. substantial charges for the amortization of certain purchased
intangible assets, deferred stock compensation or similar
items; and
. impairment charges taken in the future for goodwill amounts
that cannot be supported in future periods.

We cannot assure you that we will be able to successfully
integrate any businesses, products, technologies, or personnel that we
might acquire in the future, and our failure to do so could have a material
adverse effect on our business, operating results and financial condition.
Moreover, even if we do obtain benefits in the form of increased sales and
earnings, there may be a lag between the time when the expenses associated
with an

acquisition are incurred and the time when we recognize such benefits. This
is particularly relevant in cases where it is necessary to integrate new
types of technology into our existing portfolio and new types of products
may be targeted for potential customers with which we do not have
pre-existing relationships.

We May Need Additional Capital to Fund Our Future Operations and, If It Is
Not Available When Needed, We May Need to Reduce Our Planned Development
and Marketing Efforts, Which May Reduce Our Net Revenue and Prevent Us From
Achieving Profitability

We believe that our existing working capital, based on proceeds
from the initial public offering in April 1999, proceeds from the secondary
offering in October 1999, and cash available from credit facilities and
future operations, will enable us to meet our working capital requirements
for at least the next 12 months. However, if cash from future operations is
insufficient, or if cash is used for acquisitions or other currently
unanticipated uses, we may need additional capital. The development and
marketing of new products and the expansion of reseller and distribution
channels and associated support personnel requires a significant commitment
of resources. In addition, if the markets for our products develop more
slowly than anticipated, or if we fail to establish significant market
share and achieve sufficient net revenue, we may continue to consume
significant amounts of capital. As a result, we could be required to raise
additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing
stockholders. If additional funds are raised through the issuance of debt
securities, such securities may provide the holders certain rights,
preferences, and privileges senior to those of common stockholders, and the
terms of such debt could impose restrictions on our operations. We cannot
assure you that additional capital, if required, will be available on
acceptable terms, or at all. If we are unable to obtain sufficient amounts
of additional capital, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business, financial condition and operating results.

If Our Products Contain Undetected Software or Hardware Errors, We Could
Incur Significant Unexpected Expenses and Lose Sales

Network products frequently contain undetected software or
hardware errors when new versions are first released to the marketplace. In
the past, we have experienced such errors in connection with new products
and product upgrades. We expect that such errors will be found from time to
time in new or enhanced products after the commencement of commercial
shipments. These problems may have a material adverse effect on our
business by causing us to incur significant warranty and repair costs,
diverting the attention of our engineering personnel from new product
development efforts, and causing significant customer relations problems.

Our products must successfully interoperate with products from
other vendors. As a result, when problems occur in a network, it may be
difficult to identify the sources of these problems. The occurrence of
hardware and software errors, whether caused by our products or another
vendor's products, could result in the delay or loss of market acceptance
of our products and any necessary revisions may cause us to incur
significant expenses. The occurrence of any such problems would likely have
a material adverse effect on our business, operating results and financial
condition.

Provisions in Our Charter or Agreements May Delay or Prevent a Change of
Control

Provisions in our certificate of incorporation and bylaws may
delay or prevent a change of control or changes in our management. These
provisions include:

. the division of the board of directors into three separate
classes;
. the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors;
and
. the ability of the board of directors to alter our bylaws
without getting stockholder approval.

Furthermore, we are subject to the provisions of section 203 of
the Delaware General Corporation Law. These provisions prohibit large
stockholders, in particular those owning 15% or more of the outstanding
voting

stock, from consummating a merger or combination with a corporation unless
this stockholder receives board approval for the transaction or 66 2/3% of
the shares of voting stock not owned by the stockholder approve the merger
or combination. In addition, we adopted a stockholders' rights agreement in
fiscal 2001.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The primary objective of our investment activities is to preserve
principal while at the same time maximize the income we receive from our
investments without significantly increasing risk. Some of the securities
that we have invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued
with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the principal amount of our investment will
probably decline. To minimize this risk, we maintain our portfolio of cash
equivalents and short-term investments in a variety of securities,
including commercial paper, other non-government debt securities and money
market funds. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing
interest rate. The following table presents the amounts of our cash
equivalents, short-term investments and long-term investments that are
subject to market risk by range of expected maturity and weighted-average
interest rates as of September 30, 2001. This table does not include money
market funds because those funds are not subject to market risk.

Maturing in
---------------------------------------------------------------------
Three months Three months Greater than Fair
or less to one year one year Total Value
------- ----------- -------- ----- -----
(In thousands)

Included in cash and cash equivalents .... $ 59,010 $ 59,010 $ 59,010
Weighted average interest rate ......... 4.58%
Included in short-term investments ....... $ 36,931 $ 36,931 $ 36,931
Weighted average interest rate ......... 6.80%
Included in investments .................. $ 45,145 $ 45,145 $ 45,145
Weighted average interest rate ......... 4.67%

Exchange Rate Sensitivity

Currently, all of our sales and the majority of our expenses are
denominated in U.S. dollars and as a result, we have experienced no
significant foreign exchange gains and losses to date. While we have
conducted some transactions in foreign currencies during the three months
ended September 30, 2001 and expect to continue to do so, we do not
anticipate that foreign exchange gains or losses will be significant.

Foreign Exchange Forward Contracts

We enter into foreign exchange forward contracts to offset the impact
of currency fluctuations on certain nonfunctional operating expenses,
denominated in Japanese Yen, the Euro, Swedish Krona and British pound. The
foreign exchange forward contracts we enter into have original maturities
ranging from one to three months. We do not enter into foreign exchange
forward contracts for trading purposes. See Note 5 of Notes to Condensed
Consolidated Financial Statements.

PART II. Other Information

Item 1. Legal Proceedings

Item 2. Changes in Securities - None

Item 3. Defaults Upon Senior Securities - None

Item 4. Submission of Matters to a Vote of Security Holders - None

Item 5. Other Information - None

Item 6. Exhibits and Reports on Form 8-K - none

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EXTREME NETWORKS, INC.
(Registrant)

/S/HAROLD L. COVERT
--------------------------------------

HAROLD L. COVERT
Vice President, Chief Financial Officer
And Secretary

November 13, 2001