EXTREME NETWORKS INC, 10-Q, 1999-05-14

EXTREME NETWORKS INC
10-Q, 1999-05-14
COMPUTER COMMUNICATIONS EQUIPMENT

Previous: ABN AMRO ASSET MANAGEMENT USA INC, 13F-HR, 1999-05-14

Next: FLYCAST COMMUNICATIONS CORP, S-8, 1999-05-14

<PAGE>

________________________________________________________________________________
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 March 31,1999 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 333-71921

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

DELAWARE 77-0430270
(State or 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 No X
---

The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at May 6, 1999 was 48,991,163

________________________________________________________________________________
<PAGE>

EXTREME NETWORKS, INC.
FORM 10-Q

INDEX

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets
March 31, 1999 and June 30, 1998 3

Condensed Consolidated Statements of Operations
Three months ended and nine months ended
March 31, 1999 and 1998 4

Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 1999 and 1998 5

Notes to Condensed Consolidated Financial
Statements (Unaudited) 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11

PART II. OTHER INFORMATION

Item 1. Legal Proceedings Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders 27

Item 5. Other Information Not Applicable

Item 6. Exhibits and Reports on Form 8-K 27

Item 7A Quantitative and Qualitative Disclosures about
Market Risk Not Applicable

Signatures 28

2
<PAGE>

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited) (1)
Assets

Current assets:
Cash and cash equivalents $ 10,705 $ 9,510
Short-term investments 4,322 10,995
Accounts receivable, net 11,368 7,808
Inventories 414 123
Other current assets 1,437 588
-------------- ------------
Total current assets 28,246 29,024
Property and equipment, net 4,888 4,469
Other assets 213 238
-------------- ------------
$ 33,347 $ 33,731
============== ============

Liabilities and stockholders' equity

Current liabilities:
Accounts payable $ 6,257 $ 9,993
Accrued liabilities 9,767 3,885
Income tax liability 1,125 -
Notes payable, current portion 666 834
Capital lease obligations, current
portion 599 516
-------------- ------------
Total current liabilities 18,414 15,228
Notes payable, net of current portion 1,477 1,167
Capital lease obligations, net of current portion 1,196 1,467
Stockholders' equity:
Convertible preferred stock 29 29
Common stock 12 12
Additional paid-in capital 38,816 38,056
Deferred stock compensation (235) (369)
Accumulated deficit (26,362) (21,859)
-------------- ------------
Total stockholders' equity 12,260 15,869
-------------- ------------
$ 33,347 $ 33,731
============== ============

(1) Derived from audited financial statements

See accompanying notes to the unaudited condensed consolidated financial
statements.

3
<PAGE>

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

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 29,051 $ 7,335 $ 59,902 $ 13,439
Cost of revenue 14,235 5,490 29,840 9,047
------------ ----------- ----------- -----------
Gross profit 14,816 1,845 30,062 4,392

Operating expenses:
Research and development 4,761 2,752 11,341 7,300
Selling and marketing 7,482 2,457 17,685 5,907
General and administrative 1,809 670 4,602 1,712
------------ ----------- ----------- -----------

Total operating expenses 14,052 5,879 33,628 14,919
------------ ----------- ----------- -----------

Operating income (loss) 764 (4,034) (3,566) (10,527)
Other income (expense), net (31) 25 63 51
------------ ----------- ----------- -----------
Income (loss) before income taxes 733 (4,009) (3,503) (10,476)

Provision for income taxes 300 - 1,000 -
------------ ----------- ----------- -----------
Net income (loss) $ 433 $ (4,009) $ (4,503) $ (10,476)
============ =========== =========== ===========
Basic net income (loss) per
common share $ 0.05 $ (0.84) $ (0.63) $ (2.69)
============ =========== =========== ===========
Diluted net income (loss) per
common share $ 0.03 $ (0.84) $ (0.63) $ (2.69)
============ =========== =========== ===========
Weighted average shares outstanding
used in computing basic net income
(loss) per share 7,923 4,760 7,185 3,899
============ =========== =========== ===========
Weighted average shares outstanding
used in computing diluted net income
(loss) per share 14,656 4,760 7,185 3,899
============ =========== =========== ===========

Pro forma basic net income (loss) per
share $ 0.01 $ (0.13) $ (0.12) $ (0.37)
============ =========== =========== ===========
Pro forma diluted net income (loss)
per share $ 0.01 $ (0.13) $ (0.12) $ (0.37)
============ =========== =========== ===========
Shares used in computing pro forma
basic net income (loss) per common
share 36,984 32,082 36,246 28,651
============ =========== =========== ===========
Shares used in computing pro forma
diluted net income (loss) per common
share 43,717 32,082 36,246 28,651
============ =========== =========== ===========

</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statement

4
<PAGE>

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

Nine Months Ended
------------------------
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ (4,503) $ (10,476)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,451 820
Amortization of deferred stock compensation 134 17
Changes in operating assets and liabilities:
Accounts receivable (3,560) (5,522)
Inventories (291) (94)
Other current and noncurrent assets (824) (829)
Accounts payable (3,736) 1,018
Accrued compensation 2,106 418
Accrued warranty 497 1,057
Accrued purchase commitments 197 -
Other accrued liabilities 3,082 6,994
Income tax liability 1,125 146
Due to shareholder - (109)
----------- -----------
Net cash used in operating activities (2,322) (6,560)
----------- -----------

Investing activities:
Property and equipment purchases, net (3,870) (2,544)
Purchases of short-term investments - (2,495)
Maturities of short-term investments 6,673 -
----------- -----------
Net cash provided by (used in) investing
activities 2,803 (5,039)
----------- -----------

Financing activities:
Proceeds from issuance of convertible preferred
stock - 20,285
Proceeds from issuance of common stock 760 110
Proceeds from notes payable 783 1,827
Principal payments on notes payable (641) (222)
Principal payments of capital lease obligations (188) 630
----------- -----------
Net cash provided by financing activities 714 22,630
----------- -----------

Net increase in cash and cash equivalents 1,195 11,031
Cash and cash equivalents at beginning of period 9,510 10,047
----------- -----------
Cash and cash equivalents at end of period $ 10,705 $ 21,078
=========== ===========
</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statements.

5
<PAGE>

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

1. BASIS OF PRESENTATION

The 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 adjustments, necessary for a fair
presentation of the financial position at March 31, 1999 and the operating
results and cash flows for the three months and nine months ended March 31, 1999
and 1998. The condensed balance sheet at June 30, 1998 has been derived from
audited financial statements as of that date. These financial statements and
notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto, included in the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission.

The results of operations for the three months and nine months ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the future quarters or the year ending June 30, 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Extreme was incorporated in the state of California on May 8, 1996 and is
engaged in the design, development, manufacture, and sale of high performance
LAN networking products based on Layer 3 switching and Quality of Service
technology. Extreme has incurred operating losses through December 31, 1998 and
recorded a small profit in the quarter ended March 31, 1999. The company has an
accumulated deficit of $26.4 million at March 31, 1999.

Reincorporation, Amendment to the Articles of Incorporation

During January 1999, Extreme's Board of directors authorized the
reincorporation of the Company in the State of Delaware. This reincorporation
was effective prior to Extreme's initial public offering. Upon reincorporation,
Extreme will be authorized to issue 150,000,000 shares of Common Stock, $.001
par value and 2,000,000 shares of undesignated Preferred Stock, $.001 par value.

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.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that materially affect the amounts reported in the financial
statements. Actual results could differ materially from these estimates.

6
<PAGE>

Cash Equivalents and Short-Term Investments

Extreme considers all highly liquid investment securities with maturity
from date of purchase of three months or less to be cash equivalents and
investment securities with maturity from date of purchase of more than three
months but less than one year, to be short-term investments.

Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with material unrealized gains
and losses, if any, included in 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.

Inventories

Inventories are stated at the lower of cost or market (on a first-in,
first-out basis) and are comprised substantially of finished goods at March 31,
1999.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject Extreme to concentration of
credit risk consist principally of marketable investments and accounts
receivable. Extreme has placed its investments with six high-credit quality
issuers with no more than $2.0 million due from any one issuer. For the nine
months ended March 31, 1999, sales to Compaq, Hitachi Cable and Tokyo Electron
accounted for 19%, 16% and 11% of the Company's net revenue, respectively. For
the three months ended March 31, 1999, sales to Tokyo Electron, Hitachi Cable
and Compaq accounted for 19%, 19% and 16% of the Company's net revenues,
respectively. No other customer accounts for more than 10% of Extreme's net
revenues respectively. Extreme operates solely within one business segment, the
development and marketing of end-to-end LAN switching solutions.

Accrued Liabilities

Accrued liabilities consist of:
March 31, June 30,
1999 1998
---------- ----------
(In thousands)
Accrued compensation and benefits $ 3,041 $ 935
Accrued warranty 1,570 1,073
Accrued purchase commitments 1,090 893
Other accrued liabilities 4,066 984
---------- ----------
$ 9,767 $ 3,885
========== ==========

Revenue Recognition

Extreme generally recognizes product revenue at the time of shipment,
unless Extreme has future obligations for installation or has to obtain customer
acceptance in which case revenue is deferred until these obligations are met.
Revenue from service obligations is deferred and recognized on a straight-line
basis over the contractual period. Amounts billed in excess of revenue
recognized are included as deferred revenue in the accompanying consolidated
balance sheets. Extreme has established a program which enables third party
resellers to return up to 15% of their previous month's purchases in exchange
for a purchase order of equal or greater dollar value. The amount of estimated
product returns is provided for in the period of the sale.

7
<PAGE>

Upon shipment to its customers, Extreme provides for the estimated cost to
repair or replace products to be returned under warranty. Extreme's warranty
period is typically 12 months from the date of shipment to the end user.

Foreign Operations

Extreme's foreign offices consist of sales, marketing and support
activities through its foreign subsidiaries and an overseas reseller network.
Operating income generated by the foreign operations of Extreme and their
corresponding identifiable assets were not material in any period presented.

Extreme's export sales represented 57% and 64% of net revenue in the nine-
month period ended March 31, 1999 and March 31, 1998, respectively. All of the
export sales to date have been denominated in U.S. dollars and were derived from
sales to Europe and Asia.

Net Income (Loss) Per Share

Basic net income (loss) per share and diluted net income (loss) per share
are presented in conformity with Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued or granted for nominal consideration prior to the
effective date of the initial public offering must be included in the
calculation of basic and diluted net income (loss) per common share as if they
had been outstanding for all periods presented. To date, Extreme has not had any
issuances or grants for nominal consideration.

In accordance with SFAS No. 128, basic net income (loss) per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Basic and diluted pro
forma net income (loss) per share, as presented in the consolidated statements
of operations, have been computed as described above and also gives effect,
under Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.

8
<PAGE>

The following table presents the calculation of basic and diluted and pro
forma basic and diluted net income (loss) per common share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 433 $ (4,009) $ (4,503) $(10,476)
======== ======== ======== ========
Weighted-average shares of common stock
outstanding 11,855 11,442 11,725 11,094

Less: Weighted-average shares subject to
repurchase (3,932) (6,682) (4,540) (7,195)
-------- -------- -------- --------
Weighted-average shares used in computing basic
net income (loss) per common share 7,923 4,760 7,185 3,899
======== ======== ======== ========
Weighted-average shares used in computing diluted
net income (loss) per common share 14,656 4,760 7,185 3,899
======== ======== ======== ========
Basic net income (loss) per common share $ 0.05 $ (0.84) $ (0.63) $ (2.69)
======== ======== ======== ========
Diluted net income (loss) per common share $ 0.03 $ (0.84) $ (0.63) $ (2.69)
======== ======== ======== ========
Pro forma:
Net income (loss) $ 433 $ (4,009) $ (4,503) $(10,476)
======== ======== ======== ========
Shares used above 7,923 4,760 7,185 3,899
Pro forma adjustment to reflect weighted
effect of assumed conversion of convertible
preferred stock 29,061 27,322 29,061 24,752
-------- -------- -------- --------
Shares used in computing pro forma basic net
income (loss) per common share (unaudited) 36,984 32,082 36,246 28,651
======== ======== ======== ========
Shares used in computing pro forma diluted net
income (loss) per common share (unaudited) 43,717 32,082 36,246 28,651
======== ======== ======== ========
Pro forma basic net income (loss) per common
share (unaudited) $ 0.01 $ (0.13) $ (0.12) $ (0.37)
======== ======== ======== ========
Pro forma diluted net income (loss) per common
share (unaudited) $ 0.01 $ (0.13) $ (0.12) $ (0.37)
======== ======== ======== ========
</TABLE>

Comprehensive Income (Loss)

Extreme adopted Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income," at December 31, 1998. Under SFAS 130, Extreme
is required to display comprehensive income and its components as part of the
financial statements. Other comprehensive income includes certain changes in
equity that are excluded from net income. Specifically, SFAS 130 requires
unrealized holding gains and losses on available-for-sale securities, to be
included in accumulated other comprehensive income. Comprehensive income (loss)
for the three and nine months ended March 31, 1999 and 1998 approximated net
income (loss).

9
<PAGE>

Recently Issued Accounting Standard

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to shareholders. SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major customers. Extreme
will adopt SFAS No. 131 effective June 30, 1999. Extreme expects that the
implementation of this standard will not have a material effect on its financial
statement disclosures.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Extreme is required to adopt SFAS No. 133
for the year ending June 30, 2002. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because Extreme
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS No. 133 is expected to have no
material impact on Extreme's financial condition or results of operations.

In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain
costs related to internal use software once certain criteria have been met.
Extreme is required to implement SOP 98-1 for the year ending June 30, 2000.
Adoption of SOP 98-1 is expected to have no material impact on Extreme's
financial condition or results of operations.

3. COMMITMENTS

Extreme has outstanding purchase order commitments for materials of
approximately $4.4 million and $19.2 million at June 30, 1998 and March 31,
1999, respectively. Extreme expects these purchase orders to be fulfilled and
the related invoices to be paid in fiscal year 1999. Of this amount, the Company
has accrued and expensed approximately $1.1 million of the outstanding purchase
order commitments for materials due to obligations to suppliers as of March 31,
1999. This expense is included within cost of revenue for the nine months ended
March 31, 1999.

Facility Lease

In February 1999, Extreme agreed to lease 77,000 square feet for the
purpose of being its primary facility in Santa Clara, California. The related
cost of this lease is approximately $120,000 per month. The lease expires in
December 2002. Extreme commenced occupancy in March 1999.

4. INCOME TAXES

The Company has recorded a tax provision of $1.0 million for the nine month
period ended March 31, 1999. The provision for income taxes consists primarily
of foreign taxes, state income taxes and federal alternative minimum taxes.

FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes our historical operating performance and the
reported cumulative net losses in all prior years, we have provided a full
valuation allowance against our net deferred tax assets. We intend to evaluate
the realizability of the deferred tax assets on a quarterly basis.

10
<PAGE>

5. SUBSEQUENT EVENT (unaudited)

The Company completed its initial public offering of approximately 8
million common shares (including the underwriters over-allotment provision) on
April 13, 1999 and raised approximately $127 million net of offering costs.
Extreme Networks is listed on the Nasdaq National Market under the symbol
"EXTR."

Part I. FINANCIAL INFORMATION

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

When used in this discussion, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the timing of
availability and functionality of products under development, product mix,
trends in average selling prices, the percentage of export sales and sales to
strategic customers and the availability and cost of products from the Company's
suppliers, are subject to risks and uncertainties, including those set forth
below under "Factors That May Affect Results," that could cause actual results
to differ materially from those projected. These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.

The following information should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Operating
Results" on pages 22 through 30 of the Company's prospectus filed April 8, 1999
and "Factor's That May Affect Results" in this document.

Overview

From our inception in May 1996 through September 1997, our operating
activities related primarily to developing a research and development
organization, testing prototype designs, building an ASIC design infrastructure,
commencing the staffing of our marketing, sales and field service and technical
support organizations, and establishing relationships with resellers and OEMs.
We commenced volume shipments of our Summit1 and Summit2, the initial products
in our Summit stackable product family, in October 1997, and we began shipping
our BlackDiamond modular product family in September 1998. Since inception, we
have incurred significant losses and as of March 31, 1999, we had an accumulated
deficit of $26.4 million.

Our revenue is derived primarily from sales of our Summit and BlackDiamond
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 "Factors That May Affect Results-
If a Key Reseller, OEM or Other Significant Customer Cancels or Delays a Large
Purchase, Extreme's Revenues May Decline and the Price of Its Stock May Fall."
Extreme recorded sales to customers greater than 10% as follows:

------------------------------------------------------------------------------
Customer 3Com Compaq Hitachi Cable Tokyo Electron
------------------------------------------------------------------------------
Three months ended March 31, 1998 - 31% 15% -
------------------------------------------------------------------------------
Three months ended March 31, 1999 - 16% 19% 19%
------------------------------------------------------------------------------
Nine months ended March 31, 1998 28% 17% 10% -
------------------------------------------------------------------------------
Nine months ended March 31, 1999 - 19% 16% 11%
------------------------------------------------------------------------------

We market and sell our products through resellers and, to a lesser extent,
OEMs and our field sales organization. We sell our products through more than
105 resellers in 39 countries. In the nine-month period ended March 31, 1999,
sales to customers outside of North America accounted for approximately 57% of
our net revenue. Currently, all of our international sales are denominated in
U.S. dollars. We generally recognize product revenue at
11
<PAGE>

the time of shipment, unless we have future obligations for installation or have
to obtain customer acceptance, in which case revenue is deferred until such
obligations have been satisfied. We have established a program which, under
specified conditions, enables third party resellers to return products to us.
The amount of potential product returns is estimated and provided for in the
period of the sale. Service revenue is recognized ratably over the term of the
contract period, which is typically 12 months.

We expect to experience rapid erosion of average selling prices of our
products due to a number of factors, including competitive pricing pressures and
rapid technological change. Our gross margins will be affected by such declines
and by fluctuations in manufacturing volumes, component costs and the mix of
product configurations sold. In addition, our gross margins may fluctuate due to
the mix of distribution channels through which our products are sold, including
the potential effects of our development of a two-tier distribution channel. We
generally realize higher gross margins on sales to resellers than on sales
through our OEMs. Any significant decline in sales to our OEMs or resellers, or
the loss of any of our OEMs or resellers could materially adversely affect our
business, operating results and financial condition. In addition, the
introduction of new products can cause product transitions and result in excess
or obsolete inventories. Any excess or obsolete inventories may also reduce our
gross margins.

We outsource the majority of our manufacturing and supply chain management
operations, and we conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in Santa Clara, California.
Accordingly, a significant portion of our cost of revenue consists of payments
to our contract manufacturers, Flextronics and MCMS. We expect to realize lower
per unit product costs as a result of volume efficiencies. However, we cannot
assure you when or if such price reductions will occur. The failure to obtain
such price reductions could materially adversely affect our gross margins and
operating results.

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 ASICs and software. We
expense all research and development expenses as incurred. We believe that
continued investment in research and development is critical to attaining our
strategic product and cost-reduction objectives and, as a result, we expect
these expenses to increase in absolute dollars in the future.

Selling 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, advertising and promotional expenses. We
intend to pursue selling and marketing campaigns aggressively and therefore
expect these expenses to increase significantly in absolute dollars in the
future. In addition, we expect to substantially expand our field sales
operations to support and develop leads for our resellers, which would also
result in an increase in selling and marketing expenses.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel, recruiting
expenses, professional fees and other general corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
operation as a public company.

During the year ended June 30, 1998, in connection with the grant of
certain stock options to employees, Extreme recorded deferred stock compensation
of $437,000 representing the difference between the exercise price and the
deemed fair value of Extreme's common stock on the date such stock options were
granted. Such amount is included as a reduction of stockholders' equity and is
being amortized by charges to operations on a graded vesting method. Extreme
recorded amortization of deferred stock compensation expense of approximately
$68,000 and $134,000 for the year ended June 30, 1998 and the nine-month period
ended March 31, 1999, respectively. At March 31, 1999, Extreme had a total of
approximately $235,000 remaining to be amortized over the corresponding vesting
period of each respective option, generally four years. The amortization expense
relates to options awarded to employees in all operating expense categories.
This amount has not been separately allocated to these categories.

Despite growing revenues, we have only been profitable for the quarter
ended March 31, 1999. Our net losses have not decreased proportionately with the
increase in our revenue primarily because of increased expenses relating to our
growth in operations. Because of the lengthy sales cycle of our products, there
is often a significant delay between the time we incur expenses and the time we
realize the related revenue. See "Factors That May Affect

12
<PAGE>

Results - The Sales Cycle for Extreme's Products is Long and Extreme May Incur
Substantial Non-Recoverable Expenses or Devote Significant Resources to Sales
that Do Not Occur When Anticipated." In addition, we moved to a 77,000 square
foot facility located in Santa Clara, California in March 1999. The rent for
this new facility will be significantly greater than our rent obligations for
our prior facility. To the extent that future revenues do not increase
significantly in the same periods in which operating expenses increase, our
operating results would be adversely affected. See "Factors That May Affect
Results - A Number of Factors Could Cause Extreme's Quarterly Financial Results
to Be Worse Than Expected, Resulting in a Decline in Its Stock Price."

Results of Operations

The following table sets forth, for the periods indicated, the percentage
of net revenue represented by certain items reflected in our Condensed
Consolidated Financial Statements:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 49.0 74.8 49.8 67.3
----- ----- ----- -----
Gross profit 51.0 25.2 50.2 32.7
Operating expenses:
Research and development 16.4 37.5 18.9 54.3
Selling and marketing 25.8 33.5 29.5 44.0
General and administrative 6.2 9.1 7.7 12.7
----- ----- ----- -----
Total operating expenses 48.4 80.1 56.1 111.0
----- ----- ----- -----
Operating income (loss) 2.6 (54.9) (5.9) (78.3)
Other income (expense), net (0.1) 0.3 0.1 0.4
----- ----- ----- -----
Income (loss) before income taxes 2.5 (54.6) (5.8) (77.9)
Provision for income taxes 1.0 - 1.7 -
----- ----- ----- -----
Net income (loss) 1.5 % (54.6)% (7.5)% (77.9)%
===== ===== ===== =====
</TABLE>

Net revenue. Net revenue increased from $7.3 million for the three-month
period ended March 31, 1998 to $29.1 million for the three-month period ended
March 31, 1999, an increase of $21.8 million. Net revenue increased from $13.4
million for the nine-month period ended March 31, 1998 to $59.9 million for the
nine-month period ended March 31, 1999, an increase of $46.5 million. This
increase resulted primarily from increased sales of our Summit stackable
products and the introduction of our BlackDiamond modular product family in
September 1998.

North America sales increased from $4.8 million for the nine-month period
ended March 31, 1998 to $25.8 million for the nine-month period ended March 31,
1999, an increase of $21.0 million. Sales outside North America increased from
$8.6 million for the nine-month period ended March 31, 1998 to $34.1 million for
the nine-month period ended March 31, 1999, an increase of $25.5 million. The
overall increase in sales outside North America reflected the growth in demand
for our Summit and BlackDiamond products and an increase in the number of
resellers, offset in part by a decrease in OEM sales.

Gross profit. Gross profit increased from $1.8 million for the three-month
period ended March 31, 1998 to $14.8 million for the three-month period ended
March 31, 1999, an increase of $13.0 million. Gross profit increased from $4.4
million for the nine-month period ended March 31, 1998 to $30.1 million for the
nine-month period ended March 31, 1999, an increase of $25.7 million. The
increase in gross margin resulted primarily from improved manufacturing
efficiencies, reductions in component costs and a shift in our channel mix from
OEMs to resellers, which were offset in part by lower average selling prices due
to increased competition.

Research and development expenses. Research and development expenses
increased from $2.8 million for the three-month period ended March 31, 1998 to
$4.8 million for the three-month period ended March 31, 1999, an increase of
$2.0 million. Research and development expenses increased from $7.3 million for
the nine-month period ended March 31, 1998 to $11.3 million for the nine-month
period ended March 31, 1999, an increase of $4.0 million.

13
<PAGE>

The increase was primarily due to nonrecurring engineering and initial product
verification expenses, additions to the Company's engineering staff and an
increase in depreciation charges due to increases in capital spending on design
and simulation software and test equipment. This percentage decrease was
primarily the result of an increase in our net revenue.

Selling and marketing expenses. Selling and marketing expenses increased
from $2.5 million for the three-month period ended March 31, 1998 to $7.5
million for the three-month period ended March 31, 1999, an increase of $5.0
million. Selling and marketing expenses increased from $5.9 million for the
nine-month period ended March 31, 1998 to $17.7 million for the nine-month
period ended March 31, 1999, an increase of $11.8 million. This increase was
primarily due to the hiring of additional sales and customer support personnel,
increased commissions and advertising and promotional campaigns in support of
the introduction of our BlackDiamond modular product family in September 1998
and the establishment of new sales offices. This percentage decrease was
primarily the result of an increase in our net revenue.

General and administrative expenses. General and administrative expenses
increased from $0.7 million for the three-month period ended March 31, 1998 to
$1.8 million for the three-month period ended March 31, 1999, an increase of
$1.1 million. General and administrative expenses increased from $1.7 million
for the nine-month period ended March 31, 1998 to $4.6 million for the nine-
month period ended March 31, 1999, an increase of $2.9 million. This increase
was due primarily to the hiring of additional finance, information technology
and legal and administrative personnel, and increased spending on information
systems. This percentage decrease was primarily the result of an increase in our
net revenue.

Provision for income taxes. The Company has recorded a tax provision of
$1.0 million for the nine month period ending March 31, 1999. The provision for
income taxes consists primarily of foreign taxes, state income taxes and federal
alternative minimum taxes.

Liquidity and Capital Resources

Since inception, we have financed our operations and capital expenditures
primarily through the sale of preferred stock, capital leases and other debt
financing. Cash used in operations for the nine-month periods ended March 31,
1998 and 1999 was $6.6 million and $2.3 million, respectively. As of March 31,
1999, we had $15.0 million in cash, cash equivalents and short-term investments.
We expect that accounts receivable and inventories will continue to increase to
the extent our revenues continue to rise. Any such increase can be expected to
reduce cash, cash equivalents and short-term investments.

We have a revolving line of credit for $5.0 million with Silicon Valley
Bank. Borrowings under this line of credit bear interest at the bank's prime
rate. As of March 31, 1999, there were no outstanding borrowings under this line
of credit. We also have a capital equipment line with Silicon Valley Bank for
$4.0 million. Borrowings under this capital equipment line bear interest at the
bank's prime rate. This agreement requires that we maintain certain financial
ratios and levels of tangible net worth, profitability and liquidity. As of
March 31, 1999, borrowings under this capital equipment line were approximately
$800,000. In addition, we have a $5.0 million subordinated loan and security
agreement with Comdisco, Inc. Borrowings under this loan bear interest at a rate
of 9.75% per annum and are secured by all of our tangible assets. As of March
31, 1999, borrowings under this loan were approximately $1.8 million.

Capital expenditures were $3.9 million for the nine months ended March 31,
1999 and $2.5 million for the nine months ended March 31, 1998. We expect
capital expenditures to increase in the last quarter of fiscal 1999 primarily

14
<PAGE>

due to costs of moving to a new facility and capital expenditures for
information systems and manufacturing test fixtures.

In February 1999, we agreed to lease a 77,000 square foot facility in Santa
Clara, California. The related cost of this lease is expected to be
approximately $120,000 per month. The lease has a term of 47 months.

We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. In
order to build a sustainable business in the LAN switching market, the trend of
using cash in our operations may continue over the next several quarters. We are
working toward a business model that will allow us to achieve profitability,
which is necessary to generate cash from operations. Achieving this model will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of our products. 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 would have rights, preferences and privileges
senior to holders of common stock and the term 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 cash balances, 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.

Year 2000 Readiness Disclosure

Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "year 2000 problem."

Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 projects and reporting such status to our
board of directors. This project team is currently assessing the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have not obtained verification or validation from any independent
third parties of our processes to assess and correct any of our year 2000
problems or the costs associated with these activities.

Internal infrastructure. We believe that we have identified approximately
250 personal computers and servers, six software applications, including
Microsoft Windows 95, Microsoft Office 97 and Outlook 98 and Microsoft Mail
Server, and our enterprise resource planning system, and related equipment used
in connection with our internal operations that will need to be evaluated to
determine if they must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. Upon completion of such
evaluation, which we expect to occur by the end of April 1999, we expect to
commence the process of modifying, upgrading, and replacing major systems that
have been assessed as adversely affected, and expect to complete this process
before the occurrence of any material disruption of our business.

15
<PAGE>

Systems other than information technology systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems, and other common devices, of
which there are approximately 15, may be affected by the year 2000 problem. We
are currently assessing the potential effect and costs of remediating the year
2000 problem on our office, equipment and our new facilities in Santa Clara,
California.

Products and software programs. We have tested and intend to continue to
test all of our products and software programs for year 2000 problems. To date,
we have been able to correct any problems with our products and software
programs relating to year 2000 prior to releasing them to our customers. We
currently do not expect any significant problems to arise with our products and
software programs relating to the year 2000.

We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems will not exceed $200,000,
almost all of which we believe will be incurred during calendar 1999. This
estimate is being monitored and we will revise it as additional information
becomes available.

Based on the activities described above, we do not believe that the year
2000 problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects as a result of our year 2000 problem activities.

Suppliers. We are checking the web sites of third-party suppliers of
components used in the manufacture of our products to determine if these
suppliers are certifying that the components they provide us are year 2000
compliant. To date, we believe all critical components that we obtain from third
party suppliers are year 2000 compliant, except that Microsoft has not indicated
that Windows 95 and its office mail programs are year 2000 compliant. We expect
that we will be able to resolve any significant year 2000 problems with
Microsoft and any other third-party suppliers of components; however, there can
be no assurance that these suppliers will resolve any or all year 2000 problems
before the occurrence of a material disruption to the operation of our business.
Any failure of these third parties to timely resolve year 2000 problems with
their systems could have a material adverse effect on our business, operating
results and financial condition.

Most likely consequences of year 2000 problems. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all year 2000 problems affecting us have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, no one
can accurately predict how many year 2000 problem-related failures will occur or
the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we believe that the following consequences are possible:

. a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert management's
time and attention and financial and human resources from ordinary business
activities;

. several business disputes and claims for pricing adjustments or penalties
due to year 2000 problems by our customers, which we believe will be resolved in
the ordinary course of business; and

. a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which could
result in litigation or contract termination.

Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of June 1999. Depending on the systems affected, these plans
could include:

. accelerated replacement of affected equipment or software;

. short to medium-term use of backup equipment and software;

. increased work hours for our personnel; and

16
<PAGE>

. use of contract personnel to correct on an accelerated schedule any year
2000 problems that arise or to provide manual workarounds for information
systems.

Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.

Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.

Factors That May Affect Results

Extreme Has a History of Losses, Expects Future Losses and Cannot Assure You
that It Will Achieve Profitability

In the three months ended March 31, 1999, we achieved a marginal profit.
Prior to this time, we had not achieved profitability and although our revenue
has grown in recent quarters, we cannot be certain that we will continue to
realize sufficient revenue to achieve profitability. As of March 31, 1999, we
had an accumulated deficit of $26.4 million. 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 significantly
higher revenue to achieve and sustain profitability.

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

We plan to significantly increase our operating expenses to expand our
sales and marketing activities, broaden our customer support capabilities,
develop new distribution channels, fund increased levels of research and
development and build our operational infrastructure. We base our operating
expenses on anticipated revenue trends and a high percentage of our expenses are
fixed in the short term. As a result, any delay in generating or recognizing
revenue could cause our quarterly operating results to be below the expectations
of public market analysts or investors, which could cause the price of our
common stock to fall.

We may experience a delay in generating or recognizing revenue because of 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 in 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 significant product shipments at the end of a quarter. Failure to ship
these products by the end of a quarter may adversely affect our operating
results. Furthermore, our customer agreements typically provide that the
customer may delay scheduled delivery dates and cancel orders within specified
time frames without significant penalty.

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:

. fluctuations in demand for our products and services, including
seasonality, particularly in Asia;

. unexpected product returns or the cancellation or rescheduling of
significant 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 achieve required cost reductions;

17
<PAGE>

. our ability to obtain sufficient supplies of sole or limited sourced
components for our products;

. unfavorable changes in the prices of the components we purchase;

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

. the mix of products sold and the mix of distribution channels through which
they are sold; and

. costs relating to possible acquisitions and integration of technologies or
businesses.

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.

Intense Competition in the Market for Enterprise LAN Equipment Could Prevent
Extreme From Increasing Revenue and Prevent Extreme From Achieving or Sustaining
Profitability

The market for enterprise LAN switches is intensely competitive. Our
principal competitors include Alcatel, Bay Networks, Cabletron Systems, Cisco
Systems, Ericsson, FORE Systems, IBM, Lucent Technologies, Nokia, Nortel
Networks, Siemens, 3Com and Xylan. Many of our current and potential competitors
have longer operating histories and substantially greater financial, technical,
sales, marketing and other resources, as well as greater name recognition and
larger installed customer bases, than we do. These competitors may have
developed or could in the future develop new technologies that compete with our
products or even render our products obsolete.

To remain competitive, we believe we must, among other things, invest
significant resources in developing new products and enhancing our current
products and maintaining customer satisfaction. If we fail to do so, our
products may not compete favorably with those of our competitors and our revenue
and future profitability could be materially adversely affected.

Extreme Expects the Average Selling Prices of Its Products to Decrease Rapidly
Which May Reduce Gross Margins or Revenue

The enterprise LAN equipment industry has experienced rapid erosion of
average selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial period-
to-period fluctuations 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, new product introductions by us or our
competitors or other factors. Therefore, 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 materially adversely affect
our operating results and cause the price of our common stock to decline.

Extreme's Market is Subject to Rapid Technological Change and to Compete,
Extreme Must Continually Introduce New Products that Achieve Broad Market
Acceptance

The enterprise LAN 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
product. Alternative technologies, including asynchronous transfer mode, or ATM,
could achieve widespread market acceptance and displace Ethernet technology on
which our product lines and architecture are based. We cannot assure you that
our technological approach will achieve broad market acceptance or that other
technologies or devices will not supplant our approach.

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
materially

18
<PAGE>

adversely affect our operating results by unexpectedly decreasing sales,
increasing our inventory levels of older products and exposing us to greater
risk of product obsolescence. The market for enterprise LAN 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 enterprise LAN equipment. To remain competitive we need to
introduce products in a timely manner that incorporate or are compatible with
these new technologies as they emerge. We have experienced delays in releasing
new products and product enhancements in the past which delayed sales and
resulted in lower quarterly revenue than anticipated. We may experience similar
delays in product development in the future and any delay in product
introduction could adversely affect our ability to compete and cause our
operating results to be below our expectations or the expectations of public
market analysts or investors.

Continued Rapid Growth Will Strain Extreme's Operations and Will Require Extreme
to Incur Costs to Upgrade Its Infrastructure

Since the introduction of our product line, we have experienced a period of
rapid growth and expansion which has placed, and continues to place, a
significant strain on our resources. Unless we manage such growth effectively,
we may make mistakes in operating our business such as inaccurate sales
forecasting, incorrect material planning or inaccurate financial reporting,
which may result in unanticipated fluctuations in our operating results. Our net
revenue increased significantly for the nine months ended March 31, 1999, and
from June 30, 1998 to March 31, 1999, the number of our employees increased from
119 to 193. We expect our anticipated growth and expansion to strain our
management, operational and financial resources. Our management team has had
limited experience managing such rapidly growing companies on a public or
private basis. In January 1999, we hired a new Chief Financial Officer. To
accommodate this anticipated growth, we will be required to:

. improve existing and implement new operational and financial systems,
procedures and controls;

. hire, train and manage additional qualified personnel, including in the
near future sales and marketing personnel; and

. effectively manage multiple relationships with our customers, suppliers and
other third parties.

We may not be able 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. For example, in
the quarter ended June 30, 1998, our operating results were adversely impacted
due to a provision of approximately $900,000 that we recorded for purchase order
commitments for certain components that exceeded our estimated requirements at
the end of that quarter. This was due primarily to an engineering change in
certain of our Summit family of products and a reduced demand forecast from one
of our customers. In August 1998, we installed a new management information
system, but we have not fully implemented its functionality. 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, if we grow internationally, we will have 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.

As a result of our rapid growth, we moved our entire operations in March
1999 to an approximately 77,000 square foot facility located in Santa Clara,
California. This move may disrupt our business and materially adversely affect
our operating results.

Extreme Must Develop and Expand Its Indirect Distribution Channels to Increase
Revenues and Improve Its Operating Results

19
<PAGE>

Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through resellers and, to a lesser extent, OEMs,
as well as expanding our field sales organization. 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 which would require us to enter into agreements with a small number of
stocking distributors. We cannot assure you that we will be able to enter into
such agreements or successfully develop a two-tier distribution structure. Our
failure to do so 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.

In order to support and develop leads for our indirect distribution
channels, we plan to expand our field sales and support staff significantly. We
cannot assure you that this internal expansion will be successfully completed,
that the cost of this expansion will not exceed the revenues generated or that
our expanded sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish our distribution channels or manage the expansion of our
sales and support staff would materially adversely affect our ability to grow
and increase revenue.

Because Substantially All of Extreme's Revenue is Derived From Sales of Two
Product Families, Extreme is Dependent on Widespread Market Acceptance of These
Products

We currently derive substantially all of our revenue from sales of our
Summit and BlackDiamond product families. 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 critical to our future success. Factors that may affect the market
acceptance of our products include market acceptance of enterprise LAN switching
products, and Gigabit Ethernet and Layer 3 switching technologies in particular,
the performance, price and total cost of ownership of our products, the
availability and price of competing products and technologies, and the success
and development of our resellers, OEMs and field sales channels. Many of these
factors are beyond our control. 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. The
introduction of new and enhanced products may cause our customers to defer or
cancel orders for existing products. We have in the past experienced delays in
product development and such delays may occur in the future. Therefore, to the
extent customers defer or cancel orders in the expectation of any new product
release, any delay in development or introduction could cause our operating
results to suffer. Failure of our existing or future products to maintain and
achieve widespread levels of market acceptance may significantly impair our
revenue growth.

If a Key Reseller, OEM or Other Significant Customer Cancels or Delays a Large
Purchase, Extreme's Revenues May Decline and the Price of Its Stock May Fall

To date, a limited number of resellers, OEMs 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. Because our expense levels are based on our expectations as
to future revenue and to a large extent are fixed in the short term, a
substantial reduction or delay in sales of our products to, or the loss of any
significant reseller, OEM or other customer, or unexpected returns from
resellers could materially adversely affect our business, operating results and
financial condition. Although our largest customers may vary from period-to-
period, we anticipate that our operating

Extreme recorded sales to customers greater than 10% as follows:

20
<PAGE>

results for any given period will continue to depend to a significant extent on
large orders from a small number of customers, particularly in light of the high
sales price per unit of our products and the length of our sales cycles.

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

. our customers can stop purchasing and our resellers and OEMs can stop
marketing our products at any time;

. our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements;

. our reseller agreements provide for discounts based on expected or actual
volumes of products purchased or resold by the reseller in a given period; and

. our reseller and OEM agreements generally do not require minimum purchases.

We have established a program which, under specified conditions, enables
some third party resellers to return products to us. The amount of potential
product returns is estimated and provided for in the period of the sale. Some of
our OEM agreements also provide manufacturing rights and access to our source
code upon the occurrence of specified conditions of default. If we were to
default on these agreements, our OEMs could use our source code to develop and
manufacture competing products, which would materially adversely affect our
performance and ability to compete.

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

The timing of our sales 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 sales price per unit, and often
represent a significant and strategic decision by an enterprise regarding its
communications infrastructure. Accordingly, the purchase of our products
typically involves significant internal procedures associated with the
evaluation, testing, implementation and acceptance of new technologies. This
evaluation process frequently results in a lengthy sales process, typically
ranging from three months to longer than a year, and subjects the sales cycle
associated with the purchase of our products to a number of significant risks,
including budgetary constraints and internal acceptance reviews. The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are evaluating our products and before they may place an order with
us, we may incur substantial sales and marketing expenses and expend significant
management effort. Consequently, if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, we may be unable to
compensate for the shortfall, which could materially adversely affect our
operating results.

Extreme Purchases Several Key Components for Products From Single or Limited
Sources and Could Lose Sales if These Sources Fail to Fill Its 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. We are likely to encounter shortages and delays in
obtaining components in the future which could materially adversely affect our
ability to meet customer orders. Our principal sole sourced components include:

. ASICs;

. microprocessors;

. programmable integrated circuits;

. selected other integrated circuits;

. cables; and

. custom-tooled sheet metal.

21
<PAGE>

Our principal limited sourced components include:

. flash memories;

. dynamic and static random access memories, commonly known as DRAMs and
SRAMs, respectively; and

. printed circuit boards.

We use a rolling six-month forecast based on anticipated product orders 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 orders do not
match forecasts, we may have excess or inadequate inventory of certain materials
and components, which could materially adversely affect our operating results
and financial condition. 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.

Extreme Needs to Expand Its Manufacturing Operations and Depends on Contract
Manufacturers for Substantially All of Its Manufacturing Requirements

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 third party manufacturing vendors to manufacture our products. We
currently subcontract substantially all of our manufacturing to two companies-
Flextronics International, Ltd., located in San Jose, California, which
manufactures our Summit1, Summit2 and Summit4 and BlackDiamond products, and
MCMS, Inc., located in Boise, Idaho, which manufactures our Summit24 and
Summit48 products. We have experienced a delay in product shipments from a
contract manufacturer in the past, which in turn delayed product shipments to
our customers. We may in the future experience similar or other problems, such
as inferior quality and insufficient quantity of product, any of which could
materially adversely affect our business and operating results. There can be no
assurance that 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 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 either of our contract manufacturers would cause a delay in our
ability to fulfill orders while we obtain a replacement manufacturer and would
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 as a result 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.

If Extreme Loses Key Personnel or is Unable to Hire Additional Qualified
Personnel as Necessary, It May Not Be Able to Successfully Manage Its Business
or Achieve Its Objectives

Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing and manufacturing
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 neither have
employment contracts with nor key person 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 manufacturing personnel. Competition for these personnel

22
<PAGE>

is intense, especially in the San Francisco Bay Area, and we have had difficulty
hiring employees in the timeframe we desire, particularly software engineers.
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 required personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives, such as
product introductions, on time. 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 cannot assure you that we will not
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 ourselves against any such claims, regardless of
the merits of such claims.

Extreme's Products Must Comply With Evolving Industry Standards and Complex
Government Regulations or Its Products May Not Be Widely Accepted, Which May
Prevent Extreme From Sustaining Its Revenues or Achieving Profitability.

The market for enterprise LAN 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. In addition, in the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission and Underwriters Laboratories.
Internationally, products that we develop may be required to comply with
standards established by telecommunications authorities in various countries as
well as with 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 would
not be able to sell our products where these standards or regulations apply,
which may prevent us from sustaining our revenues or achieving profitability.

Extreme Needs to Expand Its Sales and Support Organizations to Increase Market
Acceptance of Its Products and If It Fails to Do So, Extreme Will Not Be Able to
Increase Revenues

Our products and services require a sophisticated sales effort targeted at
several levels within a prospective customer's organization. Unless we expand
our sales force we will not be able to increase revenues. We have recently
expanded our sales force and plan to hire additional sales personnel. However,
competition for qualified sales personnel is intense, and we might not be able
to hire the kind and number of sales personnel we are targeting.

We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. The design and installation of networking products can be
complex; accordingly, we need highly-trained customer service and support
personnel. Hiring customer service and support personnel is very competitive in
our industry due to the limited number of people available with the necessary
technical skills and understanding of our products.

Extreme Depends Upon International Sales for Much of Its Revenue and Extreme's
Ability to Sustain and Increase Its International Sales Depends on Successfully
Expanding Its International Operations

Our ability to grow will depend in part on the expansion of international
sales and operations which have and are expected to constitute a significant
portion of our sales. Sales to customers outside of North America accounted for
approximately 62% and 57% of our net revenue in fiscal 1998 and the nine-months
ended March 31, 1999, respectively. Our international sales primarily depend on
our resellers and OEMs. The failure of our resellers and OEMs 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:

23
<PAGE>

. longer accounts receivable collection cycles;

. difficulties in managing operations across disparate geographic areas;

. difficulties associated with enforcing agreements through foreign legal
systems;

. import or export licensing requirements;

. potential adverse tax consequences; and

. unexpected changes in regulatory requirements.

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.
Doing so will subject us to fluctuations in exchange rates between the U.S.
dollar and the particular local currency. Because we currently denominate sales
in U.S. dollars, we do not anticipate that the adoption of the Euro as a
functional legal currency of certain European countries will materially affect
our business.

Extreme 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 expect to review acquisition prospects
that would complement our current product offerings, augment our market coverage
or enhance our technical capabilities, or that may otherwise offer growth
opportunities. While we have no current agreements or negotiations underway with
respect to any such acquisitions, we may 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; or

. assume contingent liabilities.

Such actions by us could materially adversely affect our operating results
and/or the price of our common stock. Acquisitions also entail numerous risks,
including:

. difficulties in the assimilation of acquired operations, technologies or
products;

. unanticipated costs associated with the acquisition;

. 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; and

. potential loss of key employees of acquired organizations.

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 materially adversely affect our business,
operating results and financial condition.

Extreme May Need Additional Capital to Fund Its Future Operations Which, If It
Is Not Available When Needed, Extreme May Need to Reduce Its Planned Development
and Marketing Efforts, Which May Reduce Its Revenues and Prevent Extreme From
Achieving Profitability

We believe that our existing working capital proceeds from this offering 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

24
<PAGE>

expansion of reseller channels and associated support personnel is expected to
require a significant commitment of resources. In addition, if the market for
enterprise Layer 3 LAN switches were to develop more slowly than anticipated or
if we fail to establish significant market share and achieve a meaningful level
of revenues, we may continue to incur significant operating losses and utilize
significant amounts of capital. 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, such securities would
have rights, preferences and privileges senior to holders of common stock and
the term 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.

If Extreme's Products Contain Undetected Software or Hardware Errors, Extreme
Could Incur Significant Unexpected Expenses and Lost Sales

Network products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. We have experienced such
errors in the past 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 commencement of commercial shipments. These problems may
materially adversely affect our business by causing us to incur significant
warranty and repair costs, diverting the attention of our engineering personnel
from our 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 source of the problem. 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 result in the incurrence of significant expenses. The
occurrence of any such problems would likely have a material adverse effect on
our business, operating results and financial condition.

Extreme's Limited Ability to Protect Its Intellectual Property May Adversely
Affect Its 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.

We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology.

If Extreme or Its Key Suppliers and Customers Fail to Be Year 2000 Compliant,
Extreme's Business May Be Severely Disrupted And Its Revenues May Decline

The year 2000 computer issue creates a risk for us. If systems do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on our operations. The risk exists in four areas:

. potential warranty or other claims from our customers;

. systems we use to run our business;

. systems used by our suppliers; and

. the potential reduced spending by other companies on networking solutions as
a result of significant information systems spending on year 2000 remediation.

25
<PAGE>

We are currently evaluating our exposure in all of these areas.

We are in the process of conducting an inventory and evaluation of the
information systems used to run our business. Systems which are identified as
non-compliant will be upgraded or replaced. For the year 2000 non-compliance
issues identified to date, the cost of remediation is not expected to be
material to our operating results. However, if implementation of replacement
systems is delayed, or if significant new non-compliance issues are identified,
our operating results or financial condition could be materially adversely
affected.

We intend to contact our critical suppliers to determine that the suppliers'
operations and the products and services they provide are year 2000 compliant.
Where practicable, we will attempt to mitigate our risks with respect to the
failure of suppliers to be year 2000 ready. However, failures remain a
possibility and could have an adverse impact on our operating results or
financial condition.

Since all customer situations cannot be anticipated, we may see an increase
in warranty and other claims as a result of the year 2000 transition. In
addition, litigation regarding year 2000 compliance issues is expected to
escalate. For these reasons, the impact of customer claims could have a material
adverse impact on our operating results or financial condition.

Businesses that face year 2000 compliance issues may require significant
hardware and software upgrades or modifications to their computer systems and
applications. These companies may plan to devote a substantial portion of their
information systems' spending to fund such upgrades and modifications and divert
spending away from networking solutions. This change in customers' spending
patterns could materially adversely impact our business, operating results or
financial condition.

Provisions in Extreme's 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;

. the ability of the board of directors to alter our bylaws without getting
stockholder approval; and

. the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.

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 662/3% of the shares of voting
stock not owned by the stockholder approve the merger or combination. Further,
we have investor agreements with Compaq, Siemens and 3Com which require us to
give these companies notice if we receive an acquisition offer or if we intend
to pursue one.

Substantial Future Sales of Extreme's Common Stock in the Public Market Could
Cause Its Stock Price to Fall

The market price of our common stock could drop as a result of sales of a
large number of shares in the market after the offering or in response to the
perception that these sales could occur. All of the 8,050,000 shares sold in the
offering are freely tradeable, with the 40,940,905 other shares outstanding,
based on the number of shares outstanding as of March 31, 1999, being
"restricted securities" as defined in Rule 144 of the Securities Act of 1933,
and tradable in the near future.

26
<PAGE>

Extreme's Stock Price May Be Extremely Volatile and You May Not Be Able to
Resell Your Shares at or Above the Offering Price

There was no public market for Extreme shares prior to the offering. The
offering price for the shares was determined through negotiations between the
representatives of the underwriters and us. You may not be able to resell your
shares at or above the initial public offering price due to a number of factors,
including:

. actual or anticipated fluctuations in our operating results;

. changes in expectations as to our future financial performance or changes in
financial estimates of securities analysts;

. announcements of technological innovations; and

. the operating and stock price performance of other comparable companies.

In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings - None

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

1. Extreme solicited the consent of its shareholders as of March 30, 1999
to approve the following:

(1) An amendment to its 1996 Stock Option Plan to increase the number
of shares reserved for issuance under the Option Plan from
9,014,309 shares of our common stock to 17,014,309 shares of our
common stock.

For Against Abstain
--- ------- -------
34,662,012 0 0

(2) The 1999 Employee Stock Purchase Plan with a share reserve of
1,000,000 shares of our common stock.

For Against Abstain
--- ------- -------
34,662,012 0 0

(3) Our reincorporation into the state of Delaware.

For Against Abstain
--- ------- -------
34,662,012 0 0

(4) The form of Indemnity agreement to be entered into by Extreme and
certain of our officers and directors.

For Against Abstain
--- ------- -------
34,662,012 0 0

Item 5. Other Information - None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

27 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with the Edgar
requirements)

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the three months
ended March 31, 1999.

Item 7A Quantitative and Qualitative Disclosures about Market Risk - None

27
<PAGE>

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/ VITO E. PALERMO
--------------------------

VITO E. PALERMO
Vice President, Chief Financial Officer
And Secretary

May 14, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 10,705
<SECURITIES> 4,322
<RECEIVABLES> 11,368
<ALLOWANCES> 0
<INVENTORY> 414
<CURRENT-ASSETS> 28,246
<PP&E> 10,108
<DEPRECIATION> 5,220
<TOTAL-ASSETS> 33,347
<CURRENT-LIABILITIES> 18,414
<BONDS> 0
0
29
<COMMON> 12
<OTHER-SE> 12,219
<TOTAL-LIABILITY-AND-EQUITY> 33,347
<SALES> 59,902
<TOTAL-REVENUES> 59,902
<CGS> 29,840
<TOTAL-COSTS> 29,840
<OTHER-EXPENSES> 33,628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,503)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,503)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)

</TABLE>