XYLAN CORP, 424A, 1996-05-16

XYLAN CORP
424A, 1996-05-16
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>
Filed Pursuant to Rule 424(a)
Registration Number 333-03623
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued May 13, 1996
3,500,000 Shares

[XYLAN LOGO APPEARS HERE]

XYLAN
COMMON STOCK

-----------

OF THE 3,500,000 SHARES OF COMMON STOCK OFFERED, 2,800,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
AND 700,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES
AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." OF THE
2,800,000 SHARES OF COMMON STOCK BEING OFFERED BY THE U.S. UNDERWRITERS,
320,000 SHARES ARE BEING SOLD BY THE COMPANY AND 2,480,000 SHARES ARE
BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY PART OF THE
PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS. THE
COMPANY'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "XYLN." ON MAY 10, 1996, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
WAS $67 3/4 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."

-----------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 4 HEREOF.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

-----------

PRICE $ A SHARE

-----------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
525,000 additional Shares at the price to the public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $ , $ and $ , respectively.
See "Underwriters."

-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1996 at
the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.

-----------

MORGAN STANLEY & CO.
Incorporated
ALEX. BROWN & SONS
Incorporated
DEUTSCHE MORGAN GRENFELL
ROBERTSON, STEPHENS & COMPANY
WESSELS, ARNOLD & HENDERSON
May , 1996
<PAGE>

Filed Pursuant to Rule 424(a)
Registration Number 333-03623
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued May 13, 1996
3,500,000 Shares

[XYLAN LOGO APPEARS HERE]

XYLAN
COMMON STOCK

-----------

OF THE 3,500,000 SHARES OF COMMON STOCK OFFERED, 700,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 2,800,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 700,000 SHARES OF COMMON STOCK BEING OFFERED BY
THE INTERNATIONAL UNDERWRITERS, 80,000 SHARES ARE BEING SOLD BY THE
COMPANY AND 620,000 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY
WILL NOT RECEIVE ANY PART OF THE PROCEEDS FROM THE SALE OF SHARES
BY THE SELLING SHAREHOLDERS. THE COMPANY'S COMMON STOCK IS
LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "XYLN."
ON MAY 10, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $67 3/4 PER SHARE.
SEE "PRICE RANGE OF COMMON STOCK."

-----------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

-----------

PRICE $ A SHARE

-----------

MORGAN STANLEY & CO.
International
ALEX. BROWN & SONS
International
DEUTSCHE MORGAN GRENFELL
ROBERTSON, STEPHENS & COMPANY
WESSELS, ARNOLD & HENDERSON
May , 1996
<PAGE>

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 4
The Company............................................................... 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Price Range of Common Stock............................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 26
Management................................................................ 40
Certain Transactions...................................................... 48
Principal and Selling Shareholders........................................ 50
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriters.............................................................. 56
Legal Matters............................................................. 59
Experts................................................................... 59
Additional Information.................................................... 59
Index to Consolidated Financial Statements................................ F-1
</TABLE>

----------------
OmniSwitch(R) is a registered trademark of the Company. Xylan(TM),
AutoTracker(TM), OmniVision(TM), Optimized Device Switching(TM) and
PizzaSwitch(TM) are trademarks of the Company. All other trademarks or trade
names referred to in this Prospectus are the property of their respective
owners.

----------------
Except as otherwise noted herein, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriters."

----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITERS."

2
<PAGE>

Hubs are the basic
building blocks of most
data networks today.
Each workstation and
server is connected
directly to a hub port.
Hubs are interconnected
with one or more
routers. In some
networks routers are
interconnected with an
FDDI backbone network.
Response times in hub-
and router-based
networks can degrade as
bandwidth requirements
rise, particularly as
graphical applications
become more widely used.

Adding Xylan's
OmniSwitch between a
router and the hubs
attached to it off-loads
local traffic from the
router. This leaves the
router with more
processing power to move
data to other parts of
the building or campus.
The OmniSwitch can be
deployed widely or can
be added in one part of
the campus at a time.

Once installed, the
OmniSwitch provides a
number of tools for
enhancing network
performance. Dividing
hubs into multiple
Ethernet segments or
token rings, each with
its own dedicated switch
port, increases the
bandwidth available to
every workstation.
Servers shared by many
workstations can be
connected to high-speed
switched ports, such as
100 megabit Ethernet
FDDI and ATM. In
addition, workstations
which need particularly
high throughput can be
assigned to dedicated
switched ports.
<PAGE>

As OmniSwitches become more broadly
installed, the backbone gradually shifts
from routers to switches. This results in
higher performance and allows the network
administrator to organize users into virtual
LANs. Virtual LANs make it easier to move
users around the building or campus. Routing
is still used to connect to remote sites and
to interconnect virtual LANs.

With the OmniSwitch, the organization can
add new backbone technologies such as ATM
while continuing to use existing
technologies such as FDDI. This allows a
gradual migration of a critical enterprise
resource to emerging higher performance
technologies.

Over time all FDDI backbone traffic can
transition to a high-speed ATM backbone
based on Xylan's products. Using Xylan's ATM
LAN Emulation, network administrators can
centralize servers, ease management burdens
and enhance server security.
XYLAN'S OMNISWITCH IMPROVES THE PERFORMANCE OF HUB- AND ROUTER-BASED NETWORKS
AND PROVIDES A LONG-TERM TRANSITION TO HIGH-SPEED FULLY SWITCHED NETWORKS.

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.

THE COMPANY

Xylan Corporation ("Xylan" or the "Company") is a leading provider of high-
bandwidth switching systems that enhance the performance of existing local area
networks and facilitate migration to next generation networking technologies
such as ATM. Current hub- and router-based networks are facing performance
degradation due to the continued growth in the size of networks, increasing
demands of high-performance personal computers and workstations, and emergence
of graphical applications, such as document image processing, desktop video,
medical imaging, modeling and simulation and the World Wide Web. To address
these issues, a new generation of "switched-media" technologies has emerged,
including LAN switching, ATM switching and virtual LANs.

Xylan offers the OmniSwitch and PizzaSwitch product families, which support
all popular LAN types with "any-to-any" MAC-layer translation, and allow the
use of LAN switches in place of shared-media hubs. The Company's switches are
based on a distributed, modular, multiprocessor architecture that currently
combines LAN switching, virtual LANs and routing in a single product and allows
switching performance to increase in linear proportion to the number of ports.
Xylan's AutoTracker product supports flexible virtual LANs and simplifies
network management. The Company is also developing ATM switching technology and
ASICs for integration into its product line.

Xylan has strategic OEM partnerships with leading communications and
networking companies, including Alcatel N.V., Digital Equipment Corporation,
Hitachi Computer Products (America), Inc. and Network Systems Corporation, that
have significant customer relationships already in place. Xylan pursues direct
sales to organizations in the United States with large networking requirements
and employs network integrators to target customers worldwide. The Company's
products have been deployed by a broad range of organizations, ranging from
companies in the telecommunications, manufacturing, medical, computer services,
media and finance/insurance industries to educational institutions and the
federal government.

RECENT DEVELOPMENTS

For the quarter ended March 31, 1996, the Company reported revenue of $23.4
million, a 51% increase over the prior quarter, and net income of $2.7 million.
The Company's PizzaSwitch product, introduced in March 1996, contributed
approximately 10% of revenue for the quarter. During the quarter, the Company
expanded its direct sales force by 25%. Since the completion of its initial
public offering in March 1996, the Company completed the installation of a new
management information system and entered into a binding memorandum of
understanding to settle its litigation with Ascom Timeplex Inc.

THE OFFERING

<TABLE>
<S> <C>
U.S. Offering........... 2,800,000 Shares
International Offering.. 700,000 Shares
Total................... 3,500,000 Shares (including 400,000 Shares by the Company
and 3,100,000 Shares by the Selling Shareholders)
Common Stock to be
outstanding after the
offering............... 40,643,427 Shares (1)(2)
Use of Proceeds......... For general corporate purposes, including working capital
Nasdaq National Market
Symbol................. XYLN
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED
PERIOD ENDED ---------------- ------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1994 1995 1995 1995 1995 1995 1996
------------ ------- ------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 443 $29,662 $1,397 $ 4,503 $ 8,240 $15,522 $23,392
Gross profit............ -- 116 14,244 436 1,844 3,854 8,110 12,569
Operating income (loss). (531) (4,151) (9,514) (3,041) (3,743) (3,181) 451 2,586
Net income (loss)....... (522) (4,083) (9,441) (2,970) (3,713) (3,195) 437 2,683
Net income (loss) per
share (3).............. $ (0.45) $ 0.01 $ 0.06
Shares used in per share
computation (3)........ 21,151 43,096 43,957
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, --------------------------
1995 ACTUAL AS ADJUSTED(1)(4)
------------ -------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 6,034 $ 81,652 $107,033
Working capital........................ 11,130 92,393 117,774
Total assets........................... 27,248 122,246 147,627
Net shareholders' equity............... 16,105 106,391 131,772
</TABLE>
- -------
(1) Assumes the Underwriters' over-allotment option from the Company is not
exercised. See "Underwriters."
(2) Based on the number of shares outstanding as of March 31, 1996. Does not
include an aggregate of 6,811,300 shares of Common Stock issuable upon
exercise of options outstanding as of March 31, 1996.
(3) For an explanation of the determination of the number of shares used in
computing net income per share, see Note 1 of Notes to Consolidated
Financial Statements.
(4) As adjusted to reflect the sale of 400,000 shares of Common Stock offered
by the Company at an assumed offering price of $67 3/4 and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."

3
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following factors
should be carefully considered in evaluating the Company and its business
before purchasing the shares of Common Stock offered hereby.

Limited Operating History; Recent Profitability; Uncertain Future
Profitability. The Company was organized in July 1993 and began shipping its
first LAN switching products in volume in the first quarter of 1995. The
Company's initial products offered limited interfaces and, in September 1995,
the Company began offering fully-featured products. Accordingly, the Company
has only a limited operating history upon which an evaluation of the Company
and its prospects can be based. As of March 31, 1996, the Company had an
accumulated deficit of $11.4 million. The Company has experienced substantial
revenue growth since January 1995, and first achieved profitability in the
fourth quarter of 1995. Due to the Company's limited operating history, there
can be no assurance of revenue growth and profitability on a quarterly or
annual basis in the future. While the Company achieved significant quarter-to-
quarter revenue growth since it introduced its products in 1995, the Company
does not expect to sustain the same rate of sequential quarterly revenue
growth in future periods. The Company intends to increase significantly its
investments in 1996 in research and development, sales and marketing and
related infrastructure. Any such increases will be highly dependent on factors
including the continued growth of the Company's revenues and the rate thereof,
success in hiring the appropriate personnel and market acceptance of the
Company's products. Due to the anticipated increases in the Company's
operating expenses, the Company's operating results will be adversely affected
if revenue does not increase. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in
rapidly evolving markets. To address these risks, the Company must, among
other things, successfully increase the scope of its operations, respond to
competitive developments, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating advanced
technologies. There can be no assurance that the Company will be successful in
addressing such risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Fluctuations in Operating Results. The Company's revenue and operating
results may fluctuate from quarter to quarter and from year to year due to a
combination of factors, including (i) the timing and amount of significant
orders from the Company's OEM partners and network integrators, (ii) the
Company's success in developing, introducing and shipping product enhancements
and new products, (iii) the ability to obtain sufficient supplies of sole or
limited source components for the Company's products, (iv) the ability to
attain and maintain production volumes and quality levels for its products,
(v) the mix of distribution channels and products, (vi) new product
introductions by the Company's competitors, (vii) pricing actions by the
Company or its competitors, (viii) changes in material costs and (ix) general
economic conditions. See "Risk Factors--Dependence on OEM Partners and Network
Integrators; Customer Concentration," "--Dependence on Sole and Limited Source
Suppliers and Availability of Components," "--Substantial Increase in
Manufacturing Operations; Dependence on Contract Manufacturing," "--
Competition," "--Rapid Technological Change; New Products and Evolving
Markets," "--Uncertain Market Acceptance of the Company's Products; Product
Concentration" and "--Product Complexity."

The Company's revenue in any period is highly dependent upon the sales
efforts and success of Xylan's OEM partners and network integrators, which are
not within the control of the Company. The Company generally realizes a higher
gross margin on direct sales than on sales through its OEM partners and
network integrators. Accordingly, if the Company's OEM partners and network
integrators were to account for an increased portion of the Company's revenue,
gross margins would decline. In addition, new products may have different
gross margins than existing products. In particular, the Company's
PizzaSwitch, introduced in the first quarter of 1996, currently has a lower
gross margin than the OmniSwitch. A significant portion of the Company's

4
<PAGE>

expenses, such as rent, headcount and capital lease expenses, are relatively
fixed in advance, based in large part on the Company's forecasts of future
sales. If sales are below expectations in any given period, the adverse effect
of a shortfall in sales on the Company's operating results may be magnified by
the Company's inability to adjust spending to compensate for such shortfall.
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected revenue for that quarter. To achieve its
revenue objectives, the Company is dependent upon obtaining orders in a
quarter for shipment in that quarter. Furthermore, the Company's agreements
with its customers typically provide that they may change delivery schedules
and cancel orders within specified timeframes without significant penalty. The
Company's industry is characterized by short product life cycles and declining
prices of existing products, which requires continual improvement of
manufacturing efficiencies and introduction of new products and enhancements
to existing products to maintain gross margins. Moreover, in response to
competitive pressures or to pursue new product or market opportunities, the
Company may take certain pricing or marketing actions that could materially
and adversely affect the Company's operating results. For example, a reduction
in prices of the Company's products could result in lower revenues, an
increase in discounts offered to the Company's OEM partners or network
integrators would adversely affect the Company's operating margins, and a
substantial targeted marketing campaign could significantly increase marketing
expense and result in decreased profitability. As a result of all of the
foregoing, there can be no assurance that the Company will be able to achieve
or sustain profitability on a quarterly or annual basis. In addition, it is
possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Competition. The market for network switching products is intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, rapid technological change and continued
emergence of new industry standards. Many networking companies, including Bay
Networks, Inc., Cabletron Systems, Inc., Cisco Systems, Inc., FORE Systems,
Inc. and 3Com Corporation, have introduced, or have announced their intention
to develop, network switching products that are or will be competitive with
the Company's products. In addition, many of the Company's large competitors
offer customers a broader product line which provides a more comprehensive
networking solution than the Company currently offers. Xylan expects that
other companies will also enter markets in which the Company competes. In
addition to competition from providers of network switching products, the
Company expects to face competition from other vendors in the networking
market who may incorporate switching functionality into their products or
provide alternative network solutions. Furthermore, the Company's OEM partners
may in the future develop competitive products and may then decide to
terminate their relationships with the Company. Many of the Company's 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 a larger installed customer base, than the
Company. As a result, these competitors may be able to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, competitors with a larger installed customer
base may have a competitive advantage over the Company when selling similar
products or alternative networking solutions to such customers. Increased
competition could result in significant price competition, reduced profit
margins or loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully against either current or potential competitors in the future.
See "Business--Competition" and "Risk Factors--Dependence on Proprietary
Technology; Intellectual Property Litigation."

Substantial Increase in Manufacturing Operations; Dependence on Contract
Manufacturing. The Company is in the process of substantially increasing its
flow of materials, contract manufacturing capacity and internal test and
quality functions to respond to customer demand and reduce its order lead
times. Any inability or delay in increasing product flow would limit the
Company's revenue, could adversely affect the Company's competitive position
and could result in late fees or cancellation of orders under agreements with
the Company's OEM partners, although these have not occurred to date. The
Company currently requires additional manufacturing space and is in the
process of leasing an additional 40,000 square feet of space (a portion of
which will be used for manufacturing) that is scheduled to be occupied during
July 1996. Any delay in leasing or

5
<PAGE>

occupying this additional space, or interruption in the normal flow of
production as the Company expands manufacturing activities to this new
facility, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company may also require
manufacturing space beyond this 40,000 square foot facility in 1996 or
thereafter. There can be no assurance that such additional space, if required,
will be available in a timely manner or on commercially reasonable terms.
Xylan's operational strategy relies on outsourcing of manufacturing. The
Company currently subcontracts component procurement and kitting to a small
number of companies, and printed circuit board assembly to a single company
(Victron, Inc.), that specialize in those services. In connection with its
operational strategy, the Company is seeking to secure additional sources of
supply, including additional contract manufacturers. The Company has
experienced in the past, and may in the future experience, problems with its
contract manufacturer, such as inferior quality, insufficient quantities and
late delivery of product. While such problems have not resulted in any
material liabilities from the Company to its customers or end-users to date,
there can be no assurance that such problems will not generate material
liabilities for the Company or adversely impact the Company's relations with
its customers and end-users in the future. In addition, the Company may in the
future experience pricing pressure from its contract manufacturers. To date,
the Company has had only limited experience with the use of contract
manufacturers. There can be no assurance that the Company will effectively
manage its contract manufacturers or that these manufacturers will meet the
Company's future requirements for timely delivery of products of sufficient
quality and quantity. The Company intends to introduce a number of new
products and product enhancements in 1996 and 1997, which will require that
the Company rapidly achieve volume production by coordinating its efforts with
those of its suppliers and contract manufacturers. Certain of the Company's
products in development will require contract manufacturers to adopt or
develop advanced manufacturing techniques, which could inhibit volume
manufacturing of those products. The inability of Xylan's contract
manufacturers to provide it with adequate supplies of high-quality products or
the loss of any of the Company's contract manufacturers could cause a delay in
Xylan's ability to fulfill orders while the Company identifies a replacement
manufacturer and could have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business--
Manufacturing."

Dependence on Sole and Limited Source Suppliers and Availability of
Components. Several key components used in the manufacture of the Company's
products are currently purchased only from single or limited sources. At
present, single-sourced components include programmable integrated circuits,
selected integrated circuits and cables and custom-tooled sheet metal; and
limited-sourced components include flash memories, dynamic random access
memories ("DRAMs"), printed circuit boards and ASICs. The Company generally
does not have long-term agreements with any of these single or limited sources
of supply. The Company is in the process of incorporating ASICs in many of its
products. Each of these ASICs is initially being manufactured only by a single
source, particularly LSI Logic Corporation, and accordingly the risks of
relying on sole sources is expected to increase. Any interruption in the
supply of any of these components, or the inability of the Company to procure
these components from alternate sources at acceptable prices and within a
reasonable time, could have a material adverse effect upon the Company's
business, operating results and financial condition. Qualifying additional
suppliers is time consuming and expensive and the likelihood of errors is
greater with new suppliers. The Company uses a rolling six-month forecast
based on anticipated product orders to determine its general materials and
components requirements. Lead times for materials and components ordered by
the Company 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, the Company may have excess or inadequate inventory of
certain materials and components. From time to time the Company has
experienced shortages and allocations of certain components and has
experienced delays in filling orders while waiting to obtain the necessary
components. Given current worldwide demand for integrated circuits and certain
other components used by the Company and the complexity and yield problems in
manufacturing such integrated circuits and components, such shortages and
allocations are likely to occur in the future and could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Manufacturing."

Management of Growth. The Company's recent growth has placed a significant
strain on the Company's financial and management personnel and information
systems and controls. This growth has resulted in a

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<PAGE>

continuing increase in the level of responsibility for both existing and new
management personnel. The Company recently implemented new and enhanced
financial and management information systems and controls and is training its
personnel to operate such systems. Any difficulty in the operation of such new
and enhanced systems or the training of personnel, or any disruptions in the
transition to such new or enhanced systems and controls, could adversely
affect the Company's ability to accurately forecast sales demand and calibrate
manufacturing to such demand, to calibrate purchasing levels, to accurately
record and control inventory levels, and to record and report financial and
management information on a timely and accurate basis. Due to its rapid growth
and the fact that such systems and controls had not been implemented, the
Company experienced each of these problems in 1995. The occurrence of the
Company's problems with forecasting sales demands did not result in shortfalls
in projected revenues in 1995. However, the occurrence of any of these events
in the future could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
Analysis of Financial Condition and Results of Operations."

Dependence on OEM Partners and Network Integrators; Customer
Concentration. The Company is pursuing a sales and marketing strategy focused
on developing three channels of distribution for its products: worldwide OEM
partners, network integrators in North America and overseas and direct sales.
The Company has established OEM partnerships with leading communications and
networking companies, including Alcatel N.V. ("Alcatel"), Digital Equipment
Corporation ("Digital"), Hitachi Computer Products (America), Inc.
("Hitachi"), and Network Systems Corporation. Although there is a large number
of end-users of Xylan's products, the Company's customer base is highly
concentrated and a relatively small number of customers have accounted for a
significant portion of the Company's revenue to date. The Company's OEM
partners and network integrators account, and are expected to continue to
account, for a substantial portion of the Company's net revenue. Aggregate
sales to OEM partners accounted for approximately 60% and 42% of Xylan's
revenue in 1995 and the first quarter of 1996, respectively. Sales to three of
the Company's OEM partners, Hitachi, Digital and Alcatel, accounted for 17.6%,
17.2% and 10.5%, respectively, of revenue in 1995. Network integrators
accounted for approximately 33% and 56% of Xylan's revenue in 1995 and the
first quarter of 1996, respectively. During the first quarter of 1996, one of
the Company's network integrators in Japan accounted for in excess of 30% of
the Company's revenue for the quarter. However, the Company anticipates that
this network integrator will not constitute a similar portion of the Company's
revenue in future periods. Each of the Company's OEM partners and network
integrators can cease marketing the Company's products with limited notice to
Xylan and with little or no penalty. In addition, the Company's agreements
with its OEM partners and network integrators generally provide for discounts
based on expected or actual volumes of products purchased or resold by the
reseller in a given period and do not require minimum purchases. Certain of
these agreements provide manufacturing rights and access to source code upon
the occurrence of specified conditions or defaults. The Company's agreement
with Alcatel limits the number of additional network integrators Xylan may
appoint in certain European countries and restricts the Company's ability to
sell directly to end users in such countries. The Company expects that certain
of its OEM partners will in the future develop competitive products and, if
they do so, they may decide to terminate their relationship with the Company.
In addition, many of the Company's resellers offer competitive products
manufactured either by third parties or by themselves. Furthermore, certain of
the Company's OEM partners and network integrators offer alternative
networking solutions, designed by themselves or third parties, or have pre-
existing relationships with current or potential competitors of the Company.
There can be no assurance that the Company's OEM partners and network
integrators will give a high priority to the marketing of the Company's
products as compared to competitive products or alternative networking
solutions or that Xylan's OEM partners and network integrators will continue
to offer the Company's products. Any reduction or delay in sales of the
Company's products by its OEM partners and network integrators could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will retain
its current OEM partners or network integrators or that it will be able to
recruit additional or replacement OEM partners or network integrators. The
loss of one or more of the Company's OEM partners or network integrators could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company generally realizes a higher gross margin
on direct sales than on sales through its OEM partners and network
integrators. Accordingly, if the Company's OEM partners and network
integrators were to account for an increased portion of the Company's

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<PAGE>

revenue, its gross margin would decline. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Sales and Marketing."

Rapid Technological Change; New Products and Evolving Markets. The market
for the Company's products is characterized by frequent new product
introductions, rapidly changing technology and continued emergence of new
industry standards, any of which could render Xylan's existing products
obsolete. The Company's success will depend to a substantial degree upon its
ability to develop and introduce in a timely fashion new products and
enhancements to its existing products that meet changing customer requirements
and emerging industry standards. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. There can be no assurance that the Company will be able to identify,
develop, manufacture, market or support new or enhanced products successfully
or on a timely basis, that new Company products will gain market acceptance or
that the Company will be able to respond effectively to product announcements
by competitors, technological changes or emerging industry standards. In
addition, the Company has on occasion experienced delays in the introduction
of new products and product enhancements. Furthermore, from time to time, the
Company may announce new products or product enhancements, capabilities or
technologies that have the potential to replace or shorten the life cycle of
the Company's existing product offerings and that may cause customers to defer
purchasing existing Company products or cause resellers to return products to
the Company. The market for LAN switch products is evolving and the Company
believes its ability to compete successfully in this market is dependent upon
the continued compatibility and interoperability of its products with products
and architectures offered by various vendors, including workstation and
personal computer architectures and computer and network operating systems.
There can be no assurance that the Company will be able to effectively address
the compatibility and interoperability issues raised by technological changes
or evolving industry standards. A key element of the Company's strategy is the
development of multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing the price/performance of the Company's
products. Any failure to continue to introduce new products or product
enhancements and develop and incorporate ASICs effectively and on a timely
basis, customer delays in purchasing products in anticipation of new product
introductions or any inability of the Company to respond effectively to
product announcements by competitors, technological changes or emerging
industry standards could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Products
and Technology" and "--Product Development."

Uncertain Market Acceptance of the Company's Products; Product
Concentration. The Company currently derives substantially all of its revenue
from its OmniSwitch and PizzaSwitch products and the Company expects that
revenue from these products will continue to account for a substantial portion
of the Company's revenue at least through 1997. Broad market acceptance of
these products is, therefore, critical to the Company's future success.
Factors that may affect the market acceptance of the Company's products
include market acceptance of network switching products, the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its OEM partners and network integrators. Moreover,
the Company's operating history in the network switching market and its
resources are limited relative to those of certain of its current and
potential competitors. The Company's future performance will also depend in
part on the successful development, introduction and market acceptance of new
and enhanced products. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition.

Product Complexity. Products as complex as those offered by the Company
frequently contain undetected software or hardware errors when first
introduced or as new versions are released. As is common among participants in
the Company's industry, the Company has experienced such errors in the past in
connection with product upgrades and new products. Despite testing by the
Company and by current and potential customers, Xylan expects that such errors
will be found from time to time in new or enhanced products after commencement
of commercial shipments. The Company believes it has addressed these errors
when they have occurred through software and hardware revisions. However, the
occurrence of such errors could, and the inability to correct such errors
would, result in the delay or loss of market acceptance of the Company's
products, additional warranty

8
<PAGE>

expense, diversion of engineering and other resources from the Company's
product development efforts and the loss of credibility with Xylan's OEM
partners, network integrators and end users, any of which would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Industry Background," "--Products and
Technology," "--Product Development" and "--Competition."

Dependence on Proprietary Technology; Intellectual Property Litigation. The
Company's success and its ability to compete is dependent, in part, upon its
proprietary technology. The Company does not hold any issued patents and
currently relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary rights in its
products. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In the event that protective measures are not
successful, the Company's business, operating results and financial condition
could be materially and adversely affected. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. See "Business--Proprietary Rights
and Litigation."

The Company is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights of others. On June 8,
1995, a suit alleging misappropriation of trade secrets, infringement of U.S.
Patent No. 5,394,402 and improper hiring of employees was brought against
Xylan by Ascom Timeplex Inc. ("Ascom Timeplex") in the U.S. District Court for
the Central District of California in Los Angeles, California, seeking
injunctive relief and unspecified monetary damages. The Company and Ascom
Timeplex have signed a binding memorandum of understanding to settle this
litigation and dismiss all of Ascom Timeplex's charges against the Company and
against Steve Y. Kim, John Bailey and another employee named in Ascom
Timeplex's complaint, and otherwise release the parties from all claims. The
settlement also involves a royalty-free license to the Company of Ascom
Timeplex's virtual LAN technology covered by the patent and a royalty-free
license to Ascom Timeplex of certain technology embodied in the Company's
currently available products for use in and in connection with Ascom
Timeplex's Synchrony product family. These licenses are not assignable other
than to a successor-in-interest to Ascom Timeplex. The Company also undertakes
to transfer a copy of the licensed technology to Ascom Timeplex and for a
specified time not to hire Ascom Timeplex employees. The release by Ascom
Timeplex is conditioned on transfer of this technology. The parties are
preparing a definitive agreement for this settlement.

Since patent applications in the United States are not publicly disclosed
until the patent issues, applications may have been filed which, if issued as
patents, would relate to the Company's products. In addition, the Company has
not conducted a comprehensive patent search relating to the technology used in
its products. The Company is subject to the risk of claims and litigation
alleging infringement of the intellectual property rights of others. In
addition to the claims of Ascom Timeplex, Xylan has, from time to time,
received claims from third parties alleging infringement of such third
parties' intellectual property rights. The Company believes that none of the
current claims against the Company would result in material liability if
successful. Although such claims have not resulted in material litigation to
date, there can be no assurances that such claims will not be successful or
generate material litigation in the future. Furthermore, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future based on patents or trade secrets or that such claims
will not be successful. The Company could incur substantial costs in defending
itself and its customers against any such claims, regardless of the merits of
such claims. Parties making such claims may be able to obtain injunctive or
other equitable relief which could effectively block the Company's ability to
sell its products in the United States and abroad, and could result in an
award of substantial damages. In the event of a successful claim of
infringement, the Company, its customers and end-users may be required to
obtain one or more licenses from third parties. There can be no assurance that
the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost or at all. The defense of any lawsuit could
result in time-consuming and expensive litigation, damages, license fees,
royalty payments and restrictions on the Company's ability to sell its
products, any of which could have a material adverse effect on the Company's
business, financial condition and

9
<PAGE>

results of operations. See "Business--Proprietary Rights and Litigation" and
Note 10 of Notes to Consolidated Financial Statements.

Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering, sales and marketing and
manufacturing personnel, many of whom would be difficult to replace. In
particular, the Company believes that its future success is highly dependent
on Steve Y. Kim, Chairman, President and Chief Executive Officer and John
Bailey, Vice President of Development. The Company does not have employment
contracts with, and does not currently maintain key man life insurance
covering, its key personnel. The Company believes its future success will also
depend in large part upon its ability to attract and retain highly skilled
managerial, engineering, sales and marketing, finance and manufacturing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of the services of any of the 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 have a
material adverse effect on the Company's business, operating results or
financial condition. In addition, companies in the networking industry whose
employees accept positions with competitive companies frequently claim that
their competitors have engaged in unfair hiring practices. Xylan has, from
time to time, received such claims from other companies and, although claims
to date have not resulted in material litigation other than in connection with
Ascom Timeplex, there can be no assurance that the Company will not receive
additional claims in the future as it seeks to hire qualified personnel or
that such claims will not result in material litigation involving the Company.
The Company could incur substantial costs in defending itself against any such
claims, regardless of the merits of such claims. To date, the Company has not
lost any employees as a result of such claims. See "Business--Employees" and
"Management--Executive Officers and Directors."

International Operations. The Company's sales to customers outside of the
United States accounted for approximately 49% and 67% of the Company's revenue
in 1995 and the first quarter of 1996, respectively. However, these
percentages may understate sales of the Company's products to international
end-users because certain of the Company's U.S.-based OEM partners market the
Company's products abroad. The Company's international sales are conducted
primarily through its OEM partners and independent territory-specific network
integrators. Failure of the Company's OEM partners and network integrators to
effectively market the Company's products internationally or the loss of any
of these resellers could have a material adverse effect on the Company's
business, operating results and financial condition. A number of additional
risks are inherent in international operations. The Company's 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 the
Company's products less competitive in international markets. International
sales may also be limited or disrupted by the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, currency exchange fluctuations, political instability, trade
restrictions and changes in tariffs. The Company's operating results could
also be adversely affected by seasonality of international sales, with
industry sales typically being lower in Asia in the first calendar quarter and
in Europe in the third calendar quarter. These international factors could
have a material adverse effect on future sales of the Company's products to
international end-users and, consequently, the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."

Market for Network Switches; General Economic Conditions. Demand for the
Company's products depends in large part on overall demand for network
switching products, which may in the future fluctuate significantly based on
numerous factors, including adoption of alternative technologies, capital
spending levels and general economic conditions. While certain analysts
believe that there is a significant market for network switches, there can be
no assurance as to the rate or extent of the growth of this market. There can
be no assurance that the Company will not experience a decline in demand for
its products, which would have a material adverse effect on the Company's
business, operating results and financial condition.

Need for Additional Capital. The Company requires substantial working
capital to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that the net
proceeds of this offering, together with its existing cash balances and line
of credit and cash flow

10
<PAGE>

expected to be generated from future operations, will be sufficient to meet
the Company's capital requirements through at least the end of 1996, although
the Company could be required, or could elect, to seek to raise additional
capital during 1996. The Company's future capital requirements 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 the Company's products. The
Company expects that it may need to raise additional equity or debt financing
in the future. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

Regulatory Matters. The Company's products must meet industry standards and
receive certification for connection to certain public telecommunications
networks prior to their sale. In the United States, the Company's products
must comply with various regulations defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, the Company's
products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
Consultative Committee on International Telegraph and Telephony. Although the
Company's products have not been denied any regulatory approvals or
certifications to date, any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Industry Background."

Control by Officers, Directors and Existing 5% Shareholders. Following this
offering, the Company's executive officers and directors, together with
entities affiliated with such individuals, and other holders of 5% or more of
the Company's outstanding capital stock (prior to the offering) will
beneficially own approximately 61.7% of the Company's Common Stock
(approximately 60.9% if the Underwriters' over-allotment option is exercised
in full). Accordingly, these shareholders will be able to elect a majority of
the Company's directors, will retain the voting power to approve matters
requiring shareholder approval and will continue to have significant influence
over the affairs of the Company. This concentration of ownership could have
the effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal and Selling Shareholders."

Anti-Takeover Provisions. Certain provisions of the Company's charter
documents, including provisions eliminating the ability of shareholders to
take action by written consent and limiting the ability of shareholders to
raise matters at a meeting of shareholders without giving advance notice, may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Company's Common Stock. In addition, effective upon qualification of the
Company as a "listed corporation," as defined in Section 301.5(d) of the
California Corporations Code (the "California Code"), the Company's charter
documents will eliminate cumulative voting and provide that the Company's
Board of Directors will be divided into two classes, each of which serves for
a staggered two-year term, which may make it more difficult for a third party
to gain control of the Company's Board of Directors. The Board of Directors
has authority to issue up to 5,000,000 shares of Preferred Stock and to fix
the rights, preferences, privileges and restrictions, including voting rights,
of these shares without any further vote or action by the shareholders. The
rights of the holders of the Company's Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value
of the Common Stock. The Company has no present plan to issue shares of
Preferred Stock. See "Description of Capital Stock--California Anti-Takeover
Effects" and "Management--Stock and Other Plans."

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<PAGE>

Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Company's Common Stock. The number of shares
of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements entered into in connection with the Company's
initial public offering under which the holders of such shares have agreed not
to sell or otherwise dispose of any of their shares prior to September 8, 1996
without the prior written consent of Morgan Stanley & Co. Incorporated.
However, Morgan Stanley & Co. Incorporated may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements. As a result of these restrictions, based on shares
outstanding and options granted as of March 31, 1996, the following shares of
Common Stock will be eligible for future sale in the public market. On the
date of this Prospectus, 8,330,000 shares, including the 3,500,000 shares
offered hereby and 4,830,000 shares sold in the Company's initial public
offering on March 11, 1996, will be eligible for sale. 575,399 shares will be
eligible for sale in the public market beginning on June 10, 1996. Beginning
on September 8, 1996, an additional 24,689,289 shares will become eligible for
sale in the public market upon expiration of lock-up agreements, subject to
compliance with the provisions of Rule 144 adopted under the Securities Act.
In addition, at various times after September 8, 1996, an additional 4,234,495
shares will become eligible for sale in the public market upon expiration of
their respective two-year holding periods, subject to certain volume and
resale restrictions set forth in Rule 144. Alcatel Data Networks has agreed
not to sell or otherwise dispose of its 2,814,244 shares until March 11, 1997,
without the prior written consent of Morgan Stanley & Co. Incorporated, except
pursuant to the exercise of its piggyback registration rights. As of March 31,
1996, options to purchase 6,811,300 shares of the Common Stock of the Company
were outstanding. 334,950 shares subject to such options were eligible for
sale upon exercise as of the filing of the Company's Registration Statement on
Form S-8 filed with the SEC in April 1996. An additional 57,712 shares will
become eligible for sale upon exercise at various dates on or before June 9,
1996, subject to vesting provisions, and 166,200 shares will become eligible
for sale upon exercise at various dates after June 9, 1996 and on or before
September 8, 1996, subject to vesting provisions. The 6,243,458 shares
underlying the remaining options will become eligible for sale upon exercise
at various dates after September 8, 1996. In addition, at various times after
September 8, 1996, an additional 4,234,495 shares will become eligible for
sale in the public market upon expiration of their respective two-year holding
periods, subject to certain volume and resale restrictions set forth in Rule
144. Following this offering and expiration of the lock-up agreements, the
holders of 21,954,401 shares will have certain rights to require the Company
to register those shares under the Securities Act. If such holders, by
exercising their demand registration rights, cause a large number of shares to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Shares Eligible for Future Sale," "Description of Capital Stock"
and "Underwriters."

Possible Volatility of Stock Price. The market price of the shares of Common
Stock has been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, announcement of technological innovations
or new product introductions by the Company or its competitors, changes of
estimates of the Company's future operating results by securities analysts,
developments with respect to copyrights or proprietary rights, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the Common Stocks of technology
companies. These broad market fluctuations may adversely effect the market
price of the Company's Common Stock. See "Underwriters."

12
<PAGE>

THE COMPANY

Xylan Corporation is a leading provider of high-bandwidth switching systems
that enhance the performance of existing local area networks ("LANs") and
facilitate migration to next-generation networking technologies such as
asynchronous transfer mode ("ATM"). The Company's switching technologies
address the need for additional bandwidth in current networks brought about by
the emergence of graphical applications, continued growth in network size, and
increasing demands of high-performance personal computers and workstations.
Xylan seeks to offer a family of network switching products that exceed
competitive products in features, flexibility and price/performance.

Networking technologies have evolved over the last several decades in
response to changes in the ways organizations use computers. As personal
computers proliferated, local area network technologies such as Ethernet and
token ring were widely implemented to connect these workstations to shared
resources. Intelligent hubs emerged as a reliable and structured method of
connecting workstations into LANs. As the networks continued to grow, a single
Ethernet or token ring LAN could not accommodate the proliferation of data,
making it necessary to divide the network into separate domains. Hub- and
router-based networks have become the most widely used "shared-media" network
environments. Currently, shared-media LANs are facing performance degradation
due to the continued growth in the size of networks and increasing demands of
high-performance personal computers and workstations. The increasing bandwidth
requirements are also being driven by the emergence of graphical applications,
such as document image processing, desktop video, medical imaging, modeling
and simulation and the World Wide Web. To address these issues, a new
generation of "switched-media" technologies, including LAN switching, ATM
switching and virtual LANs, has emerged to enable organizations to increase
the throughput of today's networks, simplify network management, and provide a
migration path to next generation high-speed switched networks.

Xylan has focused on the high end of the LAN and ATM switch markets. Xylan's
product architecture currently combines LAN switching, virtual LANs and
routing in a single product. The Company's switches are based on a
distributed, modular, multiprocessor architecture, which allows switching
performance to increase in linear proportion to the number of ports. The
Company's products support all popular LAN types with "any-to-any" medium
access control layer ("MAC-layer") translation, and allow the use of LAN
switches in place of shared-media hubs. Xylan's AutoTracker product supports
flexible virtual LANs and simplifies network management. The Company is also
developing ATM switching technology and application specific integrated
circuits ("ASICs") for integration into its product line. The Company offers
products that provide modularity, redundancy, high port count, routing
capabilities and extensive interfaces.

The Company intends to achieve broad global distribution through the
combination of OEM partners and network integrators supported by a direct
sales force. Xylan has established strategic OEM partnerships with leading
communications and networking companies, including Alcatel N.V., Digital
Equipment Corporation, Hitachi Computer Products (America), Inc. and Network
Systems Corporation, that have significant customer relationships already in
place and provide such customers with worldwide service and support. The
Company believes that this strategy has allowed it to more quickly penetrate
the LAN and ATM switch markets and to reduce the expenses of product
introduction, marketing and support. Xylan is pursuing direct sales to
organizations in the United States with large networking requirements,
focusing on early adopters of new technologies and the government. The
Company's products have been deployed by a broad range of organizations,
ranging from companies in the telecommunications, manufacturing, medical,
computer services, media and finance/insurance industries to educational
institutions and the federal government. End users of the Company's products
include Fujitsu Ltd., MCI Telecommunications Corp., Mitsubishi Semiconductor
America, Inc., Samsung Electronics, UCLA and the U.S. Department of the Air
Force. None of these end users accounted for a material portion of the
Company's revenue in 1995 or the first quarter of 1996 and certain of these
end users are customers of the Company's OEM partners and network integrators.

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<PAGE>

The Company was incorporated in California in July 1993. The Company's
principal executive offices are located at 26679 West Agoura Road, Calabasas,
California 91302, and its telephone number is (818) 880-3500. The Company
maintains a World Wide Web site at http://www.xylan.com.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 400,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$25.4 million ($59.3 million if the Underwriters' over-allotment option is
exercised in full), based on an assumed offering price of $67 3/4 and after
deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company intends to use the net proceeds
for general corporate purposes, including working capital, primarily to
finance higher levels of inventories and accounts receivable. A portion of the
net proceeds may also be used for the acquisition of businesses, products and
technologies that are complementary to those of the Company. The Company has
no current plans, agreements or commitments and is not currently engaged in
any negotiations with respect to any such transaction. Pending such uses, the
net proceeds of this offering will be invested in investment grade, interest-
bearing securities.

The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.

DIVIDEND POLICY

The Company has not paid any cash dividends on its capital stock since
inception and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's existing bank line of credit
currently prohibits the payment of cash dividends on its capital stock without
the bank's consent. See Note 3 of Notes to Consolidated Financial Statements.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "XYLN." The Company commenced its initial public
offering of Common Stock on March 11, 1996 at a price of $26 per share. The
following table sets forth for the periods indicated during 1996 the high and
low closing sale prices of the Company's Common Stock as reported by the
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
First Quarter (from March 12, 1996)....................... $58 3/8 $51 1/4
Second Quarter (through May 10, 1996)..................... 70 1/2 52 1/2
</TABLE>

On May 10, 1996, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $67 3/4 per share. As of March 31,
1996, there were approximately 160 holders of record of 40,243,427 shares of
outstanding Common Stock.

14
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to reflect the sale of 400,000 shares of Common Stock
offered by the Company hereby (at an assumed offering price of $67 3/4 and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company).

<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Capital lease obligations, long-term (1)............. $ 423 $ 423
Shareholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized, no
shares issued and outstanding actual and as
adjusted........................................... -- --
Common Stock, $.001 par value, 200,000,000 shares
authorized; 40,243,427 shares issued and
outstanding actual, 40,643,427 shares issued and
outstanding as adjusted (2)........................ 40 41
Additional paid-in capital.......................... 119,839 145,219
Unearned compensation............................... (2,125) (2,125)
Accumulated deficit................................. (11,363) (11,363)
-------- --------
Net shareholders' equity........................... 106,391 131,772
-------- --------
Total capitalization.............................. $106,814 $132,195
======== ========
</TABLE>
- --------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Common Stock issued and outstanding does not include (i) 6,811,300 shares
issuable at a weighted average exercise price of $3.11 per share upon
exercise of stock options outstanding as of March 31, 1996 or
(ii) 5,159,674 shares reserved for issuance pursuant to the Company's
stock plans. See "Management--Stock and Other Plans" and Notes 6 and 11 of
Notes to Consolidated Financial Statements.

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and related notes thereto, and
with Management's Discussion and Analysis of Financial Condition and Results
of Operations, included elsewhere in this Prospectus. The consolidated
statements of operations data for the period ended December 31, 1993 and for
the years ended December 31, 1994 and 1995 and the consolidated balance sheet
data at December 31, 1994 and 1995 are derived from, and are qualified by
reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
statements of operations data for the five quarters ended March 31, 1996 are
derived from unaudited consolidated financial statements of the Company, which
in the opinion of management reflect all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The historical results are not necessarily indicative
of results to be expected for any future period.
<TABLE>
<CAPTION>

YEAR ENDED THREE MONTHS ENDED
PERIOD ENDED DECEMBER 31, -------------------------------------------------
DECEMBER 31, ---------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1994 1995 1995 1995 1995 1995 1996
------------ ------- ------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................... $ -- $ 443 $29,662 $ 1,397 $ 4,503 $ 8,240 $15,522 $23,392
Cost of revenue........... -- 327 15,418 961 2,659 4,386 7,412 10,823
------ ------- ------- ------- ------- ------- ------- -------
Gross profit............. -- 116 14,244 436 1,844 3,854 8,110 12,569
------ ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development. 343 2,404 7,154 1,039 1,646 2,040 2,429 3,194
Sales and marketing...... -- 695 13,011 2,088 3,336 3,779 3,808 5,800
General and
administrative.......... 188 1,168 3,593 350 605 1,216 1,422 989
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 531 4,267 23,758 3,477 5,587 7,035 7,659 9,983
------ ------- ------- ------- ------- ------- ------- -------
Operating income (loss)... (531) (4,151) (9,514) (3,041) (3,743) (3,181) 451 2,586
Interest income (expense),
net...................... 9 68 73 71 30 (14) (14) 177
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss) before
income taxes............. (522) (4,083) (9,441) (2,970) (3,713) (3,195) 437 2,763
Income tax expense........ -- -- -- -- -- -- -- 80
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ (522) $(4,083) $(9,441) $(2,970) $(3,713) $(3,195) $ 437 $ 2,683
====== ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share (1)................ $(0.02) $ (0.19) $ (0.45) $ (0.14) $ (0.18) $ (0.15) $ 0.01 $ 0.06
====== ======= ======= ======= ======= ======= ======= =======
Shares used in per share
computation (1) ......... 21,067 21,109 21,151 21,151 21,151 21,151 43,096 43,957
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- ------------
1993 1994 1995 1996
------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $1,306 $4,584 $ 6,034 $ 81,652
Working capital........................ 1,216 4,186 11,130 92,393
Total assets........................... 1,411 6,613 27,248 122,246
Capital lease obligations, long-term... -- 239 509 423
Net shareholders' equity............... 1,269 5,367 16,105 106,391
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used to compute
net income (loss) per share.

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains trend analysis and other forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the forward
looking statements as a result of the risk factors set forth below and
elsewhere in this Prospectus, particularly under "Risk Factors."

OVERVIEW

Since its incorporation in July 1993, Xylan has focused on the development,
marketing and sale of high-bandwidth switching systems that enhance the
performance of existing LANs and facilitate migration to next generation
networking technologies such as ATM. During 1994, the Company incurred
operating expenses of $4.3 million and an operating loss of $4.2 million as it
invested in the development of its initial LAN switching product, the
formation of its sales and marketing organization and the establishment of its
distribution networks. In 1994, the Company also conducted an ancillary
network integration business, which generated revenue of $443,000. Subsequent
to December 31, 1994, the Company generated no revenue from this ancillary
network integration business.

The Company began commercial shipments of its initial OmniSwitch products in
January 1995. Since then, revenue has increased significantly on a quarterly
basis to an aggregate of $29.7 million in 1995 and $23.4 million for the
quarter ended March 31, 1996, reflecting substantial growth of the LAN switch
market, continued introduction by the Company of additional features and
enhancements to its OmniSwitch product family and the introduction of the
PizzaSwitch in March 1996, all of which expanded the portion of the market
addressed by Xylan's products, market acceptance of the Company's LAN
switching products, and investment in sales and marketing efforts, including
significant expansion of the Company's domestic and international product
distribution network. During 1995, the Company incurred operating expenses of
$23.8 million, resulting in a net loss of $9.4 million. The Company first
achieved profitability in the fourth quarter of 1995. The Company markets its
products worldwide through OEM partners, network integrators and its own
direct sales force.

The following table sets forth the Company's revenue by sales channel and
geographic region as a percentage of total revenue for the quarters ended
March 31, 1995, December 31, 1995 and March 31, 1996 and the year ended
December 31, 1995.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- YEAR ENDED
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1995 1995 1996 1995
CHANNEL --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
OEM............................ 25% 71% 42% 60%
Network Integrator............. 69 27 56 33
Direct Sales................... 6 2 2 7
REGION(1)
North America.................. 45% 46% 33% 51%
International.................. 55 54 67 49
</TABLE>
--------

(1) These percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S.-based OEM
partners sell the Company's products abroad.

The Company intends to continue to significantly increase its investments in
research and development, sales and marketing and related infrastructure. Any
such increases will be highly dependent on factors including the continued
growth of the Company's revenues and the rate thereof, success in hiring the
appropriate personnel and market acceptance of the Company's products. Due to
the anticipated increases in the Company's operating expenses, the Company's
operating results will be materially and adversely affected if revenue does
not increase. Xylan's limited operating history makes the prediction of future
annual or quarterly operating results difficult or

17
<PAGE>

impossible. Although the Company has experienced revenue growth in all
quarters since revenue was first recognized, such growth rates will not be
sustainable and are not indicative of future operating results. There can be
no assurance that the Company will sustain profitability.

As described above, in 1993, the Company commenced operations and was
primarily engaged in the development of systems and operations and initial
research and development for the Company's products, whereas in 1994, the
Company was primarily engaged in the research, development and testing of its
products and conducted an ancillary network integration business. In 1995, the
Company began commercial sales of its products and devoted attention to adding
additional features and functionality to such products. Because of the
Company's significantly different levels of operations during these periods,
year-to-year comparisons are not meaningful. The following discussion
summarizes the Company's quarterly results of operations in 1995 and the first
quarter of 1996. Where more than one factor affecting a change in an item is
discussed, the Company has attempted, but has been unable, to quantify the
relative contribution of each factor due to the unsophisticated nature of the
Company's financial and management information systems during most of 1995,
which severely limited the Company's ability at that time to allocate reliably
dollar amounts among different factors. However, the Company believes that it
has placed such factors in their relative order of importance.

QUARTERLY RESULTS OF OPERATIONS

The following tables present quarterly operating results for each of the
four quarters of 1995 and the first quarter of 1996 and such data as a
percentage of revenue for each quarter. This information is unaudited, but in
the opinion of management reflects all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The results for any quarter are not necessarily
indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE SEPT. DEC.
MARCH 31, 30, 30, 31, MARCH 31,
1995 1995 1995 1995 1996
--------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue......................... $ 1,397 $ 4,503 $ 8,240 $15,522 $23,392
Cost of revenue................. 961 2,659 4,386 7,412 10,823
------- ------- ------- ------- -------
Gross profit................... 436 1,844 3,854 8,110 12,569
------- ------- ------- ------- -------
Operating expenses:
Research and development....... 1,039 1,646 2,040 2,429 3,194
Sales and marketing............ 2,088 3,336 3,779 3,808 5,800
General and administrative..... 350 605 1,216 1,422 989
------- ------- ------- ------- -------
Total operating expenses...... 3,477 5,587 7,035 7,659 9,983
------- ------- ------- ------- -------
Operating income (loss)......... (3,041) (3,743) (3,181) 451 2,586
Interest income (expense), net.. 71 30 (14) (14) 177
------- ------- ------- ------- -------
Net income (loss) before income
taxes.......................... (2,970) (3,713) (3,195) 437 2,763
Income tax expense.............. -- -- -- -- 80
------- ------- ------- ------- -------
Net income (loss)............... $(2,970) $(3,713) $(3,195) $ 437 $ 2,683
======= ======= ======= ======= =======
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 68.8 59.0 53.2 47.8 46.3
------ ----- ----- ----- -----
Gross margin.................. 31.2 41.0 46.8 52.2 53.7
------ ----- ----- ----- -----
Operating expenses:
Research and development...... 74.4 36.6 24.7 15.6 13.7
Sales and marketing........... 149.5 74.1 45.9 24.5 24.8
General and administrative.... 25.1 13.4 14.8 9.2 4.2
------ ----- ----- ----- -----
Total operating expenses..... 249.0 124.1 85.4 49.3 42.7
------ ----- ----- ----- -----
Operating income (loss)........ (217.8) (83.1) (38.6) 2.9 11.0
Interest income (expense), net. 5.1 0.7 (0.2) (0.1) 0.8
------ ----- ----- ----- -----
Net income (loss) before income
taxes......................... (212.7) (82.4) (38.8) 2.8 11.8
Income tax expense............. -- -- -- -- 0.3
------ ----- ----- ----- -----
Net income (loss).............. (212.7)% (82.4)% (38.8)% 2.8% 11.5%
====== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1995, DECEMBER 31, 1995 AND MARCH 31, 1996

Revenue

Revenue for the quarter ended March 31, 1995, the first quarter in which
products were shipped, was $1.4 million. Revenue for the quarter ended
December 31, 1995 was $15.5 million and increased 51% to $23.4 million for the
quarter ended March 31, 1996. The increase in revenue was due to a number of
factors, including substantial growth of the LAN switching market, continued
introduction by the Company of additional features and functions to its
OmniSwitch product family and the introduction of the PizzaSwitch product
family in March 1996, significant shipments to end users in Japan, market
acceptance of the Company's LAN switching products, and the Company's
investment in sales and marketing efforts. The relative contribution of most
of these factors cannot be quantified, and future changes in an individual
factor therefore cannot be used to predict future revenue growth. While the
Company has achieved quarter-to-quarter revenue growth in previous quarters,
the Company does not expect to sustain this rate of sequential quarterly
revenue growth in future periods.

For the quarters ended March 31, 1995, December 31, 1995 and March 31, 1996,
the Company's three largest customers in each quarter accounted for 42%, 58%
and 59%, respectively, of revenue. Of the three largest customers in the first
quarter of 1996, one customer, a network integrator in Japan, accounted for in
excess of 30% of revenue. The Company anticipates that this customer will not
constitute a similar proportion of the Company's revenue in future periods.
Sales to customers outside of North America accounted for approximately 55%,
54% and 67%, of the Company's revenue in the quarters ended March 31, 1995,
December 31, 1995, and March 31, 1996, respectively. However, these
percentages may understate sales of the Company's products to international
end users because certain of the Company's U.S.-based OEM partners sell the
Company's products abroad.

Gross Profit

Gross margins were approximately 31%, 52% and 54% for the quarters ended
March 31, 1995, December 31, 1995 and March 31, 1996, respectively. The lower
gross margins in the first quarter of 1995 resulted from allocating fixed
costs over a smaller revenue base, costs associated with tooling charges and
smaller lot sizes during the early months of the Company's initial product
introduction. The increase from the fourth quarter of 1995 to the first
quarter of 1996 resulted primarily from increased sales to network
integrators, relative to sales to the Company's OEMs that are typically made
at lower margins. This increase was partially offset by lower margins from
PizzaSwitch product sales.

19
<PAGE>

The Company's gross margins in the future will be affected by a number of
factors, including product mix, competitive market pricing and discount
levels, manufacturing volumes and fluctuations in component costs. After
initial product introduction, the Company's strategy is to seek to reduce
component costs, particularly by integrating newly-developed ASICs into such
products. In addition, the timing and execution of new product introductions
may impact gross margins and result in excess or obsolete inventories. The
Company's gross margins may also fluctuate due to the mix of distribution
channels employed. The Company expects to realize higher gross margins on
direct sales than on sales through its OEM partners and network integrators.
Although gross margins may vary from quarter to quarter, the Company does not
anticipate improvements in gross margins during the remainder of 1996.

Research and Development Expenses

Research and development expenses were $1.0 million, $2.4 million and $3.2
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This represents an increase of 220% from the first quarter
of 1995 to the first quarter of 1996, and an increase of 33% from the fourth
quarter of 1995 to the first quarter of 1996. These increases were primarily
due to a significant increase in the number of development personnel,
additional product development expenses incurred in connection with ongoing
development of new products and enhancements to the OmniSwitch and PizzaSwitch
product family as well as significant prototyping and tooling costs related to
the final development and test phases of new products. From December 31, 1995
to March 31, 1996, the number of development personnel increased by
approximately 22%.

As a percentage of revenue, research and development expenses were 74%, 16%
and 14% for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This decline was due to the significant increases in
revenue.

The market for the Company's products is characterized by frequent new
product introductions and rapidly changing technology and industry standards,
any of which can render Xylan's existing products obsolete. As a result, the
Company's success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion new products and enhancements to its
existing products that meet changing customer requirements and emerging
industry standards. Accordingly, the Company expects to continue to make
substantial investments in research and development and anticipates that
research and development expenses will continue to increase in 1996 in
absolute dollars.

Sales and Marketing Expenses

Sales and marketing expenses were $2.1 million, $3.8 million and $5.8
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This represents an increase of 176% from the first quarter
of 1995 to the first quarter of 1996, and an increase of 53% from the fourth
quarter of 1995 to the first quarter of 1996. These increases were primarily
due to expenses related to the addition of direct sales personnel throughout
the United States, Europe and Asia, increased commission expenses resulting
from higher sales, and advertising and promotional campaigns in support of the
Company's direct and network integrator channels. The Company incurred
additional sales and marketing expenses in connection with the launch of the
PizzaSwitch, the introduction of additional features and enhancements to the
OmniSwitch product family and demonstration equipment used for customer
trials. From December 31, 1995 to March 31, 1996, the number of sales and
marketing personnel increased by approximately 25%.

As a percentage of revenue, sales and marketing expenses were 150%, 25% and
25% for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. The decline was due to the significant increases in
revenue.

As the Company continues to expand its direct sales force, adding personnel
and offices worldwide, and to introduce new products and enhancements to its
existing products, it expects that sales and marketing expenses will continue
to increase in 1996 in absolute dollars.

20
<PAGE>

General and Administrative Expenses

General and administrative expenses were $350,000, $1.4 million and $1.0
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. The increase in the first quarter of 1995 to the first
quarter of 1996 primarily reflects the addition of personnel and systems to
support the growth of Xylan's business. The decrease from the fourth quarter
of 1995 to the first quarter of 1996 is primarily due to a reduction in legal
expenses associated with the Ascom Timeplex litigation, and relocation costs
and severance payments for certain employees that were incurred in the quarter
ended December 31, 1995.

As a percentage of revenue, general and administrative expenses were 25%, 9%
and 4% for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. These declines were due to the significant increases in
revenue.

As the Company continues to expand its direct sales force, add personnel and
offices worldwide, and introduce new products and enhancements to its existing
products, it expects that general and administrative expenses will continue to
increase in 1996 in absolute dollars.

Interest Income (Expense)

Interest income (expense), net was $71,000, $(14,000) and $177,000 for the
quarters ended March 31, 1995, December 31, 1995 and March 31, 1996,
respectively. The increase in the first quarter of 1996 over the prior
quarters is primarily the result of interest income earned on the net proceeds
of $87.4 million from the Company's initial public offering.

Provision for Income Taxes

The Company's provision for income taxes for the quarter ended March 31,
1996 was 3% of pretax income, reflecting the use of net operating loss
carryforwards. For the remainder of 1996, the Company expects to continue to
record a 3% provision for income taxes, although such percentage may vary
depending on several factors, including tax benefits associated with the
disqualifying disposition of shares acquired under incentive stock options,
the availability of research and development tax credits and the international
component of the Company's business. As of December 31, 1995, the Company had
available net operating loss carryforwards for federal and state tax purposes
of approximately $12.4 million and $6.2 million, respectively, to offset
future United States tax obligations. See Note 7 of Notes to Consolidated
Financial Statements.

FOUR QUARTERS ENDED DECEMBER 31, 1995

Revenue

The Company's revenue increased by 222%, 83% and 88% from the first to
second, second to third and third to fourth quarter, respectively, of fiscal
1995. The increase in revenues was due to a number of factors, including
substantial growth of the LAN switching market, continued introduction by the
Company of additional features and enhancements to its OmniSwitch product
family, which expanded the portion of the market addressed by Xylan's
products, market acceptance of the Company's LAN switching products, and the
Company's investment in sales and marketing efforts. The large percentage
increases are due primarily to the relatively small dollar value of revenue in
each period, which magnifies absolute dollar changes in revenue from period to
period. The relative contribution of each of these factors cannot be
quantified, so future changes in a factor cannot be used to predict future
revenue growth. While the Company achieved quarter-to-quarter revenue growth
averaging 85% in the third and fourth quarters of fiscal 1995, the Company
does not expect to sustain this rate of sequential quarterly revenue growth in
future periods.

21
<PAGE>

Gross Profit

Gross margins increased in 1995 by 323% from the first to second quarter,
109% from the second to third quarter, and 110% from the third to fourth
quarter. The increases were primarily due to decreased unit manufacturing
costs resulting from higher volumes. The Company's gross margins in the future
will be affected by a number of factors, including competitive market pricing
and discount levels, manufacturing volumes and fluctuations in component
costs. The large percentage increase in all quarters is due primarily to the
small dollar value of gross profit in each period, particularly the percentage
increase arising from $436,000 of gross profit in the first quarter to $1.8
million in the second quarter. The percentage increases from the second to
third and third to fourth quarters correlate with revenue increases in those
periods. The Company's future gross margins will also be affected by the mix
of product features and configurations sold in a period. In addition, timing
and execution of the introduction of new products, which may have different
gross margins, can cause product transitions, resulting in excess or obsolete
inventories. After initial introduction of a product, the Company's strategy
is to seek to reduce component costs, particularly by integrating newly-
developed ASICs into such products. The Company's gross margins may also
fluctuate due to the mix of distribution channels employed. The Company
generally realizes a higher gross margin on direct sales than on sales through
its OEM partners and network integrators.

Research and Development Expenses

Research and development expenses increased during each quarter of 1995 by
58%, from the first to second quarter, 24% from the second to third quarter,
and 19% from the third to fourth quarter. These increases were primarily due
to a significant increase in the number of development personnel and
additional product development expenses incurred in connection with ongoing
development of new products and enhancements to the OmniSwitch product family.
As shown in the table, research and development expenses as a percentage of
revenue declined substantially in each quarter of 1995 due to the significant
quarter-to-quarter increases in revenue. The Company expenses research and
development costs as incurred. The Company's research and development
expenditures totaled $343,000, $2.4 million and $7.1 million for the period
from inception to December 31, 1993 and for the fiscal years ended December
31, 1994 and 1995, respectively. The market for the Company's products is
characterized by frequent new product introductions and rapidly changing
technology and industry standards, any of which can render Xylan's existing
products obsolete. As a result, the Company's success will depend to a
substantial degree upon its ability to develop and introduce in a timely
fashion new products and enhancements to its existing products that meet
changing customer requirements and emerging industry standards.

Sales and Marketing Expenses

Sales and marketing expenses increased by 60% from the first to second
quarter of 1995, and by 13% from the second to third quarter. The increase
from the third to fourth quarter was nominal. The increases in the first three
quarters were primarily due to expenses related to the Company's initial
product launch, the addition of direct sales personnel throughout the United
States, Europe and Asia and increased commission expenses resulting from
higher sales. The introduction of additional features and enhancements to the
OmniSwitch product family in 1995, and related expenditures for demonstration
equipment used for customer trials and promotional activities, resulted in
fluctuations in quarterly sales and marketing expenses, particularly the
substantial increase in such expenses in the third quarter of 1995. In
addition, the quarterly results reflect the impact of an aggregate adjustment
of approximately $2 million relating to a change in the Company's method of
accounting for demonstration units to expense the cost of such units which had
previously been capitalized. This adjustment resulted in an increase in sales
and marketing expense, allocated among quarters based on the quarter in which
demonstration units were shipped. This adjustment is not expected to impact
the Company's future financial results.

22
<PAGE>

General and Administrative Expenses

General and administrative expenses increased by 73% from the first to
second quarter of 1995, by 101% from the second to third quarter and by 17%
from the third to fourth quarter, reflecting hiring of administrative
personnel to support the growth of Xylan's business and costs related to
enhancing the Company's financial and management information systems. In
addition, beginning in the third quarter of 1995, general and administrative
expenses were substantially increased by spending associated with the Ascom
Timeplex litigation. During 1995 the Company recorded for financial statement
presentation purposes unearned compensation of $941,000 for the difference
between the grant price and the deemed fair market value in connection with
certain Common Stock options granted during 1995, which will be recorded as
compensation expense ratably over the five-year vesting period for each
option. During 1995 the Company recorded $54,000 of such compensation expense.
In addition, in connection with certain Common Stock options granted during
the three months ended March 31, 1996 for financial statement presentation
purposes the Company has recorded additional unearned compensation of
$1,395,000 for the difference between the grant price and the deemed fair
market value, which, beginning in 1996, will be recorded as compensation
expense ratably over the five-year vesting period for each option. Future
compensation expense will be allocated, based on each such optionee's
function, to research and development, sales and marketing and general and
administrative expenses.

Interest Income (Expense)

Interest income (expense) fluctuated on a quarter-to-quarter basis during
1995, primarily depending upon the level of the Company's cash balances and
the funding required for daily operations.

Provision for Income Taxes

As a result of net operating losses, no provision for income taxes was
recorded for 1995.

FACTORS AFFECTING FUTURE RESULTS

The Company's revenue and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including (i)
the timing and amount of significant orders from the Company's OEM partners
and network integrators, (ii) the Company's success in developing, introducing
and shipping product enhancements and new products, (iii) the ability to
obtain sufficient supplies of sole or limited source components for the
Company's products, (iv) the ability to attain and maintain production volumes
and quality levels for its products, (v) the mix of distribution channels and
products, (vi) new product introductions by the Company's competitors, (vii)
pricing actions by the Company or its competitors, (viii) changes in material
costs and (ix) general economic conditions. The Company's revenue in any
period is highly dependent upon the sales efforts and success of Xylan's OEM
partners and network integrators, which are not within the control of the
Company. The Company generally realizes a higher gross margin on direct sales
than on sales through its OEM partners and network integrators. Accordingly,
if the Company's OEM partners and network integrators were to account for an
increased portion of the Company's revenue, gross margins would decline. Any
decline in sales to OEM partners and network integrators, or the loss of any
of the Company's OEM partners or network integrators could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, new products may have different gross margins than
existing products. In particular, the Company's PizzaSwitch product, which
became commercially available during the first quarter of 1996, currently has
a lower gross margin than the OmniSwitch. A significant portion of the
Company's expenses, such as rent, headcount and capital lease expenses, are
relatively fixed in advance, based in large part on the Company's forecasts of
future sales. If sales are below expectations in any given period, the adverse
effect of a shortfall in sales on the Company's operating results may be
magnified by the Company's inability to adjust spending to compensate for such
shortfall. The Company's backlog at the beginning of each quarter typically is
not sufficient to achieve expected revenue for that quarter. To achieve its
revenue objectives, the Company is dependent upon obtaining orders in a
quarter for shipment in that quarter. Furthermore, the Company's agreements
with its customers typically provide that they may change delivery schedules
and cancel orders within specified

23
<PAGE>

timeframes without significant penalty. The Company's industry is
characterized by short product life cycles and declining prices of existing
products, which requires continual improvement of manufacturing efficiencies
and introduction of new products and enhancements to existing products to
maintain gross margins. The Company intends to introduce a number of new
products and product enhancements in 1996 and 1997, which will require that
the Company rapidly achieve volume production by coordinating its efforts with
those of its suppliers and contract manufacturers and the inability of the
Company's contract manufacturers to provide the Company with adequate supplies
of high-quality products or the loss of any of the Company's contract
manufacturers could cause a delay in the Company's ability to fulfill customer
orders, which in turn could cause the Company to fail to meet its revenue
objectives for a particular period. Moreover, in response to competitive
pressures or to pursue new product or market opportunities, the Company may
take certain pricing or marketing actions that could materially and adversely
affect the Company's operating results. As a result of all of the foregoing,
there can be no assurance that the Company will be able to achieve or sustain
profitability on a quarterly or annual basis. In addition, it is possible that
in some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially and adversely
affected. See "Risk Factors."

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations and capital
expenditures through the sale of Common and Preferred Stock, for aggregate
proceeds of approximately $117 million, and capital lease and other debt
financing. During 1995, cash utilized by operating activities was $14.3
million, compared to $4.0 million in 1994. The increase in cash utilized
during 1995 reflected the increased working capital necessary to fund
significantly expanded operations and the resulting inventory and accounts
receivable. For the quarters ended March 31, 1995, December 31, 1995 and March
31, 1996 cash utilized by operations was $4.1 million, $2.5 million and
$2.0 million, respectively. The decrease in cash utilized from the fourth
quarter of 1995 to the first quarter of 1996 is the result of the increase in
net income partially offset by increased working capital necessary to fund the
significantly expanded operations and the resulting inventories and accounts
receivable.

Capital expenditures aggregated $4.3 million in fiscal 1995 and $700,000,
$1.6 million and $2.8 million for the quarters ended March 31, 1995, December
31, 1995 and March 31, 1996, respectively. The Company expects capital
expenditures to increase to approximately $13 million in 1996. The Company
does not anticipate material capital expenditures to be made for additional
manufacturing space in 1996.

The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company's future capital requirements 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 the Company's products. There can
be no assurance that additional equity or debt financing, if required, will be
available on acceptable terms or at all.

The Company's principal source of liquidity as of March 31, 1996, consisted
of $56.2 million in cash and cash equivalents, $25.5 million in short-term
investments and a $7.5 million bank credit facility. The Company believes that
existing cash and investment balances, the proceeds of this offering and cash
flow expected to be generated from future operations, will be sufficient to
meet the Company's requirements for at least the next 12 months.

NEWLY ADOPTED FINANCIAL ACCOUNTING STANDARDS

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This statement provides
guidelines for recognition of impairment losses related to long-term assets.
The adoption of this new standard did not have a material effect on the
Company's consolidated financial statements.

24
<PAGE>

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement No. 123"). This statement encourages, but does not require, a fair
value based method of accounting for employee stock options. The Company
elected to continue to measure compensation costs under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and to comply with the pro forma
disclosure requirements of Statement No. 123. The adoption of this standard
had no impact on the Company's consolidated financial statements.

25
<PAGE>

BUSINESS

Xylan Corporation is a leading provider of high-bandwidth switching systems
that enhance the performance of existing local area networks and facilitate
migration to next generation networking technologies such as ATM. Current hub-
and router-based networks are facing performance degradation due to the
continued growth in the size of networks, increasing demands of high-
performance personal computers and workstations, and emergence of graphical
applications, such as document image processing, desktop video, medical
imaging, modeling and simulation, and the World Wide Web. To address these
issues, a new generation of "switched-media" technologies has emerged,
including LAN switching, ATM switching and virtual LANs.

Xylan offers the OmniSwitch and PizzaSwitch product families, which support
all popular LAN types with "any-to-any" MAC-layer translation, and allow the
use of LAN switches in place of shared-media hubs. The Company's switches are
based on a distributed, modular, multiprocessor architecture that currently
combines LAN switching, virtual LANs and routing in a single product and
allows switching performance to increase in linear proportion to the number of
ports. Xylan's AutoTracker product supports flexible virtual LANs and
simplifies network management. The Company is also developing ATM switching
technology and ASICs for integration into its product line.

Xylan has strategic OEM partnerships with leading communications and
networking companies, including Alcatel, Digital, Hitachi and Network Systems
Corporation, that have significant customer relationships already in place.
Xylan pursues direct sales to organizations in the United States with large
networking requirements and employs network integrators to target customers
worldwide. The Company's products have been deployed by a broad range of
organizations, ranging from companies in the telecommunications,
manufacturing, medical, computer services, media and finance/insurance
industries to educational institutions and the federal government. End users
of the Company's products include Fujitsu Ltd., MCI Telecommunications Corp.,
Mitsubishi Semiconductor America, Inc., Samsung Electronics, UCLA and the U.S.
Department of the Air Force. None of these end users accounted for a material
portion of the Company's revenue in 1995 or the first quarter of 1996 and
certain of these end users are customers of the Company's OEM partners and
network integrators.

INDUSTRY BACKGROUND

Networking technologies have evolved over the last several decades in
response to changes in the ways organizations use computers. As shown on the
chart below, approximately ten years ago a transition in networking
technologies occurred in response to the increasing use of personal computers
within organizations. As personal computers proliferated, local area network
technologies such as Ethernet and token ring were widely implemented to
connect these workstations to shared resources. Intelligent hubs emerged as a
reliable and structured method of connecting workstations into LANs. As the
networks continued to grow, a single Ethernet or token ring LAN could not
accommodate the proliferation of data, making it necessary to divide the
network into separate domains. The first devices used for this purpose were
bridges; however, one limitation of bridges is that they indiscriminately
broadcast some types of information throughout the entire network. The amount
of this "broadcast traffic" increases as the network grows, and in a large
network can create a heavy load on all workstations. To solve this problem,
routers were developed to intercept broadcast traffic and forward that
information "intelligently," minimizing the load on the network. As a result,
hub- and router-based networks became the most widely used network
environments.

<TABLE>
<CAPTION>
MAINFRAME MINICOMPUTER SHARED-MEDIA SWITCHED
ERA ERA NETWORK ERA NETWORK ERA
1965-1975 1975-1985 1985-1995 1995-
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTING mainframes minicomputers personal graphical
PLATFORMS computers workstations

- -----------------------------------------------------------------------------------------------------------------------------------
INFORMATION textual data textual data program and graphical data
TRANSMITTED data files

- -----------------------------------------------------------------------------------------------------------------------------------
BANDWIDTH shared, low-speed dedicated, low- shared, high-speed dedicated, high-
REQUIREMENTS bandwidth speed bandwidth bandwidth speed bandwidth
- -----------------------------------------------------------------------------------------------------------------------------------
KEY front end statistical intelligent hubs, LAN switches and
NETWORKING processors, multiplexers, bridges and routers ATM switches with
TECHNOLOGIES controllers data PBXs routing functionality
</TABLE>

26
<PAGE>

Currently, LANs are again facing performance degradation due to the
continued growth in the size of networks and increasing demands of high-
performance personal computers and workstations. The increasing bandwidth
requirements are also being driven by the emergence of graphical applications,
such as document image processing, desktop video, medical imaging, modeling
and simulation, and the World Wide Web. A new generation of switching
technologies is currently emerging to address these issues and migrate
customers to next-generation networking systems.

Shared-Media LANs

Traditional LAN types, such as Ethernet, token ring, and Fiber Distributed
Data Interface ("FDDI"), are often referred to as "shared-media" technologies
because they require computers to take turns communicating on a single LAN. On
these LANs, a computer can only send information when another computer is not
doing so. This technology works well when workstations only need short,
infrequent bursts of network access, such as the transfer of a file from a
file server or to a network printer. As more workstations share a single LAN,
demands for access to the network increase. As a result, individual users
experience slower network response times.

In a typical shared-media LAN, workstations and servers are connected to a
hub, which functions as a single LAN. In order to improve network performance,
larger networks are often divided into multiple LANs. Individual LANs, which
are built using hubs, are connected to each other using routers which are the
backbone of most present-day networks. Routers facilitate the flow of traffic
between LANs by intercepting broadcast traffic and only forwarding the
necessary traffic to its appropriate destination, minimizing the load on the
network. Routers are relatively expensive, since intelligent control of
network traffic requires complex software and high-performance hardware.

In addition, as the number of LANs increases, a routed network becomes more
difficult and costly to manage. A hub- and router-based network is based on
physical LANs, where all workstations on a single physical Ethernet or token
ring are assigned the same network address. Routers, by moving traffic between
hubs using these addresses, require network administrators to change the
network address of a workstation when it is relocated. This results in
substantial work for network administrators when moves are common.

New graphical applications have increased network loads enormously, which
can overwhelm shared-media networks. Shared-media LANs require workstations
and servers to contend for the total capacity or "bandwidth" of the network.
As a result, the effective bandwidth available to each computer declines with
the growth of the number of computers connected to the LAN and the volume of
network traffic. Network users employing data-intensive applications also can
"crowd out" other users who require less bandwidth.

As illustrated below, graphical applications have accelerated the trend
toward progressively higher network loads measured in million bits per second
("Mbps") throughput.

[GRAPHIC APPEARS HERE]

27
<PAGE>

LAN Switching

Network administrators are increasingly using a new LAN technology based on
switching to avoid the performance degradation experienced by users of shared-
media LANs. In a network switch, each workstation and server has its own
dedicated connection, so that they do not have to take turns transmitting over
the LAN. Current LAN switches support some combination of existing LAN types,
such as Ethernet, Fast Ethernet (100BaseT), token ring and FDDI. These
switches increase the throughput of an existing LAN with minimal cost and
disruption, because users do not have to change network interface cards,
cabling or workstation software. As a result, LAN switches are starting to
augment, and in some cases replace, hubs and routers. According to
International Data Corporation, the market for LAN switches was $349 million
in 1994 and is expected to grow from $1.25 billion in 1995 to $3.9 billion in
1999.

Local area networks typically use one or more "wiring closets" on each floor
of a building. Wiring runs from 30 to 150 workstations in each part of the
building into a single closet where the hubs have been located. This closet
is, accordingly, the logical place for the switches. Large networks need
switches that share the characteristics of today's high-end hubs: support for
a large number of ports, hot-swappable (exchangeable while the system is
operational) input/output ("I/O") modules, redundant power and common logic.
However, most current LAN switches only support a limited number of devices
and lack other characteristics required for optimal use in wiring closets.

Since large, complex networks generally use multiple LAN types, users need
LAN switches that provide translation among a number of the more widely used
protocols, which the Company refers to as "any-to-any" translation. This
allows workstations using Ethernet and token ring to access servers and
backbones using high-speed technologies, such as FDDI, 100BaseT and ATM.
Routers can achieve this result, but a router's complexity slows down the data
traffic.

Many large organizations have built FDDI backbones over the last five years,
and LAN switches need to be able to operate across these backbones. Many of
these organizations are also expected to install ATM backbones, and LAN
switches will need to be able to operate across these as well. Few current LAN
switches support both FDDI and ATM backbones.

ATM Switching

Organizations generally employ multiple networks, each dedicated to a single
traffic type, such as data, voice or video. In contrast, a single ATM network
can support textual data, graphical data, voice and video. ATM cells can be
transmitted more predictably than traditional, variable-length packets, and at
much higher rates. However, most current workstations are equipped to support
Ethernet, token ring or FDDI, rather than ATM. In addition, ATM workstation
interface cards and ATM switches are still relatively expensive. As a result,
ATM can be deployed more cost-effectively in LAN backbones and wide area
networks ("WANs") where the cost of the ATM switch is amortized over a large
number of workstations.

Some LAN switches include ATM "uplinks" in which workstations are attached
to the LAN switch and the LAN switch is in turn attached to the ATM-switched
network acting as a campus backbone. Eventually, however, many customers will
want to be able to connect their workstations directly to the ATM switches.
Today few LAN switches can provide ATM switching capabilities, and those that
can do so have relatively little ATM switching capacity. According to Vertical
Systems Group, the market for ATM switches is expected to grow from
approximately $160 million in 1995 to $950 million in 1998.

Virtual LANs

LAN switching makes it possible to use virtual LANs. With virtual LANs,
network managers can organize users into domains in order to prevent
broadcasts from overloading the network. Broadcast traffic is kept within a
virtual LAN, which is connected to other virtual LANs by routing. Virtual LANs
enable network managers to

28
<PAGE>

group users logically rather than based upon physical location within the
network. In addition, virtual LANs can simplify network administration as
users move around the campus.

Effective virtual LANs must have the ability to:

. sustain the high throughput of switched networks;
. accommodate a variety of LAN types;
. span both FDDI and ATM backbones;
. allow virtual LANs to be defined flexibly by switch port, MAC address or
network-layer address;
. track workstations automatically when they are moved within a building or
across a campus;
. "look past" hubs to the workstations connected to them; and
. provide easy configuration and management.

The combination of LAN switching, ATM switching and virtual LANs enables
organizations to increase the throughput of today's networks and simplify
network management, while providing a migration path to next generation high-
speed switched networks.

THE XYLAN SOLUTION

Xylan was founded to provide high-bandwidth switching systems that enhance
the performance of existing LANs and facilitate migration to next-generation
networking technologies such as ATM. The Company's products accomplish these
goals by providing "any-to-any" MAC-layer translation; supporting widely used
LAN types such as Ethernet, token ring and FDDI; and enabling the customer to
replace shared-media hubs with LAN switches. Xylan's AutoTracker product is
designed to support powerful, flexible virtual LANs and to simplify network
management.

Xylan has designed its product architecture specifically to support LAN
switching, ATM switching, virtual LANs and routing. The Company's switches are
based on a distributed, modular, multiprocessor architecture. This
architecture allows switching performance to increase in linear proportion to
the number of ports, unlike many other switches based on a central switching
engine, which generally cannot increase performance as ports are added. The
Company's virtual LAN capability is integrated directly into its hardware
architecture and controlled by distributed reduced instruction set computing
("RISC") processors and ASICs to achieve high throughput and flexibility.
Xylan's products can both switch within virtual LANs and route between them.
The Company has also developed a substantial number of LAN interface modules,
enabling the customer to tailor the product to a particular application. The
Company is developing multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing price/performance of the Company's
products.

COMPANY STRATEGY

Xylan's objective is to facilitate the migration of computer networking to
switched, dedicated-bandwidth, high-speed connections by providing a family of
network switching products that exceed competitive offerings in features,
flexibility and price/performance. The key elements of the Company's strategy
are highlighted below:

Invest to Establish Early Market Leadership

Xylan's strategy has been and continues to be to establish a position as an
early leader in the emerging market for LAN and ATM switching. The Company
believes that early leadership translates into a better understanding of
customer needs, the opportunity to optimize products to meet those needs, and
the ability to maintain the reputation of a market leader as switching
technology becomes more widely adopted. To date, Xylan has moved rapidly to
build strong sales and marketing functions in order to establish early
customer relationships. Xylan believes that evaluation purchases by a customer
can lead to volume purchases from the Company as the customer implements
switching solutions more broadly. Xylan intends to continue investing in its
infrastructure in order to fully capitalize on the growth of the LAN and ATM
switch markets.

29
<PAGE>

Maintain Technology Leadership

Xylan was founded to design leading-edge switching technology. The Company
has assembled a development team of 75 engineers at March 31, 1996 and
invested heavily in design and simulation tools. Xylan believes that its
current products offer a range of features and price/performance
characteristics that exceed competitive offerings. The Company's goal is to
combine, in a single switch, advanced LAN and ATM switching architectures, and
to make extensive use of ASICs to reduce costs and increase performance.

Focus on High-End LAN and ATM Switch Markets

Xylan has focused on the high end of the LAN and ATM switch markets. The
Company offers products that provide modularity, redundancy, high port count,
routing capabilities and extensive interfaces. Xylan believes that continuing
to incorporate high-end product features into its products will facilitate the
Company's ability to sell to high-end customers, who tend to be early adopters
of new technologies.

Enhance Existing LANs and Facilitate Migration to High-Speed Networks

Xylan's products increase the performance of a hub- and router-based network
by adding switching technology to the network. The Company's products support
all popular LAN types and provide any-to-any MAC-layer translation. In
addition, the Company's virtual LAN capabilities make an existing network
easier to manage. At the same time, the Company's products facilitate user
migration to future high-speed networks such as ATM and 100BaseT, making these
products long-term strategic networking solutions.

Leverage Strategic Distribution Relationships

Xylan has established strategic OEM relationships with leading
communications and networking companies that have significant customer
relationships already in place and provide such customers with worldwide
service and support. The Company believes that this strategy has allowed it to
more quickly penetrate the LAN and ATM switch markets and to reduce the
expenses of product introduction, marketing and support.

Expand Global Distribution Presence

Xylan pursues both direct sales to large organizations in the United States,
focusing on early adopters of new technologies and the government, and
international sales, which broaden the market for the Company's products. The
Company intends to continue to use a broad variety of global distribution
channels to introduce and maintain the presence of its products in the market
through the combination of OEM partners and network integrators supported by
Xylan's direct sales force.

PRODUCTS AND TECHNOLOGY

Xylan offers a family of products that are designed to serve as a complete
switching system for a building or campus. The Company's OmniSwitch and
PizzaSwitch products provide flexible high-end LAN switching, virtual LAN
capability, high-speed routing and comprehensive network management
capabilities. The Company's OmniVision software provides a graphical network
management capability designed to be compatible with the users' network
environment, and the Company believes that its AutoTracker capability
facilitates virtual LAN configuration and management.

OmniSwitch

The OmniSwitch is a modular, chassis-based switch that provides high-
performance switching within virtual LANs and routing between virtual LANs.
The OmniSwitch supports a variety of LAN types, interconnecting Ethernet,
token ring, FDDI and ATM with any-to-any MAC-layer protocol translation. The
Company offers the OmniSwitch in both five-slot and nine-slot enclosures,
which can be configured with a mix of LAN switching

30
<PAGE>

modules to meet a customer's specific needs. Both enclosures use the same
hardware and software and provide redundant, load-sharing power supplies with
separate AC inputs. The OmniSwitch is designed to be located in the customer's
wiring closet. The list price for a fully configured OmniSwitch typically
ranges from $15,000 to $85,000, depending on the configuration necessary to
meet the needs of a specific customer.

The Xylan OmniSwitch family of products is based on a distributed, modular,
multiprocessor LAN switching architecture. This distributed architecture
eliminates the traditional central switching engine, enabling data to move
more quickly through the Company's switching modules. In addition, users can
increase the processing capacity of an OmniSwitch by simply adding switching
modules.

The OmniSwitch serves as a platform for a broad array of switching modules.
Each module not only performs I/O functions, but also acts as an independent
switching engine, communicating directly with other modules in the OmniSwitch.
To provide the power needed to combine high-speed switching with protocol
translation, virtual LANs and routing, each module has five ASICs, two RISC
processors, high-speed CAM (content-addressable memory), and dual-ported VRAM
(video RAM). All data is switched in its native frame format and translated,
when necessary, by the destination switching module, resulting in increased
efficiency.

PizzaSwitch

The Company's PizzaSwitch product, which was introduced during the first
quarter of 1996, is based on the same hardware architecture and incorporates
the same switching and software capabilities as the OmniSwitch. Consequently,
the PizzaSwitch has much more robust features and functionality than
traditional small switches, making it suitable for a wide range of customers
and applications. The PizzaSwitch is designed to be cost-effective in smaller
configurations. The PizzaSwitch may be used alone in a small network or in
combination with multiple OmniSwitch and PizzaSwitch devices in a larger
network. While the OmniSwitch is fully modular, the PizzaSwitch combines
twelve Ethernet ports with a small number of modular high-speed ports, which
can be FDDI or ATM.

Xylan's products currently offer the following LAN interfaces and switching
capabilities:

LAN INTERFACES SUPPORTED BY XYLAN PRODUCTS

<TABLE>
<CAPTION>
ETHERNET TOKEN RING* FDDI ATM
---------- --------------------- ----------------------- -------------------
<S> <C> <C> <C>
. Ethernet 10BaseT . Token ring over UTP . FDDI over multimode . ATM OC-3 over
. Ethernet 10Base2 . Token ring over STP fiber (DAS and SAS) multimode fiber
. Ethernet 10Base5 . Token ring over . FDDI over single-mode . ATM OC-3 over
. Ethernet 10BaseFL multimode fiber fiber (DAS and SAS) single mode fiber
. FDDI over UTP
(TP/PMD)
</TABLE>

*Not currently available in the PizzaSwitch product.

SWITCHING CAPABILITIES OF XYLAN PRODUCTS

.Transparent bridging (802.1D) .Low latency

.Source route bridging .Network-wide virtual LANs

.Source route/transparent bridging .Virtual rings

.Optimized Device Switching .ATM LAN encapsulation (RFC 1483)

.Translations among all supported .IP over ATM (RFC 1577)
MAC-layer interfaces

.IP and IPX routing .Optimized trunking protocol

31
<PAGE>

AutoTracker--Virtual LANs

The OmniSwitch hardware and software architecture was designed to support
flexible virtual LANs. The Company's AutoTracker capability allows a network
manager to group devices logically, rather than physically, using policy-based
management. Workstation movements can be automatically tracked for the network
manager through the network. Virtual LAN processing is integrated into the
OmniSwitch's hardware and software architecture in order to maintain switching
performance. A virtual LAN supported by AutoTracker can include any
combination of LAN types supported by the OmniSwitch. For example, a single
virtual LAN could include Ethernet and token ring workstations as well as FDDI
and ATM servers. Virtual LANs supported by AutoTracker can span multiple
switches, across FDDI and/or ATM backbones. Any given workstation or server
can belong to as many as 32 virtual LANs. AutoTracker also allows workstations
attached to a single hub to be assigned to different virtual LANs.

OmniVision--Network Management

Xylan's OmniVision network management software operates within a customer's
existing network management environment. It supports the OmniSwitch and
PizzaSwitch with a graphical interface which operates on industry-standard
applications for both Windows (Hewlett-Packard's OpenView) and UNIX (OpenView
and SunSoft's SunNet Manager). Network managers can also control the
OmniSwitch with an ASCII menu-driven interface.

ATM Switching Technology

Xylan is developing ATM switching technology and currently expects to make
this technology commercially available in the second half of 1996. The Company
intends to incorporate this ATM switching capability into the OmniSwitch, in
combination with its existing LAN switching capability. The Company believes
that a new ATM switching architecture, Distributed Input Buffering with Output
Control, will allow both data-based and real-time traffic to be handled with
minimal cell loss even under heavy loads. Video streams and other real-time
traffic would also be supported.

PRODUCT DEVELOPMENT

The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. Xylan intends to make substantial investments in product
development and to participate in the development of industry standards. The
Company monitors changing customer needs and works closely with its OEM
partners, network integrators, end-user customers and market research
organizations to track changes in the marketplace, including emerging industry
standards and local area networking protocols.

The Company's products are developed using a distributed architecture that
allows multiple development teams to work in parallel. The Company believes
that this accelerates the product development cycle and reduces the time to
bring new products and features to market. Xylan intends to continue to use
this approach to develop and introduce additional products and enhancements in
the future.

The Company is focusing development efforts on expanding the LAN interface
and routing protocol capabilities of its products, supporting carrier services
and additional industry standards, adding higher capacity platforms and
expanding the Company's network management capabilities. In addition, Xylan
has devoted and continues to devote significant resources to the design,
simulation and fabrication of ASICs to reduce costs and increase the
performance of its products. No assurances can be given that the Company will
be able to introduce any or all of these products, or any future products, on
a timely basis, if at all. Furthermore, there can be no assurance that the
Company will be able to identify, develop, manufacture, market or support new
products or enhancements to its existing products successfully or on a timely
basis, that new Company products will gain

32
<PAGE>

market acceptance or that the Company will be able to respond effectively to
product announcements by competitors, technological changes or emerging
industry standards.

The Company's research and development expenditures totaled $343,000, $2.4
million and $7.1 million for the period from inception to December 31, 1993
and for the fiscal years ended December 31, 1994 and 1995, respectively, and
$3.2 million for the first quarter of 1996. At March 31, 1996, 82 full-time
employees were engaged in research and product development. The Company
performs its research and product development activities at its headquarters
and in offices located in Irvine, California and Salt Lake City, Utah. The
Company is seeking to hire additional skilled development engineers, who are
currently in short supply. The Company's business, operating results and
financial condition could be adversely affected if it encounters delays in
hiring required engineers.

SALES AND MARKETING

The Company's sales and marketing strategy is focused on three channels of
distribution: worldwide OEM partners, network integrators in North America and
overseas, and direct sales. In general, the Company's resale agreements with
its OEM partners and network integrators are not exclusive and each of the
Company's OEM partners and network integrators can cease marketing the
Company's products at their option with limited notice and with little or no
penalty. In addition, these agreements generally provide for discounts based
on expected or actual volumes of products purchased or resold by the reseller
in a given period and do not require minimum purchases. Certain of these
agreements provide manufacturing rights and access to source code upon the
occurrence of specified conditions or defaults.

OEM Partners

The Company has established OEM partnerships with leading communications and
networking companies, including Alcatel, Digital, Hitachi and Network Systems
Corporation. Aggregate sales to OEM partners accounted for approximately 60%
and 42% of Xylan's revenue in 1995 and the first quarter of 1996,
respectively. Sales to three of the Company's OEM partners, Hitachi, Digital
and Alcatel, accounted for 17.6%, 17.2% and 10.5%, respectively, of revenue in
1995. Each of the Company's OEM partners resells the Company's products under
its own name. Certain of them have also agreed to supply Xylan with technology
to be incorporated into the OmniSwitch. Each of Xylan's OEM partners is a
major network integrator, as well as a manufacturer. The Company believes that
its OEM partnerships enhance its ability to penetrate large organizations
because these resellers have long-term supplier relationships with these
potential customers. Since OEM partners provide support to their customers,
Xylan is also able to focus its support efforts on its direct customers, and
on training and high-level backup support to OEM partners and network
integrators. The Company's agreement with Alcatel limits the number of
additional network integrators Xylan may appoint in certain European countries
and restricts the Company's ability to sell directly to end users in such
countries.

Network Integrators

The Company also currently sells its products through more than 70 network
integrators worldwide. The Company's network integrators supplement the direct
and OEM channels. Network integrators generally are responsible for system
installation, technical support and follow-on services to customers in their
respective territories. Network integrators accounted for approximately 33%
and 56% of Xylan's revenue in 1995 and the first quarter of 1996,
respectively. No individual network integrator accounted for more than 4% of
the Company's revenue in 1995. During the first quarter of 1996, one of the
Company's network integrators in Japan accounted for in excess of 30% of the
Company's revenue for the quarter. However, the Company anticipates that this
network integrator will not constitute a similar portion of the Company's
revenue in future periods.

33
<PAGE>

Direct Sales in North America

Xylan maintains a direct sales organization to focus on major account sales,
promote the Company's products and ensure direct contact with the Company's
current and potential customers. As of March 31, 1996, this sales organization
in North America consisted of 44 persons. Xylan's sales organization also
provides support to OEM partners and network integrators, assists end-user
customers in addressing complex switching problems, and promotes the features
and capabilities of the Company's products. In addition, the Company believes
that direct sales helps the Company to monitor changing customer requirements.

Xylan's International Sales Organization

The Company has designed its products and established its marketing and
sales channels to address the global market opportunities for LAN switching
products. The Company's international sales are conducted primarily through
its OEM partners and independent, territory-specific network integrators. The
Company believes that there is a strong international market for its products.
Sales to customers outside of North America accounted for approximately 49%
and 67% of the Company's revenue in 1995 and the first quarter of 1996,
respectively, with approximately 33% and 15% of 1995 revenue being
attributable to sales to customers in Asia-Pacific and Europe, respectively.
However, these percentages may understate sales of the Company's products to
international end-users because certain of the Company's U.S.-based OEM
partners market the Company's products abroad. Currently the Company has
approximately 31 sales and marketing personnel operating out of 11 locations
throughout Europe (France, Germany, the Netherlands, Sweden and the United
Kingdom), South Africa and Asia-Pacific (Australia, China, Japan, Korea and
Singapore). This international sales organization provides support to OEM
partners and network integrators and promotes the features and capabilities of
the Company's products.

34
<PAGE>

End Users

The Company's products have been deployed by a broad range of organizations,
ranging from companies in the telecommunications, manufacturing, medical,
computer services, media and finance/insurance industries to educational
institutions and the federal government. The following organizations are
representative end users of the Company's products.

TELECOMMUNICATIONS MEDIA
Bell Atlantic Corp. Canadian Broadcasting Corp.
Bell-Northern Research Ltd. General Instrument
BellSouth Corp. North American Color
Dacom Inc. R. R. Donnelley
Intermedia Communications, Inc. Time Warner
MCI Telecommunications Corp.
New Brunswick Telephone Company FINANCE/INSURANCE
Nippon Telephone and Telegraph Company Aetna

Bank of Valletta
MANUFACTURING Household Finance
ABB Inc. Liberty Life Insurance Co.
Bombardier Corp Scandinavian Bank of Switzerland
Caterpillar Inc. VanCity
Data General Corp. Volksbank
Fujitsu Ltd. Western Surety

Hyundai Heavy Industries
Lockheed Martin Corp. EDUCATION
Mitsubishi Semiconductor America, Inc. Korea University
Pratt & Whitney Northeastern Illinois University
Samsung Electronics Plymouth University
Sverdrup Seoul National University
University of California, Los
MEDICAL Angeles
Central Texas Medical Center University of Helsinki
Medical University of South Carolina University of Illinois
Ryerson Polytechnic University, University of Toronto
Toronto
St. Mercy's Hospital
GOVERNMENT

COMPUTER SERVICES Bonneville Power Administration
Comdisco Inc. Chief of Naval Operations
Compumark Office of the Secretary of Defense
Demon Internet Ltd. Port of Singapore Authority
Electronic Data Systems Corp. U.S. Department of the Air Force
GTECH Corp. U.S. Army IM&T
NexGen Inc. U.S. Atlantic Command

Marketing

The Company has a number of marketing programs to support the sale and
distribution of its products. The objective of these programs is to inform OEM
partners, network integrators and prospective end-user customers about the
capabilities and benefits of the Company's products. Marketing programs
include participation in industry tradeshows, technical conferences and
technology seminars; preparation of competitive analyses; sales training;
publication of technical and educational articles in industry journals;
maintenance of Xylan's World Wide Web site; advertising; and direct mail
distribution of Company literature.

35
<PAGE>

CUSTOMER SERVICE AND SUPPORT ENGINEERING

The Company's OEM partners and network integrators generally provide
installation, maintenance and support services to their customers, with the
Company providing backup support. Xylan's customer service and support
organization installs, maintains and supports products sold in the United
States by the Company's direct sales force as well as certain sales by the
Company's OEM partners and network integrators.

Xylan employs systems engineers who work closely with the Company's OEM
partners, network integrators and direct sales personnel to assist end-users
with pre- and post-sales support matters. These systems engineers provide
input to the product development process based on their experiences in the
field. The Company supports customers and sales personnel by providing
telephone support. The Company also offers on-site installation and technical
assistance for fixed fees.

The Company's customers have a choice of maintenance options depending upon
the level of service desired. Xylan typically provides its network integrators
with a 15-month hardware warranty and a six-month software warranty,
commencing on product shipment. Warranty terms for OEM partners are negotiated
on a case-by-case basis.

MANUFACTURING

Xylan's manufacturing operations consist primarily of material planning and
procurement, final assembly, software loading, test and quality assurance.
Xylan's operational strategy relies on outsourcing of manufacturing to reduce
fixed costs and to provide flexibility in meeting market demand. The Company
currently subcontracts component procurement and kitting and printed circuit
board assembly to a company that specializes in these services. The Company
takes the printed circuit board-based modules produced by its contract
manufacturer and inserts them into product enclosures in combination with
Xylan's software to meet the needs of individual customers.

In connection with its outsourcing strategy, the Company is seeking to
secure additional sources of supply, including additional contract
manufacturers. The Company has experienced in the past, and may in the future
experience, problems with its contract manufacturers, such as quality,
quantity and on-time delivery. In addition, the Company may in the future
experience pricing pressures from its contract manufacturers. To date, the
Company has had only limited experience with the use of contract
manufacturers. There can be no assurance that the Company will effectively
manage its contract manufacturers or that these contract manufacturers will
meet the Company's future requirements for timely delivery of products of
sufficient quality and quantity. The Company intends to introduce a number of
new products and product enhancements in 1996 and 1997, which will require
that the Company rapidly achieve volume production by coordinating its efforts
with those of its suppliers and contract manufacturers. Certain of the
Company's products in development will require contract manufacturers to adopt
or develop advanced manufacturing techniques, which could inhibit volume
manufacturing of those products. The inability of Xylan's contract
manufacturers to provide it with adequate supplies of high-quality products or
the loss of any of the Company's contract manufacturers could cause a delay in
Xylan's ability to fulfill orders while the Company identifies a replacement
manufacturer and could have a material adverse effect on the Company's
business, operating results and financial condition.

The Company uses a rolling six-month forecast based on anticipated product
orders to determine its general materials and component requirements. Lead
times for materials and components ordered by the Company vary significantly,
and depend on factors such as the specific supplier, contract terms and demand
for a component at a given time. Currently, the Company acquires materials and
completes certain standard subassemblies based on the Company's forecast. Upon
receipt of firm orders from customers, the Company assembles fully-configured
systems and subjects them to a number of tests before shipment. If orders do
not match forecasts, the Company may have excess or inadequate inventory of
certain materials and components. The Company recently implemented new and
enhanced financial and management information systems and controls and is
training its personnel to operate such systems. Any difficulty in the
operation of such new and enhanced systems and

36
<PAGE>

controls or the training of personnel, or any disruptions in the transition to
such new or enhanced systems and controls, could adversely affect the
Company's ability to accurately forecast sales demand and calibrate
manufacturing to such demand, to calibrate purchasing levels and to accurately
record and control inventory levels and to record and report financial and
management information on a timely and accurate basis.

Although the Company generally uses standard parts and components for its
products, several key components used in the manufacture of the Company's
products are currently purchased only from single or limited sources. At
present, single-sourced components include programmable integrated circuits,
selected other integrated circuits and cables and custom-tooled sheet metal;
and limited-sourced components include flash memories, DRAMs, printed circuit
boards and ASICs. The Company generally does not have long-term agreements
with any of these single or limited sources of supply. The Company is in the
process of incorporating ASICs in many of its products. Each of these ASICs is
initially being manufactured only by a single source, particularly LSI Logic
Corporation, and, accordingly, the risks of relying on sole sources is
expected to increase. Any interruption in the supply of any of these
components, or the inability of the Company to procure these components from
alternate sources at acceptable prices and within a reasonable time, could
have a material adverse effect upon the Company's business, operating results
and financial condition. Qualifying additional suppliers is time consuming and
expensive and the likelihood of errors is greater with new suppliers. From
time to time the Company has experienced shortages and allocations of certain
components and has experienced delays in fulfilling orders while waiting to
receive the necessary components. Given current worldwide demand for
integrated circuits and certain other components used by the Company, such
shortages and allocations are likely to occur again in the future and could
have a material adverse effect on the Company's business, operating results
and financial condition.

COMPETITION

The market for network switching products is intensely competitive and
subject to frequent product introductions with improved price/performance
characteristics, rapid technological change and continued emergence of new
industry standards. Many networking companies, including Bay Networks, Inc.,
Cabletron Systems, Inc., Cisco Systems, Inc., FORE Systems, Inc. and 3Com
Corporation have introduced, or have announced their intention to develop,
network switching products that are or will be competitive with the Company's
products. In addition, many of the Company's large competitors offer customers
a broader product line which provides a more comprehensive networking solution
than the Company currently offers. Xylan expects that other companies will
also enter markets in which the Company competes. In addition to competition
from providers of network switching products, the Company expects to face
competition from other vendors in the networking market who may incorporate
switching functionality into their products or provide alternative network
solutions. Furthermore, the Company's OEM partners may in the future develop
competitive products and may then decide to terminate their relationships with
the Company. Many of the Company's 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
a larger installed customer base, than the Company. As a result, these
competitors may be able to devote greater resources to the development,
promotion, sale and support of their products than the Company. In addition,
competitors with a larger installed customer base may have a competitive
advantage over the Company when selling similar products or alternative
networking solutions to such customers. Increased competition could result in
significant price competition, reduced profit margins or loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against either current or
potential competitors in the future.

Xylan believes that the principal competitive factors in its market are: (i)
expertise and familiarity with LAN and ATM protocols, LAN and ATM switching,
and network management; (ii) product performance, features, functionality, and
reliability; (iii) price/performance; (iv) timeliness of new product
introductions; (v) adoption of emerging industry standards; (vi) customer
service and support; (vii) size and scope of distribution network; (viii)
access to customers; (ix) size of installed customer base; and (x) corporate
operating history and financial

37
<PAGE>

resources. The Company believes that it is competitive with respect to the
first seven of these factors and intends to become competitive with respect to
the remaining factors.

Unlike the Company, many of its competitors have received ISO-9000
certification, which is provided by an independent organization that certifies
that design and manufacturing processes adhere to certain established
standards. Many organizations, particularly internationally and in the
telecommunications industry, will not purchase products from suppliers that
have not received ISO-9000 certification. Accordingly, until it has obtained
ISO-9000 certification, the Company may be precluded from selling its products
to such organizations and its ability to compete with other suppliers of
network communications equipment may be adversely affected. While the Company
is seeking ISO-9000 certification, there can be no assurance as to when or if
the Company will obtain such certification.

PROPRIETARY RIGHTS AND LITIGATION

The Company's success and its ability to compete is dependent, in part, upon
its proprietary technology. The Company does not hold any issued patents and
currently relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary rights in its
products. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.

38
<PAGE>

obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be
required to obtain one or more licenses from third parties. There can be no
assurance that the Company or its customers could obtain necessary licenses
from third parties at a reasonable cost or at all. The defense of any lawsuit
could result in time consuming and expensive litigation, damages, license
fees, royalty payments and restrictions on the Company's ability to sell its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

EMPLOYEES

As of March 31, 1996, the Company employed 257 persons, including 112 in
sales and marketing (of whom 13 are systems and support engineers), 82 in
research and product development, 37 in operations, and 26 in finance and
administration. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes that its
relationship with its employees is good.

Competition for qualified personnel in the computer networking and
communications industry is intense. There can be no assurance that the Company
will be successful in retaining its key employees or that it can attract the
additional skilled personnel required for the Company's future growth. In
addition, companies in the networking industry whose employees accept
positions with competitive companies frequently claim that their competitors
have engaged in unfair hiring practices. Xylan has, from time to time,
received such claims from other companies and, although claims to date have
not resulted in material litigation other than in connection with Ascom
Timeplex, there can be no assurance that the Company will not receive
additional claims in the future as it seeks to hire qualified personnel or
that such claims will not result in material litigation involving the Company.
The Company could incur substantial costs in defending itself against any such
claims, regardless of the merits of such claims.

FACILITIES

The Company leases approximately 40,000 square feet of office, development
and manufacturing space in three adjacent facilities in Calabasas, California.
The current leases on this space expire in April 1999. In addition, the
Company currently requires additional manufacturing space and is in the
process of leasing an additional 40,000 square feet of space (a portion of
which will be used for manufacturing) that is scheduled to be occupied during
July 1996. The Company also has 33 sales and support offices worldwide. Xylan
may also need to obtain additional office, development and manufacturing space
to accommodate expected business growth during 1996. There can be no assurance
that such additional facilities, if required, will be available in a timely
manner or on commercially reasonable terms.

39
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of March 31, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steve Y. Kim................ 46 President, Chief Executive Officer and Chairman
John Bailey................. 38 Vice President of Product Development
C. Stephen Cordial.......... 45 Vice President and Chief Financial Officer
Douglas Hill................ 43 Vice President of Corporate Communications
Yuri Pikover................ 34 Vice President of Worldwide Sales
Kevin T. Walsh.............. 38 Vice President of Marketing
Kevin G. Hall(1)(2)......... 36 Director
Robert C. Hawk.............. 56 Director
Trude C. Taylor(1)(2)....... 74 Director
John L. Walecka(1)(2)....... 36 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Mr. Kim, a co-founder of the Company, has served as the Company's President
and Chief Executive Officer and Chairman of the Board of Directors since the
Company's inception in July 1993. Prior to co-founding the Company, Mr. Kim
founded and served as President and Chief Executive Officer of Fibermux
Corporation ("Fibermux"), a networking company, from November 1984 to June
1993. Prior to founding Fibermux, Mr. Kim held management and design positions
with a number of companies, including Phalo Optical Systems Division, Litton
Data Systems, and Burroughs Corporation.

Mr. Bailey joined the Company in January 1994 and has served in various
engineering management positions, most recently as Vice President of Product
Development. Prior to joining the Company, Mr. Bailey was an Assistant Vice
President for LAN Internetworking Technology at Ascom Timplex, a networking
company, from September 1992 to January 1994. From January 1990 to September
1992, Mr. Bailey served in various engineering management and design positions
at Unisys Corporation, a computer manufacturer.

Mr. Cordial has served as the Company's Vice President and Chief Financial
Officer since September 1995. Prior to joining the Company, Mr. Cordial was
Vice President of Operations and Chief Financial Officer at Voysys
Corporation, a voicemail company, from September 1993 to September 1995. Mr.
Cordial served as Vice President of Finance and Chief Financial Officer at
Sierra Semiconductor Corporation from January 1985 to September 1993.

Mr. Hill joined the Company in January 1994 and has served in various
marketing management positions, most recently as Vice President of Corporate
Communications. Prior to joining the Company, Mr. Hill was Senior Consultant
at Western Data Group, a network integration company, from October 1989 to
January 1994. Mr. Hill has also served as Vice President, Marketing and Sales
at ACT Networks, Inc., a networking company, and as Assistant Vice President
at MICOM Systems, Inc. ("MICOM Systems"), a networking company.

Mr. Pikover, a co-founder of the Company, has served in various sales and
management positions since the Company's inception in July 1993, most recently
as Vice President of Worldwide Sales. From August 1988 to June 1993, Mr.
Pikover served as Regional Sales Manager at Fibermux. Mr. Pikover served in
various sales, marketing and technical positions at MICOM Systems from
September 1982 to August 1988.

Mr. Walsh joined the Company in May 1995 and has served in various marketing
management positions, most recently as Vice President of Marketing. Prior to
joining the Company, Mr. Walsh served in various management positions at Ascom
Timeplex from August 1990 to May 1995, most recently as Director, Technical
Marketing.

40
<PAGE>

Mr. Hall has served as a member of the Company's Board of Directors since
September 1994. Mr. Hall has been a General Partner of Norwest Equity Partners
since 1993. Prior to joining Norwest, Mr. Hall served as a principal at
Brentwood Associates from July 1992 to August 1993, and as an associate at
Brentwood from June 1988 to July 1992. Mr. Hall also serves as a director of
Vantive Corporation, Plasma & Materials Technologies, Inc. and several
privately held companies.

Mr. Hawk has served as a member of the Company's Board of Directors since
July 1995. Mr. Hawk has served as President and Chief Executive Officer of
U.S. West Multimedia Group since May 1996. Mr. Hawk served as President of the
Carrier Division of U.S. West from September 1990 to May 1996, and has been
employed in the telecommunications field for over 25 years. Prior to joining
U.S. West, Mr. Hawk was employed at Mountain Bell. Mr. Hawk also serves as a
director of Premisys Communications and Pairgain Technologies.

Mr. Taylor has served as a member of the Company's Board of Directors since
August 1993. Mr. Taylor has been a principal with TC Associates, a consulting
firm, since May 1986. Mr. Taylor serves as a director of Plantronics, Inc.,
Densepac Microsystems, Inc. and several privately held companies.

Mr. Walecka has served as a member of the Company's Board of Directors since
February 1994. Mr. Walecka has been a General Partner of certain venture
capital funds associated with Brentwood Associates, a venture capital company,
since January 1990. From May 1984 to January 1990, Mr. Walecka was an
associate with Brentwood Associates. Mr. Walecka also serves as a director of
Documentum, Inc. and several privately held companies.

The Company's Bylaws currently authorize six directors. All directors hold
office until the next annual meeting of shareholders or until their successors
are duly elected and qualified. The Company's Board of Directors approved an
amendment to its Articles of Incorporation, effective upon qualification of
the Company as a "listed corporation," as defined in Section 301.5(d) of the
California Code, that provides for a classified Board of Directors consisting
of two classes with directors in each class serving staggered two-year terms.
Upon the expiration of the term of each class of directors, members
constituting such class of directors will be elected for a two-year term at
the next succeeding annual meeting of shareholders. See "Description of
Capital Stock--California Anti-Takeover Effects."

The officers serve at the discretion of the Board of Directors. There are no
family relationships between any of the directors or executive officers of the
Company.

The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of the Company, and an Audit Committee, which reviews the results and scope of
the audit and other services provided by the Company's independent
accountants. See "--Compensation Committee Interlocks and Insider
Participation."

DIRECTOR COMPENSATION

Members of the Company's Board of Directors do not receive compensation for
their services, but are reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors. The Company
has adopted the 1996 Directors' Stock Option Plan and, under such plan,
nonemployee directors will be eligible to receive stock options in
consideration for their services. See "--Stock and Other Plans," and "Certain
Transactions."

41
<PAGE>

EXECUTIVE COMPENSATION

The following table shows the compensation received in the fiscal year ended
December 31, 1995 by the Company's Chief Executive Officer and the Company's
four other executive officers who earned in excess of $100,000 during such
fiscal year (collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------ ---------------------
NAME AND PRINCIPAL SECURITIES UNDERLYING ALL OTHER
POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- ------------------ --------- -------- --------------------- ------------
<S> <C> <C> <C> <C>
Steve Y. Kim............ $112,500 $19,714 260,000 $169,533(1)
Chairman, President and
Chief Executive
Officer
John Bailey............. 119,963 14,217 100,000 --
Vice President of
Product Development
C. Stephen Cordial(2)... 32,455 8,542 200,000 100,000(3)
Vice President and
Chief Financial
Officer
Douglas Hill............ 109,791 13,464 40,000 --
Vice President of
Corporate
Communications
Yuri Pikover............ 83,923 8,542 -- 48,524(4)
Vice President of
Worldwide Sales
</TABLE>
- --------
(1) Includes $162,533 paid in commissions for fiscal year 1995.
(2) Mr. Cordial joined the Company in September 1995.
(3) Includes $60,000 paid as reimbursement for relocation expenses and $40,000
paid as reimbursement for taxes incurred.
(4) Represents amounts paid in commissions for fiscal year 1995.

The following table sets forth information for the Named Executive Officers
with respect to grants of options to purchase Common Stock of the Company made
during the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS(1) 10-YEAR OPTION TERM($)(2)
------------------------------------------------------- -------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS DEEMED
UNDERLYING GRANTED TO EXERCISE FAIR
OPTIONS EMPLOYEES IN PRICE MARKET EXPIRATION
NAME GRANTED (#) FISCAL YEAR(%) ($/SH.) VALUE($) DATE 0% 5% 10%
- ---- ----------- -------------- -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steve Y. Kim............ 260,000 5.8% $1.10 $1.25 10/18/05 $39,000 $243,391 $556,966
John Bailey............. 100,000 2.2 1.00 1.25 10/18/05 25,000 103,612 224,218
C. Stephen Cordial...... 200,000 4.5 0.375 1.00 9/29/05 125,000 250,779 443,748
Douglas Hill............ 40,000 0.9 1.00 1.25 10/18/05 10,000 41,445 89,687
Yuri Pikover............ -- -- -- -- -- -- -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR

- --------
(1) The stock options listed above were granted pursuant to the Company's 1993
Plan. Each option becomes exercisable at a rate of 20% each year for five
years following the date of grant, as long as the optionee remains an
employee with, consultant to or director of the Company. The maximum term
of each option

42
<PAGE>

granted is ten years from the date of grant; provided, however, that
options granted to Mr. Kim have a term of five years from the date of
grant. The exercise price is equal to the value of the stock on the grant
date, as determined in good faith by the Board of Directors on the date of
grant based upon a review of a number of factors, including the Company's
operating results and financial condition through the grant date (including
lack of profitability and developments in litigation with Ascom Timeplex),
the most recent price at which the Company had sold Preferred Stock in
capital raising transactions, the aggregate liquidation preference of
outstanding Preferred Stock and the likelihood of near-term conversion of
outstanding Preferred Stock; provided, however, that options granted to Mr.
Kim have an exercise price equal to 110% of the Board-determined value of
the stock on the grant date. The Company subsequently determined, based in
part on an independent appraisal of the Company's Common Stock as of
September 30, 1995, that for financial statement presentation purposes the
Company should record unearned compensation in connection with the options
listed above for the difference between the grant price and the deemed fair
market value. The method used to value shares of Common Stock to determine
deemed fair market values for option grant disclosure purposes was to
adjust the appraised value of the Common Stock at September 30, 1995 to
reflect the value of a share of Common Stock on the option grant date. The
methods of valuation used by the independent appraiser to determine fair
market value (based on an arms-length transaction) were primarily estimates
of future cash flows, and also a comparison to similar publicly traded
companies, with a discount applied for the lack of a public market for the
Common Stock. The adjustments to this fair market value at September 30,
1995 were based on the Company's evaluation of several factors at each
grant date relative to the status of these factors at September 30, 1995.
The factors were the Company's operating results and financial condition
through the grant date (including lack of profitability, market acceptance
of the Company's products and developments in litigation with Ascom
Timeplex), the most recent price at which the Company had issued and sold
Preferred Stock in capital raising transactions, the probability and timing
of a liquid market for the Common Stock in light of the Company's
performance and market conditions and the aggregate liquidation preference
of outstanding Preferred Stock.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the deemed fair market value are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price. The
figures set forth in the 0% column reflect the value of such options
without any further appreciation of the deemed fair market value of the
underlying securities after the grant date, based upon the difference
between the exercise price and the deemed fair market value of the
underlying securities on the grant date. Actual gains, if any, on stock
option exercises are dependent on the future financial performance of the
Company, overall market conditions and the option holders' continued
employment through the vesting period. This table does not take into
account any appreciation in the deemed fair market value of the Common
Stock from the date of grant to the date of this Prospectus, other than
the columns reflecting assumed rates of appreciation of 5% and 10%.

The following table sets forth information for the Named Executive Officers
with respect to exercises of options to purchase Common Stock of the Company
in the fiscal year ended December 31, 1995. No named executive officer
exercised a stock option during fiscal 1995.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT
YEAR END (#) FISCAL YEAR END ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steve Y. Kim................ -- 260,000 $ -- $396,500
John Bailey................. 48,000 292,000 127,850 648,650
C. Stephen Cordial.......... -- 200,000 -- 450,000
Douglas Hill................ 40,000 200,000 102,600 475,400
Yuri Pikover................ -- -- -- --
</TABLE>
- -------
(1) Based on the deemed fair market value of the option shares at fiscal year
end ($2.675 per share as determined in good faith by the Board of
Directors) less the option exercise price payable for such shares.

43
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Board of Directors are
Messrs. Hall, Taylor and Walecka. No member of the Compensation Committee was
at any time during the fiscal year ended December 31, 1995, or at any other
time, an officer or employee of the Company. No executive officer of the
Company serves as a member of the Board of Directors or Compensation Committee
of any entity which has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee.

STOCK AND OTHER PLANS

1993 Stock Incentive Plan. The Company's 1993 Stock Incentive Plan was
adopted by the Board of Directors and approved by the shareholders in October
1993. A total of 8,000,000 shares of Common Stock have been reserved for
issuance under the Company's 1993 Stock Incentive Plan (the "1993 Plan"). As
of March 31, 1996, 679,026 shares had been issued upon the exercise of stock
options or stock purchase rights granted under the 1993 Plan, 6,811,300 shares
were subject to outstanding options and 509,674 shares remained available for
future grant. The 1993 Plan provides for the grant to employees of the Company
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and for the grant of nonstatutory stock options to employees and
consultants of the Company. Stock purchase rights may also be granted to
employees and consultants. The 1993 Plan is administered by the Board of
Directors or a committee of the Board of Directors (the "Administrator"),
which selects the optionees, determines the number of shares to be subject to
each option and determines the exercise price of each option. The exercise
price of all incentive stock options granted under the 1993 Plan must be at
least equal to the fair market value of the Common Stock on the date of grant
(which, in the event that the Company's Common Stock is not publicly traded,
shall be determined in good faith by the Administrator on the date of grant).
The exercise price of all nonstatutory stock options granted under the 1993
Plan must be at least equal to 85% of such fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any stock option granted must equal at least
110% of such fair market value on the grant date and the maximum term of the
option must not exceed five years. The term of all other options granted under
the 1993 Plan may not exceed ten years. The Company in 1995 granted certain
options at fair market value (110% of fair market value for an option granted
to Mr. Kim) and subsequently determined, based in part on an independent
appraisal, to record unearned compensation in connection with these options
for the difference between the exercise price and the deemed fair market value
for financial statement presentation purposes.

In the event of certain changes in control of the Company, the 1993 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; provided, however, that the
Administrator may, in lieu of such assumption or substitution, provide for the
optionee to have the right to exercise the option as to all or a portion of
the stock subject thereto, including shares which would not otherwise be
exercisable, in which case each option will be exercisable for 15 days from
the date of notice of such determination. Unless terminated sooner, the 1993
Plan will terminate in August 2003. The Board has authority to amend or
terminate the 1993 Plan, provided no such action would impair the rights of
the holder of any outstanding options without the written consent of such
holder.

1996 Stock Plan. The Company's 1996 Stock Plan (the "1996 Plan") was adopted
by the Board of Directors in January 1996, and approved by the shareholders in
February 1996. A total of 3,000,000 shares of Common Stock have been reserved
for future issuance under the 1996 Plan. The 1996 Plan provides for the grant
to employees of the Company (including officers and employee directors) of
incentive stock options within the meaning of Section 422 of the Code, and for
the grant of nonstatutory stock options to employees and consultants of the
Company. Stock purchase rights may also be granted to employees and
consultants. The 1996 Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"), which selects the
optionees, determines the number of shares to be subject to each option and
determines the exercise price of each option. In no event, however, may an
individual employee receive option grants for more than 300,000 shares under
the 1996 Plan in any fiscal year. The exercise price of all incentive stock
options granted

44
<PAGE>

under the 1996 Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted under the 1996 Plan must be at least equal to the fair
market value of the Common Stock on the date of grant for grants made to
certain of the Company's executive officers and at least 85% of the fair
market value of the Common Stock on the date of grant for all other persons.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the maximum term of the option must not exceed
five years. The term of all other options granted under the 1996 Plan may not
exceed ten years.

In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; provided, however, that the
Administrator may, in lieu of such assumption or substitution, provide for the
optionee to have the right to exercise the option as to all or a portion of
the stock subject thereto, including shares which would not otherwise be
exercisable, in which case each option will be exercisable for 15 days from
the date of notice of such determination. Unless terminated sooner, the 1996
Plan will terminate ten years from its effective date. The Board has authority
to amend or terminate the 1996 Plan, provided no such action would impair the
rights of the holder of any outstanding options without the written consent of
such holder.

1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
January 1996, and approved by the shareholders in February 1996. A total of
1,500,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Code, will be implemented by a series of offering periods of 24
months duration with new offering periods (other than the first offering
period) commencing on or about February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six
months duration, with the last day of each period being designated a purchase
date. The first such offering period commenced on the effective date of the
Company's initial public offering (March 11, 1996) and continues through
January 31, 1998, with the first purchase date occurring on January 31, 1997,
and subsequent purchase dates to occur every six months thereafter. The
Purchase Plan is administered by the Board of Directors, or a committee named
by the Board of Directors. Employees (including officers and employee
directors) of the Company, or of any majority owned subsidiary designated by
the Board, are eligible to participate if they are employed by the Company or
any such subsidiary for at least 20 hours per week and more than five months
per year. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions, which may not exceed 10% of an employee's
compensation, at a price equal to the lower of 95% of the fair market value of
the Company's Common Stock at the beginning of the offering period or the
purchase date. If the fair market value of the Common Stock on a purchase date
is less than the fair market value at the beginning of the offering period, a
new twenty-four month offering period will automatically begin on the first
business day following the purchase date with a new fair market value. The
maximum number of shares purchasable by all participants on a purchase date
may not exceed 375,000 shares. Employees may end their participation in the
Purchase Plan at any time during the offering period, and once during each
offering period may decrease the rate of payroll deductions. Participation in
the Purchase Plan ends automatically on termination of employment with the
Company.

The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the Purchase Plan will be assumed
or an equivalent right substituted by the successor corporation unless the
Board of Directors shortens the offering period so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder. If not terminated earlier, the Purchase
Plan will have a term of twenty years.

1996 Directors' Stock Option Plan. The 1996 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in January 1996,
and approved by the shareholders in February 1996. A total of 150,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan. The
Directors'

45
<PAGE>

Plan provides for the grant of nonstatutory stock options to non-employee
directors of the Company. The Directors' Plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the Board of Directors. The Directors' Plan
provides that each person who is a nonemployee director as of the effective
date of such plan will be granted an option (the "First Option") to purchase
15,000 shares of Common Stock on such effective date. Each person who first
becomes a nonemployee director of the Company after the effective date shall
be granted a nonstatutory stock option to purchase 15,000 shares of Common
Stock (the "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. Thereafter, on the date of each annual
meeting of the Company's shareholders, each nonemployee director shall be
granted an additional option to purchase 5,000 shares of Common Stock (a
"Subsequent Option") if, on such date, he or she shall have served on the
Company's Board of Directors for at least six months. The Directors' Plan
provides that the First Option shall become exercisable in installments as to
33 1/3% of the total number of shares subject to the option on the first
anniversary of the date of grant of the First Option and 33 1/3% on each
anniversary of the date of grant of the First Option and each Subsequent
Option shall become exercisable in full on the third anniversary of the date
of the grant of that Subsequent Option. The exercise price of all stock
options granted under the Directors' Plan shall be equal to the fair market
value of a share of the Company's Common Stock on the date of grant of the
option. Options granted under the Directors' Plan have a term of ten years.
The Directors' Plan sets neither a maximum nor a minimum number of shares for
which options may be granted to any one nonemployee director, but does specify
the number of shares that may be included in any grant and the method of
making a grant. No option granted under the Directors' Plan is transferable by
the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order (as defined by the Code), and
each option is exercisable, during the lifetime of the optionee, only by such
optionee.

In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, each option will be
assumed or an equivalent option substituted by the successor corporation,
unless the successor corporation does not agree to the assumption or
substitution, in which case the option will terminate upon consummation of the
transaction. The Board of Directors may amend or terminate the Directors'
Plan; provided, however, that no such action may adversely affect any
outstanding option, and the provisions regarding the grant of options under
the plan may be amended only once in any six-month period, other than to
comport with changes in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") or to Code. If not terminated earlier, the Directors'
Plan will have a term of ten years.

401(k) Plan. The Company's tax deferred savings plan (the "401(k) Plan") was
adopted by the Board of Directors in May 1995. The 401(k) Plan is intended to
qualify under Sections 401 and 501 of the Code, so that contributions by
employees or by the Company to the 401(k) Plan, and income earned on
contributions, are generally not taxable to employees until withdrawn from the
401(k) Plan. The 401(k) Plan covers all employees of the Company. Employees
may elect to defer, in the form of contributions to the 401(k) Plan, between
1.0% and 12.0% of their pre-tax compensation; however, the amount deferred may
not exceed the statutorily prescribed annual limit. The 401(k) Plan permits
matching contributions of up to 25% (not to exceed an aggregate $2,000 per
calendar year), vested over five years, to be made to the 401(k) Plan by the
Company on behalf of employees. Contributions are allocated to each employee's
individual account, which is invested in selected mutual funds or a guaranteed
income fund according to the directions of the employee.

LIMITATIONS OF DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Articles of Incorporation include a provision that eliminates
the personal liability of its directors to the Company and its shareholders
for monetary damages for breach of the directors' fiduciary duties in certain
circumstances. This limitation has no effect on a director's liability (i) for
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interest of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv)
for acts or omissions that show a reckless disregard for the director's duty
to the Company or its

46
<PAGE>

shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a
risk of a series a serious injury to the Company or its shareholders, (v) for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Corporations Code (the
"California Code") concerning contracts or transactions between the Company
and a director or (vii) under Section 316 of the California Code concerning
directors' liability for improper dividends, loans, and guarantees. The
provision does not extend to acts or omissions of a director in his capacity
as an officer. Further, the provision will not affect the availability of
injunctions and other equitable remedies available to the Company's
shareholders for any violation of a director's fiduciary duty to the Company
or its shareholders.

The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with
individual directors, officers, employees and other agents. These indemnity
agreements have been entered into with all directors and executive officers
and provide the maximum indemnification permitted by law. These agreements,
together with the Company's Bylaws and Articles of Incorporation, may require
the Company, among other things, to indemnify these directors or executive
officers (other than liability resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a
court that they are not entitled to indemnification, and to obtain directors'
and officers' insurance if available on reasonable terms. Section 317 of the
California Code and the Company's Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expense incurred) arising under the
Securities Act. The Company has also obtained directors' and officers'
liability insurance.

47
<PAGE>

CERTAIN TRANSACTIONS

Since the inception of the Company in July 1993, the Company has issued, in
private placement transactions, shares of Preferred Stock as follows: (i) in
October 1993 and February 1994, an aggregate of 10,134,664 shares of the
Company's Series A Preferred Stock at a price of $0.30 per share, (ii) in
September 1994, October 1994 and November 1994, an aggregate of 7,718,600
shares of the Company's Series B Preferred Stock at a price of $0.80 per
share, (iii) in March 1995, an aggregate of 3,964,244 shares of the Company's
Series C Preferred Stock at a price of $2.52 per share, (iv) in October 1995
and December 1995, an aggregate of 1,262,120 shares of the Company's Series D
Preferred Stock at a price of $4.00 per share, and (v) in December 1995, an
aggregate of 952,382 shares of the Company's Series E Preferred Stock at a
price of $5.25 per share. In addition, in February 1994 a warrant to purchase
1,666,666 shares of the Company's Series A Preferred Stock was sold at an
exercise price of $0.325 per share, which warrant was exercised in August
1994. The purchasers of the Series A, Series B, Series C, Series D and Series
E Preferred Stock included, among others, the following 5% shareholders,
directors, and entities associated with directors:

<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
NAME STOCK STOCK STOCK STOCK STOCK
- ---- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Brentwood Associates VI,
L.P.(1)..................... 5,000,000 1,250,000 -- 300,000 145,334
Entities affiliated with
Norwest Equity
Partners, IV(2)............. -- 3,375,000 -- 575,000 148,674
Alcatel Data Networks S.A.... -- -- 3,964,244 -- --
Entities Affiliated with
Crosspoint Venture Partners
93.......................... 1,666,666 625,000 -- 150,000 --
Trude C. Taylor.............. 500,000 100,000 -- -- --
Robert C. Hawk............... -- -- -- 12,120 --
</TABLE>
- --------
(1) Holdings of Series A Preferred Stock include 1,666,666 shares acquired
upon exercise of a warrant for the purchase thereof. John Walecka, a
director of the Company, is affiliated with Brentwood Associates VI, L.P.
(2) Kevin Hall, a director of the Company, is affiliated with Norwest Equity
Partners, IV.

In March 1995, Alcatel Data Networks, S.A. ("ADN"), a joint venture between
Alcatel and Sprint Corporation, purchased 3,964,244 shares of the Company's
Series C Preferred Stock for an aggregate of approximately $10,000,000. In
connection with such investment, the parties entered into agreements pursuant
to which (i) ADN is subject to a "standstill" provision barring its purchase
of additional shares of the Company's capital stock if following the purchase
it would own more than 20% of the Company's total voting securities, subject
to certain exceptions (including (a) if a bona fide offer is made by a third
party which, if successful, would result in such party owning or having the
right to acquire more than 35% of the total outstanding voting securities of
the Company, (b) if a third party acquires more than 10% of the total
outstanding voting securities of the Company, (c) in connection with the
exercise of ADN's right of first refusal in the sale of securities by the
Company, (d) at any time after the termination of that certain Product and
Technology Agreement between ADN and the Company and (e) if the number of
outstanding securities of the Company is reduced as a result of any
repurchases by the Company), (ii) the Company is entitled to certain rights of
first refusal in the event that ADN proposes to sell or transfer its shares,
(iii) ADN is entitled to certain rights of first refusal in the event that the
Company proposes to sell shares to a third party under certain circumstances,
(iv) the Company will make available to ADN certain of the Company's products
in kit form for integration into certain of ADN's wide area network products
and (v) ADN was granted certain manufacturing rights with respect to the
Company's products. Also in connection with this transaction, the Company and
Alcatel entered into an International Distribution Agreement pursuant to which
the Company granted to Alcatel worldwide distribution rights with respect to
the Company's products and under which the Company is limited as to the number
of additional network integrators

48
<PAGE>

that it may appoint in certain European countries and is restricted in its
ability to sell directly to end users in such countries.

The Company has entered into an indemnification agreement with each of its
executive officers and directors.

Holders of Preferred Stock are entitled to certain registration rights in
respect of the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights."

The Company has granted options to certain of its executive officers and
directors. See "Management--Option Grants in Last Fiscal Year" and "--Stock
and Other Plans."

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions, including
loans (if any), between the Company and its officers, directors and principal
shareholders and their affiliates will be approved by a majority of the Board
of Directors, including a majority of the independent and disinterested
outside directors of the Board of Directors, and will be on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties.

49
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1996, as
adjusted to reflect the sale by the Company of the shares offered hereby by,
(i) each person known to the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) each director of the
Company who beneficially owns shares of Common Stock, (iii) each of the Named
Executive Officers, (iv) all directors and executive officers of the Company
as a group and (v) the Selling Shareholders.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)
NAME AND ADDRESS OF ------------------ SHARES BEING -----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------- ---------- ------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Brentwood Associates VI, 6,695,334 16.6% 500,000 6,195,334 15.2%
L.P. ...................
2730 Sand Hill Road,
Suite 250
Menlo Park, CA 94025
Steve Y. Kim(2) ......... 6,460,000 16.1 -- 6,460,000 15.9
26679 W. Agoura Road
Calabasas, CA 91302
Norwest Equity Partners, 4,098,674 10.2 306,084 3,792,590 9.3
IV(3)...................
3000 Sand Hill Road
Building 3, Suite 245
Menlo Park, CA 94025
Alcatel Data Networks 2,814,244 7.0 -- 2,814,244 6.9
S.A.....................
12, rue de la Baume
Paris, France 75008
Yuri Pikover(4).......... 2,890,000 7.2 60,000 2,830,000 7.0
26679 W. Agoura Road
Calabasas, CA 91302
Crosspoint Venture Part- 2,441,666 6.1 182,341 2,259,325 5.6
ners 93(5) .............
One First Street
Los Altos, CA 94022
Kevin G. Hall(6)......... 4,098,674 10.2 306,084 3,792,590 9.3
Robert C. Hawk........... 80,200 * -- 80,200 *
Trude C. Taylor(7)....... 690,000 1.7 44,807 645,193 1.6
John L. Walecka(8)....... 6,695,334 16.6 500,000 6,195,334 15.2
John Bailey(9)........... 101,000 * 30,000 71,000 *
C. Stephen Cordial....... -- -- -- -- --
Douglas Hill(10)......... 80,000 * 10,000 70,000 *

All directors and
executive officers as a
group (10 persons)(11).. 21,103,208 52.1 950,891 20,152,317 49.3

OTHER SELLING SHAREHOLDERS

U.S. Venture Partners IV, 1,509,080 3.7 112,696 1,396,384 3.4
L.P. ...................
Marilyn Marcus Alper..... 500,000 1.2 100,000 400,000 1.0
45 shareholders each ben-
eficially owning less
than 1% of the Company's
Common Stock............ 3,303,168 8.2 1,754,072 1,549,096 3.8
</TABLE>
- --------
* Less than 1%

(1) The persons named in this table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable

50
<PAGE>

and except as indicated in the other footnotes to this table. Beneficial
ownership is determined in accordance with the rules of the Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days after March 31, 1996 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.

(2) Includes 1,000,000 shares of Common Stock held by the Kim Irrevocable
Children's Trust dated September 15, 1995, and 5,460,000 shares held by
the Kim Family Trust dated June 11, 1991.

(3) Represents 3,375,000 shares of Common Stock held by Norwest Equity
Partners, IV and 723,674 shares of Common Stock held by Norwest Equity
Partners, V. Kevin G. Hall, a director of the Company, is a general
partner of both Itasca Partners, the general partner of Norwest Equity
Partners, IV, and Itasca Partners, V, L.L.P., the general partner of
Norwest Equity Partners, V. Mr. Hall disclaims beneficial ownership of
the shares held by such entities except to the extent of his
proportionate partnership interest therein.

(4) Includes 300,000 shares of Common Stock held by the Pikover Irrevocable
Children's Trust dated September 15, 1995, and 100,000 shares of Common
Stock held by the Pikover 1995 Irrevocable Trust dated September 15,
1995.

(5) Represents 2,368,072 shares of Common Stock held by Crosspoint Venture
Partners 93 and 73,594 shares of Common Stock held by Crosspoint 1993
Entrepreneurs Fund.

(6) Represents 3,375,000 shares of Common Stock held by Norwest Equity
Partners, IV and 723,674 shares of Common Stock held by Norwest Equity
Partners, V, which Mr. Hall may be deemed to beneficially own by virtue
of his status as a general partner of entities that are the general
partners of each of the above listed entities. Mr. Hall disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein. See footnote
(3) above.

(7) Includes 40,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 1996.

(8) Represents shares held by Brentwood Associates VI, L.P., which Mr.
Walecka may be deemed to beneficially own by virtue of his status as a
general partner of Brentwood VI Ventures, L.P., the general partner of
Brentwood Associates VI, L.P. Mr. Walecka disclaims beneficial ownership
of the shares held by such entity except to the extent of his
proportionate partnership interest therein.

(9) Includes 96,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1996. Does not include a total of 340,000
shares issuable upon exercise of options.

(10) Represents 80,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1996. Does not include a total of 240,000
issuable upon exercise of options.

(11) Includes 224,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1996.

51
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock,
$0.001 par value.

COMMON STOCK

As of March 31, 1996, there were 40,243,427 shares of Common Stock
outstanding that were held of record by approximately 160 shareholders. There
will be 40,643,427 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise of stock options after
March 31, 1996) after giving effect to the sale of the shares of Common Stock
offered hereby.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the Common Stock.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to determine the
powers, preferences, rights, qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of undesignated
Preferred Stock including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption prices and liquidation preferences, and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the shareholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the shareholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. At present, the Company has no plans to
issue any shares of Preferred Stock.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

After this offering, the holders of 21,954,401 shares of Common Stock (the
"Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of an agreement between the Company
and the holders of Registrable Securities. Subject to certain limitations in
the agreement, the holders of at least 30% of the Registrable Securities held
by certain investors may require, on one occasion at any time after six months
from the effective date of this offering, that the Company use its best
efforts to register the Registrable Securities for public resale. In addition,
the holders of at least 50% of the Registrable Securities held by Alcatel Data
Networks, S.A., may require, on one occasion at any time after March 11, 1997,
that the Company use its best efforts to register the Registrable Securities
for public resale. If the Company registers any of its Common Stock either for
its own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of the Registrable Securities
may also require the Company, on no more than two occasions over any twelve-
month period, to register all or a portion of their Registrable Securities on
Form S-3 when use of such form becomes available to the Company, provided,
among other limitations, that the proposed aggregate selling price, net of
underwriting discounts and commissions, is at least $3,000,000. All expenses
incurred in

52
<PAGE>

connection with a registration on Form S-3, including all registration, filing
and qualification fees, but excluding underwriting discounts and commissions
and fees for special counsel to the holders participating in the S-3
registration, must be borne by the Company.

CALIFORNIA ANTI-TAKEOVER EFFECTS

Certain provisions of law, and the Company's Articles of Incorporation and
Bylaws, could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions include authorization of the issuance
of up to 5,000,000 shares of Preferred Stock, with such characteristics, and
potential effects on the acquisition of the Company, as are described in
"Preferred Stock" above. The Company's Articles of Incorporation also provide
that, for as long as the Company has a class of stock registered pursuant to
the Exchange Act, shareholder action can be taken only at an annual or special
meeting of shareholders and may not be taken by written consent. In addition,
upon qualification of the Company as a "listed corporation," as defined in
Section 301.5(d) of the California Code, cumulative voting will be eliminated
and the Board of Directors be divided into two classes of directors, serving
staggered two-years terms. At each annual meeting, one class of directors will
be elected for a two-year term. See "Management." These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of the Company to negotiate first with the Company. The Company believes that
the benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals
could result in an improvement of their terms.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston. Its telephone number is (617) 575-2000.

53
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market price from time to time.
Furthermore, because only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price.

Upon completion of this offering, the Company will have outstanding
40,643,427 shares of Common Stock, (assuming no exercise of the Underwriters'
over-allotment option or outstanding options under the 1993 Plan after March
31, 1996). Of these shares, the 8,330,000 (including the 3,500,000 shares sold
in this offering and 4,830,000 shares sold in the Company's initial public
offering on March 11, 1996), will be freely transferable without restriction
or further registration under the Securities Act unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 of the
Securities Act (an "Affiliate"), which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act. The remaining
32,313,427 shares outstanding upon completion of this offering and held by
existing shareholders will be "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of the contractual
restrictions described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 575,399 shares will be available for sale in the public market on June 9,
1996, (ii) 24,689,289 shares will be eligible for sale on September 8, 1996,
(iii) 2,814,244 shares will be eligible for sale on March 11, 1997 and (v)
4,234,495 shares will be eligible for sale after September 8, 1996 upon
expiration of their respective two-year holding periods.

Upon completion of this offering, the holders of 21,954,401 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.

In connection with the Company's initial public offering, all directors and
executive officers and certain other shareholders of the Company, holding in
the aggregate substantially all of the shares of Common Stock outstanding
prior to such offering, have agreed with the Underwriters not to sell or
otherwise dispose of any shares of Common Stock prior to September 8, 1996
(the "Lockup Period") without the prior written consent of Morgan Stanley &
Co. Incorporated. In addition, ADN has agreed not to sell or otherwise dispose
of any shares of Common Stock until March 11, 1997 without the prior written
consent of Morgan Stanley & Co. Incorporated, except pursuant to the exercise
of its piggyback registration rights. See "Underwriters." The number of shares
of Common Stock available for sale in the public market is further limited by
restrictions under the Securities Act.

In general, under Rule 144 as currently in effect, beginning June 9, 1996 a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least two years, including persons who may be deemed
"affiliates" of the Company, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent of
the number of shares of Common Stock then outstanding or the average weekly
trading volume of the Common Stock as reported through the Nasdaq National
Market during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner
of sale provisions and notice requirements and to the availability of current
public information about the Company. In addition, a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
Restricted Shares proposed to be sold, would be entitled to sell such shares
under Rule 144(k) without

54
<PAGE>

regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.

Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Exchange Act, in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this Prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning June 9, 1996, may be sold
by persons other than Affiliates subject only to the manner of sale provisions
of Rule 144 and by Affiliates under Rule 144 without compliance with its two-
year minimum holding period requirements.

The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers,
in whole or in part, the economic risk of ownership of the Common Stock, prior
to September 8, 1996, without the prior written consent of Morgan Stanley &
Co. Incorporated, subject to certain limited exceptions.

In April 1996, the Company filed a registration statement under the
Securities Act covering approximately 11,929,000 shares of Common Stock
subject to outstanding options or reserved for issuance under the Company's
stock plans. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to affiliates and the
lapsing of the Company's repurchase options, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.

55
<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions in an Underwriting Agreement
dated the date hereof, each of the U.S. Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, Deutsche
Morgan Grenfell/C.J. Lawrence Inc., Robertson, Stephens & Company LLC, and
Wessels, Arnold & Henderson, L.L.C. are serving as U.S. Representatives, have
severally agreed to purchase, and the Company and the Selling Shareholders
have severally agreed to sell to them, and the International Underwriters
named below, for whom Morgan Stanley & Co. International Limited, Alex. Brown
& Sons International, Morgan Grenfell & Co., Limited, Robertson, Stephens &
Company LLC, and Wessels, Arnold & Henderson, L.L.C. are acting as
International Representatives (collectively with the U.S. Representatives, the
"Representatives"), have severally agreed to purchase, and the Company and the
Selling Shareholders agreed to sell to them, the respective number of shares
of Common Stock set forth opposite their respective names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................
Alex. Brown & Sons Incorporated..................................
Deutsche Morgan Grenfell/C.J. Lawrence Inc.......................
Robertson, Stephens & Company LLC ...............................
Wessels, Arnold & Henderson, L.L.C. .............................
---------
Subtotal....................................................... 2,800,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited.......................
Alex. Brown & Sons International.................................
Morgan Grenfell & Co., Limited...................................
Robertson, Stephens & Company LLC ...............................
Wessels, Arnold & Henderson, L.L.C. .............................
---------
Subtotal....................................................... 700,000
---------
Total......................................................... 3,500,000
=========
</TABLE>

The U.S. Underwriters and International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that
the obligations of the several Underwriters to pay for and accept delivery of
the shares of Common Stock offered hereby are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any are taken.

56
<PAGE>

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (a) it is not purchasing any shares of Common Stock being sold by
it (the "U.S. Shares") for the account of anyone other than a United States or
Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any U.S. Shares or distribute
this Prospectus outside the United States or Canada or to anyone other than a
United States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions set forth below, (a) it is not purchasing
any shares of Common Stock being sold by it (the "International Shares") for
the account of any United States or Canadian Person and (b) it has not offered
or sold, and will not offer or sell, directly or indirectly, any International
Shares or distribute this Prospectus within the United States or Canada or to
any United States or Canadian Person. The foregoing limitations do not apply
to stabilization transactions or to certain other transactions specified in
the Agreement Between U.S. and International Underwriters. With respect to
Robertson, Stephens & Company LLC and Wessels, Arnold & Henderson, L.L.C., the
foregoing representations or agreements (i) made by each of them in their
capacity as a U.S. Underwriter shall apply only to shares of Common Stock
purchased by each of them in their capacity as a U.S. Underwriter, (ii) made
by each of them in their capacity as an International Underwriter shall apply
only to shares of Common Stock purchased by each of them in their capacity as
an International Underwriter and (iii) shall not restrict either of their
abilities to distribute the Prospectus to any person. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside of the
United States and Canada of any United States or Canadian Person) and includes
any United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person and "United States" means the United States of
America, its territories, its possessions and all areas subject to its
jurisdiction.

Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the offering price set forth on the cover page hereof,
in United States dollars, less an amount not greater than the per share amount
of the concession to dealers set forth below.

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send to
any dealer who purchases from it any shares of Common Stock a notice stating
in substance that, by purchasing such shares such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares in Canada or to, or for the benefit of, any
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of Common Stock in
Canada will be made only pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer is
made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Common Stock a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 and
the Regulations with respect

57
<PAGE>

to anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of Common
Stock if that person is of a kind described in Article II(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a
person to whom such document may otherwise lawfully be issued or passed on.

Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered
or sold, and will not offer or sell, directly or indirectly, in Japan or to or
for the account or any resident thereof, any shares of Common Stock acquired
in connection with this offering, except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption
from the regulation requirement of the Securities and Exchange Law of Japan.
Each International Underwriter has further agreed to send to any dealer who
purchases from it any of such shares of Common Stock a notice stating in
substance that such dealer may not offer or sell any of such shares, directly
or indirectly, in Japan or to or for the account of any resident thereof,
except pursuant to any exemption from the registration requirement of the
Securities and Exchange Law of Japan, and that such dealer will send to any
other dealer to whom it sells any shares a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered
or sold, and will not offer and sell, directly or indirectly or offer or sell
to any person for re-offering or resale, directly or indirectly any shares of
common stock to any resident of the Republic of Korea (as the term is defined
under the Foreign Exchange Management Law of the Republic of Korea), or in the
Republic of Korea, except pursuant to applicable laws and regulations of the
Republic of Korea.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the offering price set forth on
the cover page hereof and part to certain dealers at a price which represents
a concession not in excess of $ per share under the offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other dealers.

Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 525,000 shares of Common Stock, at
the offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering over-allotments, if any, incurred
in the sale of the shares of Common Stock offered hereby. To the extent such
option is exercised, each U.S. Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such U.S. Underwriter's name
in the preceding table bears to the total number of shares of Common Stock
offered hereby to the U.S. Underwriters.

The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

See "Shares Eligible For Future Sale" for a description of certain
arrangements entered into in connection with the Company's initial public
offering by which all Selling Shareholders, officers and directors and certain
other shareholders and option holders of the Company have agreed not to sell
or otherwise transfer the Common Stock or convertible securities of the
Company held by them until either September 8, 1996 or March 11, 1997 without
the prior written consent of Morgan Stanley & Co. Incorporated. The Company
has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior consent of Morgan Stanley & Co. Incorporated,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, until
September 8, 1996.

58
<PAGE>

Pursuant to regulations promulgated by the Securities and Exchange
Commission, market makers in the Common Stock who are Underwriters or
prospective underwriters ("passive market makers") may, subject to certain
limitations, make bids for or purchases of shares of Common Stock until the
earlier of the time of commencement (the "Commencement Date") of offers or
sales of the Common Stock contemplated by this Prospectus or the time at which
a stabilizing bid for such shares is made. In general, on and after the date
two business days prior to the Commencement Date (1) such market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such stock for the two full consecutive calendar months
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) such market maker may not effect
transactions in, or display bids for, the Common Stock at a price that exceeds
the highest bid for the Common Stock by persons who are not passive market
makers and (3) bids made by passive market makers must be identified as such.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Venture Law Group, A Professional
Corporation, 2800 Sand Hill Road, Menlo Park, California 94025. Tae Hea Nahm,
a director of Venture Law Group, is the Secretary of the Company. As of the
date of this Prospectus, Mr. Nahm and investment partnerships of which certain
directors of Venture Law Group are general partners beneficially own 18,750
shares of the Company's Common Stock. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated financial statements of Xylan Corporation as of December
31, 1994 and 1995 and for the period from July 9, 1993 (date of incorporation)
to December 31, 1993 and for each of the years in the two-year period ended
December 31, 1995 included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement, of which
this Prospectus constitutes a part, under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information
with respect to the Company and the Common Stock offered hereby. Statements
contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits filed therewith, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at
prescribed rates.

59
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat
Marwick LLP,
Independent Certified
Public Accountants..... F-2
Consolidated Balance
Sheets................. F-3
Consolidated Statements
of Operations.......... F-4
Consolidated Statements
of Shareholders'
Equity................. F-5
Consolidated Statements
of Cash Flows.......... F-6
Notes to Consolidated
Financial Statements... F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Xylan Corporation:

We have audited the accompanying consolidated balance sheets of Xylan
Corporation and subsidiary as of December 31, 1994 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from July 9, 1993 (date of incorporation) to December 31, 1993 and
for the years ended December 31, 1994 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Xylan
Corporation and subsidiary as of December 31, 1994 and 1995 and the results of
their operations and their cash flows for the period from July 9, 1993 (date
of incorporation) to December 31, 1993 and for the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Los Angeles, California
January 22, 1996, except as to the
last paragraph of
Note 10, which is as of May 1, 1996

F-2
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 694 $ 6,034 $ 56,180
Short-term investments........................ 3,890 -- 25,472
Accounts receivable, net...................... 122 13,142 19,731
Inventories................................... 282 2,128 4,646
Prepaid expenses and other current assets..... 205 383 1,440
------- -------- --------
Total current assets........................ 5,193 21,687 107,469
Investments..................................... -- -- 7,023
Property and equipment, net..................... 1,225 5,073 7,314
Other assets.................................... 195 488 440
------- -------- --------
$ 6,613 $ 27,248 $122,246
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease
obligations.................................. $ 119 $ 329 $ 337
Accounts payable.............................. 590 7,371 9,778
Accrued payroll and related costs............. 257 1,003 1,481
Other accrued expenses........................ 41 1,255 2,773
Deferred revenue.............................. -- 599 707
------- -------- --------
Total current liabilities................... 1,007 10,557 15,076
Capital lease obligations, less current
installments................................. 239 509 423
Deferred revenue.............................. -- 77 356
------- -------- --------
Total liabilities........................... 1,246 11,143 15,855
------- -------- --------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $0.001 par value:
Series A, Authorized 12,000,000 shares;
issued and outstanding 11,801,330 shares in
1994 and 1995............................... 12 12 --
Series B, Authorized, issued and outstanding
7,718,600 shares in 1994 and 1995........... 8 8 --
Series C, Authorized, issued and outstanding
3,964,244 shares in 1995.................... -- 4 --
Series D, Authorized, issued and outstanding
1,262,120 shares in 1995.................... -- 1 --
Series E, Authorized, issued and outstanding
952,382 shares in 1995...................... -- 1 --
Common stock, $0.001 par value. Authorized
70,000,000 shares in 1994 and 1995, and
200,000,000 (unaudited) shares in 1996;
issued and outstanding 10,085,266, 10,320,426
and 40,243,427 (unaudited) shares,
respectively................................. 10 10 40
Additional paid-in capital.................... 9,942 31,002 119,839
Unearned compensation......................... -- (887) (2,125)
Accumulated deficit........................... (4,605) (14,046) (11,363)
------- -------- --------
Net shareholders' equity.................... 5,367 16,105 106,391
------- -------- --------
$ 6,613 $ 27,248 $122,246
======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD ENDED YEARS ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
------------ ---------------- ----------------
1993 1994 1995 1995 1996
------------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ -- $ 443 $29,662 $ 1,397 $23,392
Cost of revenue................ -- 327 15,418 961 10,823
------ ------- ------- ------- -------
Gross profit............... -- 116 14,244 436 12,569
------ ------- ------- ------- -------
Operating expenses:
Research and development..... 343 2,404 7,154 1,039 3,194
Sales and marketing.......... -- 695 13,011 2,088 5,800
General and administrative... 188 1,168 3,593 350 989
------ ------- ------- ------- -------
Total operating expenses....... 531 4,267 23,758 3,477 9,983
------ ------- ------- ------- -------
Operating income (loss).... (531) (4,151) (9,514) (3,041) 2,586
Interest income, net........... 9 68 73 71 177
------ ------- ------- ------- -------
Income (loss) before income
taxes......................... (522) (4,083) (9,441) (2,970) 2,763
Income tax expense............. -- -- -- -- 80
------ ------- ------- ------- -------
Net income (loss).......... $ (522) $(4,083) $(9,441) $(2,970) $ 2,683
====== ======= ======= ======= =======
Net income (loss) per share.... $ (.02) $ (.19) $ (.45) $ (.14) $ .06
====== ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding................... 21,067 21,109 21,151 21,151 43,957
====== ======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK ADDITIONAL NET
-------------------------------------------- COMMON PAID-IN UNEARNED ACCUMULATED SHAREHOLDERS'
SERIES A SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL COMPENSATION DEFICIT EQUITY
-------- -------- -------- -------- -------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuances of
preferred
stock........... $ 5 $ -- $ -- $ -- $ -- $ -- $ 1,535 $ -- $ -- $ 1,540
Issuances of
common
stock........... -- -- -- -- -- 10 241 -- -- 251
Net loss......... -- -- -- -- -- -- -- -- (522) (522)
---- ---- ---- ---- ---- ---- -------- ------- -------- --------
Balance at
December 31,
1993............ 5 -- -- -- -- 10 1,776 -- (522) 1,269
Issuances of
preferred
stock........... 7 8 -- -- -- -- 8,160 -- -- 8,175
Issuances of
common
stock........... -- -- -- -- -- -- 6 -- -- 6
Net loss......... -- -- -- -- -- -- -- -- (4,083) (4,083)
---- ---- ---- ---- ---- ---- -------- ------- -------- --------
Balance at
December 31,
1994............ 12 8 -- -- -- 10 9,942 -- (4,605) 5,367
Issuances of
preferred
stock........... -- -- 4 1 1 -- 20,008 -- -- 20,014
Issuances of
common
stock........... -- -- -- -- -- -- 108 -- -- 108
Issuances of
common stock
warrants........ -- -- -- -- -- -- 3 -- -- 3
Unearned
compensation.... -- -- -- -- -- -- 941 (941) -- --
Unearned
compensation
amortization.... -- -- -- -- -- -- -- 54 -- 54
Net loss......... -- -- -- -- -- -- -- -- (9,441) (9,441)
---- ---- ---- ---- ---- ---- -------- ------- -------- --------
Balance at
December 31,
1995............ $ 12 $ 8 $ 4 $ 1 $ 1 $ 10 $ 31,002 $ (887) $(14,046) $ 16,105
Conversion of
preferred stock
to common stock
(unaudited)..... (12) (8) (4) (1) (1) 26 -- -- -- --
Issuances of
common stock
(unaudited)..... -- -- -- -- -- 4 87,442 -- -- 87,446
Unearned
compensation
(unaudited)..... -- -- -- -- -- -- 1,395 (1,395) -- --
Unearned
compensation
amortization
(unaudited)..... -- -- -- -- -- -- -- 157 -- 157
Net income
(unaudited)..... -- -- -- -- -- -- -- -- 2,683 2,683
---- ---- ---- ---- ---- ---- -------- ------- -------- --------
Balance at March
31, 1996
(unaudited)..... $ -- $ -- $ -- $ -- $ -- $ 40 $119,839 $(2,125) $(11,363) $106,391
==== ==== ==== ==== ==== ==== ======== ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD ENDED YEARS ENDED THEE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ----------------- ------------------
1993 1994 1995 1995 1996
------------ ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........ $ (522) $(4,083) $ (9,441) $ (2,970) $ 2,683
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Depreciation and
amortization........... 2 131 928 93 524
Consulting expense paid
in common stock........ -- 1 108 6 --
Unearned compensation
amortization........... -- -- 54 -- 157
Change in:
Accounts receivable.... -- (122) (13,020) (1,052) (6,589)
Inventories............ -- (282) (1,846) (1,815) (2,518)
Prepaid expenses and
other current assets.. (52) (154) (178) 56 (1,057)
Other assets........... (15) (180) (294) (49) 48
Accounts payable....... 81 508 6,782 1,284 2,407
Accrued payroll and
related costs......... 17 240 746 34 478
Other accrued expenses. 44 (2) 1,213 271 1,518
Deferred revenue....... -- -- 676 19 388
------ ------- -------- -------- --------
Net cash used in
operating activities. (445) (3,943) (14,272) (4,123) (1,961)
------ ------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment............... (40) (959) (4,295) (699) (2,765)
Sales (purchases) of
investments............. -- (3,890) 3,890 (5,821) (32,495)
------ ------- -------- -------- --------
Net cash used in
investing activities. (40) (4,849) (405) (6,520) (35,260)
------ ------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuances
of common stock and
common stock warrants... 251 5 3 -- 87,446
Proceeds from issuances
of convertible preferred
stock................... 1,540 8,175 20,014 9,986 --
Repayments of debt....... -- -- -- -- (79)
------ ------- -------- -------- --------
Net cash provided by
financing activities. 1,791 8,180 20,017 9,986 87,367
------ ------- -------- -------- --------
Net increase
(decrease) in cash
and cash equivalents. 1,306 (612) 5,340 (657) 50,146
Cash and cash equivalents
at beginning of period... -- 1,306 694 694 6,034
------ ------- -------- -------- --------
Cash and cash equivalents
at end of period......... $1,306 $ 694 $ 6,034 $ 37 $ 56,180
====== ======= ======== ======== ========
Supplemental disclosure of
cash flow information--
cash paid during the
period for interest...... $ 1 $ 18 $ 101 $ 10 $ 58
====== ======= ======== ======== ========
Supplemental disclosure of
noncash investing and
financing activities--
financed capital
expenditures............. $ -- $ 359 $ 480 $ -- $ --
====== ======= ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Since its incorporation in July 1993, Xylan Corporation has focused on the
development, marketing and sale of dedicated, high-bandwidth switching systems
that easily integrate with and enhance the performance of customers' existing
LANs, as well as facilitate migration to new networking technologies.

During the period from July 1993 (date of incorporation) to December 31,
1993, referred to as the period ended December 31, 1993, and the year ended
December 31, 1994, Xylan Corporation was a developmental stage company as
defined in Financial Accounting Standards Board Statement No. 7 "Development
Stage Enterprises." Planned principal operations commenced as of January 1,
1995 and, accordingly, Xylan Corporation is no longer considered a
developmental stage company.

Principles of Consolidation

The consolidated financial statements include the accounts of Xylan
Corporation and its 99.8% owned subsidiary (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The minority interest in the subsidiary is not considered
material.

The accompanying consolidated balance sheet as of March 31, 1996 and the
consolidated statements of operations and cash flows for the three months
ended March 31, 1995 and 1996 are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation for the periods presented. The consolidated results of
operations for the three months ended March 31, 1996, are not necessarily
indicative of the results for any future period.

Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Investments

Short-term investments at December 31, 1994 consist of U.S. Treasury
securities. Investments at March 31, 1996, consist of corporate and debt
securities. The Company adopted the provisions of Statement of Financial
Accounting Standards Board No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (SFAS No. 115). SFAS No. 115 requires investments
to be classified based on management's intent in one of three categories:
held-to-maturity securities, available-for-sale securities and trading
securities. Held-to-maturity securities are recorded at amortized cost.
Available-for-sale securities are recorded at market value with unrealized
gains and losses reported as a separate component of shareholders' equity.
Trading securities are recorded at market value with unrealized gains and
losses reported in earnings. The Company classifies its investments as
available-for-sale and held to maturity securities. At December 31, 1994 and
March 31, 1996, the market value of the available-for-sale securities
approximated cost.

Inventories

Inventories, consisting principally of component parts, are stated at the
lower of cost or market being determined using the first-in, first-out method.
Inventories are shown net of valuation reserves of $132,000 and $275,000 at
December 31, 1995 and March 31, 1996, respectively.

F-7
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

Revenue Recognition

The Company generally recognizes product revenue at the time of shipment,
unless the Company has future obligations for installation or has to obtain
customer acceptance in which case revenue is deferred until earned. Revenue
from service obligations is deferred and recognized on a straight line basis
over the contract period. Amounts billed in excess of revenue recognized are
included as deferred revenue in the accompanying consolidated balance sheets.

During the three months ended March 31, 1996, the Company shipped certain
products for which the earnings process was not complete. Accordingly, the
Company deferred recognition of the related revenue and cost of revenue and
recorded as of March 31, 1996 approximately $2.4 million as a decrease in
inventory and approximately $2.4 million as an increase in accounts
receivable.

Revenue Related Accruals

The Company accrues the estimated costs to fulfill customer warranty and
technical support obligations upon the recognition of the related revenue.
This accrual is included in other accrued expenses on the accompanying
consolidated balance sheet and aggregated $446,000 and $537,000 at December
31, 1995 and March 31, 1996, respectively.

Reserves for sales returns and doubtful accounts are established based upon
historical experience and management's estimates as shipments are made. The
allowance for sales returns and doubtful accounts aggregated $466,000 and
$565,000 at December 31, 1995, and March 31, 1996, and is shown as a reduction
of accounts receivable on the accompanying consolidated balance sheet.

Depreciation and Amortization

Depreciation of property and equipment is calculated on the straight-line
method over estimated useful lives ranging from 3 to 5 years, or in the case
of capital lease assets over the shorter of the lease term or the estimated
useful life of the asset.

Research and Development Costs

The Company charges all research and development costs to expense as
incurred.

Income Taxes

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109").
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

F-8
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

Computation of Net Income (Loss) per Share

Net income (loss) per common and common equivalent share has been computed
using the weighted average number of common and common equivalent shares
outstanding using the treasury stock method, as adjusted for the common stock
split described in Note 11 for all periods presented, and is summarized as
follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------- -------------
1993 1994 1995 1995 1996
------------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common stock
outstanding.......................... 10,236 10,278 10,320 10,320 37,364
Weighted average common stock
equivalents outstanding.............. 10,831 10,831 10,831 10,831 6,593
------ ------ ------ ------ ------
Shares used in net income (loss) per
share calculation.................... 21,067 21,109 21,151 21,151 43,957
====== ====== ====== ====== ======
</TABLE>

Pursuant to the requirements of the Securities and Exchange Commission,
common stock, stock options, warrants and convertible preferred stock issued
by the Company during the twelve months immediately preceding the initial
public offering date have been included in the calculation of the weighted
average shares outstanding for all periods presented using the treasury stock
method based on the estimated initial public offering price. Accordingly, for
all periods presented, weighted average common stock outstanding includes
253,160 shares of common stock issued during fiscal 1995. For all periods
presented through December 31, 1995, weighted average common stock equivalents
outstanding includes 3,977,236 common stock equivalent shares for options
issued during fiscal 1995, 674,182 common stock equivalent shares for options
issued from the period from January 1, 1996 to March 4, 1996, and 6,178,746
shares issued upon the conversion of the convertible preferred stock into
common stock. Stock options, warrants and convertible preferred stock issued
prior to 1995 are excluded from the computation for loss periods as their
inclusion would be antidilutive. For the three months ended March 31, 1996,
weighted average common stock equivalents outstanding includes 6,592,930
common stock equivalent shares for options issued.

On a pro forma basis, the loss per share for the year ended December 31,
1995 assuming the inclusion of all series of convertible preferred stock as
common stock equivalents outstanding is $(0.23).

Long Lived Assets

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement provides
guidelines for recognition of impairment losses related to long-term assets.
The adoption of this new standard did not have a material effect on the
Company's consolidated financial statements.

Accounting for Stock Options

Use of Estimates

Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.

F-9
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

(2)PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures................................. $ 182 $ 253 $ 602
Manufacture and test equipment......................... 167 1,323 2,324
Computer equipment and purchased software.............. 968 4,301 5,603
Leasehold improvements................................. 31 247 360
------ ------ ------
1,348 6,124 8,889
Less accumulated depreciation and amortization....... 123 1,051 1,575
------ ------ ------
Net property and equipment............................. $1,225 $5,073 $7,314
====== ====== ======
</TABLE>

Assets acquired under capitalized leases, which are included in property and
equipment, at December 31, 1994 and 1995, and March 31, 1996 aggregated
$413,000, $1,176,000 and $1,176,000, respectively. Accumulated depreciation
related to these assets aggregated $54,000, $304,000 and $391,000 at December
31, 1994 and 1995, and March 31, 1996 respectively.

(3)NOTES PAYABLE

In 1995, the Company entered into a revolving line of credit agreement
providing for borrowings up to the lesser of $6,000,000 or 80% of eligible
accounts receivable, as defined, interest payable monthly at the bank's prime
rate (8.25% at March 31, 1996) plus 0.5% and expiring January 31, 1997. The
Company had available borrowings of $6,000,000 at March 31, 1996.

In 1995, the Company also entered into a $1,500,000 term loan agreement,
interest payable monthly at the bank's prime rate (8.25% at March 31, 1996)
plus 1.5% and expiring September 30, 1998.

As of December 31, 1995, and March 31, 1996 the Company had no outstanding
borrowings on the aforementioned notes payable. Additionally, the notes are
cross collateralized, secured by all Company personal property and contain
certain financial covenants and restrictions. As of March 31, 1996 the Company
was in compliance with such covenants and restrictions.

(4)CAPITAL LEASE OBLIGATIONS

Capital lease obligations are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations, secured by related assets,
payable in monthly installments including interest
ranging from 4% to 21% through January 1999............. $358 $838 $760
Less current installments................................ 119 329 337
---- ---- ----
$239 $509 $423
==== ==== ====
</TABLE>

F-10
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

Future minimum capital lease payments at December 31, 1995 are as follows
(in thousands):

<TABLE>
<S> <C>
Year ending December 31,
1996.................................. $390
1997.................................. 335
1998.................................. 200
1999.................................. 46
----
971
Less amounts representing interest...... 133
----
$838
====
</TABLE>

(5)SHAREHOLDERS' EQUITY

Convertible Preferred Stock

During 1993, the Company issued 5,134,664 shares of series A convertible
preferred stock for cash consideration of $1,540,399.

During 1994, the Company issued 6,666,666 shares of series A convertible
preferred stock for cash consideration of $2,000,000 and 7,718,600 shares of
series B convertible preferred stock for cash consideration of $6,174,880.

During 1995, the Company issued 3,964,244 shares of series C convertible
preferred stock for cash consideration of $10,000,004, 1,262,120 shares of
series D convertible preferred stock for cash consideration of $5,048,480 and
952,382 shares of series E convertible preferred stock for cash consideration
of $5,000,006. Legal expenses of approximately $34,000 were netted against the
proceeds of the 1995 convertible preferred stock issuances.

Details of the convertible preferred stock are as follows:

<TABLE>
<CAPTION>
SERIES
--------------------------------
A B C D E
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Liquidation preference per share(1)......... $.300 $.800 $2.523 $4.000 $5.250
Cumulative annual per share dividend(2)..... $.021 $.056 $ .177 $ .280 $ .368
Votes per share............................. 1 1 1 1 1
Common share issuable upon conversion(3).... 1 1 1 1 1
</TABLE>
- --------
(1) Plus accrued but unpaid dividends.
(2) If declared by the board of directors. As of December 31, 1995 no
dividends have been declared.
(3) Subject to adjustment and automatic conversion as defined.

F-11
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

On the effectiveness of the Company's initial public offering all of the
25,698,676 outstanding shares of preferred stock were converted into the same
number of shares of common stock. The following table presents the Company's
pro forma unaudited shareholders' equity as if all such conversions and the
changes in preferred and common stock authorized shares referred to in note 11
had occurred at December 31, 1995 (in thousands, except share data):

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(UNAUDITED)
<S> <C>
Shareholders' Equity:
Preferred stock $0.001 par value. Authorized 5,000,000
shares.................................................... $ --
Common stock $0.001 par value. Authorized 200,000,000
shares; issued and outstanding 36,019,102................. 36
Additional paid-in capital................................. 31,002
Unearned compensation...................................... (887)
Accumulated deficit........................................ (14,046)
--------
Net shareholders' equity.................................. $ 16,105
========
</TABLE>

Common Stock

During 1993, the Company issued 10,000,000 shares of common stock for cash
consideration of $250,000 and 5,000 shares of common stock for services with a
fair value of $300. During 1994 the Company issued 61,134 shares of common
stock for cash consideration of $5,268 and 19,132 shares of common stock for
services with a fair value of $1,148. During 1995 the Company issued 68,080
shares of common stock to a director for promissory notes of $25,530. Such
notes were repaid subsequent to December 31, 1995. The Company determined
subsequent to the grant of such stock, based in part on an independent
appraisal of the common stock as of September 30, 1995, to record for
financial statement reporting purposes compensation expense of $5,050 for the
difference between the grant price and the deemed fair market value.
Additionally, during 1995 the Company issued 167,080 shares of common stock
for services with a fair value of $77,161.

Stock Warrants

During 1994, the Company granted to an equipment lessor a warrant to
purchase 188,076 shares of Series A convertible preferred stock of the Company
at a price per share of $0.325. This warrant was exercisable at grant date and
on the effectiveness of the Company's initial public offering this warrant was
converted into 185,725 shares of Common Stock.

During 1995, in connection with the issuance of series D convertible
preferred stock, the Company sold warrants, at $0.005 per share, to purchase
315,528 shares of common stock of the Company at an exercise price
per share of $3.50 and in connection with the issuance of series E convertible
preferred stock, the Company sold warrants, at $0.005 per share, to purchase
238,096 shares of common stock of the Company at a price per share of $4.60.
These warrants expired upon the closing of the Company's initial public
offering.

(6)STOCK INCENTIVE PLANS

The Company has a 1993 Stock Incentive Plan (the "Plan"). Under the Plan,
8,000,000 shares of the Company's authorized but unissued common stock are
reserved for options or stock purchase grants issuable to officers, employees,
consultants and the members of the Board of Directors of the Company.

The Board of Directors or a committee consisting of not less than two Board
members (the "Plan Administrator") has sole discretion and authority to
promulgate, amend and rescind rules and regulations relating to the

F-12
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

administration of the Plan and to select the eligible participants to whom
options will be granted or shares sold, the number of shares covered by the
option or to be sold, the exercise or purchase price and the form and terms of
agreement to be used.

For the period ended December 31, 1993 and for the years ended December 31,
1994 and 1995, the Company issued 5,000, 80,266, and 235,160 shares of common
stock, respectively, pursuant to stock purchase grants. Stock option activity
relating to the Plan is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
PERIOD ENDED DECEMBER 31, ENDED
DECEMBER 31, ------------------- MARCH 31,
1993 1994 1995 1996
------------ --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of
period..................... -- 400,000 2,650,000 6,375,000
Granted................... 400,000 2,250,000 4,719,000 1,451,000
Exercised................. -- -- -- (359,000)
Canceled.................. -- -- (994,000) (656,000)
------- --------- --------- ----------
Balance at end of year...... 400,000 2,650,000 6,375,000 6,811,000
======= ========= ========= ==========
Exercisable stock options... -- 80,000 529,200 512,000
======= ========= ========= ==========
Price range of options...... $ .06 $.06-.10 $.06-2.63 $.06-26.00
======= ========= ========= ==========
</TABLE>

Stock options shall be exercisable over the exercise period which shall be
determined by the Plan Administrator. However, it may not exceed five years
from the date the option is granted in the case of optionees who own at least
10% of the total combined voting power of all classes of stock of the Company.
As of March 31, 1996, 510,000 shares were reserved for future issuance under
the Plan.

The Company determined subsequent to the grant of certain options, based in
part on an independent appraisal of the common stock at September 30, 1995, to
record for financial statement presentation purposes unearned compensation of
$941,000 for the difference between the exercise price and the deemed fair
market value. The methods of valuation used by the independent appraiser to
determine fair market value (based on an arms-length transaction) were
primarily estimates of future cash flows, and also a comparison to similar
publicly traded companies, with a discount applied for the lack of a public
market for the Company's stock. The unearned compensation is recorded as a
separate component of shareholders' equity and will be recorded as
compensation expense ratably over the related vesting period. For the year
ended December 31, 1995 and the three months ended March 31, 1996, the Company
recorded $54,000 and $157,000 of compensation expense, respectively.

For the period from January 1, 1996 through March 4, 1996, the Company
issued options, net of cancellations, to purchase 1,100,000 shares of common
stock with exercise prices ranging from $5.25 to $20.00 per share. In
connection with the grant of such options, for financial statement
presentation purposes the Company has recorded additional unearned
compensation of $1,395,000, net of cancellations, for the difference between
the grant price and the deemed fair market value, which will be recorded as
compensation expense ratably over the vesting period for each option.

(7) INCOME TAXES

The provision for income taxes, all current, for the period from July 9,
1993 (date of incorporation) to December 31, 1993, for the years ended
December 31, 1994 and 1995 and for the three months ended March 31, 1995
consists solely of the annual minimum California franchise tax of $800. Such
amount is included in general

F-13
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

and administrative expense in the accompanying consolidated statements of
operations. For the three months ended March 31, 1996 the provision for income
taxes, all current, aggregated $80,000.

The provision for income taxes differs from the expected tax expense
(benefit) computed by applying the Federal corporate tax rate of 35% to net
income (loss) principally due to the effect of net operating loss
carryforwards.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $1,772 $4,796 $3,410
Research and development tax credit
carryforwards.................................... 204 630 630
Allowances and reserves.......................... -- 239 310
Accrued expenses................................. -- 305 410
Other............................................ -- 91 282
------ ------ ------
Total gross deferred tax assets................. 1,976 6,061 5,042
Less valuation allowance.......................... 1,976 6,061 5,042
------ ------ ------
Net deferred tax assets......................... $ -- $ -- $ --
====== ====== ======
</TABLE>

The net change in the valuation allowance for the period ended December 31,
1993, the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1996 was an increase (decrease) of $201,000, $1,775,000, $4,085,000
and $(1,019,000), respectively. In assessing the realizability of deferred tax
assets, management considered whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and tax
planning strategies in making this assessment. In order to fully realize the
deferred tax asset at December 31, 1995, the Company will need to generate
future taxable income of approximately $14,500,000 prior to the expiration of
the net operating loss carryforwards in 2010. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, the Company has
established a valuation allowance for all deductible differences.

As of December 31, 1995, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $12,400,000 and
$6,200,000, respectively which are available to offset future taxable income,
if any, through 2010. Additionally, the Company had research and development
tax credit carryforwards for federal and state income tax purposes of $460,000
and $170,000, respectively, which are available to offset future income taxes,
if any, through 2010.

(8)SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND EXPORT SALES

Significant Customers

During 1994, substantially all of the Company's revenue was derived from
network integration services and one customer accounted for 13.8% of revenue.
During 1995 the Company did not generate any revenue from network integration
services. Three customers accounted for 17.6%, 17.2% and 10.5% of revenue for
the year ended December 31, 1995, respectively, 17.1%, 16.3% and 8.2% of
revenue for the three months ended March 31, 1995, respectively, and 34.4%,
12.8% and 11.9% for the three months ended March 31, 1996, respectively.

F-14
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of accounts receivable. The credit risk
associated with accounts receivable is mitigated by the Company's credit
evaluation process, reasonably short collection terms and the geographical
dispersion of sales transactions. The Company's three major customers in 1995,
each of whom accounted for more than 10% of revenue, aggregated 22%, 21% and
9%, respectively, of accounts receivable at December 31, 1995. The Company's
three major customers for the three months ended March 31, 1996 aggregated
40%, 17% and 6%, of accounts receivable at March 31, 1996.

Export Sales

Export sales information is as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED MARCH
DECEMBER 31, 31,
------------ --------------
1994 1995 1995 1996
---- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
North America..................................... $443 $15,267 $ 626 $ 7,723
Asia.............................................. -- 9,780 576 14,040
Europe............................................ -- 4,508 195 1,586
Other............................................. -- 107 -- 43
---- ------- ------ -------
$443 $29,662 $1,397 $23,392
==== ======= ====== =======
</TABLE>

(9) EMPLOYEE BENEFIT PLAN

In May 1995, the Company adopted a defined contribution 401(k) plan. The
plan covers all full-time employees who are at least 21 years of age and have
completed one year of service. Participants may contribute 1% to 12% of their
pretax compensation. The plan permits the Company to make matching
contributions up to 25% of the participants contribution and vest over five
years. The Company's matching contributions for fiscal 1995 and the three
months ended March 31, 1996 were approximately $102,000 and $55,000,
respectively.

(10)COMMITMENTS AND CONTINGENCIES

The Company is obligated under noncancelable operating lease agreements for
equipment and facilities expiring on various dates through 1999. Rental
expense for the period ended December 31, 1993, the years ended December 31,
1994 and 1995 and the three months ended March 31, 1996 aggregated $17,000,
$93,000, $718,000 and $292,000 respectively.

Future annual minimum rental commitments under noncancelable operating
leases at December 31, 1995 are as follows (in thousands):

<TABLE>
<S> <C>
Year ending December 31;
1996................................ $ 630
1997................................ 336
1998................................ 336
1999................................ 122
------
$1,424
======
</TABLE>

F-15
<PAGE>

XYLAN CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

During 1995 a lawsuit alleging misappropriation of trade secrets, patent
infringement and improper hiring of employees was brought against the Company
by Ascom Timeplex Inc. ("Ascom Timeplex"). The Company and Ascom Timeplex have
signed a binding memorandum of understanding to settle this litigation and
dismiss all of Ascom Timeplex's charges against the Company and against Steve
Y. Kim, John Bailey and another employee named in Ascom Timeplex's complaint,
and otherwise release the parties from all claims. The settlement also
involves a royalty-free license to the Company of Ascom Timeplex's virtual LAN
technology covered by the patent and a royalty-free license to Ascom Timeplex
of certain technology embodied in the Company's currently available products
for use in and in connection with Ascom Timeplex's Synchrony product family.
These licenses are not assignable other than to a successor-in-interest to
Ascom Timeplex. The Company also undertakes to transfer a copy of the licensed
technology to Ascom Timeplex and for a specified time not to hire Ascom
Timeplex employees. The release by Ascom Timeplex is conditioned on transfer
of this technology. The parties are preparing a definitive agreement for this
settlement.

(11) SUBSEQUENT EVENTS (UNAUDITED)

On January 22, 1996 the Board of Directors:

. Approved a two-for-one stock split of the Company's capital stock, which
became effective as of February 28, 1996. Accordingly, all references to
the number of shares and per share information for all periods presented
have been adjusted to give effect to the stock split.

. Authorized increasing the common stock authorized shares to 200,000,000
and authorized 5,000,000 shares of undesignated preferred stock.

. Adopted certain technical amendments to the 1993 Stock Incentive Plan.

. Adopted the 1996 Stock Option Plan (the "1996 Plan") which reserves
3,000,000 shares of common stock for issuance under this plan. The 1996
Plan provides for the grant to Company employees of incentive stock
options and for the grant of nonstatutory stock options to employees and
consultants of the Company. Incentive stock options are granted at 100%
of fair market value. Nonstatutory stock options granted to certain of
the Company's executive officers must be at fair market value and grants
to all other persons must be at least 85% of fair market value at grant
date. Outstanding options under the 1996 Plan vest in varying increments
and expire five to ten years after grant or upon earlier termination.

. Adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan")
which reserves 1,500,000 shares of Common Stock for issuance. The
Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, at a price equal to the lower of 95% of the fair market
value of the Company's common stock at the beginning of the offering
period or the purchase date. The Purchase Plan expires in 20 years.

. Adopted the 1996 Directors Stock Option Plan (the "Directors' Plan")
which reserves 150,000 shares of common stock for issuance related to
nonstatutory stock options to nonemployee directors of the Company.
Options are exercisable at the fair market value of common stock on the
grant date and have a term of ten years.

On March 11, 1996, the Company commenced its initial public offering of a
total of 4,830,000 shares of common stock, including the underwriter's over-
allotment of 630,000 shares. Of the total, 3,680,000 shares of common stock
were sold by the Company, and 1,150,000 shares were sold by a selling
shareholder. Aggregate net proceeds to the Company were approximately $87.4
million.

Upon the effectiveness of the initial public offering, all of the 25,698,676
outstanding shares of preferred stock were converted into the same number of
shares of common stock. Additionally, a warrant containing an automatic net
exercise provision was converted into 185,725 shares of common stock.

On May 12, 1996, the Board of Directors authorized the filing of a
registration statement for a secondary public offering of the Company's
capital stock, including shares held by selling shareholders.

F-16
<PAGE>

[XYLAN LOGO]
<PAGE>

Descriptions of numbered graphics on inside front cover

Graphic 1

A green double circle representing an FDDI backbone connected by three separate
purple lines to three grey boxes with green markings and a purple "R"
representing routers. Each router is connected by purple lines to three grey
boxes either with yellow markings representing ethernet-based hubs or with a
circle within the box representing token ring-based hubs. One hub is connected
by purple lines to schematic representations of two workstations and one server.

Graphic 2

Same as graphic 1, with a larger black and grey box representing the Xylan
OmniSwitch inserted on one purple line which formerly directly connected a
router with three hubs. Each of the three hubs is connected by lines to the
OmniSwitch, which has a single line connection with the router. Schematic
representations of six workstations and two servers are connected by lines in
groups of two or three to the hubs.

Graphic 3

Same as graphic 2, with an fourth hub connected by lines to the OmniSwitch and
the connections among hubs, servers and workstations reconfigured so two
workstations and one server connect directly to the OmniSwitch.

Graphic 4

An FDDI backbone is connected with purple lines to three OmniSwitches. One
OmniSwitch is connected with purple lines to two workstations, one server, two
ethernet hubs and two token ring hubs. A workstation is connected by a purple
line to each hub. A second OmniSwitch is connected by purple lines to two
ethernet hubs, three servers and a router. The router is connected by a purple
line to a blue cloud labeled "WAN". A third OmniSwitch is connected by purple
lines to four token ring hubs and two ethernet hubs. One of the four token ring
hubs is connected by purple lines to two workstations.

Graphic 5

Same as graphic 4, with a grey box containing a red X representing ATM
positioned above and to the right of the FDDI backbone. The ATM box is
connected by purple lines to each of the three OmniSwitches.

Graphic 6

Same as graphic 4, except the ATM box has replaced the FDDI backbone, and the
three servers formerly connected to the second OmniSwitch are connected directly
to the ATM box.
<PAGE>

Page 27 graphic

An X-Y diagram with the X axis bearing labels referring to the even years from
1986 through 1994, and each of 1995 and 1996, and the Y axis labeled "Mbps" and
bearing values on a roughly logarithmic scale from 2 to 1000. The lines for the
axes terminate in arrow points. Within the diagram, variously sized rectangles
are placed to represent the time period during which different graphical
applications have been used and the Mbps network loads associated with each
application. A rectangle labeled "Term to Host" covers 1986 and approximately 2
to 5 Mbps. A rectangle labeled "File/PC Sharing" covers half of 1986 through a
small portion of 1988 and approximately 5 through 10 Mbps. A rectangle labeled
"File Transfer" covers from 1987 through 1989 and approximately 8 through 25
Mbps. A rectangle labeled "CAD/CAM/CAE" covers a part of 1989 through 1990 and
approximately 10 through 80 Mbps. A rectangle labeled "Image Processing" covers
1990 through most of 1992 and approximately 40 through 200 Mbps. A rectangle
labeled "Work Flow" covers 1992 through the first part of 1996 and approximately
5 through 8 Mbps. A rectangle labeled "Medical Imaging" covers the second half
of 1992 through the first part of 1995 and approximately 50 through 500 Mbps. A
rectangle labeled "Desktop Video" covers 1993 through the arrow extending beyond
1996 and approximately 8 through over 100 Mbps. A rectangle labeled
"Modeling/Simulation covers part of 1994 through the arrow extending beyond 1996
and approximately 200 through the arrow extending beyond 1000 Mbps. A rectangle
labeled "World Wide Web" covers half of 1995 through the arrow extending beyond
1996 and approximately 4 through 20 Mbps.