10-K/A

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                  FORM 10-K/A

           
(MARK ONE)
    [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE SECURITIES EXCHANGE ACT OF 1934
              FOR THE FISCAL YEAR ENDED MARCH 31, 2001
                                    OR
    [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE SECURITIES EXCHANGE ACT OF 1934
              FOR THE TRANSITION PERIOD FROM
              TO



                       COMMISSION FILE NUMBER: 000-26541

                             GADZOOX NETWORKS, INC.
             (Exact name of registrant as specified in its charter)

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



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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, $0.005 PAR VALUE

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

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

     The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $101,115,958 as of May 25, 2001, based upon the
closing price on the NASDAQ National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose. The number of shares outstanding of the
Registrant's common stock on June 18, 2001 was 34,062,214 shares.
                             ---------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting of
Stockholders (the "Proxy Statement") to be filed with the Securities and
Exchange Commission are incorporated by reference to Part III of this Annual
Report on Form 10-K Report.
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                             GADZOOX NETWORKS, INC.

                                   FORM 10-K

                                     INDEX



                                                                          PAGE
                                                                          ----
                                                                    
PART I..................................................................    2

  Item 1.   Business....................................................    2
  Item 2.   Properties..................................................   19
  Item 3.   Legal Proceedings...........................................   19
  Item 4.   Submission of Matters to a Vote of Security Holders.........   20

PART II.................................................................   20

  Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................   20
  Item 6.   Selected Financial Data.....................................   21
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   22
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risks.......................................................   51
  Item 8.   Financial Statements And Supplementary Data.................  F-1
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................   52

PART III................................................................   52

  Item 10.  Directors and Executive Officers of the Registrant..........   52
  Item 11.  Executive Compensation......................................   52
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   52
  Item 13.  Certain Relationships and Related Transactions..............   52

PART IV.................................................................   53

  Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.........................................................   53



                                     PART I

     In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that relate to future events or future
performance such as the sufficiency of our capital resources to fund continuing
operations; statements relating to the transition of the Storage Area Network,
or SAN, industry to 2-gigabit-per-second speeds; our commitment to continue to
devote substantial resources to product research and development and to develop
new products with greater capabilities and that support new industry protocol
standards, including development and deployment of the Slingshot 4218 Fibre
Channel fabric backbone switch; timing of first shipments of the Slingshot 4218;
our commitment to continue to work with industry leaders to promote SAN
architecture and develop new products; our intentions to enter into additional
distributor and reseller agreements in the U.S. and internationally; our
intentions to continue to develop reusable elements; our intentions to continue
sponsoring educational seminars; the percentage of our fiscal 2002 sales that
will be derived from new products; our intentions to expand our sales and
marketing operations; anticipated future levels of general and administrative
expenses; and the evolution of SAN capabilities and the market for SAN products.
In certain cases you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential" or "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including but not limited to our ability to raise
sufficient capital to enable us to continue to operate our business; market
acceptance of the Company's new products and the speed at which customers adopt
current and new products for SANs; the ability and willingness of our OEM and
distribution channel partners to buy and sell our products; our ability to
develop, introduce, ship and support new products and product enhancements;
growth rates of the market segment within which the Company participates;
competition in the Company's industry and the timing of new technology and
product introductions; the ability to retain and hire skilled personnel and the
risks outlined under "Part II -- Risk Factors" and elsewhere in this Form 10-K.
All forward-looking statements included in this document are based on
information available to us on the date hereof and we assume no obligation to
update any such forward-looking statements.

ITEM 1.  BUSINESS

  OVERVIEW

     We are a provider of hardware and software products that enable the
creation of networks made up of computers and data storage devices which have
become known as storage area networks, or SANs. Our SAN products are based on
Fibre Channel technology, a set of specifications designed to enable computing
devices, such as computers and storage devices, to rapidly exchange large
amounts of data. We have designed our products to leverage the capabilities of
Fibre Channel technology to enable companies to better manage the growth of
mission-critical data by overcoming the limitations of the traditional small
computer system interface, or SCSI, which is a captive storage architecture.

     We expect that a substantial majority of our net revenues for fiscal 2002
will be derived from sales of new products currently under development or
evaluation, including the Slingshot 4218. If sales from new products are lower
than expected or if we are unable to raise additional capital, including through
a draw down under our equity line financing agreement, we will be required to
make a significant reduction in operating expenses and capital expenditures in
fiscal 2002 to ensure that we will have adequate cash reserves to fund
operations through the end of fiscal 2002.

     Our SAN products include (1) the Capellix 3000 chassis switch, a switch
that can be configured to perform multiple functions by adding hardware that is
scalable from 6 to 32 ports; (2) the Capellix 2000 arbitrated loop switch, an
8-port switch that is extendable to 11 ports, designed for the entry-level
switch market; (3) the Slingshot 4218 switch, a 2 gigabit 18-port Fibre Channel
fabric switch (announced in April 2001) currently being evaluated by a number of
OEMs and resellers; (4) the Gibraltar managed hub designed

                                        2


to provide centralized management of a SAN and (5) the Ventana SAN management
software application which provides monitoring and control of SAN devices.

     We began shipments of our SAN products, in commercial quantities, in
October 1995. Our primary customers included original equipment manufacturer or,
OEM customers, and distribution channel partners. Our major current OEM
customers include, among others, Hewlett-Packard Company, and Compaq Computer
Corporation. We have a two-tier distribution channel comprised of distributors
and resellers. Our major distribution customers currently consist of Bell
Microproducts, Inc., Consan (a Gates/Arrow Company) and Tech Data Corporation.

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

     We were incorporated in April 1992 in California as Gadzoox Microsystems,
Inc. In May 1997, we changed our name to Gadzoox Networks, Inc., and in August
1997, we reincorporated in Delaware. In July 1999, we sold 3,500,000 shares of
common stock to the public in our initial public offering. Our principal
executive offices are located at 5850 Hellyer Avenue, San Jose, California
95138, and our telephone number is (408) 360-4950. Our corporate web site is
located at www.gadzoox.com.

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

  INDUSTRY BACKGROUND

  Growth Of Enterprise Data

     The volume of data generated in today's business environment continues to
grow at a significant rate. This growth is fueled by a number of factors,
including:

     - the emergence and rapid growth of data-intensive applications such as
       e-commerce, on-line transaction processing, web-serving, digital video
       and other multimedia applications and enterprise resource planning;

     - the increasing demand for more comprehensive disaster recovery tools
       which can be deployed across greater distances;

     - the increasing importance of digital information as a strategic business
       asset;

     - advances in storage technology and the resulting decline in the cost of
       storage capacity; and

     - a trend toward distributing data in the enterprise client-server
       environment.

  Traditional Captive Storage Architecture

     The growth of the amount of enterprise data has resulted in a corresponding
need to manage, share, back-up and make data widely accessible. This need has
traditionally been addressed by connecting individual high-performance
computers, known as servers, to dedicated storage devices. This approach results
in a "captive" storage architecture where storage devices are connected to only
one server, and not to any of the other servers utilized by an enterprise. These
connections are made through the use of the SCSI technology. Traditional captive
storage architecture has several significant limitations, including:

     - Capacity Constraints.  SCSI technology cannot typically support more than
       15 individual disk drives. In general, to add additional storage
       capacity, additional servers must be added, which is costly and
       inefficient.

                                        3


     - Performance Constraints.  The bandwidth, or rate at which data can be
       transmitted, of commercially available SCSI technology is fixed at 40 or
       80 megabytes per second. Accordingly, the addition of a new storage
       device may not result in a proportional increase in performance because
       the available bandwidth may be fully utilized by the amount of data
       already flowing between the server and the existing storage devices.
       Further, the addition of new storage devices may actually degrade
       performance as more devices compete to utilize available bandwidth.

     - Lack Of Management.  SCSI technology does not have any inherent
       capability to manage connections, storage or data. As a result, servers
       are burdened with management tasks. This is cumbersome because there is
       no centralized monitoring and control. This is also inefficient because
       server bandwidth is spent managing data and not serving clients,
       generating a need for more servers. Because of this lack of centralized
       management, we believe the cost of managing storage exceeds the cost of
       the storage devices themselves.

     - Lack Of Availability And Disaster Tolerance.  In general, a SCSI device
       can only be accessed by its dedicated server. If the server becomes
       unavailable for any reason, such as a breakdown of the server or a
       disaster affecting the entire data center, data on its connected storage
       devices becomes inaccessible. This lack of fault and disaster tolerance
       makes the enterprise vulnerable to server or data center failures.
       Because the SCSI standard typically limits the distance between servers
       and storage devices to 25 meters, redundant storage devices in remote
       locations are generally not practical or cost-effective. As a result,
       sustained data availability in a captive storage architecture following a
       system failure or disaster is difficult to achieve.

     - Lack Of Efficient Transmission Of Data Between Storage Devices And Client
       Applications.  A SCSI device can only be connected between storage
       devices and servers. This tasks the server with providing the
       interconnect between the storage device and the application utilizing the
       data. This is inefficient because server bandwidth is spent transmitting
       data.

     - Lack Of Sufficient Distance.  SCSI devices are typically limited to just
       a few meters of connection distance, depending on the speed of the SCSI
       device. This leads to problems where large data centers need to connect
       storage to servers, or in campus environments where buildings may share
       storage devices.

  Development Of Fibre Channel

     In 1994, the American National Standards Institute, or ANSI, approved the
Fibre Channel standard as an open standard technology specifically for high
performance, input/output intensive environments, such as server-storage
connectivity. Commercially available Fibre Channel products today offer over
1-gigabit-per-second of bandwidth. The industry is expected to transition to
2-gigabit-per-second speeds in 2001. Multiple Fibre Channel links of 10
kilometers, or in certain instances 80 kilometers, may each be interconnected to
enable long distances between servers and storage devices. Fibre Channel
technology also enables hundreds, theoretically thousands, of storage devices
and servers to be interconnected.

  The Need For A New Storage Architecture

     Despite the greater bandwidth and capacity offered by Fibre Channel
technology, it alone does not address the data management, data availability and
disaster tolerance issues resulting from the growth of enterprise data. A new
storage architecture comprised of a new model for connecting storage devices
with servers and a foundation for distributing data management applications is
needed.

  The Need For A New Connection Between Sans And Local And Wide Area Networks,
  Or Lans And Wans

     Through the popularity of the Internet and the emergence of e-business
systems, companies have come to rely on electronic data to conduct business.
While the use of electronic data has streamlined business processes to reduce
operating costs and expanded markets to increase revenue for many businesses, it
has also

                                        4


increased their vulnerability to system failures or site disasters. To minimize
these risks, companies are implementing disaster tolerance systems that copy or
"mirror" data from the company's primary SAN site to additional SAN locations to
help ensure continuous availability of data.

     Although localized SAN installations based on Fibre Channel have provided
solutions for specific server application needs, the absence of long distance
connectivity capabilities has posed a barrier for large enterprises and service
providers that need to interconnect remote SAN sites for the purpose of data
replication and restoration. By connecting SANs to LANs or WANs, users can
leverage the existing infrastructure of local and wide area networks to transmit
data from one SAN site to another without incurring the cost and time of
installing a new dedicated long distance SAN infrastructure.

  Managed Storage In An Environment Of Personnel Constraints And High Storage
  Growth

     As more and more applications and data move online with global requirements
of 24 hours a day, 7 days a week availability, the systems to support these
requirements need to change and become more efficient. The proliferation of
distributed systems has resulted in many enterprises with hundreds or even
thousands of servers and storage devices. This, combined with the rapid growth
of storage in many enterprises, creates an unmet demand for storage management.
Trained personnel to manage data day-to-day are often not available and backup
remains too cumbersome. Physical storage needs to be moved, protected and
allocated in a more dynamic and efficient manner.

  THE GADZOOX SOLUTION

     We sell hardware and software products that create SANs for the intelligent
management of enterprise data. To address limitations of traditional captive
storage architecture, we pioneered the development of the SAN by leveraging the
capabilities of Fibre Channel technology to create a new network architecture
designed to enable multiple storage devices to be connected to multiple servers.
We deploy products to provide new ways of clustering storage devices, making the
management of data and the addition of new storage devices more efficient.
Additionally, we provide advanced management capabilities to make storage easier
to manage and protect.

     We believe the combination of our technical innovation and our market
vision has influenced and will continue to influence the evolution of the SAN
market.

     We developed some of the first SAN devices and introduced products that are
designed to manage data from within a SAN without relying on servers. Our
products include hubs with intelligent diagnostics, a chassis switch based on
the Fibre Channel Arbitrated Loop protocol, or FC-AL, a fixed-port FC-AL
stackable switch, and the recently announced Slingshot 4128, a Fibre Channel
fabric switch which is currently being evaluated by a number of OEMs and
resellers. Utilizing the proven principles of centralized network management for
LANs, we were also the first to deliver management network devices and
management software for SANs. These devices are designed to centralize the
monitoring, diagnosis and control of a SAN and address the limitations of
traditional captive storage architectures in the following ways.

  Capacity Scalability

     Our hub, switch and SAN management products are designed to allow users to
scale servers and storage capacity independently to meet their individual needs.
Our products help users realize Fibre Channel technology's ability to connect
hundreds of storage devices or subsystems to multiple servers. This is more
cost-effective than the traditional captive storage architecture, which requires
businesses to purchase more than one server to facilitate the addition of
storage devices.

  Increased Performance

     Our hub and Capellix family of switch products are designed to provide
access to data at speeds exceeding 1 gigabit per second. Our Capellix chassis
switch has greater port capacity (scalable from 6 ports to 32 ports) and a
faster switching backplane than the 8-port and 16-port SAN switches available
from other

                                        5


SAN vendors. Our Slingshot switch product has the highest port density in its
class, and is designed to provide access to data at 2-gigabit-per-second speeds.
This enables higher performance and more cost-effective scaling because more
devices, manufactured by us or our competitors, can be connected through a
single switch than can be connected through existing switches. Our products
leverage the multiple server/multiple storage topology of SANs to allow multiple
users simultaneous access to stored data over independent paths within the SAN.
This permits faster access to data by more users than possible in traditional
captive storage architecture.

  Manageability

     Our management software products are designed to provide centralized
monitoring and control of storage and networking devices in a distributed SAN
environment. For example, our proprietary management software features and
Ventana SAN Manager software are designed to minimize downtime by monitoring,
detecting, isolating and troubleshooting faults as they occur. Our products
leverage the SAN environment to facilitate the sharing of storage resources,
such as tape backup devices and disk arrays, or disk drives grouped together to
provide added storage capacity. Our products also leverage the SAN environment
to reduce the total cost of ownership of storage networks. We have designed our
products to integrate with LAN management software tools, such as the
Hewlett-Packard OpenView(TM), Computer Associates Unicenter(R) and IBM
Tivoli(TM). We believe that centralized management results in a total cost of
ownership model where the cost of data management is significantly less than the
cost of the storage devices themselves.

  Data Availability And Disaster Tolerance

     Our products are designed to further enhance SANs by allowing network
administrators to specify primary and secondary data transmission pathways known
as failover links. SANs are substantially more fault tolerant than traditional
captive storage architecture because access to storage devices on a SAN is
independent of any single server. As a result, even if one or more servers fail,
data stored on SAN storage devices is still accessible by other servers
connected to the SAN. In addition, because Fibre Channel technology allows
devices to be located farther apart physically than SCSI technology, storage
devices on the same SAN can be placed in remote locations to increase disaster
tolerance.

  Interoperability

     Our current products leverage the FC-AL protocol. This protocol is the most
widely deployed Fibre Channel standard. As a result, our products are compatible
with substantially all major Fibre Channel servers and storage subsystems.
Additionally, our Capellix chassis product is highly interoperable with other
products in the market due to (1) its ability to communicate to substantially
all major Fibre Channel servers and storage subsystems; (2) its ability to
interoperate with most hubs and switches manufactured by other SAN vendors; and
(3) the ability of its chassis design to provide "future proofing" to allow for
new printed circuit boards with new functionality to be easily added to the
chassis. This interoperability allows customers to install our products into
their existing networks to allow them to better preserve their investment in
existing equipment and provide a path for upgrades. Our new product, the
Slingshot 4218, which is currently being evaluated by a number of OEMs and
resellers, is based upon the Fibre Channel fabric protocol, or FC-SW and has
been designed to fully conform to the Fibre Channel Switch-2, or FC-SW-2
standard, which defines the standard method for fabric services in a
multi-switch network.

  Modular Scalability

     The modular design of our products allow users to scale and upgrade the
capabilities of their SANs as required. Our customers are able to meet their
evolving storage and performance needs through the incremental installation or
upgrade of switches and SAN management software features.

                                        6


  Increased Network Stability

     Our proprietary Reflex feature is integrated in all of our Capellix switch
products and is designed to automatically bypass faulty links and devices to
help ensure network stability. Our proprietary PerfectPort feature is designed
to increase the reliability of each Fibre Channel link to our switch products.
This enhances the reliability of the SAN. In addition, the use of PerfectPort in
each link enables all devices in the SAN to be interconnected without limitation
in the number of network devices or the distance between SAN devices.

  Platform For Advanced Data Management

     Our products are designed to allow storage devices to share data without
the intervention of a server. This feature creates a platform that helps enable
third-party applications, such as serverless backup applications that allow
backups to be performed over a SAN without a server. Serverless backup helps
alleviate servers and local area networks of backup traffic so they can more
effectively serve clients.

  GADZOOX STRATEGY

     Our objective is to continue to develop and deliver innovative storage
network products. Key elements of this strategy include the following:

  Leverage Experience in Storage Area Networks

     We intend to introduce high-quality, cost-effective products and product
enhancements to meet the needs of the evolving SAN market. Our engineers have
significant technological experience in both storage and networking. Our insight
into the potential of Fibre Channel technology stems from the knowledge base of
several of our employees who were involved in the establishment of the original
Fibre Channel standards. We believe our participation on Fibre Channel and
related standards committees, such as the Storage Networking Industry
Association (SNIA), the Internet Engineering Task Force (IETF), the National
Committee for Information Technology Standards (NCITS), and the Fibre Alliance,
will enable us to extend our influence in the Fibre Channel market and into
other technologies as they are applied to SANs. We believe this technological
expertise has been instrumental in developing our SAN architecture and
introducing innovative products and we intend to continue to devote substantial
resources to our product development efforts.

     We remain committed to advancing the standardization of SAN capabilities
through our participation in industry standards organizations, trade groups and
strategic partnerships. For example, we have led the way in the development of
SANmark(TM) conformance tests with the Fibre Channel Industry Association. These
tests provide a mechanism to verify that devices are conforming to industry
standards that Gadzoox is helping to develop, such as the FC-SW-2 standard which
is currently out for public review and should be published shortly. We fully
employ the standards of the National Committee for Information Technology
Standards and other open standards bodies in our Slingshot family of Fibre
Channel fabric switch products. Today, our personnel hold elected leadership
positions in several industry working groups, including FC-SW-2, SNIA Technical
Council and the FCIA SanMark Technical Committee and actively participate in
other industry working groups including; FC-MI, T11.3, IPFC and FCIP. These
industry working groups are comprised of representatives from various companies
within the industry and their objectives include such things as promoting SAN
interoperability standards, product technical advancements, product feasibility
demonstrations and technical peer reviews. Participation and leadership
positions in these groups is important to the Company as it gives the Company
increased visability within the industry and helps to demonstrate the Company's
expertise and competence in the storage area networking space.

  Develop Products Consistent With SAN Evolution

     Recognizing that SAN architecture was a new storage connectivity paradigm,
we targeted our initial product development efforts to the introduction of
active hubs as the basic building block of SANs. As SAN architecture began to
gain market acceptance, we introduced managed hubs and SAN management software
to allow centralized monitoring and control in larger distributed environments.
In September 1999, we first commercially shipped the Capellix 3000 chassis
switch, designed to provide highly scalable switching

                                        7


capabilities with port counts from 6 ports to 32 ports, without the need to
change other elements of the SAN, such as servers and storage devices. In March
2000, we first commercially shipped the Capellix 2000 stackable switch, an
8-port or 11-port switch. In April 2001, we announced the Slingshot 4218, an
open standards-based Fibre Channel fabric switch. The Slingshot is currently
being evaluated by a number of OEMs and resellers. We expect to begin shipping
this product during the quarter ending September 2001. By basing new products on
open standards, the need to reengineer systems to accommodate
non-standards-compliant products, such as existing Fibre Channel FC-SW products,
is diminished. By focusing on developing products consistent with SAN evolution,
we believe that we have been a significant factor in the emergence of the SAN
market. As SAN architecture gains wider market acceptance, we intend to continue
to introduce products designed to enable greater capabilities.

  Develop Data Management Architecture

     We plan to leverage the SAN infrastructure to continue to develop a new
data management architecture. Although SAN architecture addresses a number of
problems resulting from the growth of enterprise data, we believe that its role
will continue to evolve over time. Similar to the way that LAN architecture
evolved from a connectivity method for the sharing of data and printers into an
infrastructure that enabled the advent of client-server computing, we believe
SAN architecture holds the potential of enabling further changes in the way data
is managed. By eliminating the dependency between individual servers and the
access to storage, SAN architecture enables the removal of data management
applications from each server and consolidation in the SAN. In doing so, server
processing capacity can be applied to business critical applications while data
management functions are distributed within the SAN infrastructure, thereby
creating a distributed data management environment.

     We believe that the improvements in reliability and security resulting from
a distributed data management environment can enhance overall data availability.
Correspondingly, the elevated role of an intelligent SAN infrastructure can
result in higher-value SAN product segments. To influence these evolutionary
steps, we plan to work with industry standards organizations, OEM customers,
distribution channel partners and strategic partners to develop, standardize and
promote a distributed SAN-based data management architecture.

  Focus On Key OEM Customers And Expand Distribution

     We intend to continue to focus on our OEM customer and distribution channel
relationships to develop new markets. Our major OEM and distribution customers
currently consist of the following:



              OEM CUSTOMERS                          DISTRIBUTION CUSTOMERS
              -------------                          ----------------------
                                         
Hewlett-Packard Company                     Bell Microproducts, Inc.
Compaq Computer Company                     Consan (a Gates/Arrow Company)
                                            Tech Data, Inc.


     While our OEM customers have historically accounted for the majority of our
net revenues, our success depends largely on sales to OEMs and, in part, on the
successful creation of an open market channel through distributors and
resellers. Approximately 12% of our net revenues for the quarter ended March 31,
2001 came from distributor and reseller partners and 88% from OEM customers. We
have taken several actions to improve our distribution channel partners'
abilities to sell our products at the end-user level, including expanding
training and customer service capability and implementing new reseller and
distributor programs. However our primary sales focus is on OEM accounts.

     We offer a comprehensive training and marketing support program to our
partners through our Gadzoox Associates in Networking, or GAIN, program. We
intend to enter into agreements with additional distributors or resellers, both
in the United States and abroad, to increase our geographic coverage and address
new vertical markets, however, we cannot assure you that we will be successful
in these efforts or that our net revenues will increase if we are successful.

                                        8


  Working Closely With Strategic Partners And Industry Alliances

     We intend to work closely with leaders in the storage, networking and
computing industries to develop new and enhanced SAN products. We believe that
establishing strategic relationships with technical partners is essential to
facilitate the efficient and reliable integration of their capabilities into SAN
solutions. To this end, we have developed strategic relationships and industry
alliances with leading technology companies including the following:

ATL Products
     (data backup applications)
Compaq Computer Corporation
     (storage management)
Exabyte Corporation
     (data backup applications)
Legato Systems, Inc.
     (data backup application)
Tivoli Systems Incorporated
     (network management)
Microsoft Corporation
     (server clustering and web-based management)
Novell, Incorporated
     (server clustering, network management)
Seagate Technologies, Inc.
     (storage device interface technologies)
Sun Microsystems, Inc.
     (storage management architecture)
Veritas Software Corporation
     (storage management architecture)
Computer Associates
     (data backup application, network management)
Lucent Technologies
     (Fibre Channel -- Internet Protocol standards)

  Employ Reusable Elements

     Our products incorporate reusable application specific integrated circuit,
or ASIC, cores and firmware agents, or small software applications used to carry
out specific functions. This allows us to accelerate time-to-market, reduce
development costs and leverage interoperability with existing products. In
December 2000, we discontinued our relationship with Vitesse Semiconductor
Corporation, our previous supplier of ASICs and have formed a strategic and
business partnership with LSI Corporation to assist in the design as well as
manufacture of our proprietary ASICs. We intend to continue developing reusable
elements and leveraging them in order to quickly respond to changes in market
requirements.

  PRODUCTS

     We offer a comprehensive line of networking products consisting of SAN
managed hubs, switches and management software. Our products are designed to
address the needs of our existing and potential customers to enable the adoption
and growth of SANs for a broad range of markets and applications. In fiscal
2001, approximately 74% of our revenues were derived from sales of our hub
products and 26% from Capellix switch products. In fiscal 2000, 100% of our
revenues were derived from the sale of our hub products. In fiscal 1999,
substantially all of our revenues were derived from sales of our hub products.
We expect that a substantial majority of our net revenues for fiscal year 2002
will be derived from sales of new products currently under development or
evaluation, including the Slingshot 4218 Fibre Channel fabric switch.

                                        9


  Network Products

     Our line of network products currently includes a managed hub, chassis and
stackable switches. Our products enable the cost-effective installation, scaling
and extension of SAN capacity, performance and management capabilities.

     The following product listing summarizes the key features and benefits of
our networking products:

                                                        
HIGH-END HUB
Gibraltar C/XM
                                 First Commercial Shipment:   February 1997
                                 Description:                 Managed hub
                                                              10-port managed hub
                                 Benefits:                    Enables efficient scalability
                                                                for enterprise environments
                                                              Management via Ventana
                                                              Fully FC-AL standards compliant
FC-AL SWITCHES
Capellix 3000
                                 First Commercial Shipment:   September 1999
                                 Description:                 Multi-protocol chassis switch
                                                              Modular chassis-based design
                                                                scalable from 6 ports to 32
                                                                ports
                                                              28-Gigabit-per-second switching
                                                                backplane
                                                              Innovative storage switch
                                                                technology
                                                              Supports multiple Fibre Channel
                                                                and networking protocols
                                                                through protocol plug-in
                                                                modules
                                 Benefits:                    High bandwidth backplane
                                                                enables more effective
                                                                scalability than 8-port or
                                                                16-port switches
                                                              Designed to be integrated
                                                                without reengineering or
                                                                changes to existing devices
                                                              Plug-in modules provide
                                                                configuration flexibility
                                                              Modular hardware and agent
                                                                design offers upgradability
                                                                and extensibility
                                                              Management via Ventana
                                                                communicates with most other
                                                                vendors' commercially
                                                                available hubs and switches,
                                                                fully FC-AL standards
                                                                compliant
Capellix 2000
                                 First Commercial Shipment:   March 2000
                                 Description:                 Stackable 8-port switch extends
                                                                to 11-ports with plug-in
                                                                module



                                        10

                                                        
                                 Benefits:                    Plug-in module for port
                                                                expansion
                                                              Modular hardware and agent
                                                                design offers upgradability
                                                                and extensibility
                                                              Management via Ventana
                                                                communicates with most other
                                                                vendors' commercially
                                                                available hubs and switches
FIBRE CHANNEL FABRIC SWITCH
Slingshot 4218
                                 First Commercial Shipment:   Expected quarter ending
                                                                September 2001, announced in
                                                                April 2001
                                                              Currently under evaluation by
                                                                OEMs and resellers
                                 Description:                 18-port Fibre Channel Fabric
                                                                Switch 1 gigabit or 2 gigabit
                                                                speed, auto-negotiated
                                                                port-by-port
                                                              Open standards-based (FC-SW-2)
                                 Benefits:                    18 ports in 1U chassis for high
                                                                density, low footprint
                                                              Enables heterogeneous SAN
                                                                fabrics and interoperability
                                                                with existing 1 gigabit
                                                                devices
                                                              Load sharing trunks to enable
                                                                selectable bandwidth between
                                                                switches
                                                              Management via Ventana SANtools
                                                                FX



  Management Products

     Our modular, upgradable management products are designed to enable users to
deploy management capabilities as required and enhance the ability to maintain
compliance with future management standards. To minimize the requirement for
multiple connections from managed hubs to a management console, our products
employ our proprietary IntraCom proxy management system. Unlike other products
that impose distance limitations or require multiple connections, our proxy
management system is designed to enable a single managed "master" device to
manage other "slave" devices over existing Fibre Channel links without impacting
the flow of data.

                                        11


     The following product listing summarizes the key features and benefits of
our management products:

                                                
MANAGEMENT SOFTWARE
Ventana SAN Manager and
  Ventana SANtools
                         First Commercial Shipment:   May 1997
                         Description:                 SAN management application monitors,
                                                        detects, isolates and troubleshoots
                                                        faults as they occur
                         Benefits:                    Centralized network and data
                                                        management, enhances data
                                                        availability
                                                      Designed to integrate into enterprise
                                                        platforms such as OpenView(TM),
                                                        Unicenter(R) and Tivoli(TM)



  CUSTOMERS

     We began commercial shipment of our SAN products in fiscal 1996, and as of
March 31, 2001, we had shipped products to over 97 organizations in 30
countries.

  OEM Customers

     Historically, we have focused on sales to OEM customers because we believed
that they were most capable of influencing the development of the early SAN
market. We continue to believe that by partnering with leading OEM customers, we
will continue to be well positioned to introduce new products and develop new
markets. We work closely with our OEM customers as we develop new products and
rely on these OEM customers for market feedback.

     In fiscal 2001, Hewlett-Packard Company represented approximately 42% of
our net revenues and Compaq Computer Corporation represented approximately 33%
of our net revenues. In fiscal 2000, Hewlett-Packard Company represented 33% of
our net revenues and Compaq Computer Corporation represented 17% of our net
revenues. In fiscal 1999, Hewlett-Packard Company represented 42% of our net
revenues and Compaq Computer Corporation represented 15% of our net revenues.

     We focus our sales and marketing efforts on OEM customers that manufacturer
Unix and Windows NT servers and high-end disk and tape storage subsystems. OEM
customers have been a key to our growth in the various stages of the emerging
market and have represented a significant portion of our revenues. We believe
that this is largely due to the ability of our OEM customers to deliver
complete, factory-configured solutions, which are installed and serviced by
their dedicated technical support organizations. Even as the technology of a
given solution matures and becomes suitable to transition to an open market
integration model, the evolutionary nature of the SAN market should enable us to
continue to present our OEM customers with the opportunity to integrate and
deploy new capabilities as they are developed. To help ensure the successful
deployment of these capabilities, we plan to continue to strengthen our OEM
customer relationships and focus on the advancements of technology and
standards.

  Distribution Channel Partners

     As the SAN market has matured, we have developed a two-tier distribution
channel that is comprised of distributors and resellers. Distributors and
resellers enable us to pursue a number of vertical markets and applications,
such as e-commerce, internet service providers, digital video, digital
publishing, oil and gas exploration and medical imaging. Our major distribution
channel partners consist of Bell Microproducts, Inc., Consan (a Gates/Arrow
Company) and Tech Data Corporation.

     We maintain a two-tier distribution marketing program. Our Gadzoox
Associates in Networking, or GAIN, program addresses the SAN market development
challenges and opportunities. By providing our partners with a comprehensive set
of sales tools and in-depth training in technology, products, interoperability

                                        12


and applications, we believe that we can enhance their ability to identify sales
opportunities and deploy solutions. As a result of lower-than-expected net
revenues from distribution channel partners, we have taken several actions to
improve sell-through at the end-user level, including expanding training and
customer service capability and implementing new reseller and distributor
programs. In addition to partner development activities, we also actively work
on end-user education. With the goal of generating awareness and end-user demand
for SAN solutions, we have participated in a number of seminars with partners,
such as ATL Products, Inc., Compaq Computer Corporation, Chaparral Network
Storage, Inc., Computer Associates International, Inc., Exabyte, Inc.,
Hewlett-Packard Company, Legato Systems, Inc., Microsoft Corporation, Novell,
Inc., Veritas Software Corporation and XIOtech Corporation, Inc. We plan to
continue these educational seminars in conjunction with our channel and
strategic partners. In addition, during the fiscal year 2001, we launched a SAN
Training and Certification program. We cannot assure you that these programs
will be effective to increase sales into and through the distribution channel or
to increase our net revenues.

     Historically, we have derived net revenues from a limited number of OEM and
distribution channel partners, which subjects us to business risks. Furthermore,
the inability or unwillingness of our distribution channel partners to resell
SAN networking equipment, including full SAN solutions, would significantly
reduce our net revenues which would harm our business.

  SALES, MARKETING AND CUSTOMER SERVICE

     Our sales and marketing strategy is focused on the development of the SAN
market through relationships with OEM customers and distribution channel
partners. OEM customers have demonstrated the ability to resell our SAN products
due, in part, to the length of time they have been involved in the SAN
marketplace and the strength of their internal technical, sales and marketing
structures. OEM customers are able to sell full SAN solutions including servers,
storage and SAN switches. Our distribution channel partners have participated in
the SAN market for a shorter period of time and often do not have fully trained
technical, sales and marketing staff. As a result, they are not as well
positioned as our OEM customers to provide full solution sales. Additionally,
distribution channel partners may not be able to effectively compete with OEMs.
We believe that selling through both OEM and distribution channel customers will
help the SAN market evolve and ultimately enhance our ability to address a large
end-user base. However, our distribution channel partners must establish strong
technical, sales and marketing capabilities to effectively perform in this
marketplace.

     As of March 31, 2001, our sales and marketing organization consisted of a
total of 67 people, including field sales representatives, systems engineers,
applications engineers, product marketing, product management, channel marketing
and marketing communications. Our field sales personnel are located in San Jose
and Arcadia, California; Austin, Grapevine, Kingwood and Plano, Texas;
Dawsonville, Georgia; Rolling Meadows, Illinois; Babylon, New York; Berkshire,
England; North Point, Hong Kong and Munich, Germany.

  Customer Service

     Our customer service organization provides product and technical support to
our OEM customers and distribution channel partners as well as warranty repair
or replacement services. Through our indirect sales model and our partner
training programs, we minimize the need for a large end-user support
organization. We provide direct self-service support for our products through
our website. As of March 31, 2001, our customer service organization included 6
full-time employees. We plan to augment our internal staff as required in the
future.

  TECHNOLOGY

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

                                        13


  Fibre Channel And Other Networking Technologies

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

     There are two main industry standards for the Fibre Channel protocol; FC-AL
and FC-SW. Based on the cost-effective nature and wide industry deployment of
the FC-AL protocol, we elected to base the design of our initial hub and switch
products on that standard. As the needs of the market evolve and as more third-
party products are developed to interoperate with other protocols, including
FC-SW, we plan to introduce products and modular enhancements that support these
protocol standards. Fibre Channel standards continue to be enhanced and new
industry standards are being developed. We intend to fully employ standards and
introduce products and modular enhancements that support new protocol standards
in areas such as SCSI technology, Infiniband, Ethernet, Gigabit Ethernet,
asynchronous transfer mode (ATM), Fibre Channel FC-SW, DWDM and transmission
control protocol/Internet protocol (TCP/IP).

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

  Core ASIC Design

     We design our own core ASICs and employ personnel with expertise in
semiconductor process and design methods. Our proprietary ASICs are manufactured
using complementary metal-oxide semiconductor, or CMOS, technologies. We have
successfully designed proprietary ASICs with speeds exceeding 1 gigahertz. We
discontinued our business relationship with Vitesse Semiconductor, Inc. in
December 2000, our previous ASIC supplier, and have formed a strategic and
business partnership with LSI Logic Corporation to assist in the design as well
as manufacture of our proprietary ASICs. Our CMOS ASIC staff possess experience
in ASIC architecture, design and testing.

  System Design

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

  Software

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

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

                                        14


  RESEARCH AND DEVELOPMENT

     Our research and development expenses were $29.4 million in fiscal 2001,
$18.2 million in fiscal 2000 and $13.9 million in fiscal 1999. We believe that
our research and development efforts are essential to our ability to develop and
deliver innovative products that address the needs of the market and help evolve
the capabilities of SANs. At March 31, 2001, we had 68 full time employees
engaged in research and development.

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

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

  MANUFACTURING

  Contract Manufacturing

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

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

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

  ISO 9001

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

  COMPETITION

     The competitive environment in the SAN market is still developing. We
anticipate that the market for our products will continue to be highly
competitive, continually evolving and subject to rapid technological change. New
SAN products are being introduced by various server and storage providers as
well as our current and future competitors, and existing products will be
continually enhanced. We face competition primarily from other sellers of SAN
hub and switch products, including, but not limited to, Brocade Communication
Systems, Inc., McDATA Corporation, QLogic Corporation and Vixel Corporation, in
the SAN switch market, and Emulex Corporation and Vixel Corporation, in the SAN
hub market. Furthermore, although we

                                        15


currently offer products that are complimentary to SAN software products offered
by companies such as Legato Systems, Inc. and Veritas Software Corporation, they
and other enterprise software developers may in the future compete with us. We
also compete with providers of data storage solutions that employ traditional
technologies, including SCSI-based technology such as, Adaptec, Inc., LSI Logic
Corporation and QLogic Corporation.

     In addition, as the market for SAN products grows, we may face competition
from traditional networking companies and other manufacturers of networking
equipment. These networking companies may enter the SAN market by introducing
their own products, acquiring an existing SAN infrastructure provider or by
entering into alliances with an existing SAN provider. It is also possible that
OEM customers could develop and introduce products competitive with our product
offerings. We believe the competitive factors in the SAN market include the
following:

     - product performance and features;

     - product reliability and interoperability;

     - price;

     - strength of customer relationships, including OEM and distribution
       channel partners;

     - ability to meet delivery schedules; and

     - customer service and technical support.

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

  INTELLECTUAL PROPERTY

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

                                        16


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

  BACKLOG

     At March 31, 2001, the backlog for our products was approximately $1.7
million. This backlog represents orders that are scheduled for delivery to
customers during the quarter ending June 2001. This compares to backlog of
approximately $5.1 million at March 31, 2000, for delivery to customers during
the quarter ending June 2000. Typically, our OEM customers forecast expected
purchases on a three to six month rolling basis, as compared to distribution
channel partners which order as required with minimal order fulfillment time.
All orders are subject to cancellation or delay by the customers with limited or
no penalty. Therefore, our backlog is not necessarily indicative of actual sales
for any succeeding period.

  EMPLOYEES

     As of March 31, 2001, we had 227 full time employees, of whom 68 employees
were engaged in research and development, 50 were in engineering services, 67
were in sales and marketing, 23 were in manufacturing and 19 were in finance,
administration and information services. None of our employees are represented
by a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.

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

  EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information regarding our executive
officers as of June 29, 2001:



NAME                                           AGE                       POSITION
----                                           ---                       --------
                                               
Michael Parides(1)...........................  42    President, Chief Executive Officer, and Director
Wayne Rickard................................  42    Senior Vice President, Research and Development
Ronald von Trapp.............................  53    Vice President, Worldwide Sales
David Eichler................................  52    Vice President, Finance and Chief Financial
                                                     Officer
Clark Foy....................................  37    Vice President, Marketing
William Hubbard..............................  57    Vice President, Manufacturing
Steven Dalton................................  42    Vice President, Engineering
Kristin Strout...............................  34    Vice President, Human Resources


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

(1) Member of the audit committee.

     Michael Parides has served as our President, Chief Executive Officer and as
a director of Gadzoox since September 2000. In January 2000 Michael joined the
Company as Vice President of Advanced SAN

                                        17


Solutions and Customer Service and was promoted in June 2000 to Chief Operating
Officer. From June 1999 to January 2000, Mr. Parides was the Group Vice
President of the Storage, Computer Systems, Software and Documents Management
businesses at Dataquest/Gartner Group, a market research company. From November
1997 to June 1999, Mr. Parides was an independent consultant. From September
1996 to November 1997 he served as Vice President of Marketing of the
Workstation, System and Server Division at Quantum Corporation, a storage
systems company, or Quantum. From June 1995 to September 1996 Mr. Parides was
the Vice President of Marketing, Consumer Desktops at IBM, a computer and
software company. Mr. Parides holds a B.S. in electrical engineering from
Rutgers University and an MBA from Duke University.

     Wayne Rickard joined us in April 1996 initially as our Vice President of
Research and Development and General Manager at our Placentia, California
facility. In January 1999 Mr. Rickard was promoted to Senior Vice President of
Research and Development. In June 2000 Mr. Rickard was promoted to Chief
Technical and Strategic Officer and has been serving in this capacity since that
time. From September 1981 until joining us in April 1996, Mr. Rickard worked at
Emulex Corporation, a data networking company, where he last served as senior
director of engineering from April 1994 through April 1996. Mr. Rickard holds a
B.S. in electrical engineering from California State University, Fullerton and
an M.B.A. from Pepperdine University.

     Ronald von Trapp joined us in October 2000 as Vice President of Worldwide
Sales. From August 1999 to September 2000, Mr. von Trapp was Vice President of
Worldwide Sales at Vixel Corporation, a SAN switch company. From October 1997 to
July 1999, Mr. von Trapp served as Vice President Worldwide Sales and Marketing
for Mylex Corporation, a RAID storage systems company. From February 1997 to
September 1997, he served as Vice President North American Sales for Maxtor
Corporation, a storage systems company. From October 1988 to July 1996, Mr. von
Trapp was Director of North American Distribution Sales for Quantum. Mr. von
Trapp attended California State University, Fullerton.

     David Eichler joined the Company in May 2001 as Vice President of Finance
and Chief Financial Officer. From January 1999 to May 2001, Mr. Eichler was Vice
President of Finance and Administration and Chief Financial Officer for Alliance
Semiconductor Corporation, a memory semiconductor company. Mr. Eichler served as
Vice President of Finance and Chief Accounting Officer for Adobe Systems Inc., a
software company, from December 1997 to December 1998. From March 1994 to
November 1997, Mr. Eichler was Senior Vice President of Finance and
Administration and Chief Financial Officer for Hyundai Electronics America, a
semiconductor, computer and storage systems and telecommunications systems
company, and served on the board of directors for three subsidiary companies.
Mr. Eichler also held a number of senior financial management positions with
Tandem Computers Inc., a fault-tolerant, mini-computer company. Mr. Eichler
holds an MBA from the University of California, Los Angeles, a B.S. in
accounting from Northeastern University and is a certified public accountant.

     Clark Foy joined the Company in June 2000 as Vice President of Marketing.
From June 1997 to June 2000, Mr. Foy served in a number of senior management
positions at Quantum, including Vice President of Marketing, Director of
Strategic and Technical Marketing and Product Team Leader in the High-End
Storage Division, as well as Director of Strategic Planning for the Hard Disk
Drive Group. From July 1994 to May 1997, Mr. Foy held a number of management
positions with Compaq Computer Corporation, a computer systems company,
including Manager of Product Strategy and Planning, Manager of Business Unit
Strategy and Planning, and Manager of Business Planning for the Desktop PC
Division. Mr. Foy holds an MBA from Northwestern University and a B.S. in
business administration from Miami University of Ohio.

     William Hubbard has served as Vice President of Manufacturing since
September 1997. From May 1995 to July 1997, Mr. Hubbard served as Vice
President, Manufacturing for Gregory Associates, a contract manufacturing
company. From March 1994 to May 1995, Mr. Hubbard was Vice President of
Operations for Hughes LAN Networks, a supplier of local area networking
equipment. Mr. Hubbard holds a B.S. in manufacturing technology from Montana
State University and an M.S. in Management Science and Engineering from
Worchester Polytechnic Institute.

     Steven Dalton joined us in January 2000 as our Vice President of
Development. From October 1998 to January 2000, Mr. Dalton served as the Vice
President of Engineering, Americas for Force Computers, Inc.

                                        18


From February 1997 to October 1998 Mr. Dalton was Vice President of Product
Development for Auspex Systems, Inc., or Auspex, a developer and manufacturer of
network attached storage devices. From March 1995 to September 1996, Mr. Dalton
served as Vice President of Engineering of Auspex and in September 1996, he was
promoted to President and Chief Technical Officer, in which capacity he served
until February 1997. Mr. Dalton holds a BSET degree from California Polytechnic
State University and is currently enrolled in the MBA program at Golden Gate
University.

     Kristin Strout joined the Company in February 2001 as Vice President of
Human Resources. From October 1998 to May 2000, Ms. Strout served as Regional HR
Planning Director, Asia Pacific for Lucent Technologies, a telecommunications
company. From January 1996 to September 1998, Ms. Strout was Director and Senior
Management Consultant at GML Consulting Limited, a human resource and management
consulting company based in Hong Kong. Between May 1992 and January 1996, Ms.
Strout was Human Resources Consultant with HR Strategies, a human resources
consulting company. Ms. Strout holds a B.A. degree in Psychology from Stanford
University.

ITEM 2.  PROPERTIES

     Our corporate headquarters and engineering facility of approximately 65,000
square feet is located in San Jose, California. We lease this facility pursuant
to a lease agreement that expires in November 2005. Additionally, the Company is
subleasing approximately 8,000 square feet of adjacent space which expires in
January 2002. Our research and development facility of approximately 20,000
square is located in Irvine, California. We lease this facility pursuant to a
lease agreement that expires in April 2005.

     Our international sales offices are located in executive suites in London
and Munich. We lease these facilities pursuant to lease agreements that expire
in July and August 2001 respectively. We expect to renew these leases shortly.

     We also lease approximately 11,000 square feet in San Jose, California
pursuant to a lease that expires in January 2002. We vacated this facility in
October 1998 when we moved to our corporate headquarters facility. We sublease
this facility to multiple tenants on terms that are co-terminous with our lease
expiration date of January 2002.

     In May 2000, we entered into an agreement for a term of seven years to
lease an additional 73,000 square feet in a new building adjacent to our
existing corporate headquarters beginning August 2001. In March 2001 we entered
into an amendment of that lease pursuant to which the landlord of the building
agreed to seek a replacement tenant for the premises at equal or higher rent and
similar terms. If the landlord is successful in doing so, or we are able to find
a replacement tenant on terms acceptable to the landlord, the landlord will
release us of our obligation with respect to this building effective as of the
commencement of the replacement lease. In connection with the amendment, we
issued to the landlord warrants to purchase 50,000 shares of our common stock at
a price of $3.00 per share. The company has agreed to issue the landlord a
warrant to purchase an additional 50,000 shares of our common stock if it is
successful in finding a replacement tenant.

ITEM 3.  LEGAL PROCEEDINGS

     On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., Civil Action No. 01-CV-5309-RO, was filed
against us, three of our former officers and Credit Suisse First Boston
Corporation and BancBoston Robertson Stephens, Inc., two underwriters in our
initial public offering, in the United States District Court for the Southern
District of New York. The complaint alleges violations of Section 11 of the
Securities Act of 1933 ("Securities Act") against all defendants, a violation of
Section 15 of the Securities Act against the former officers, and violations of
Section 12(a)(2) of the Securities Act and Section 10(b) of the Securities
Exchange Act of 1934 (and Rule 10b-5., promulgated thereunder) against the
underwriters. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of common stock between July 19, 1999 and December 6, 2000.
As of June 18, 2001, various plaintiffs have filed similar actions asserting
virtually identical allegations against at least 45 other companies. To date,
there have been no significant developments in the litigation. As of June 26,
2001, we have received two substantially identical lawsuits, and anticipate that
additional related lawsuits may be brought against us with substantially

                                        19


identical allegations to the Cooper lawsuit. We further anticipate that all such
lawsuits will eventually be coordinated or consolidated with one another. We
intend to defend the lawsuits vigorously.

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

     Not applicable.

                                    PART II

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

     Our common stock has been quoted on the Nasdaq National Market under the
symbol "ZOOX" since our initial public offering on July 19, 1999. Prior to this
time, there was no public market for our stock. The following table sets forth
the high and low closing sales prices per share of our common stock as reported
on the Nasdaq National Market for the periods indicated. We currently expect to
retain future earnings, if any, for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future. As of June 18, 2001 there were 312 holders of record of our common
stock.

     The following table set forth, for the periods indicated the high and low
closing sales prices on Nasdaq National Market for our common stock.



                                                                 SALE PRICE
                                                              -----------------
                                                               HIGH       LOW
                                                              -------   -------
                                                                  
Fiscal 2002:
  Third Quarter (through November 6, 2001)..................  $ 1.240   $ 0.920
  Second Quarter............................................  $ 3.190   $ 0.99
  First Quarter.............................................  $ 3.650   $ 1.500
Fiscal 2001:
  Fourth Quarter............................................  $ 5.062   $ 1.468
  Third Quarter.............................................  $ 6.750   $ 2.093
  Second Quarter............................................  $14.125   $ 6.968
  First Quarter.............................................  $46.750   $13.687
Fiscal 2000
  Fourth Quarter............................................  $72.125   $37.500
  Third Quarter.............................................  $86.625   $43.563
  Second Quarter (from July 20, 1999).......................  $97.125   $53.875


     In April 2000, we issued an aggregate of 239,444 unregistered shares of our
common stock to the former stockholders of SmartSAN Systems, Inc. ("SmartSAN")
in connection with the merger of SmartSAN with one of our wholly owned
subsidiaries. The issuance was except from registration pursuant to Section 4(2)
of the Securities Act of 1933 and Regulation D based on the representations by
the former stockholders of SmartSAN that they did not have a present view
towards a distribution of the shares and there was no general advertisement
conducted in connection with the issuance of the shares.

     In May 2001, we sold 5.6 million shares of our common stock to three
investors for net proceeds of approximately $14.5 million. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933
and Regulation D based upon the representations of each of the investors that it
was an "accredited investor" as defined under Regulation D and that it was
purchasing such shares without a present view towards a distribution of the
shares. In addition, there was no general advertisement conducted in connection
with the sale.

     In August 2001, we sold 5.0 million shares of our common stock to three
investors for net proceeds of approximately $7.5 million. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933
and Regulation D and that it was purchasing such shares without a present view
                                        20


towards a distribution of the shares. In addition, there was no general
advertisement conducted in connection with the sale.

     In connection with the May 2001 sale of common stock, the Company issued a
warrant to purchase 168,000 shares of common stock to its financial advisor for
its assistance in the investor search. The warrant is immediately exercisable at
$4.14 per share, is nonforfeitable and expires three years from the date of
grant.

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

     Each warrant issuance was exempt from the registration pursuant to Section
4(2) of the Securities Act based upon representation of each of the warrant
holders that it was an "accredited investor" as defined under Regulation D and
that it would be purchasing such securities without a present view towards a
distribution of the securities. In addition, there was no general advertisement
conducted in connection with either warrant issuance.

ITEM 6.  SELECTED FINANCIAL DATA

     You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements and the Notes thereto included
elsewhere in this report. The statements of operations data for the years ended
March 31, 2001, 2000, and 1999, and the balance sheet data at March 31, 2001 and
2000, are derived from, and are qualified by reference to, the audited Financial
Statements and Notes thereto appearing elsewhere in this report. The statements
of operations data for the years ended March 31, 1998 and 1997, and the balance
sheet data as of March 31, 1999, 1998 and 1997, are derived from, and are
qualified by reference to, financial statements not appearing in this report.
Historical results are not necessarily indicative of results that may be
expected for any future period. The change in accounting policy relating to
sales to distributors in the year ended March 31, 2001, has impacted the year
over year compatibility of the selected financial data.



                                                                    YEAR ENDED MARCH 31,
                                                     ---------------------------------------------------
                                                       2001       2000       1999       1998      1997
                                                     --------   --------   --------   --------   -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                  
STATEMENT OF OPERATIONS DATA:
Net revenues.......................................  $ 33,290   $ 47,931   $ 24,821   $  9,811   $   823
Cost of revenues...................................    32,131     26,128     18,638      7,898       483
                                                     --------   --------   --------   --------   -------
  Gross margin.....................................     1,159     21,803      6,183      1,913       340
                                                     --------   --------   --------   --------   -------
Operating expenses:
  Research and development.........................    29,368     18,223     13,928      7,178     2,168
  Sales and marketing..............................    23,982     11,638      5,765      2,974     1,126
  General and administrative.......................     7,992      4,285      1,649      1,774       902
  Amortization of acquired intangible assets.......     3,842         --         --         --        --
  In-process research and development costs........     4,900         --         --         --        --
  Impairment of long lived assets..................    17,829         --         --         --        --
  Restructuring and other expenses.................     2,513         --         --         --        --
  Amortization of deferred compensation............       608      1,285        547         --        --
                                                     --------   --------   --------   --------   -------
    Total operating expenses.......................    91,034     35,431     21,889     11,926     4,196
                                                     --------   --------   --------   --------   -------
Loss from operations...............................   (89,875)   (13,628)   (15,706)   (10,013)   (3,856)
Interest income, net of interest expense...........     2,332      3,267       (226)       373       259
Sale of electronic test equipment rights, net......        --         --         --         --     1,508
                                                     --------   --------   --------   --------   -------
Net loss before cumulative effect of accounting
  change...........................................  $(87,543)  $(10,361)  $(15,932)  $ (9,640)  $(2,089)
Cumulative effect of accounting change.............    (5,300)        --         --         --        --
                                                     --------   --------   --------   --------   -------
Net loss...........................................  $(92,843)  $(10,361)  $(15,932)  $ (9,640)  $(2,089)
                                                     ========   ========   ========   ========   =======


                                        21




                                                                    YEAR ENDED MARCH 31,
                                                     ---------------------------------------------------
                                                       2001       2000       1999       1998      1997
                                                     --------   --------   --------   --------   -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                  
Basic net loss per share before cumulative effect
  of change in accounting principle................  $  (3.13)  $  (0.53)  $  (3.23)  $  (2.41)  $ (0.59)
Cumulative effect of change in accounting
  principle........................................     (0.19)        --         --         --        --
                                                     --------   --------   --------   --------   -------
Basic net loss per share...........................  $  (3.32)  $  (0.53)  $  (3.33)  $  (2.41)  $ (0.59)
                                                     ========   ========   ========   ========   =======
Weighted average shares used in computing basic
  loss per share(1)................................    28,006     19,731      4,789      3,995     3,551
                                                     ========   ========   ========   ========   =======
Pro forma amounts with the change in accounting
  principle related to revenue applied
  retroactively
  Net revenues.....................................       N/A     39,823     24,568      9,811       823
  Net loss.........................................       N/A    (13,169)   (13,169)    (9,640)   (2,089)
  Basic net loss per share.........................       N/A       (.67)      (.67)     (2.41)    (0.59)




                                                                         MARCH 31,
                                                    ----------------------------------------------------
                                                      2001       2000        1999       1998      1997
                                                    --------   ---------   --------   --------   -------
                                                                       (IN THOUSANDS)
                                                                                  
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
  investments.....................................  $ 10,939   $  73,449   $ 12,202   $  4,624   $ 7,067
Working capital...................................    11,785      81,295     15,912      6,385     6,895
Total assets......................................    34,487     103,496     28,598     14,942     8,825
Long-term obligations, less current portion.......       403       1,292     15,057      1,426        16
Total stockholders' equity........................    20,421      86,790      5,659      8,169     7,820


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

(1) See Note 2 of Notes to the Financial Statements for an explanation of the
    determination of the weighted average common and common equivalent shares
    used to compute net loss per share.

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

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

  NOTE REGARDING FORWARD-LOOKING STATEMENTS

     In addition to historical information, this discussion contains
forward-looking statements that relate to future events or our future
performance such as statements relating to the sufficiency of our capital
resources to fund continuing operations; our commitment to continue to devote
substantial resources to product research and development; our intentions to
expand our sales and marketing operations; the percentage of our fiscal 2002
sales that will be derived from new products and anticipated future levels of
general and administrative expenses. In certain cases you can identify
forward-looking statements by terminology such as "may", "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intends," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including but not limited to our ability to raise sufficient capital to enable
us to continue to operate our business; market acceptance of the Company's new
products and the speed at which customers adopt current and new products for
SANs; the ability and willingness of our OEM and distribution channel partners
to buy and sell our products; our ability to develop, introduce, ship and
support new products and product enhancements; growth rates of the market
segment within which the Company participates; competition in the Company's
industry and the timing of new technology and product introductions; the ability
to retain and hire skilled personnel and the risks outlined under "Risk Factors"
and elsewhere in this Form 10-K. All forward-

                                        22


looking statements included in this document are based on information available
to us on the date hereof and we assume no obligation to update any such
forward-looking statements.

  OVERVIEW

     We are a provider of hardware and software products for storage area
networks, or SANs. Our SAN products are designed to leverage the capabilities of
Fibre Channel technology to enable enterprises to better manage the growth of
mission-critical data by overcoming the limitations of the traditional captive
storage architecture. We sell our SAN products through leading OEMs, including
Hewlett-Packard Company and Compaq Computer Corporation. We also sell our
products through distribution channel partners such as Bell Microproducts,
Consan (a Gates/Arrow Company) and Tech Data Corporation.

     We were founded in April 1992 and initially developed electronic test
equipment. Since October 1995, we have focused on developing Fibre Channel
network products that address the needs of the SAN market. Since our inception,
we have incurred significant losses, and as of March 31, 2001, we had an
accumulated deficit of $132.3 million, and for the fiscal year ended March 31,
2001, our net loss was $92.8 million. We have not, and may never, achieve
profitability on a quarterly or annual basis and anticipate that we will incur
net losses for the foreseeable future. We expect to continue to incur
significant sales and marketing, product development and administrative
expenses, and as a result, we will need to generate significant net revenues to
achieve and maintain profitability.

     We expect that a substantial majority of our net revenues for fiscal 2002
will be derived from new products currently under development or evaluation,
including the Slingshot 4218. If sales from new products are lower than expected
or if we are unable to raise additional capital, including through a draw down
under our equity line financing agreement, we will be required to make a
significant reduction in operating expenses and capital expenditures in fiscal
2002 to ensure that we will have adequate cash reserves to fund operations
through the end of fiscal 2002.

     In April 2000, we completed the acquisition of SmartSAN Systems, Inc., a
California corporation ("SmartSAN") which was accounted for under the purchase
method of accounting. We acquired all of the outstanding shares of SmartSAN by
issuing 239,433 shares of common stock and assuming options to purchase 108,376
additional shares (which numbers reflect the effect of the exchange ratio
applied to the outstanding SmartSAN shares and stock options at the time of the
acquisition). Total consideration was as follows (in thousands):

                                                           
Value of stock issued and options assumed...................  $23,625
Merger and other related costs paid in cash.................    1,169
                                                              -------
Total consideration.........................................  $24,794
                                                              =======



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

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



     At the time of the acquisition, we allocated approximately $4.9 million of
purchased in-process research and development costs. Other acquired intangible
assets, including goodwill, developed technology and other intangible assets of
approximately $20.7 million are being amortized over their estimated useful
lives of five years on a straight-line basis. Gadzoox amortized approximately
$3.8 million for fiscal year ended March 31, 2001. In the fourth quarter ended
March 31, 2001, we abandoned the Geminix(TM) product line and other technology
acquired in the SmartSAN acquisition. As a result of this abandonment,
management decided that, based on an updated analysis of the acquisition,
remaining goodwill and intangibles, totalling approximately $16.8 million, had
become impaired and were written off in the fourth quarter of fiscal 2001.

                                        23


     We currently derive substantially all of our revenues from sales of a
limited number of products within the same product line. During fiscal 1999,
substantially all of our net revenues were derived from sales of our hub
products, some of which are no longer sold. We commenced commercial shipment of
our Capellix switch products during the quarter ended December 31, 1999. While
sales of Capellix during the quarters ended December 31, 1999 and March 31,
2000, were approximately 28% and 47% respectively, of net revenues, the majority
of our net revenues in fiscal 2000 were generated from sales of our hub
products. During fiscal 2001, approximately 74% of our revenues came from sales
of hub products and approximately 26% from Capellix switch products. We expect
that net revenues from switch products will account for a substantial majority
of our total net revenues for the foreseeable future. The percentage of our net
revenues derived from switch sales may vary significantly from quarter to
quarter. Additionally, we expect that a substantial majority of our net revenues
for fiscal 2002 will be derived from new products currently under evaluation or
development. We may not be successful in our efforts to diversify our product
base. Also, we may not be successful in the adoption of our new products, in
particular our Fibre Channel fabric backbone switch, the Slingshot 4218 product,
or the adoption of other products currently under development. Additionally,
even if our customers adopt the Slingshot 4218 or other future products, we
cannot assure you that our net revenues will increase.

     We depend on a few key customers. In fiscal 2001, approximately 81% of our
net revenues came from Hewlett-Packard Company, Compaq Computer Corporation and
Bell Microproducts, Inc., with Hewlett-Packard and Compaq Computer each
accounting for 10% or more of our net revenues. In fiscal 2000, approximately
72% of our net revenues came from four customers with sales to Hewlett-Packard
Company, Compaq Computer Corporation, Bell Microproducts, Inc, and Tokyo
Electron Limited each accounting for more than 10% of our net revenues. In
fiscal 1999, approximately 84% of our net revenues came from sales to five
customers with sales to Hewlett-Packard Company and Compaq Computer Corporation
each accounting for more than 10% of our net revenues. While we are seeking to
diversify our customer base and expand the portion of our net revenues which are
derived from sales through various channels, we anticipate that our operating
results will continue to depend on volume sales to a relatively small number of
OEM customers and distribution channel partners. We may not be successful in our
efforts to diversify our customer base.

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

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

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

     Our gross margins are affected by, among other factors, fluctuations in
demand for our products, the mix of products sold, the mix of sales channels
through which our products are sold, the timing and size of customer orders and
product implementations, new product introductions both by us and by our
competitors, product obsolescence, warranty and repair costs, changes in our
pricing policies and those of our competitors,

                                        24


component costs, and the volume manufacturing pricing we are able to obtain from
our contract manufacturer. We recognize higher gross margins from sales to
distribution channel partners. As a result, a decrease in sales to these
customers will have a greater impact on gross margins than a decrease in sales
to other customers.

     Although we enter into general sales contracts with our customers, none of
our customers are obligated to purchase any amount of our products pursuant to
these contracts. We rely on our customers to submit purchase orders for specific
quantities of our products. All of our sales contracts contain provisions
regarding the following:

     - products and pricing;

     - order dates, rescheduling and cancellations;

     - warranties and repair procedures; and

     - marketing and/or sales support and training obligations.

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

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

     We currently outsource substantially all of our manufacturing to Sanmina
Corporation, a third-party manufacturer. Our agreement with Sanmina Corporation
provides for two months of rolling purchase orders and rolling forecasts for the
nine months immediately following the purchase order period. Purchase prices are
negotiable throughout the three-year contract period. We are liable for
materials that Sanmina Corporation purchases on our behalf that we cannot use,
cannot be cancelled before receipt or are unique parts otherwise unusable by
Sanmina Corporation. The agreement restricts our ability to reschedule orders
and allows us to cancel existing orders subject to penalties of up to the total
purchase price. Sanmina Corporation provides warranties on workmanship and
pass-through warranties on component parts. Sanmina Corporation purchases most
of the key components used to manufacture our products. We obtain some of these
key components, such as our application specific integrated circuits, or ASICs,
from sole sources, and other components, such as power supplies and chassis,
from limited sources. If we inaccurately forecast demand for our products,
Sanmina Corporation may be unable to provide us with adequate manufacturing
capacity. In addition, Sanmina Corporation may not be able to obtain adequate
supplies of components to meet our customers' delivery requirements.
Alternatively, excess inventories may be accumulated by Sanmina Corporation for
our account. In order to reduce the costs of sales, we relocated our
manufacturing operations from Sanmina Corporation's manufacturing facility in
Santa Clara, California to its manufacturing facility in Guntersville, Alabama
during the second half of fiscal 2000. Additionally, we may consider moving the
outsourced manufacturing to other new locations or to a new contract
manufacturer. These relocations could be time consuming and expensive and there
can be no assurance that such moves would not disrupt the manufacturing of our
products. Such disruptions could cause us to lose net revenues and damage our
customer relationships.

                                        25


  RESULTS OF OPERATIONS

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



                                                                YEAR ENDED MARCH 31,
                                                              ------------------------
                                                               2001     2000     1999
                                                              ------    -----    -----
                                                                        
SUMMARY OF OPERATIONS DATA:
Net revenues................................................   100.0%   100.0%   100.0%
Cost of revenues............................................    96.5     54.5     75.1
                                                              ------    -----    -----
Gross margin................................................     3.5     45.5     24.9
                                                              ------    -----    -----
Operating expenses:
Research and development....................................    88.2     38.0     56.1
Sales and marketing.........................................    72.0     24.3     23.2
General and administrative..................................    24.0      8.9      6.7
Amortization of acquired intangible assets..................    11.5       --       --
In-process research and development costs...................    14.7       --       --
Impairment of long lived assets.............................    53.5       --       --
Restructuring and other expenses............................     7.5       --       --
Amortization of deferred compensation.......................     1.8      2.7      2.2
                                                              ------    -----    -----
Total operating expenses....................................   273.5     73.9     88.2
                                                              ------    -----    -----
Loss from operations........................................  (270.0)   (28.4)   (63.3)
Interest income, net of interest expense....................     7.0      6.8     (0.9)
                                                              ------    -----    -----
Net loss before cumulative effect of change in accounting
  principle.................................................  (263.0)   (21.6)   (64.2)
Cumulative effect of change in accounting principle.........   (15.9)      --       --
                                                              ------    -----    -----
Net loss....................................................  (278.9)%  (21.6)%  (64.2)%
                                                              ======    =====    =====


  YEARS ENDED MARCH 31, 2001, 2000 AND 1999

  Net Revenues

     Net revenues declined by $14.6 million to $33.3 million in fiscal 2001, or
30% from $47.9 million in fiscal 2000. The decrease in revenues during fiscal
2001 was primarily due to lower sales of our Gibraltar hub product line due to
decreased demand for hub products generally and slower than anticipated adoption
of our Capellix switch products. During fiscal 2000, net revenues were $47.9
million, an increase of 93% over fiscal 1999 revenues of $24.8 million. Net
revenues for fiscal 2000 and 1999 increased over the respective prior year
periods primarily due to a broadening of our product line, additions of new OEM
customers and increased sales through distribution channel partners. In fiscal
2000, we began commercial shipments of our Capellix 3000 and Capellix 2000
switch products, however the majority of our net revenues during this period
were generated from sales of older hub products. During fiscal 1999 we began
selling our Gibraltar 6-port hub and Denali(TM) switch.

     Sales to OEMs during fiscal 2001 represented approximately 81% of our
revenue and sales to distributors represented approximately 19% of our revenue,
with sales to Hewlett-Packard Company and Compaq Corporation accounting for
approximately 75% of our net revenue. Sales to OEMs and distributors during
fiscal 2000 represented approximately 59% and 41%, respectively, with sales to
Hewlett-Packard Company, Compaq Corporation, Bell Microproducts, Inc and Tokyo
Electorn Limited, accounting for approximately 72% of our net revenues. The
significant increase in the percentage of our revenue derived from sales to OEMs
in fiscal 2001 as compared to fiscal 2000 resulted primarily from our decision
to focus on sales to OEM customers. The decision to focus our sales efforts
primarily on OEM customers in fiscal 2001 was made because we believe OEM
customers will order higher volumes than distributors, sales to OEM customers
tend

                                        26


not to be subject to return pressures, we believe we will experience less
collectibility issues with respect to our accounts receivables with OEMs, sales
to OEMs require less time and effort on the part of our sales force as compared
to sales to distributors and sales to OEM customers requires little or no
specialized support or training. In fiscal 1999, approximately 67% of our net
revenues came from three customers with sales to Hewlett-Packard, Compaq
Computer Corporation and Digital Equipment Corporation each accounting for more
than 10% of our net revenues.

     During fiscal 2001, approximately 26% of our revenue was generated by the
sale of our Capellix switch products and approximately 74% from the sale of hub
products compared to 25% and 75% in fiscal 2000, respectively. In fiscal 1999,
100% of our revenues were derived from the sale of our hub products.

     Revenues by geographic area during fiscal 2001 were 72% from North America,
25% from Europe and 3% from Asia. During fiscal 2000, these percentages were
approximately 70% from North America, 19% from Europe and 11% from Asia and in
fiscal 1999, 64% from North America, 17% from Europe and 19% from Asia.

     Net revenues during fiscal years 2001, 2000 and 1999 may not be indicative
of future results. In fiscal 2002, we expect that a substantial majority of our
net revenues will come from the sale of new products currently under evaluation
or development, including our Fibre Channel fabric backbone switch, the
Slingshot 4218. We cannot assure you that we will be able to develop and
introduce the Slingshot or other new products successfully and in the time frame
we expect or that these products will be adopted by our OEM and distribution
channel partners, or that significant net revenues would be derived if so
adopted. See "Part II -- Risk Factors -- We have limited product offerings and
our business may suffer if demand for any of these products declines or fails to
develop as we expect" and "-- Our business will suffer if we fail to develop and
successfully introduce new and enhanced products that meet the changing needs of
our customers."

  Gross Margins

     Gross margins decreased in absolute dollars by $20.6 million, or 95%,
during fiscal 2001 compared to fiscal 2000. As a percentage of sales, gross
margins declined from 45.5% in fiscal 2000 to 3.5% in fiscal 2001. The decrease
in gross margin during fiscal 2001 compared to fiscal 2000 was primarily due to:

     - increased reserves for excess and obsolete inventory in fiscal 2001 -- we
       wrote off approximately $2.5 million of unsellable material and increased
       our reserves for excess and obsolete inventory by approximately $10.6
       million based on the forecasted demand for the next 12 months. We
       establish these reserves when we believe our products are not saleable
       during the next 12 months based on projected current demand. We believe
       that reserving for excess inventory that we do not expect to use or sell
       within a normal operating cycle of 12 months is reasonable given product
       life cycles, historical experience and the current economic environment.
       Of the $10.6 million reserve for excess or obsolete inventory during
       fiscal year 2001, approximately $7.0 million relates to our Capellix 3000
       switch product, $2.0 million relates to our Capellix 2000 switch product,
       $0.9 million relates to hub switches and $0.7 million relates to other
       excess or obsolete inventories. These reserve amounts increased in fiscal
       2001 because demand for our products slowed faster than we had
       anticipated. While we have established excess inventory reserves for the
       majority of our Capellix 3000 inventory and some of our Capellix 2000
       inventory and hub products, the Company continues to sell these products
       despite little demand and, consequently, to date we have not scrapped
       this inventory. At some future date, we anticipate that we will formally
       scrap the remaining inventory with respect to these products;

     - production cancellation penalties of $1 million as a result of lower than
       expected revenues;

     - a change of product mix from sales of hub products to switch products as
       we decided to focus on selling switch products exclusively beginning in
       the quarter ended March 31, 2001 -- during fiscal 2001, approximately 26%
       of our revenue was generated by the sale of our Capellix switch products
       and approximately 74% from the sale of hub products compared to 25% and
       75% in fiscal 2000, respectively; and

                                        27


     - lower sales volumes to distribution channel partners, for which gross
       margins are typically higher than OEM customers during fiscal 2001
       approximately 19% of our net revenues were derived from sales to
       distributors and resellers compared with approximately 30% in fiscal
       2000.

     Between fiscal 2000 and fiscal 1999 the gross margin increased by $15.6
million. As a percentage of net revenues, the gross margin increased from 25% of
sales in fiscal 1999 to 45% in fiscal 2000. This increase was primarily due to
the following: a greater percentage of our net revenues were derived from higher
gross margin sales to distribution customers, a greater percentage of our net
revenues were derived from sales of higher margin new products, such as the
Capellix switch, and higher sales volumes which resulted in economies of scale
and cost savings realized from our transition to Sanmina Corporation for
contract manufacturing.

     Our gross margins could decrease if sales to distribution channel partners
decrease, if sales of our newer products are not adopted by the marketplace, if
sales volumes decrease due to lower overall demand and if the Company were to
experience increased price competition.

  Research And Development Expenses

     Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
material costs for prototype and test units and other expenses related to the
design, development, testing and enhancements of our products. We expense our
research and development costs as they are incurred.

     Research and development expenses increased from $13.9 million in fiscal
1999, to $18.2 million in fiscal 2000, to $29.4 million in fiscal 2001. These
increases were primarily due to additional research and development personnel,
including the addition of our strategic research and development team and our
two ASIC development teams primarily devoted to our development of new products
including the Capellix and Slingshot families of switch products. In fiscal 2001
research and development expenses were approximately 88.2% of sales compared to
38.0% in fiscal 2000 and 56.1% in fiscal 1999.

     We believe that a significant level of investment for product research and
development is required to remain competitive. Accordingly, we continue to
devote substantial resources to product research and development efforts and
expect that research and development expenses will continue to increase in
absolute dollars.

  Sales And Marketing Expenses

     Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. Sales and marketing expenses
increased by 106% to $24.0 million in fiscal 2001 from $11.6 million in fiscal
2000. Between fiscal 2000 and fiscal 1999 sales and marketing expenses increased
by 102% from $5.8 million to $11.6 million.

     The increased spending in each of these years was primarily due to the
hiring of additional sales and marketing personnel and the expansion of our
sales and marketing efforts. During fiscal 2001, the increase in sales and
marketing expense was primarily attributable to increased staffing and increased
activities for the Capellix line, including joint seminar, tradeshow and
advertising activities with key OEMs, alliance and distribution partners
worldwide.

     We intend to expand our sales and marketing operations and efforts
substantially, both domestically and internationally, in order to increase
market awareness of our products and more effectively train and educate our
distribution channel partners and end-users. However, we cannot be certain that
any increased expenditures will result in higher net revenues. We believe that
continued investment in sales and marketing is critical to our success and
expect these expenses to increase in absolute dollars in the future.

                                        28


  General And Administrative Expenses

     General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems. General and
administrative expenses increased by 87% to $8.0 million during fiscal 2001 from
$4.3 million in fiscal 2000, and by 160% during fiscal 2000 from $1.6 million in
fiscal 1999. The increase during fiscal 2001 and 2000 and between fiscal 2000
and 1999 was primarily attributable to increased personnel, additional expenses
incurred related to the growth of our business, expansion of our facilities and
information infrastructure and our operation as a public Company.

     We expect these expenses to increase in absolute dollars as we add
personnel to replace the personnel the Company lost due to attrition in fiscal
2001 and as the Company expands its administrative infrastructure to support the
other areas of the Company's business.

  Amortization Of Deferred Compensation

     In connection with the grant of stock options to employees, during fiscal
1999, we recorded deferred compensation within stockholders' equity of
approximately $3.0 million, representing the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price of these options at the date of grant. We recorded amortization of
deferred compensation of $0.6 million, $1.3 million, and $0.5 million during
fiscal years 2001, 2000 and 1999 respectively. At March 31, 2001, the remaining
deferred compensation of approximately $0.4 million will be amortized as
follows: $0.3 million in fiscal 2002 and $.1 million in fiscal 2003. The
amortization expense relates to options awarded to employees in all operating
expense categories. The amount of deferred compensation expense to be recorded
in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited. See Note 7 of the Notes to the
Financial Statements.

  Amortization Of Acquired Intangible Assets

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

  In-Process Research And Development Costs

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

     At the acquisition date, SmartSAN was conducting design, development,
engineering and testing activities associated the development of next-generation
Geminix products: SDM3000, RDM4000, and DDM5000, valued at $800,000, $1.1
million, and $3.0 million, respectively.

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

                                        29


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

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

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

  Restructuring And Impairment Charges

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

  Inventory and Accounts Receivable Charges and Reserves

     In the quarter ended September 30, 2000, we noted that our inventory
balance began to increase. During the same quarter we implemented a policy to
create a reserve for inventory items considered to be excess or obsolete. Excess
inventory is any inventory at a given balance sheet reporting date in excess of
anticipated 12 month demand. In the quarters ended September 30, 2000, December
31, 2000 and March 31, 2001, we recorded additional inventory reserves of $6.8
million, $1.5 million and $2.3 million, respectively, for excess and obsolete
inventory. These reserves were primarily related to our excess Capellix 3000 and
hub products. During fiscal 2001, we scrapped approximately $2.5 million of
inventory that had been reserved as excess or obsolete inventory. In addition,
because of a deterioration in general economic conditions and, in particular,
problems experienced by our distributors, in fiscal 2001 we wrote off
approximately $400,000 of uncollectible accounts receivable and increased our
reserve for doubtful accounts be approximately $200,000. See Note 9 of the Notes
to the Financial Statements.

                                        30


  Interest Income, Net Of Interest Expense

     Interest income, net of interest expense, related to our debt and lease
obligations, includes income from our cash investments, net of expenses related
to our financing obligations. Interest income, net of interest expense, totaled
$2.3 million in fiscal 2001, compared to $3.3 million in fiscal 2000 and
interest expense, net of interest income, of $0.2 million in fiscal 1999. The
decrease in interest income, net of interest expense, in fiscal 2001 was
primarily the result of lower cash levels due to the higher operating loss as
well as increased working capital and capital spending, offset in part by lower
interest expense due to the repayment of the outstanding convertible notes to
Seagate Technology, Inc. See Note 4 of the Notes to the Financial Statements.

     The increase of net interest income during fiscal 2000 compared to fiscal
1999 was primarily due to interest income earned from investment of the net
proceeds received from the issuance of common stock from our initial public
offering in July 1999, and by lower interest expense charged on the convertible
note due to partial conversion of the note in connection with our initial public
offering. This increase was partially offset by increased interest expense
charged on higher capital lease obligations. During fiscal 1999 interest
expense, net of interest income, was primarily due to accrued interest on the
convertible note, as well as, interest expense charged on our capital lease
obligations.

  Income Taxes

     As of March 31, 2001, we had approximately $108.3 million of federal and
$26.9 million of state net operating loss carryforwards for tax purposes
available to offset future taxable income. We also had Federal and state
research and development tax credit carryforwards of approximately $3.1 million
and $2.8 million respectively. Such net operating and research credit loss
carryforwards expire at various dates beginning in 2001 through 2015. We have
not recognized any benefit from the future use of loss carryforwards for these
periods or for any other periods since inception because management's estimate
of the realizability of the tax benefits of the loss carryforwards indicates
that the underlying assumptions of future profitable operations contain risks
that do not provide sufficient assurance for us to recognize such benefits
currently.

  LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations primarily through private
sales of common stock, convertible preferred stock, the issuance of a
convertible note, equipment lease financings and an initial public offering of
common stock.

     At March 31, 2001, we had approximately $10.9 million in cash and cash
equivalents and $11.8 in net working capital, a decrease of $31.9 million in
cash and cash equivalents and a decrease of $69.5 million in net working capital
from the prior fiscal year.

     In fiscal 2001, the Company used $51.0 million in cash for operating needs,
an increase of $37.5 million from fiscal 2000. This increase was primarily due
to the higher than anticipated net loss as a result of lower sales of new and
existing products and higher operating expenses coupled with higher working
capital needs.

     Additionally, during fiscal 2001, we generated $23.1 million in cash from
investing activities, primarily due to the net proceeds from the sale and
purchase of short term investments of $30.6 million, offset in part by the
purchase of capital equipment of $5.3 million and $2.2 million used for the
purchase of long term investments and the acquisition of SmartSAN.

     Net cash used by financing activities during fiscal 2001 amounted to
approximately $4.0 million. Approximately $5.1 million was used to pay the
remaining balance due on the convertible note payable to Seagate Technology,
Inc., other notes payable acquired from with SmartSAN and capital equipment
lease obligations. Proceeds from the issuance of common stock in connection with
employee stock option exercises and the employee stock purchase plan generated
approximately $1.7 million in fiscal 2001.

     In fiscal 2000, we used $13.6 million in cash for operating needs, a
decrease of 13% from $15.7 million used in fiscal 1999. This decrease was
primarily due to a decrease in our net loss from $15.9 million in fiscal 1999 to
$10.4 million in fiscal 2000. The $4.0 million net increase in inventory was
primarily the result of

                                        31


slower than anticipated demand for our Capellix switch products. The $11.2
million decrease in accounts receivable net is a result of lower revenues and
improved collection efforts. We have recorded a reserve for doubtful accounts
receivable as of March 31, 2001 and we expect to collect the net accounts
receivable amount recorded in our books on March 31, 2001.

     In fiscal 2000, we used $2.8 million in cash from investing activities to
acquire property and equipment. Additionally, we invested $30.6 million of the
proceeds from our initial public offering during fiscal 2000 in short-term
investments.

     In fiscal 2000, we generated $77.6 million in cash from financing
activities including the sale of our equity, an increase of 212% from $24.9
million generated in fiscal 1999. This increase was primarily due to the sale of
common stock in our initial public offering in July 1999. Additionally, we used
debt and leases to partially finance operations and capital purchases and we
plan to continue this practice.

     We expect to devote substantial cash resources to continue our research and
development efforts, to hire and expand our sales, support, marketing and
product development organizations, to expand marketing programs, to establish
additional facilities worldwide and for other general corporate activities.

     We incurred a net loss in the year ended March 31, 2001 of $92.8 million
and have an accumulated deficit of $132.3 million as of March 31, 2001. We have
continuously incurred net losses from operations and used $51.0 million of cash
in operations for the year ended March 31, 2001, and have working capital of
$11.8 million as of March 31, 2001.

     In May 2001, we sold 5.6 million shares of our common stock in a private
placement transaction for net proceeds of approximately $14.5 million.

     On June 28, 2001, we entered into an equity line financing agreement, or
Equity Line, with Societe Generale pursuant to which we have the right to elect
to sell and Societe Generale has the obligation to purchase up to $20 million of
our common stock over a two year period ending June 28, 2003. In addition, under
the terms of an agreement entered into with a placement agent we engaged in
connection with the equity line, we are obligated to pay a fee to the placement
agent equal to 2% of the funds we draw down under this equity line. Pursuant to
the terms of the Equity Line, we, from time to time, during the two year period
beginning on June 28, 2001, can elect to sell (which election is referred to as
a draw down) a specific dollar amount of its common stock based upon the price
and trading volume of its common stock during the thirty trading days prior to a
draw down. The price per share and the actual number of shares sold by the us
pursuant to each draw down will be determined by the price and volume of trading
in the Company's common stock during the five trading days following the day
that we notify Societe Generale of the draw down, provided that in no event will
the price per share be less than the higher of $1.00 and the price set by us in
our notice of election to make a draw upon the equity line. Under the terms of
the Equity Line Agreement, we are obligated to sell at least $5.0 million of
common stock to Societe Generale or pay a penalty equal to 6% of any portion of
such $5.0 million minimum obligation which is not sold by us. We cannot sell
more than 6,812,400 shares of common stock pursuant to the Equity Line without
first obtaining stockholder approval.

     We are also obligated in connection with the Equity Line to file a
registration statement registering the sale by Societe Generale of any shares
sold by the Company. If this registration statement is not declared effective
within 180 days of June 28, 2001, then Societe Generale shall have the right to
terminate the Equity Line, in which event the Company shall be obligated to pay
the penalty described above.

     The terms of the Equity Line limit our ability to draw down funds under
this financing line. These limitations include, but are not limited to, the
following, (i) the requirement that the price per share of the our Common Stock
remain higher than a specified minimum price during the five trading days
following the Company's election to draw upon the Equity Line, (ii) the absence
of any material adverse change in the business or financial condition of the
Company, (iii) the continued effectiveness of the registration statement
covering the sale of shares by Societe Generale and the absence of any material
omission or misstatement from the then current prospectus relating to the
registration statement and (iv) the delivery of certain letters and reports from
the Company's counsel and accountants. As a consequence, we may not be able to
draw down a sufficient amount of funds under the equity line to fund our
operations and, based on current market
                                        32


conditions and our stock price, we will, in all likelihood, need to raise
additional funds. Assuming we attempted to draw down funds and delivered such
draw down notice to SG on September 5, 2001, based on the $1.46 average volume
weighted average price of our common stock for the five trading days preceding
September 5, 2001 and the 214,000 assumed average daily trading volume of our
shares during the 30 trading days preceding September 5, 2001, based on the
limitations on our ability to draw down funds under the equity line we would not
be able to draw any funds under the equity line.

     The Equity Line prohibits Societe Generale from selling shares of the
Company's Common Stock during the term of the Equity Line other than a number of
shares equal to the amount of any draw down by the Company divided by 94% of the
minimum selling price specified in the Company's draw down election.
Consequently, Societe Generale may have the ability to sell substantially more
shares of Common Stock following a draw down election than it is obligated to
purchase in connection with the draw down, which may result in an immediate and
significant drop in the Company's stock price and a significant increase in the
number of shares issued by the Company pursuant to a draw down. Accordingly, the
Company's use of the Equity Line for financing may result in substantial
dilution to the Company's stockholders and a significant decline in the
Company's stock price.

     We believe that our cash reserves, working capital and the funds available
under the Equity Line agreement will be adequate to fund our operations through
the end of fiscal 2002. However, as discussed above, the Company's right to sell
shares under the Equity Line agreement is subject to a number of conditions and
we may not be able to sell our shares of common stock under the Equity Line
agreement when we wish or need. If we are unable to sell our shares of common
stock under the Equity Line Agreement, we will be required to raise additional
funds to continue to operate our business.

     Many companies in the high technology manufacturing industry have
experienced difficulty raising additional financing in recent months. Additional
financing may not be available to us on favorable terms or at all. Even if
additional financing is available, we may be required to obtain the consent of
our stockholders, which we may not be able to obtain. If additional financing is
not available, we may need to dramatically change our business plan, sell or
merge our business, or face bankruptcy. In addition, the issuance of equity or
equity-related securities will dilute the ownership interest of our stockholders
and the issuance of debt securities could increase the risk or perceived risk of
the Company.

     Our cash needs depend on numerous factors, including market acceptance of
and demand for our switch products, particularly new products currently under
evaluation or development, including the Slingshot 4218, our ability to develop
and introduce new products and product enhancements, prices at which we can sell
our products, the resources we devote to developing, marketing, selling and
supporting our products, the timing and expense associated with expanding our
distribution channels, increases in manufacturing costs and the prices of the
components we purchase and other factors. In fiscal 2002 a substantial majority
of our revenues are expected to be derived from the sale of new products
currently under evaluation or development, including the Slingshot 4218. We
cannot assure you that we will be able to develop and introduce the Slingshot or
other new products successfully and in the time frame we expect or that these
products will be adopted by our OEM and distribution channel partners, or that
significant net revenues would be derived if so adopted. See "Risk Factors -- We
have limited product offerings and our business may suffer if demand for any of
these products declines or fails to develop as we expect" and "-- Our business
will suffer if we fail to develop and successfully introduce new and enhanced
products that meet the changing needs or our customers." If we are unable to
raise additional capital, including through a draw down under the Equity Line,
or if sales from new products are lower than expected, we will be required to
make a significant reduction in operating expenses and capital expenditures in
fiscal 2002 to ensure that we will have adequate cash reserves to fund
operations through the end of fiscal 2002.

     Additionally, we may do one or more of the following:

     - engage a financial advisor to explore strategic alternatives, which may
       include a merger, asset sale, or another comparable transaction;

                                        33


     - raise additional capital to fund continuing operations by private
       placements of equity and/or debt securities; and

     - form a joint venture with a strategic partner or partners to provide
       additional capital resources to fund operations.

     In addition to the foregoing, we are attempting to reduce our financial
commitments and reduce future cash outflows by negotiating alternative terms
with our suppliers. In addition, cost-cutting measures could include additional
reductions in force. Further, we are working with our channel partners to
increase revenues through new marketing programs and promotions, and are
exploring potential additional sources of revenue. There can be no assurance
that we will be successful in increasing revenues or reducing cash outflows.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities," an amendment of SFAS No. 133,
which is effective for all fiscal years beginning after June 15, 2000. SFAS No.
138 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Because the Company does not
currently hold any derivative instruments and does not currently engage in any
material hedging activities, management believes that the application of SFAS
No. 138 will not have a material impact on the Company's financial position or
results of operations.

     In March 2000, FASB issued Financial Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25 ("FIN 44"). FIN 44 addresses the application of APB No. 25 to
clarify, among other issues: (a) the definition of employee for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company's adoption of FIN 44 did not have a material impact on
the Company's financial position or results of operation.

                                        34


                                  RISK FACTORS

     You should carefully consider the following risk factors and all other
information contained in this Form 10-K. Risks and uncertainties, in addition to
those we describe below, that are not presently known to us, or that we
currently believe are immaterial may also impair our business operations. If any
of the following risks occur, our business, operating results and financial
condition could be seriously harmed. In addition, the trading price of our
common stock could decline due to the occurrence of any of these risks.

RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION

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

     We have incurred net losses in every fiscal quarter since our inception in
1992, most recently a net loss of $9.2 million in our quarter ended September
30, 2001. We incurred a net loss in fiscal 2001 of $92.8 million and we had an
accumulated deficit of $151.2 million as of September 30, 2001. If we are unable
to increase revenue so that we achieve profitability, our operating results will
suffer and the price of our common stock may fall. We expect to incur
significant product development, sales and marketing and general and
administrative expenses as we focus our business on the design, development,
manufacturing and sales of fibre channel switching products, in particular our
two-gigabit Slingshot product line. Our first Slingshot product only became
commercially available in July 2001. Because we have switched the focus of our
business to our switch products and continue to phase out our Gibralter hub
product line, we do not expect to generate substantial revenue in the future
from the sales of our hub products. In fiscal 2001, of our $33.3 million in
total revenue, $24.6 million, or 74%, was attributable to sales of our Gibralter
hub products, and only $8.7 million, or 26%, was derived from sales of our
switch products. In the six months ended September 30, 2001, of our $11.6
million in revenue, $6.0 million, or 52%, was attributable to sales of our
switch products and $5.6 million, or 48%, was attributable to our Gibralter hub
products. To date, all of our revenue from sales of our switch products have
been attributable to our Capellix product line. Our future operating results
will depend on many factors, including the growth of the fibre channel switching
market and market acceptance of our new switching products. We may never be able
to achieve or sustain profitability.

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

     We had only $15.1 million in working capital available as of September 30,
2001. We have never been profitable and we used $51.0 million of cash for
operating activities in fiscal 2001, and approximately $17.0 million for the six
months ended September 30, 2001. If we are unable to raise additional financing
or if sales of our storage area network products are lower than we expect, we
may be unable to sustain our business. Additional financing may not be available
to us when and as required on commercially reasonable terms, if at all. In the
event we are able to obtain additional financing, the issuance of equity or
equity-related securities will dilute the ownership interest of our existing
stockholders and the issuance of debt securities could increase the risk or
perceived risk of our business. Issuance of debt securities could also impair
our financial condition and interest payments could have an adverse effect on
our results of operation. If we are unable to raise additional capital or if
sales from our switching products are lower than expected, we will be required
to make a significant reduction in operating expenses and capital expenditures
in fiscal 2002 to ensure that we will have adequate cash reserves to fund
operations through the end of fiscal 2002 and beyond. Additionally, we would be
required to explore strategic alternatives, which may include a merger, asset
sale or another comparable transaction or form a joint venture with a strategic
partner or partners to provide additional capital resources to fund operations.
If additional financing is not available, we may need to dramatically change our
business plan, sell or merge our business or face bankruptcy.

  WE MAY NOT BE ABLE TO DRAW DOWN A SUFFICIENT AMOUNT OF FUNDS UNDER OUR EQUITY
  LINE FINANCING ARRANGEMENT TO FUND OUR OPERATIONS.

     The terms of our equity line financing agreement with Societe Generale, or
SG, limit our ability to draw down funds under this financing line. As a
consequence, we may not be able to draw down a sufficient amount

                                        35


of funds under the equity line to fund our operations and we will, in all
likelihood, need to raise additional funds. On June 28, 2001, we entered into an
equity line with SG pursuant to which we have the right to sell to SG, and SG
has the obligation to purchase, up to $20 million of our common stock over a two
year period ending June 28, 2003. In addition, under the terms of an agreement
entered into with Shoreline Pacific Institutional Finance (the institutional
division of Financial West Group), the placement agent we engaged in connection
with the equity line, we are obligated to pay a fee to Shoreline equal to 2% of
the funds we draw down under this equity line.

     Under our equity line with SG, we can elect to sell a specific dollar
amount of our common stock based upon the price and trading volume of our common
stock during the 30 trading days prior to a draw down. Assuming the Company
attempted to draw down funds and delivered such draw down notice to SG on
October 22, 2001 and based on the $1.16 average volume weighted average price of
our common stock for the five trading days preceding October 22, 2001 and the
140,793 assumed average daily trading volume of our shares during the 30 trading
days preceding October 22, 2001, we would not be able to draw any funds under
the equity line because our maximum draw down amount under these assumptions is
$82,011 which is less than the minimum draw down amount permitted under the
equity line. In addition, in the event our stock price is less than $1.00, we
will not be able to draw down any funds under the equity line. Because our right
to sell shares under the equity line agreement is subject to a number of
conditions we may not be able to sell our shares of common stock under the
equity line agreement when we wish or need. Consequently, we may not be able to
raise sufficient capital under the equity line to fund our operations. In
addition, in the event the equity line is terminated before we have drawn down
at least $5 million, we will be required to pay a commitment fee of 6% of the
amount of the $5 million not drawn down, up to a maximum fee of $300,000. This
commitment fee will also become payable prior to the termination of the equity
line if one of the following events occurs:

     - if a registration statement covering the shares purchased by SG under the
       equity line is not declared effective by December 25, 2001 or if this
       registration statement loses its effectiveness for 20 consecutive trading
       days or for more than 80 trading days in any twelve month period.

     - if we breach any material representation, warranty or covenant contained
       in the equity line financing agreement or the related registration rights
       agreement.

     - if we fail to issue stock to SG in accordance with the terms of the
       equity line financing agreement, fail to remove any restrictive legends
       on such stock, or otherwise fail to uphold our obligations under the
       equity line and such breach is not cured within 5 trading days after we
       receive notice describing the breach from SG.

     - if we sell all or substantially all of our assets, merge or consolidate
       with another company and we are not the surviving entity, or if we effect
       a transaction or series of transaction whereby more than 50% of our
       voting power is sold.

     - if our stock price trades below $1.00 for more than 30 consecutive
       trading days.

  IF WE DRAW DOWN UNDER OUR EQUITY LINE FINANCING ARRANGEMENT WITH SG, OUR
  STOCKHOLDERS WILL BE DILUTED, POTENTIALLY SUBSTANTIALLY, AND OUR STOCK PRICE
  COULD DECLINE SIGNIFICANTLY. SG MAY ENGAGE IN SHORT-SELLING ACTIVITIES THAT
  COULD RESULT IN DECLINES IN THE TRADING PRICE OF OUR COMMON STOCK WHICH COULD
  MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION.

     Under the terms of our equity line with SG, we have the right to require
that SG purchase shares of our common stock, subject to certain conditions. The
shares of common stock that we sell to SG will be sold at a 6% discount to the
daily volume weighted average price of our common stock during each day of the
draw down period. If we were to draw down the entire $20,000,000 equity line at
the minimum purchase price of $0.94, we would be required to issue 21,276,596
shares of our common stock, or 54.1% of our currently outstanding common stock,
which would result in substantial dilution to our current stockholders. In
addition, SG's subsequent resale to the public of the shares it purchases under
the equity line may result in an immediate and significant drop in our stock
price. Furthermore, SG may engage in short-selling activities with respect to
our common stock which could also cause the trading price of our stock to
decline. In addition, The

                                        36


Nasdaq National Market has a continued listing requirement that the minimum bid
price of our common stock must exceed $1.00 and if the minimum bid price of our
common stock falls below this threshold for 30 consecutive days our stock could
be delisted from The Nasdaq National Market. On November 6, 2001, the closing
sales price of our common stock as reported by The Nasdaq National Market was
$1.00. Note that in September 2001, The Nasdaq National Market announced that it
was suspending the minimum bid requirement until January 2, 2001. If there is a
significant drop in our stock price as a result of sales of our stock made under
the equity line, short-selling activities by SG or otherwise, this could
materially adversely affect our ability to raise additional funding and to
attract and retain customers and distributors and quality personnel, which could
lead to business failure.

  IF WE ARE UNABLE TO RAISE ADDITIONAL FINANCING, IF WE CONTINUE TO EXPERIENCE
  SIGNIFICANT LOSSES, AND IF OUR TRADING PRICE DECLINES, WE MAY NOT BE ABLE TO
  CONTINUE TO MEETING THE CONTINUED LISTING CRITERIA FOR THE NASDAQ NATIONAL
  MARKET, WHICH WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL
  CONDITION.

     If we were unable to continue to list our common stock for trading on The
Nasdaq National Market, this would materially adversely affect business,
including, among other things:

     - our ability to raise additional financing to fund our operations;

     - our ability to attract and retain customers and distributors; and

     - our ability to attract and retain personnel, including management
       personnel.

     In addition, if we were unable to list our common stock for trading on The
Nasdaq National Market, many institutional investors would no longer be able to
retain their interests in and/or make further investments in our common stock
because of their internal rules and protocols. If institutional shareholders
liquidated their holdings in our common stock and/or did not continue to make
investments in our common stock, this would decrease the trading volume of our
shares and would likely result in a lower price for our common stock.

     Continued listing on The Nasdaq National Market currently requires, among
other things, that we have either stockholders' equity in excess of $10.0
million or that our net tangible assets exceed $4.0 million. The Nasdaq National
Market is in the process of phasing out this net tangible assets test and, after
November 1, 2002, we must meet the $10 million stockholders' equity requirement.
As of September 30, 2001, our stockholders' equity was approximately $2.4
million and our net tangible assets were approximately $2.4 million.
Consequently, as of September 30, 2001 we did not meet The Nasdaq National
Market continued listing requirements for either the $10 million stockholder's
equity test or the $4 million net tangible asset test. To date we have not
received notice from The Nasdaq National Market regarding our failure to comply
with this continued listing requirement. In May 2001 and August 2001, we sold an
aggregate of 10,600,000 shares of common stock resulting in net proceeds of
approximately $21.6 million. The net proceeds from May 2001 and August 2001
private placements are not currently reflected as stockholder's equity on our
balance sheet because the shares sold in these transactions will be redeemable
if the registration statements covering the resale of these shares are not
declared effective by the SEC prior to 360 days after the date the shares were
originally issued. Consequently, the proceeds from the sale of the shares are
currently recorded outside stockholders equity as redeemable common stock. If
the SEC declares effective the registration statements relating to the resale of
shares of our common stock sold in these private placements, our stockholders'
equity and net tangible assets will increase by approximately $21.6 million.
However, we expect to incur additional losses in future quarters which would
affect our ability to meet The Nasdaq National Market continued listing
standards for the minimum stockholder's equity and minimum net tangible assets
tests. Note that on March 31, 2000, our stockholders' equity was approximately
$86.8 million and our net tangible assets were approximately $86.8 million.
Furthermore, continued listing on The Nasdaq National Market requires that the
minimum bid price of our common stock exceed $1.00. If the minimum bid price of
our common stock is below the $1.00 threshold for 30 consecutive days, we will
not meet The Nasdaq National Market continued listing requirement. The closing
sales price of our common stock as of November 6, 2001 as reported by The Nasdaq
National Market was $1.00. Please note however that in

                                        37


September 2001, The Nasdaq National Market announced that it was suspending the
minimum bid requirement until January 2, 2002.

     In addition to the potential material adverse affects to our business in
the event our common stock was no longer listed for trading on The Nasdaq
National Market, we would not be able to draw down any funds under our equity
line with SG.

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

     We incurred $91.0 million in operating expenses in fiscal 2001, and
approximately $24.1 million in the six month period ended September 30, 2001. We
may not be able to reduce our operating expenses sufficiently to reduce our net
losses which were $92.8 million in fiscal 2001 and $18.5 million in the six
month period ended September 30, 2001. In March 2001, we implemented a reduction
of force decreasing our headcount by 27 employees. In August 2001, we
implemented a second reduction of force decreasing our headcount by 16
employees. In October 2001, we implemented a third reduction in force decreasing
our headcount by a further 31 employees. For the most part, each of the
reductions in force were implemented on an across-the-board basis throughout our
various departments. In the March 2001 reduction in force, 7 of the affected
employees were terminated as a direct result of our decision to discontinue the
Axxess product line. However, aside from the March 2001 reduction with respect
to the Axxess product line, no reduction in force was targeted to a specific
product line. In particular, of the 74 employees that were let go during these
reductions in force, approximately 19 of the affected employees were in our
sales and marketing department, 12 were in our operations department, 28 were in
our engineering department and 5 were in our finance department. The remaining
employees who were terminated were in administrative positions. We incurred
approximately $339,000 in severance costs related to our March 2001 reduction in
force, $288,000 in severance costs related to our August 2001 reduction in force
and approximately $601,000 in severance costs related to our October 2001
reduction in force, all of which amounts have been fully incurred and paid to
date. We are also attempting to reduce our financial commitments and reduce
future cash outflows by negotiating alternative terms with our suppliers. In
addition, future cost-cutting measures could include additional reductions in
force. If we are unable to reduce our operating expenses sufficiently, we may
not be able to reduce our net losses or sustain our business. This may impair
our ability to attract additional financing on commercially reasonable terms or
at all. Our ability to successfully reduce our operating costs could materially
affect our quarterly and annual operating results.

  WE ONLY RECENTLY BEGAN SELLING FIBRE CHANNEL SWITCH PRODUCTS AND OUR ABILITY
  TO SUCCESSFULLY SELL OUR CAPELLIX AND SLINGSHOT SWITCH PRODUCTS IS DIFFICULT
  TO EVALUATE. CONSEQUENTLY, OUR OPERATING RESULTS WILL BE DIFFICULT TO
  FORECAST.

     In the quarter ended March 31, 2001, we decided to focus our business on
selling fibre channel switch products, a segment of the storage area network
market that we have not historically competed in. In fiscal 2001, of our $33.3
million in total revenue, $24.6 million, or 74%, was attributable to sales of
our Gibraltar hub products and only $8.7 million, or 26% of our total revenue,
derived from sales of our switch products. In the six month period ended
September 30, 2001, of our $11.6 million in revenue, $6.0 million, or 52%, was
attributable to our switch products and $5.6 million, or 48%, was attributable
to our hub products. We plan to phase out our Gibralter hub product line and
focus on our switch products. We only began selling our Capellix switch products
in September 1999 and we expect much of our future revenue to come from sales of
our two-gigabit Slingshot products, the first of which only became commercially
available in July 2001.

     Because we do not have a substantial history in selling switch products and
because of the rapidly evolving nature of the storage area network market
generally, there is limited financial and operating data with which to evaluate
our performance and prospects. Further, we plan our operating expenses based
primarily on our revenue projections. Because most of our expenses are fixed in
the short-term or incurred in advance of anticipated revenue, we may not be able
to decrease our expenses in a timely manner to offset any unexpected shortfall
in revenue. The revenue and income potential of our switch products is unproven
and our historical performance is not likely to be indicative of future
performance. If we do not achieve our expected revenue
                                        38


growth, our operating results will be below our expectations and the
expectations of investors and market analysts, which could cause the price of
our common stock to decline. We may not be able to successfully penetrate the
market for storage area network switch products, attract and retain original
equipment manufacturer customers and distributors for these products or achieve
or sustain profitability. You should consider our business and prospects in
light of the heightened risks and unexpected expenses and problems we may face
as a company that is focusing its business on selling products in a segment of
the market different from its historical operations, a market segment that is
rapidly evolving and intensely competitive. We also expect sales of our switch
products to have lower margins, at least for the foreseeable future, than we
have recently experienced with our hub products which could materially adversely
affect our quarterly and annual operating results. We have been able to increase
our margins on sales of our hub products as our costs to produce these products
have decreased over time. In order to compete in the switch market we have had
to reduce prices while our costs to manufacture these products have remained
fixed.

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

     If we are unable to successfully penetrate the fibre channel switch market,
our revenue will continue to decline, our net losses will increase, we will need
to raise additional funding and we may not be able to sustain our business. In
the six month period ended September 30, 2001, we recorded $11.6 million in
total revenue compared to $18.9 million in total revenue from the six month
period ended September 30, 2000, a decrease of 39%. The quarter ended September
30, 2001 was our first quarter during which we had our two-gigabit Slingshot
switch product available and we recognized only $0.4 million of our $5.1 million
in total revenue that quarter from the sales of two-gigabit Slingshot product.
We do not have significant experience in developing, marketing, selling and
supporting switch products. In contrast, many of our competitors do have this
experience and many of our competitors have significantly greater financial,
technical, marketing and administrative resources than we do. In addition, many
of these competitors have pre-existing relationships with the primary original
equipment manufacturers that we expect to sell our switch products to. Other
factors that may affect the market acceptance of our switch products, many of
which are beyond our control, include the following:

     - growth and changing requirements of the storage area networks product
       markets;

     - availability, price, quality and performance of competing products and
       technologies;

     - performance, quality, price and total cost of ownership of our products;
       and

     - successful development of our relationships with existing and potential
       original equipment manufacturing customers and distribution channel
       partners.

     We may not be able to compete successfully in the market for fibre channel
switch storage area network products. Original equipment manufactures and other
distribution partners may not adopt our Slingshot and Capellix switch products,
and even if they do, we may not be able to generate significant revenue from the
sale of these products to sustain our business.

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

     We depend on a few key original equipment manufacturer customers for
substantially all of our revenue. In the six month period ended September 30,
2001, of our $11.6 million in total revenue, $5.2 million or 45% was due to
sales to Hewlett Packard and $3.3 million or 28% was due to sales to Compaq. In
fiscal 2001, of our $33.3 million in total revenue, $14.1 million or 42% was due
to sales to Hewlett-Packard and $11.1 million or 33% was due to sales to Compaq.
In fiscal 2000, of our $47.9 million in total revenue, $14.1 million or 29% was
due to sales to Hewlett-Packard, $8.1 million or 17% was due to sales to Compaq,
$15.8 million or 33% was due to sales to Bell Microproducts and $5.8 million or
12% was due to sales to Tokyo Electron. The primary reason for the decline is
revenue for each of our primary original equipment manufacturer customers in
fiscal

                                        39


2001 as compared to fiscal 2000 was attributable to decreased demand for our hub
products and slower than anticipated adoption of our Capellix fibre channel
switch products. In September, 2001, Hewlett-Packard and Compaq announced that
they intend to merge the two companies. If the merger is successfully completed,
the combined company may buy fewer of our products than if Hewlett-Packard and
Compaq were purchasing storage area network products as separate companies.

     Although we intend to expand our original equipment manufacturer customer
base, we anticipate that our operating results will continue to depend on sales
to a relatively small number of original equipment manufacturers. We also expect
that our decision to focus on sales of switching products will not change our
historical pattern of selling only to a relatively small number of original
equipment manufacturers. The loss of any of our key customers, or a significant
reduction in sales to those customers, could significantly reduce our expected
future revenue. Our agreements with our customers do not provide any assurance
of future sales to those customers. For example:

     - our original equipment manufacturer and reseller agreements are not
       exclusive and contain no renewal obligation;

     - our original equipment manufacturers and resellers can stop purchasing
       and marketing our products at any time; and

     - our original equipment manufacturer and reseller agreements do not
       require minimum purchases.

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

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

     Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through original equipment manufacturers,
distribution partners and resellers. We believe that expanding our sales through
distribution partners and resellers is an important part of our strategy to
increase sales of our switch products. The ability and willingness of our
distribution partners and resellers to sell our products could materially affect
our quarterly and annual operating results. Our failure to execute this strategy
successfully could limit our ability to grow or sustain revenue. During fiscal
2001, approximately $6.3 million, or 19%, of our revenue was derived from sales
to distribution partners and resellers. In the six month period ended September
30, 2001, approximately $2.9 million, or 25%, of our revenue was derived through
these channels. As we attempt to expand our sales to distribution partners and
resellers, we may increase our selling costs, as these parties generally require
a higher level of customer support than our original equipment manufacturers. If
we fail to develop and cultivate relationships with significant resellers, or if
these resellers are not successful in their sales efforts, sales of our products
may decrease and our operating results would suffer. Even where we are
successful in establishing a distribution or reseller relationships, our
agreements with the third party will likely not be exclusive, and as a result,
many of our distribution partners and resellers will carry competing product
lines. We believe that distribution partners and resellers are extremely
important influencers of end-user customer purchase decisions. Our distribution
partners and resellers may not market our products effectively or continue to
devote the resources necessary to provide us with effective sales, marketing and
technical support. Our failure to successfully develop or manage our
relationships with distribution partners and resellers could materially
adversely affect our operating results.

     Historically, we have experienced difficulties in selling our products
through distribution partners as compared to original equipment manufacturing
customers. Our original equipment manufacturing customers have demonstrated the
ability to resell our storage area network products due, in part, to the length
of time they have been involved in this marketplace and the strength of their
internal technical, sales and marketing

                                        40


structures. Our distribution channel partners have participated in this market
for a shorter period of time and often do not typically have fully trained
technical, sales and marketing staffs. As a result, they are not as well
positioned as our original equipment manufacturers to sell our products
effectively. We may never be able to increase the sales of our products through
distribution partners and resellers. If we are unable to effectively sell our
products through our distribution channel partners and resellers, our net
revenues may continue to decline and our business would be harmed.

  THE LENGTHY PROCESS REQUIRED TO MAKE SALES TO OR DEVELOP RELATIONSHIPS WITH
  ORIGINAL EQUIPMENT MANUFACTURERS AND DISTRIBUTION PARTNERS MAY IMPEDE OUR
  ABILITY TO INCREASE SALES OF OUR PRODUCTS.

     We rely on original equipment manufacturers and distribution channel
partners to distribute and sell our products. As a result, our success is
dependant on our ability to initiate, manage and expand our relationships with
significant original equipment manufacturers and our ability to attract
distribution channel partners that are able and willing to sell our products, as
well as the sales efforts of these original equipment manufacturers and
distribution channel partners. Our original equipment manufacturer customers
typically conduct significant evaluation, testing, implementation and acceptance
procedures before they begin to market and sell new technologies, including our
products. Based on our experience with our larger original equipment
manufacturer customers, this evaluation process is lengthy and has historically
been as long as nine months. During the slowdown of the U.S. economy in general
and the market for storage area network products in particular, in 2000 and the
first nine months of 2001, the sales process has lengthened to some extent, in
some cases as long as 12 months. Our sales process is complex and requires
significant sales, marketing and management efforts on our part. The complexity
of this process increases if we must qualify our products with multiple
customers at the same time. In addition, once our products have been qualified,
the length of the sales cycle of each of our original equipment manufacturers
may vary depending upon whether our products are being bundled with another
product or are being sold as an option or add-on. Sales to distribution channel
partners may also require lengthy sales and marketing cycles. Additionally, to
increase sales through the distribution channel, we have made significant
investments in activities designed to improve sell-through at the end-user level
and we may never see significant revenue resulting from these efforts. Any delay
in the sales cycle could have an adverse effect on our operating results and
financial condition.

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

     We have experienced, and expect to continue to experience, fluctuations in
sales and operating results from quarter to quarter. As a result, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful, and that such comparisons cannot be relied upon as indicators of
future performance. During the past three years, our operating results have
varied significantly. Additionally, we began focussing our business on selling
our switch products, which has not traditionally been our core business, only in
the first half of calendar 2001, and we expect that our operating results may
vary significantly in the future as we attempt to penetrate this market segment.
Our quarterly and annual operating results are likely to continue to vary
significantly in the future due to a number of factors described below and
elsewhere in this "Risk Factors" section, many of which are outside of our
control. The primary factors that may cause our quarterly net revenues and
operating results to fluctuate include the following:

     - changes in general economic conditions and specific economic conditions
       in the computer storage and networking industry;

     - increases in the prices of the components we purchase;

     - our ability to maintain quality manufacturing standards for our products;

     - our ability to maintain, increase or quickly decrease the contract
       production of our products at expected prices; and

     - the mix of distribution channels through which our products are sold.

                                        41


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

  OUR ORIGINAL EQUIPMENT MANUFACTURERS HAVE UNPREDICTABLE ORDER PATTERNS, WHICH
  MAY CAUSE OUR REVENUE TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.

     Our original equipment manufacturer customers tend to order sporadically,
and their purchases can vary significantly from quarter to quarter. Our original
equipment manufacturers generally forecast expected purchases in advance, but
frequently do not order as expected and tend to place purchase orders only
shortly before the scheduled delivery date. We plan our operating expenses based
in part on revenue projections derived from our original equipment
manufacturers' forecasts. Because most of our expenses are fixed in the short
term or incurred in advance of anticipated revenue, we may not be able to
decrease our expenses in a timely manner to offset any unexpected shortfall in
revenue. These order habits may cause our backlog to fluctuate significantly.
Moreover, our backlog is not necessarily indicative of actual sales for any
succeeding period, as orders are subject to cancellation or delay by our
original equipment manufacturers with limited or no penalty. None of our current
customers have any minimum purchase obligations, and they may stop placing
orders with us at any time, regardless of any forecast they may have previously
provided. In the past, customers have unexpectedly reduced or cancelled orders
for our products. In July 1998, Digital Equipment cancelled orders for our
Bitstrip product, and in December 1998 Hewlett-Packard unexpectedly reduced
orders for our Gibraltar 10-port product. More recently, in 2000 and 2001,
orders for our products by original equipment manufacturers have declined
significantly due to a decline in sell-through to end-user customers. The recent
terrorist attacks in New York and Washington could also contribute to further
weakening in general economic conditions. We expect that given the overall weak
general economic condition and the weakness in the market for storage area
network products in particular, our customers may continue to be slow to place
orders for our products.

RISKS RELATED TO OUR INDUSTRY

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

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

     - educate potential original equipment manufacturers, distribution channel
       partners and end-users about the benefits of storage area networks switch
       technology;

                                        42


     - maintain and enhance our relationships with leading original equipment
       manufacturers customers and channel partners;

     - predict and base our products on standards which ultimately become
       industry standards; and

     - predict and deliver new and innovative products demanded by the storage
       area marketplace.

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

     Our future success depends upon our ability to address the rapidly evolving
storage area networks market, including changes in relevant industry standards
and the changing needs of our customers by developing and introducing
high-quality, technologically-progressive, cost-effective products, product
enhancements and services on a timely basis. For example, the technology being
deployed today in most storage area networks products is FC-AL or FC-SW. During
fiscal 2001, the development of competing technologies such as Ethernet IP has
been discussed by the technical community. If we are unable to design, develop
and manufacture products that anticipate or incorporate new technologies that
are used in storage area networks in a timely manner and efficiently utilize
such new technologies in our product developments, the demand for our current
products may decrease significantly, which would harm our operating results. In
addition, our ability to develop, introduce, ship and support new products and
product enhancements could materially affect our quarterly and annual operating
results.

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

     Competition in the storage area network market is intense. In addition, the
adoption of new technology in the our market likely will intensify the
competition for improved storage area network products. In the storage area
networks switch market, our current competitors include Brocade, McData, QLogic
and Vixel. In the storage area networks hub market, our competitors include
Emulex and Vixel. In addition to these companies, we expect new storage area
networks competitors to emerge. In the future, we may also compete against data
networking companies which may develop storage area networks products.
Furthermore, although we currently offer products that complement the software
products offered by Legato and Veritas, they and other enterprise software
developers may in the future compete with us. We also compete with providers of
data storage solutions that employ traditional storage technologies, including
small computer system interface-based technology such as Adaptec, LSI Logic and
QLogic. Due to the rapidly evolving markets in which we compete, additional
competitors with significant market presence and financial resources may enter
those markets, thereby further intensifying competition.

     Many of our current and potential competitors, in comparison to us, have:

     - longer operating histories;

     - greater name recognition;

     - greater financial resources;

     - larger customer bases;

     - more established distribution channels; and

     - significantly greater financial, technical, sales, marketing,
       manufacturing and other resources.

     Moreover, our competitors may foresee the course of market developments
more accurately and could in the future develop new technologies that compete
with our products or even render our products obsolete.

     Increased competition could also result in pricing pressures, reduced
sales, reduced margins, reduced market share or the failure of our products to
achieve or sustain market acceptance. Competitive pressures, including
competitive technology and pricing pressures, could materially adversely affect
our quarterly and annual operating results. In addition, we have limited
experience competing in the market for storage area

                                        43


network switch products as we only began selling our Capellix switch products in
September 1999 and our first Slingshot switch product became commercially
available only in July 2001.

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

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

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

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

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

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

                                        44


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

     We rely heavily on our intellectual property, and efforts to protect it may
cause us to become involved in costly and lengthy litigation which would
seriously harm our business. Although we are not currently involved in any
intellectual property litigation, we may be a party to intellectual property
litigation in the future either to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. These claims
and any resulting litigation could subject us to significant liability for
damages and could cause our proprietary rights to be invalidated. Litigation,
regardless of the merits of the claim or outcome, would likely be time-consuming
and expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following:

     - stop using the challenged intellectual property or selling our products
       or services that incorporate it;

     - obtain a license to use the challenged intellectual property or to sell
       products or services that incorporate it, which license may not be
       available on commercially reasonable terms, if at all; and

     - redesign those products or services that are based on or incorporate the
       challenged intellectual property.

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

RISKS ASSOCIATED WITH MANUFACTURING OUR PRODUCTS

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

     We have limited internal manufacturing capabilities and have entered into a
manufacturing relationship with Sanmina to manufacture our storage area
networking products. Our ability to manufacture and deliver our products is
dependent on our relationship with Sanmina and our ability to, together with
Sanmina, develop manufacturing processes that will allow us to produce
sufficient quantities of products at competitive prices. We only have limited
means to internally manufacture our products and do not have alternate
outsourcing relationship with other contract manufacturers that will enable us
to meet our manufacturing requirements. While we are attempting to identify and
enter into a relationship with alternative manufacturers, identifying and
entering into an agreement with a new manufacturer and establishing
manufacturing processes is time-consuming and if we were to experience
difficulties with our manufacturing relationship with Sanmina this could
significantly interrupt the supply of our products. In addition, many of the
potential manufacturers who could manufacture our products have existing
relationships with our competitors or potential competitors and may be unwilling
to enter into agreements with us. If our relationship with Sanmina, or any
relationship we enter in the future with other manufacturers, is impaired, this
could prevent us from being able to deliver our products, damage our customer
relationships, could materially adversely affect our operating results and
financial condition.

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

     Our business would be harmed if we fail to effectively manage the
manufacture of our products. If Sanmina experiences delays, disruptions,
capacity constraints or quality control problems in its manufacturing
operations, then product shipments to our customers could be delayed, which
would negatively impact our customer relations, operating results, competitive
position and reputation. We generally place orders with Sanmina at least two
months prior to scheduled delivery of products to our customers. Accordingly, if
we inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from Sanmina or adequate quantities of
components to meet our customers' delivery requirements or we may accumulate
excess inventories. In contrast, our usage of Sanmina's facilities and our
related capital

                                        45


expenditures assume a level of customer orders that we may not realize or, if we
do realize, may not be sustained. Many of our manufacturing expenses are fixed,
and if we do not receive anticipated levels of customer orders, our expected
profit margin will decline and we may not be able to reduce our operating
expenses quickly enough to prevent a decline in our operating results.

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

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

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

  DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR BUSINESS.

     We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our products, any delay or unanticipated difficulty associated
with new product introductions or product enhancements could have a material
adverse effect on our business, quarterly and annual results of operations and
financial condition. Prior delays have resulted from numerous factors, such as:

     - Changing original equipment manufacturer product specifications;

     - Difficulties in hiring and retaining necessary personnel;

     - Difficulties in reallocating engineering resources and other resource
       limitations;

     - Changing market or competitive product requirements;

     - Unanticipated engineering complexity; and

     - Undetected errors or failures in software and hardware.

                                        46


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

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

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

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

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

ADDITIONAL RISKS ASSOCIATED WITH OUR BUSINESS

  IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL,
  ENGINEERING, SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS
  MAY SUFFER.

     Our ability to successfully develop, market, sell and support our products
depends to a significant degree upon the continued contributions of our key
personnel in engineering, sales, marketing, finance and operations, many of whom
would be difficult to replace. The loss of the services of any of our key
personnel could adversely affect our ability to implement our business plan. We
believe our future success will also depend in large part upon our ability to
attract and retain highly skilled managerial, engineering, sales, marketing,
finance and operations personnel, including executive officers. In addition, our
products and services require a sophisticated selling effort targeted at several
key people within a prospective customer's organization. This process requires
the efforts of experienced sales personnel as well as specialized consulting
professionals. Competition for these people is intense, especially in the San
Francisco Bay area where our operations are headquartered. In particular, in the
past we have experienced difficulty in hiring and retaining qualified
application-specific integrated circuits, software, system, test and customer
support engineers and executive staff and we may not be successful in attracting
and retaining individuals to fill these positions. In March 2001, we implemented
a reduction of force decreasing our headcount by 27 employees. In August 2001,
we

                                        47


implemented a second reduction of force decreasing our headcount by 16
employees. In October 2001, we implemented a third reduction in force decreasing
our headcount by a further 31 employees. As a result of these reductions in
force, our workforce has been reduced by approximately 20% from its pre-March
2001 levels. Of the 74 employees that were terminated between March and October
2001, approximately 19 of the affected employees were in our sales and marketing
department, 12 were in our operations department, 28 were in our engineering
department and 5 were in our finance department. With respect to our March 2001
reduction in force, 7 of the affected employees were terminated as a direct
result of our decision to discontinue the Axxess product line. The remaining
employees who were terminated were in administrative positions. None of the
employees laid-off as a result of these reductions in force were considered to
be key personnel by management. We do not believe these reductions in force have
had a material adverse affect on our operations. However, these reductions in
force may make it difficult for us to recruit necessary personnel in the future.
If we are unable to attract or retain qualified personnel in the future, or if
we experience delays in hiring required personnel, particularly qualified
engineers and sales personnel, our ability to develop, introduce and sell our
products could be harmed.

  WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES WHICH WILL SUBJECT US
  TO ADDITIONAL BUSINESS RISKS.

     During fiscal 2001, approximately 28% of our total revenue were derived
from international sales activities, and during fiscal 2000, international sales
represented 30% of our total revenues. In the six months ended September 30,
2001, international sales represented 29% of our total revenue. Our
international sales will be limited if we cannot establish relationships with
international distributors, establish additional foreign operations, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Even if we are able to
successfully continue international operations, we may not be able to maintain
or increase international market demand for our products which could materially
affect our quarterly and annual operating results. Our international operations
are subject to a number of risks, including:

     - multiple, protectionist, adverse and changing governmental laws and
       regulations;

     - reduced or limited protections of intellectual property rights;

     - potentially adverse tax consequences resulting from changes in tax laws;
       and

     - political and economic instability.

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

  OUR BUSINESS MAY BE HARMED BY PENDING CLASS ACTION LITIGATION.

     On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., was filed against us, three of our former
executive officers and Credit Suisse First Boston Corporation and BancBoston
Robertson Stephens, Inc., two underwriters in our 1999 initial public offering,
in the United States District Court for the Southern District of New York. The
complaint alleges violations of Section 11 of the Securities Act against all
defendants, a violation of Section 15 of the Securities Act against our former
executive officers, and violations of Section 12(a)(2) of the Securities Act and
Section 10(b) of the Securities Exchange Act and Rule 10b-5, promulgated
thereunder against the underwriters. The complaint seeks unspecified damages on
behalf of a purported class of purchasers of common stock between July 19, 1999
and December 6, 2000. On June 25, 2001, a similar complaint, captioned Goldgrab
v. Gadzoox et al., was filed against Gadzoox, the former executive officers and
several of the underwriters participating in our initial public offering in the
Southern District of New York. The complaint is substantially identical to the
Cooper complaint, except in that it alleges violations of Section 10(b) of the
Exchange Act against all defendants, including Gadzoox and the individual
defendants. There have been additional lawsuits filed

                                        48


containing allegations substantially identical to those in the Cooper and
Goldgrab complaints and we anticipate that additional related lawsuits may be
brought against us with substantially identical allegations to the Cooper
lawsuit.

     The allegations of the complaints focus on purported actions of the
underwriters in our 1999 initial public offering. The plaintiffs claim that the
underwriters solicited and received excessive commissions from investors in
exchange for favorable allocations of initial public offering shares. The
plaintiffs also claim that the underwriters entered into agreements with their
customers whereby, in exchange for favorable allocations of shares in the
offering, the customers would commit to purchase additional shares in the
aftermarket at pre-determined prices. The complaints filed to date, however, do
not contain any particular allegations of any specific "tie-in" agreement or
excessive commission received in connection with our offering specifically. The
plaintiffs contend that we are liable under Section 11 of the Securities Act
because our registration statement in the initial public offering did not
disclose the purported actions by the underwriters. Two of the complaints also
bring claims under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder, contending that we knew of, participated in or acted with reckless
disregard to the alleged misconduct of the underwriters. We further anticipate
that all such lawsuits will eventually be coordinated or consolidated with one
another. We believe we have meritorious defenses to the allegations and we
intend to defend the lawsuits vigorously. We do not believe that these matters
will have material adverse affect on our results of operation or financial
condition. However, litigation is subject to inherent uncertainties, and the
disposition of the litigation could materially adversely affect our financial
condition, results of operation and cash flows. The uncertainty associated with
substantial unresolved litigation may also impair our relationships with
existing customers and its ability to obtain new customers. Defending such
litigation will likely result in a diversion of management's time and attention
away from business operations. Such litigation may also have the effect of
discouraging potential acquirors from bidding for Gadzoox or reducing the
consideration such acquirors would otherwise be willing to pay in connection
with an acquisition.

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

     Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:

     - authorizing our board of directors to issue preferred stock without
       stockholder approval;

     - providing for a classified board of directors with staggered, three-year
       terms;

     - prohibiting cumulative voting in the election of directors;

     - requiring super-majority voting to effect significant amendments to our
       certificate of incorporation and bylaws;

     - limiting the ability of stockholders to call special meetings;

     - prohibiting stockholder actions by written consent; and

     - establishing advance notice requirements for nominations for election to
       the board of directors or for proposing matters that can be acted on by
       stockholders at stockholder meetings.

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

                                        49


  WE MAY INCUR FINANCIAL PENALTIES IN CONNECTION WITH REGISTERING FOR RESALE THE
  SHARES OF COMMON STOCK WE SOLD IN MAY 2001 AND AUGUST 2001 WHICH WOULD CAUSE
  US TO SUSTAIN ADDITIONAL LOSSES.

     In connection with our May 2001 sale of 5,600,000 shares of our common
stock and our August 2001 sale of an additional 5,000,000 shares of our common
stock, we agreed to register these shares for resale under the Securities Act.
The registration rights agreements that we entered into with our May 2001 and
August 2001 investors contain provisions requiring us to pay penalties unless a
registration statement covering the resale of these shares is declared effective
by the SEC no later than 90 days after our sale of the common stock to the
investors. With respect to the sale of the May 2001 shares, we have incurred
penalty fees totalling $375,000 for not having the registration statement
covering the resale of the shares effective through October 23, 2001 and we will
incur additional penalties of $150,000 for each 30 day period after October 23,
2001 that the registration statement covering the resale of the shares is not
effective. If the registration statement is not effective by May 2002, the
investors will have the right to demand that we repurchase the shares at 110% of
the original $2.65 per share price, which could result in an obligation of up to
$16.3 million. With respect to the sale of the August 2001 shares, we will incur
a $75,000 penalty if the registration statement covering the resale of the
shares has not been declared effective by November 2001 and we will incur
additional penalties of $112,500 for each subsequent 30 day period that the
registration statement covering the resale of the shares is not effective. If
the registration statement is not effective by August 2002, the investors will
have the right to demand that we repurchase the shares at 110% of the original
$1.50 per share price, which could result in an obligation of up to $8.3
million. Any penalties we are required to pay under the terms of our agreements
with the May 2001 and August 2001 investors will result in losses and will hurt
our operating results and financial condition.

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

     The market price of our common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. From January
1, 2000 through November 6, 2001, the market price has ranged from a high of
$68.75 per share to a low of $0.84 per share. Several factors could impact our
stock price including, but not limited to:

     - announcements concerning Gadzoox, our competitors or customers;

     - quarterly fluctuations in our operating results;

     - introduction of new products or changes in product pricing policies by us
       or our competitors;

     - conditions in the storage area network industry;

     - changes in earnings estimates by industry analysts; or

     - market conditions for high technology equities in general.

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

                                        50


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of March 31, 2001,
all of our investments were in cash and cash equivalents. See Note 2 of the
Notes to the Financial Statements.

     The following table details our short-term investments and cash and cash
equivalents at March 31, 2001 and 2000 (in thousands):



                                                                  MARCH 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
                                                                  
U.S. Government Agencies....................................  $    --   $28,243
Corporate bonds and notes...................................    6,747    42,577
Money market funds and available cash.......................    4,192     2,629
                                                              -------   -------
       Total................................................  $10,939   $73,449
                                                              =======   =======


                                        51


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS



                                                               PAGE
                                                               ----
                                                            
Report of Independent Public Accountants....................   F-2
Balance Sheets as of March 31, 2001 and 2000................   F-3
Statements of Operations for the years ended March 31, 2001,
  2000 and 1999.............................................   F-4
Statements of Stockholders' Equity for the years ended March
  31, 2001, 2000 and 1999...................................   F-5
Statements of Cash Flows for the years ended March 31, 2001,
  2000 and 1999.............................................   F-6
Notes to Financial Statements...............................   F-7
Schedule II -- Valuation and Qualifying Accounts............   F-27


                                       F-1


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

     As explained in Note 2 to the financial statements, effective April 1,
2000, the Company changed its method of accounting for revenue recognition for
sales to distributors.

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

                                          ARTHUR ANDERSEN LLP

San Jose, California
June 29, 2001

                                       F-2


                             GADZOOX NETWORKS, INC.

                                 BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



                                                                   MARCH 31,
                                                              --------------------
                                                                2001        2000
                                                              ---------   --------
                                                                    
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $  10,939   $ 42,830
  Short-term investments....................................         --     30,619
  Accounts receivable, net of allowance for doubtful
     accounts of $350 and $600 in 2001 and 2000,
     respectively...........................................      2,922     14,131
  Inventories...............................................     10,626      6,665
  Prepaid expenses and other current assets.................        961      2,464
                                                              ---------   --------
          Total current assets..............................     25,448     96,709
Property and equipment, net.................................      8,244      6,495
Other assets................................................        795        292
                                                              ---------   --------
                                                              $  34,487   $103,496
                                                              =========   ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Convertible notes.........................................  $      --   $  3,052
  Current portion of note payable...........................         --        196
  Current portion of capital lease obligations..............        924      1,545
  Accounts payable..........................................      6,176      7,079
  Compensation related accruals.............................      1,331      1,534
  Other accrued liabilities.................................      5,232      2,008
                                                              ---------   --------
          Total current liabilities.........................     13,663     15,414
Capital lease obligations, net of current portion...........        403      1,292
                                                              ---------   --------
          Total liabilities.................................     14,066     16,706
                                                              ---------   --------
Commitments and contingencies (Note 3)
Stockholders' equity:
  Common stock, $0.005 par value; 150,000,000 shares
     authorized; 28,376,200 and 26,841,844 shares issued and
     outstanding in 2001 and 2000, respectively.............        142        134
  Additional paid-in capital................................    153,003    127,251
  Deferred compensation.....................................       (426)    (1,140)
  Accumulated deficit.......................................   (132,298)   (39,455)
                                                              ---------   --------
          Total stockholders' equity........................     20,421     86,790
                                                              ---------   --------
                                                              $  34,487   $103,496
                                                              =========   ========


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

                                       F-3


                             GADZOOX NETWORKS, INC.

                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



                                                                  YEARS ENDED MARCH 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                           
Net revenues................................................  $ 33,290   $ 47,931   $ 24,821
Cost of revenues............................................    32,131     26,128     18,638
                                                              --------   --------   --------
          Gross margin......................................     1,159     21,803      6,183
                                                              --------   --------   --------
Operating expenses:
  Research and development..................................    29,368     18,223     13,928
  Sales and marketing.......................................    23,982     11,638      5,765
  General and administrative................................     7,992      4,285      1,649
  Amortization of acquired intangible assets................     3,842         --         --
  In-process research and development.......................     4,900         --         --
  Impairment of long lived assets...........................    17,829         --         --
  Restructuring and other expenses..........................     2,513         --         --
  Amortization of deferred compensation.....................       608      1,285        547
                                                              --------   --------   --------
          Total operating expenses..........................    91,034     35,431     21,889
                                                              --------   --------   --------
Loss from operations........................................   (89,875)   (13,628)   (15,706)
Other income (expense), net:
  Interest income...........................................     2,593      4,002        489
  Interest and other expense................................      (261)      (735)      (715)
                                                              --------   --------   --------
          Total other income (expense), net.................     2,332      3,267       (226)
                                                              --------   --------   --------
Loss before cumulative effect of change in accounting
  principle.................................................  $(87,543)  $(10,361)  $(15,932)
Cumulative effect of change in accounting principle.........    (5,300)        --         --
                                                              --------   --------   --------
Net loss....................................................  $(92,843)  $(10,361)  $(15,932)
                                                              ========   ========   ========
Basic net loss per share before cumulative effect of change
  in accounting principle...................................  $  (3.13)  $  (0.53)  $  (3.33)
Cumulative effect of change in accounting principle.........     (0.19)        --         --
                                                              --------   --------   --------
Basic net loss per share....................................  $  (3.32)  $  (0.53)  $  (3.33)
                                                              ========   ========   ========
Weighted average shares used in computing basic net loss per
  share.....................................................    28,006     19,731      4,789
                                                              ========   ========   ========
Pro forma amounts with the change in accounting principle
  related to revenue applied retroactively (unaudited)
  Net revenues..............................................       N/A   $ 39,823   $ 24,568
  Net loss..................................................       N/A    (13,169)   (15,988)
  Basic net loss per share..................................       N/A      (0.67)     (3.34)


     For the year ended March 31, 2001, the Company's amortization of deferred
compensation included $61 related to cost of revenues, $316 related to research
and development, $152 related to sales and marketing, and $79 related to general
and administrative. For the year ended March 31, 2000, the Company's
amortization of deferred compensation included $129 related to cost of revenues,
$668 related to research and development, $321 related to sales and marketing,
and $167 related to general and administrative. For the year ended March 31,
1999, the Company's amortization of deferred compensation included $55 related
to cost of revenues, $284 related to research and development, $137 related to
sales and marketing, and $71 related to general and administrative.
   The accompanying notes are an integral part of these financial statements.

                                       F-4


                             GADZOOX NETWORKS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)



                                 CONVERTIBLE
                               PREFERRED STOCK         COMMON STOCK       ADDITIONAL                                    TOTAL
                             --------------------   -------------------    PAID-IN       DEFERRED     ACCUMULATED   STOCKHOLDERS'
                               SHARES      AMOUNT     SHARES     AMOUNT    CAPITAL     COMPENSATION     DEFICIT        EQUITY
                             -----------   ------   ----------   ------   ----------   ------------   -----------   -------------
                                                                                            
BALANCE AT MARCH 31,
 1998......................   12,227,822    $ 60     5,078,328    $ 26     $ 21,245      $    --       $ (13,162)     $  8,169
 Issuance of common stock
   for cash................           --      --       511,401       2          128           --              --           130
 Deferred compensation.....                                 --      --        2,972       (2,972)                           --
 Amortization of deferred
   compensation............           --      --            --      --           --          547              --           547
 Issuance of preferred
   stock for cash, net.....    1,436,883       8            --      --       10,881           --              --        10,889
 Issuance of preferred upon
   partial conversion of
   notes...................      242,694       1            --      --        1,855           --              --         1,856
 Net loss..................           --      --            --      --           --           --         (15,932)      (15,932)
                             -----------    ----    ----------    ----     --------      -------       ---------      --------
BALANCE AT MARCH 31,
 1999......................   13,907,399      69     5,589,729      28       37,081       (2,425)        (29,094)        5,659
 Issuance of common stock
   for cash, net of
   offering costs of
   $7,030..................           --      --     5,835,439      30       78,579           --              --        78,604
 Amortization of deferred
   compensation............           --      --            --      --           --        1,285              --         1,285
 Issuance of common stock
   for employee stock
   purchase plan...........           --      --        38,879      --          693           --              --           693
 Conversion of warrant to
   common stock............           --      --        44,370      --           --           --              --            --
 Conversion of note payable
   to common stock.........           --      --     1,426,028       7       10,903           --              --        10,910
 Conversion of preferred
   stock to common stock...  (13,907,399)    (69)   13,907,399      69           --           --              --            --
 Net loss..................           --      --            --      --           --           --         (10,361)      (10,361)
                             -----------    ----    ----------    ----     --------      -------       ---------      --------
BALANCE AT MARCH 31,
 2000......................           --      --    26,841,844     134      127,251       (1,140)        (39,455)       86,790
 Issuance of common stock
   for cash................           --      --     1,182,861       6          989           --              --           995
 Acceleration of employee
   options.................           --      --            --      --          456           --              --           456
 Amortization of deferred
   compensation............           --      --            --      --           --          608              --           608
 Issuance of common stock
   for employee stock
   purchase plan...........           --      --       112,062      --          675           --              --           675
 Issuance common stock for
   acquisition of
   SmartSAN................           --      --       239,433       2       23,625           --              --        23,627
 Issuance of warrant to
   acquire common stock....           --      --            --      --          113           --              --           113
 Reversal of deferred
   compensation related to
   cancellation of stock
   options.................           --      --            --      --         (106)         106              --            --
 Net loss..................           --      --            --      --           --           --         (92,843)      (92,843)
                             -----------    ----    ----------    ----     --------      -------       ---------      --------
BALANCE AT MARCH 31,
 2001......................           --    $ --    28,376,200    $142     $153,003      $  (426)      $(132,298)     $ 20,421
                             ===========    ====    ==========    ====     ========      =======       =========      ========


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

                                       F-5


                             GADZOOX NETWORKS, INC.

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



                                                                  YEARS ENDED MARCH 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                           
Cash flows from operating activities:
  Net loss..................................................  $(92,843)  $(10,361)  $(15,932)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Adjustment for change in accounting principle..........     5,300         --         --
     Depreciation and amortization..........................     3,668      2,599      1,739
     Amortization of deferred compensation..................       608      1,285        547
     Change in allowance for doubtful accounts..............       172        450         85
     Accrued but unpaid interest............................        27        462        460
     Change in inventory reserve............................     8,115         --         --
     Loss on disposal of property and equipment.............        --         --        181
     Amortization of acquired intangible assets.............     3,842         --         --
     Impairment of long-lived assets........................    17,829         --         --
     Write-off of in-process research and development.......     4,900         --         --
     Non-cash restructuring and impairment charges..........     1,529         --         --
     Non-cash stock compensation............................       456         --         --
     Changes in current assets and liabilities, net of
      acquisition:
       Accounts receivable..................................     7,482     (8,600)    (2,642)
       Inventories..........................................   (12,075)    (1,359)    (1,843)
       Prepaid expenses and other assets....................       138     (2,201)      (250)
       Accounts payable and accrued liabilities.............      (196)     4,136      1,939
                                                              --------   --------   --------
          Net cash used in operating activities.............   (51,048)   (13,589)   (15,716)
                                                              --------   --------   --------
Cash flows from investing activities:
  Purchases of property and equipment.......................    (5,286)    (2,771)    (1,598)
  Proceeds from sale of short term investments..............    39,767         --         --
  Purchase of short term investments........................    (9,148)   (30,619)        --
  Purchase of long term investments.........................    (1,000)        --         --
  Net cash used in SmartSAN acquisition.....................    (1,167)        --         --
  Cash used for long term deposits..........................       (46)        --         --
                                                              --------   --------   --------
          Net cash provided by (used in) investing
             activities.....................................    23,120    (33,390)    (1,598)
                                                              --------   --------   --------
Cash flows from financing activities:
  Proceeds from convertible notes...........................        --         --     15,000
  Repayment of notes payable................................    (3,555)      (371)      (345)
  Repayment of capital lease obligations....................    (1,543)    (1,318)      (782)
  Loans to officers.........................................      (535)        --         --
  Proceeds from issuance of common stock....................     1,670      1,801        130
  Proceeds from issuance of common stock in initial public
     offering, net..........................................        --     77,495         --
  Proceeds from issuance of preferred stock, net............        --         --     10,889
                                                              --------   --------   --------
          Net cash (used in) provided by financing
             activities.....................................    (3,963)    77,607     24,892
                                                              --------   --------   --------
Net (decrease) increase in cash and cash equivalents........   (31,891)    30,628      7,578
Cash and cash equivalents at beginning of year..............    42,830     12,202      4,624
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $ 10,939   $ 42,830   $ 12,202
                                                              ========   ========   ========
Supplemental cash flow information:
  Cash paid for interest....................................  $    261   $    274   $    240
                                                              ========   ========   ========
  Property and equipment acquired under capital lease
     obligations............................................  $     --   $  1,770   $  1,750
                                                              ========   ========   ========
  Conversion of preferred stock into common stock...........  $     --   $ 34,129   $     --
                                                              ========   ========   ========
  Conversion of convertible notes to common stock...........  $     --   $ 10,910   $  1,857
                                                              ========   ========   ========
  Issuance of common stock for the acquisition of
     SmartSAN...............................................  $ 23,625   $     --   $     --
                                                              ========   ========   ========
  Issuance of warrant for common stock......................  $    113   $     --   $     --
                                                              ========   ========   ========


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

                                       F-6


                             GADZOOX NETWORKS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 MARCH 31, 2001

1.  BACKGROUND

     Gadzoox Networks, Inc. ("Gadzoox" or the "Company"), formerly Gadzoox
Microsystems, Inc., was incorporated in the state of California on April 2, 1992
and was reincorporated in Delaware on January 6, 1998. The Company is a provider
of products for storage area networks, or SANs. The Company's SAN products are
designed to leverage the capabilities of Fibre Channel technology to enable
companies to better manage the growth in mission-critical data by overcoming the
limitations of traditional captive storage architecture and creating a
foundation for data centralization.

     The Company is subject to a number of risks associated with companies in a
similar stage of development, including dependency on key employees for
technology development, reliance on a limited number of new products, reliance
on a limited number of key suppliers, reliance on a limited number of key OEM
and distribution channel customers, volatility of the storage industry,
potential competition from larger, more established companies, the ability to
penetrate the market with new products, the ability to sell its products through
OEM and distribution channels and the ability to obtain adequate financing to
support its growth.

     The Company has incurred a net loss in the year ended March 31, 2001 of
$92.8 million and has an accumulated deficit of $132.3 million as of March 31,
2001. The Company has continuously incurred net losses from operations, and used
$51.0 million for cash in operations for the year ended March 31, 2001, and has
working capital of $11.8 million as of March 31, 2001. In May 2001, the Company
sold 5.6 million shares of the Company's common stock in a private placement
transaction for net proceeds of approximately $14.5 million. In June 2001, the
Company entered into an Equity Line agreement with a financial institution.
Under this agreement, the Company can raise up to $20 million additional cash
via the sale of common stock dependent upon the terms and the conditions set out
in the agreement (see note 7). The Company believes that its cash reserves,
working capital and the funds available under the Equity Line agreement will be
adequate to fund its operations through the year ended March 31, 2002. However,
as discussed in note 7, the Company's right to sell shares under the Equity Line
agreement is subject to a number of conditions and the Company may not be able
to sell its shares of common stock under the Equity Line agreement as and when
the Company wishes or needs. If the Company is unable to sell its shares of
common stock under the Equity Line agreement, the Company will be required to
raise additional funds to continue to operate its business.

     Many companies in the high technology manufacturing industry have
experienced difficulty raising additional financing in recent months. Additional
financing may not be available to the Company on favorable terms or at all. Even
if additional financing is available, the Company may be required to obtain the
consent of its stockholders, which it may not be able to obtain. If additional
financing is not available, the Company may need to dramatically change its
business plan, sell or merge its business, or face bankruptcy. In addition, the
issuance of equity or equity-related securities will dilute the ownership
interest of its stockholders and the issuance of debt securities could increase
the risk or perceived risk of the Company.

     The Company's cash needs depend on numerous factors, including market
acceptance of, and demand for its products, their ability to develop and
introduce new products and product enhancements, prices at which it can sell
their products, the resources the Company devotes to developing, marketing,
selling and supporting its products, the timing and expense associated with
expanding its distribution channels, increases in manufacturing costs and the
prices of the components the Company purchases and other factors. In the year
ended March 31, 2002, a substantial majority of the Company's revenues are
expected to be derived from the sale of new products currently under evaluation
or development, including the Slingshot 4218. The Company cannot assure that it
will be able to develop and introduce the Slingshot or other new products
successfully, and in the time frame it expects, or that these products will be
adopted by the Company's OEM and distribution channel partners, or that
significant net revenues would be derived if so adopted. If the Company is
unable to raise additional capital, including through a draw down under the
Equity Line, or if sales from new products are

                                       F-7

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

lower than expected, the Company will be required to make a significant
reduction in operating expenses and capital expenditures in the year ended March
31, 2002 to ensure that the Company will have adequate cash reserves to fund
operations through the year ended March 31, 2002.

     In addition, the Company may do one or more of the following:

     - engage a financial advisor to explore strategic alternatives, which may
       include a merger, asset sale, or another comparable transaction;

     - raise additional capital to fund continuing operations by private
       placements of equity and/or debt securities; and

     - form a joint venture with a strategic partner or partners to provide
       additional capital resources to fund operations.

     In addition to the foregoing, the Company is attempting to reduce its
financial commitments and reduce future cash outflows by negotiating alternative
terms with its suppliers. In addition, cost-cutting measures could include
additional reductions in force. Further the Company is working with its channel
partners to increase revenues through new marketing programs and promotions, and
is exploring potential additional sources of revenue. There can be no assurance
that it will be successful in increasing revenues or reducing cash outflows.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include
inventory reserves, allowance for doubtful accounts, and income tax valuation
allowances.

  CASH AND CASH EQUIVALENTS

     Gadzoox considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. The carrying value of cash
equivalents approximates their fair value.

  SHORT-TERM INVESTMENTS

     As of March 31, 2000, the Company's short-term investments consisted of
liquid debt instruments with maturities, at the time of purchase, greater than
three months and less than one year. All such investments have been classified
as available-for-sale, and are managed by a single financial institution. At
March 31, 2000, all short-term investments were carried at fair value. Long-term
holding gains and losses, net of taxes reported, have not been material to date,
and are recorded as a separate component of stockholders' equity. The cost of
the debt security is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, interest income, realized gains and
losses, and declines in value that are considered to be less than temporary, are
included in other income (expense), net, on the accompanying statement of

                                       F-8

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

operations. There have been no declines in value that are considered to be other
than temporary for any of the three years in the period ended March 31, 2001.
Short-term investments are as follows (in thousands):



                                                                MARCH 31,
                                                              --------------
                                                              2001    2000
                                                              ----   -------
                                                               
U.S. Government Agencies....................................   $--   $27,300
Corporate bonds and notes...................................   --      3,319
                                                               --    -------
                                                               $--   $30,619
                                                               ==    =======


  CONCENTRATION OF CREDIT RISK

     As of March 31, 2001, financial instruments that potentially subject the
Company to concentration of credit risk consist principally of bank deposits and
trade accounts receivable. The Company places its cash and cash equivalents in
checking and money market accounts in high credit quality financial
institutions. The Company's trade accounts receivable are derived primarily from
sales to OEMs and distributors located primarily in the U.S. who are generally
large, well established companies. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses.

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



                                                               MARCH 31,
                                                              -----------
                                                              2001   2000
                                                              ----   ----
                                                               
Customer A..................................................   35%    23%
Customer B..................................................   33%    21%
Customer C..................................................   --%    12%


  INVENTORIES

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



                                                                 MARCH 31,
                                                              ----------------
                                                               2001      2000
                                                              -------   ------
                                                                  
Raw materials...............................................  $ 5,157   $3,582
Work-in-process.............................................       26       58
Finished goods..............................................    5,443    3,025
                                                              -------   ------
  Total.....................................................  $10,626   $6,665
                                                              =======   ======


  PROPERTY AND EQUIPMENT

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

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



                                       F-9

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                                  MARCH 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
                                                                  
Computer and laboratory equipment...........................  $ 8,700   $ 6,419
Software....................................................    3,407     2,308
Furniture and equipment.....................................    3,945     1,540
Leasehold improvements......................................    1,111       554
Construction in progress....................................       --       841
                                                              -------   -------
                                                               17,163    11,662
Accumulated depreciation and amortization...................   (8,919)   (5,167)
                                                              -------   -------
Property and equipment, net.................................  $ 8,244   $ 6,495
                                                              =======   =======


     Depreciation and amortization expense of approximately $3.7 million, $2.6
million, and $1.7 million was recognized during the fiscal years ended March 31,
2001, 2000, and 1999, respectively. Included in property and equipment are
assets acquired under capital lease obligations with an original cost of
approximately $5.1 million and $5.1 million, as of March 31, 2001 and 2000,
respectively. Related accumulated amortization of these leased assets was
approximately $4.0 million and $2.4 million as of March 31, 2001 and 2000,
respectively.

  IMPAIRMENT OF LONG-LIVED ASSETS

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

  REVENUE RECOGNITION

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

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

                                       F-10

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  WARRANTY

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

  GOODWILL AND INTANGIBLES

     Costs in excess of tangible assets acquired and liabilities assumed are
recorded as goodwill and intangibles. Goodwill and intangibles are amortized on
a straight-line basis over the estimated useful life of five years. Intangibles
relate to developed technology and workforce, arising from the Company's
acquisition of SmartSAN. As of March 31, 2001 the amount of goodwill and
intangibles was $0.

  COMPREHENSIVE INCOME (LOSS)

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which established standards for
reporting and presentation of comprehensive income and its components. This
standard defines comprehensive income as the changes in equity of an enterprise
except those resulting from stockholder transactions. The Company had no such
transactions that were material to the financial statements for the periods
ended March 31, 2001, 2000, and 1999. For each of these years, comprehensive
loss approximated the net loss.

  OTHER ACCRUED LIABILITIES

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



                                                                 MARCH 31,
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
                                                                 
Purchase commitments........................................   1,655       --
Restructuring reserve.......................................     687       --
Accrued warranty costs......................................     266      639
Sales return reserve........................................     315      651
Accrued professional fees...................................     525       50
Accrued marketing expenses..................................     569       --
Other accrued liabilities...................................   1,215      668
                                                              ------   ------
  Total.....................................................  $5,232   $2,008
                                                              ======   ======


  STOCK-BASED COMPENSATION

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

  SOFTWARE DEVELOPMENT COSTS

     Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility in the form of
a working model has been established, in accordance with

                                       F-11

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased,
or Otherwise Marketed." To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying statements of operations.

  SALES AND MARKETING COSTS

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

  RECLASSIFICATIONS

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

  BASIC NET LOSS PER SHARE

     Historical net loss per share has been calculated under SFAS No. 128,
"Earnings Per Share." Basic net loss per share on a historical basis is computed
using the weighted average number of shares of common stock outstanding. No
diluted loss per share information has been presented in the accompanying
statements of operations since potential common shares from conversion of the
convertible debenture, preferred stock, stock options, and warrants are
antidilutive. The total number of shares excluded from diluted loss per share
relating to these securities was 4,724,751, 20,256,699 and 16,481,009 for fiscal
2001, 2000 and 1999 respectively.

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



                                                            YEAR ENDED MARCH 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                                    
Net loss.............................................  $(92,843)  $(10,361)  $(15,932)
                                                       ========   ========   ========
Basic:
Weighted average shares of common stock
  outstanding........................................    28,006     19,930      5,374
Less: Weighted average shares subject to
  repurchase.........................................        --       (199)      (585)
                                                       --------   --------   --------
Weighted average shares used in computing basic net
  loss per common share..............................    28,006     19,731      4,789
                                                       ========   ========   ========
Basic net loss per common share......................  $  (3.32)  $  (0.53)  $  (3.33)
                                                       ========   ========   ========


  NEW ACCOUNTING STANDARDS

     In June 2001, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities," an amendment of SFAS No. 133,
which is effective for all fiscal years beginning after June 15, 2000. SFAS No.
138 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Because the Company does not
currently hold any derivative instruments and does not currently engage in any
material hedging activities, management believes that the application of SFAS
No. 138 will not have a material impact on the Company's financial position or
results of operations.

                                       F-12

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In March 2000, the FASB issued Financial Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB Opinion No. 25 ("FIN 44"). FIN 44 addresses the application of APB No. 25 to
clarify, among other issues: (a) the definition of employee for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company's adoption of FIN 44 did not have a material impact on
the Company's financial position or results of operation.

3.  COMMITMENTS AND CONTINGENCIES

  LEASE AGREEMENTS

     During the year ended March 31, 2000 and 1999, the Company acquired certain
equipment under capital leases. Additionally, the Company leases four facilities
under non-cancelable operating leases which expire between January 2002 and
August 2008. Future minimum lease payments under all capital and operating lease
agreements as of March 31, 2001 are as follows (in thousands):



                                                              CAPITAL   OPERATING
YEAR ENDED MARCH 31,                                          LEASES     LEASES
--------------------                                          -------   ---------
                                                                  
  2002......................................................   1,023       2,131
  2003......................................................     376       3,054
  2004......................................................      --       3,106
  2005......................................................      --       3,168
  2006......................................................      --       3,233
  2007 and thereafter.......................................      --       5,183
                                                              ------     -------
                                                               1,399     $19,875
                                                                         -------
  Less amounts representing interest
  (Weighted average interest rate of 7.50%).................     (72)
                                                              ------
  Present value of minimum lease payments...................   1,327
  Less: current portion.....................................    (924)
                                                              ------
  Non-current portion.......................................  $  403
                                                              ======


     Rent expense under non-cancelable operating lease agreements for the years
ended March 31, 2001, 2000 and 1999 was approximately $1.9 million, $1.1
million, and $0.8 million, respectively.

  LEGAL PROCEEDINGS

     From time to time, the Company may become involved in various lawsuits and
legal proceedings, which arise, in the ordinary course of business. In May 1999,
a former employee filed a complaint against the Company and in September 2000
the plaintiff and the company settled this lawsuit out of court. This lawsuit
did not have a material adverse effect on the Company's financial statements or
results of operations. Litigation is subject to inherent uncertainties, and an
adverse result in other matters could arise from time to time that may harm
Gadzoox' business, financial condition and results of operations.

     On June 6, 2001, a putative securities class action, captioned Cooper v.
Gadzoox Networks, Inc., et al., Civil Action No. 01-CV-5309-RO, was filed
against the Company, three of the Company's former officers and Credit Suisse
First Boston Corporation and BancBoston Robertson Stephens, Inc., two
underwriters in the Company's initial public offering, in the United States
District Court for the Southern District of New York.

                                       F-13

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The complaint alleges violations of Section 11 of the Securities Act of 1933
("Securities Act") against all defendants, a violation of Section 15 of the
Securities Act against the former officers, and violations of Section 12(a)(2)
of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934
(and Rule 10b-5., promulgated thereunder) against the underwriters. The
complaint seeks unspecified damages on behalf of a purported class of purchasers
of common stock between July 19, 1999 and December 6, 2000. As of June 18, 2001,
various plaintiffs have filed similar actions asserting virtually identical
allegations against at least 45 other companies. To date, there have been no
significant developments in the litigation. As of June 26, 2001, the Company had
received two substantially identical lawsuits, and anticipates that additional
related lawsuits may be brought against the Company with substantially identical
allegations to the Cooper lawsuit. The Company further anticipates that all such
lawsuits will eventually be coordinated or consolidated with one another. The
Company intends to defend the lawsuits vigorously.

4.  CONVERTIBLE NOTES

     On September 18, 1998, Gadzoox entered into a $15.0 million note purchase
agreement (the "Agreement") with Seagate Technology, Inc. ("Seagate"). The
Agreement provides that Seagate purchase up to $15.0 million of convertible
subordinated promissory notes (the "Convertible Notes"), bearing simple interest
on the unpaid principal balance at a rate equal to 5.75% per annum with
principal and interest maturing on September 18, 2001. As further outlined and
defined in the Agreement, upon the earlier to occur of (i) equity financing in
which the Company receives at least $6 million, (ii) the Company's initial
public offering, (iii) a change of control of the Company, or (iv) the maturity
date of the Convertible Note, at the sole option of the Company, any portion or
all of the then outstanding balance of principal and interest on the Convertible
Note will convert into shares of Series G preferred stock at a price of $7.65
per share. Accrued interest is converted prior to any principal owing under the
Convertible Note. In the event of a default, as defined in the agreement,
Seagate may declare all outstanding interest and principal immediately due and
payable in cash. Gadzoox may, upon thirty (30) days written notice to Seagate,
prepay the Convertible Note in whole or in part.

     For the period from October 1998 through June 30, 2000, a total of $12.8
million of principal and accrued interest was converted into 1,668,722 shares of
common stock in three separate transactions. On July 31, 2000, the Company
repaid, in full, the outstanding principal and accrued interest under the loan
of approximately $3.1 million in cash. As a result of the repayment, the company
reclassified the amount of the convertible note at March 31, 2000, of $3.1
million from long-term liabilities to current liabilities.

5.  NOTES PAYABLE

     In August 1997, in connection with lease financing (see Note 3), the
Company entered into a loan agreement (the "Note") with a lessor to provide
financing for equipment previously purchased. The face amount of the Note was
for approximately $1.1 million. The repayment period is 36 months with monthly
payments of principal and interest in the amount of approximately $33,000 with a
final installment of approximately $162,000 due on September 1, 2000. The Note
bears interest at approximately 9.0% per annum and is secured by the equipment
previously purchased. At March 31, 2001, the note had been fully repaid.

6.  ACQUISITION OF SMARTSAN SYSTEMS, INC.

     On March 2, 2000, the Company entered into a definitive agreement to
acquire SmartSAN Systems, Inc. ("SmartSAN"), a California company. The
acquisition was completed in April 2000 and was accounted for under the purchase
method of accounting. The Company acquired all of the outstanding shares of
SmartSAN by issuing 239,433 shares of its common stock and assuming options to
purchase 108,376 additional shares

                                       F-14

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(which share number reflects the effect of the exchange ratio applied to the
outstanding SmartSAN stock options at the time of the acquisition). Total
consideration was as follows (in thousands):

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



     The fair value of the Company's common stock was determined using the
average closing market price over several days on either side of the acquisition
announcement on March 2, 2000. The fair value of the SmartSAN options assumed
was estimated using the Black-Scholes pricing model and assumptions consistent
with those used to value options issued to employees in accordance with EITF
90-9 (See Note 7).

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

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



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

     At the acquisition date, SmartSAN was conducting design, development,
engineering and testing activities associated with the development of
next-generation Geminix products: SDM3000, RDM4000, and DDM5000, valued at
$800,000, $1.1 million, and $3.0 million, respectively.

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

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

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

                                       F-15

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

introductions by the Company and its competitors. The resulting net cash flows
from such projects are based on management's estimates of cost of sales,
operating expenses, and income taxes from such projects.

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

     Other acquired intangible assets, including goodwill, developed technology
and other intangible assets of approximately $20.7 million are being amortized
over their estimated useful lives of five years on a straight-line basis. During
the year ended March 31, 2001, the Company amortized approximately $3.8 million
of goodwill and acquired intangible assets.

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

     The Company acquired SmartSAN with the intent that SmartSAN would provide
the Company with a full range of products to address the storage area networking
market including hubs and switches, which the Company was already selling, and
IP routers which SmartSAN was in the process of developing. Subsequent to the
acquisition, the Company realized that the IP router market was extremely
competitive and significant additional funding would be required to develop
products and provide support. As a result, in March 2001, the Company changed
its product strategy and refocused its efforts exclusively on the higher margin
fibre channel fabric switch market. Consequently, the product lines and
technologies acquired in the SmartSAN acquisition were abandoned because they
did not support open-fabric switch technology. At this time, the former SmartSAN
products were estimated to be 100% (SDM3000), 65% (RDM4000) and 25% (DDM5000)
complete.

7.  COMMON STOCK

     In May 2001, the Company sold 5,600,000 shares of its common stock in a
private placement transaction and received net proceeds of approximately $14.5
million. Under the terms of the purchase agreement, the Company is subject to
certain financial penalties in the event that the Company fails to file an S-3
with the Securities and Exchange Commission and have the filing be declared
effective by the deadlines established in the contract. In the event that the
filing is not declared effective within 360 days of the date of the agreement,
the Company is obligated to repurchase the shares from the investors at 110% of
the original purchase price. This private placement of common stock has been
recorded outside of shareholders' equity, as redeemable common stock, since the
triggering event that would require the Company to repurchase the common stock
is not solely within the control of the Company. This amount will remain as
redeemable common stock until such time that the SEC has declared the related
S-3 effective.

     Based on the Company's previous experience in dealings with the SEC,
management believes that it is probable that the S-3 will be declared effective
by the SEC within the deadlines established in the contract and that the Company
will not be required to repurchase the common stock, and therefore the Company
has

                                       F-16

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

not recorded any accretion to the common stock. The Company will recognize any
change in the redemption value of the common stock immediately upon determining
that such redemption is probable.

     In connection with this transaction, the Company issued a warrant to
purchase 168,000 shares of common stock to its financial advisor for their
assistance in the investor search. The warrant is immediately exercisable at
$4.14 per share, is fully vested and non-forfeitable and expires three years
from the date of grant. In the first quarter ending June 30, 2001, management
will record the fair value of the warrant as an offering cost of $481,000, which
was determined using the Black-Scholes option pricing model and the following
assumptions: expected life of three years, volatility of 147%, dividend yield of
0%, and a risk-free interest rate of 4.32%.

  EQUITY LINE AGREEMENT

     On June 28, 2001, the Company entered into an equity line financing
agreement (the "Equity Line") with Societe Generale pursuant to which the
Company has the right to elect to sell and Societe Generale has the obligation
to purchase up to $20 million of the Company's common stock. Pursuant to the
terms of the Equity Line, the Company, from time to time, during the two year
period beginning on June 28, 2001, can elect to sell (which election is referred
to as a "draw down") a specific dollar amount of its common stock based upon the
price and trading volume of its common stock during the thirty trading days
prior to a draw down. The price per share and the actual number of shares sold
by the Company pursuant to each draw down will be determined by the price and
volume of trading in the Company's common stock during the five trading days
following the day that the Company notifies Societe Generale of the draw down,
provided that in no event will the price per share be less than the higher of
$1.00 and the price set by the Company in its notice of election to make a draw
upon the equity line. Under the terms of the Equity Line agreement, the Company
is obligated to sell at least $5.0 million of common stock to Societe General or
pay a penalty equal to 6% of any portion of such $5.0 million minimum obligation
which is not sold by the Company. The Company cannot sell more than 6,812,400
shares of common stock pursuant to the Equity Lien without fist obtaining
stockholder approval.

     The Company also is obligated in connection with the Equity Line to file a
registration statement registering the sale by Societe Generale of any shares
sold by the Company. If this registration statement is not declared effective
within 180 days of June 28, 2001, then Societe Generale shall have the right to
terminate the Equity Line, in which event the Company shall be obligated to pay
the penalty described above.

     The Company's ability to sell shares of its common stock under the Equity
Line is subject to a number of conditions set forth in the Equity Line
agreement, including, but not limited to, (i) the requirement that the price per
share of the Company's common stock remain higher than a specified minimum price
during the five trading days following the Company's election to draw upon the
Equity Line, (ii) the absence of any material adverse change in the business or
financial condition of the Company, (iii) the continued effectiveness of the
registration statement covering the sale of shares by Societe Generale and the
absence of any material omission or misstatement from the then current
prospectus relating to the registration statement and (iv) the delivery of
certain letters and reports from the Company's counsel and accountants.

     The Equity Line prohibits Societe Generale from selling shares of the
Company's Common Stock during the term of the Equity Line other than a number of
shares equals to the amount of any draw down by the Company divided by 94% of
the minimum selling price specified in the Company's draw down election.

                                       F-17

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  STOCK OPTION PLANS

     At March 31, 2001, shares of common stock were reserved for future
issuances as follows:

                                                           
1999 Employee Stock Purchase Plan...........................    249,059
1993 Stock Option Plan:
  Outstanding options and rights............................  4,807,060
  Reserved for future grants................................    732,615
2000 Non-Statutory Stock Option Plan:
  Outstanding options and rights............................  2,440,862
  Reserved for future grants................................    859,096
1999 Director Stock Option Plan:
  Outstanding options and rights............................     33,020
  Reserved for future grants................................     37,500
SmartSAN 1998 Equity Incentive Plan:
  Outstanding options and rights............................     33,350
  Reserved for future grants................................         --
                                                              ---------
                                                              9,192,562
                                                              =========



  1999 EMPLOYEE STOCK PURCHASE PLAN

     In May 1999, the Board of Directors approved the adoption of the Company's
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock
Purchase Plan allows eligible employees to purchase shares of common stock
through payroll deductions at 85% of the fair market value of the common stock.
A total of 150,000 shares of common stock were reserved for issuance under the
Stock Purchase Plan. The number of shares reserved for issuance under the Stock
Purchase Plan is subject to an annual increase to be added on the first day of
the Company's fiscal year, beginning in fiscal 2001, equal to the lesser of (a)
250,000 shares, (b) 0.5 % of the outstanding shares on such date, or (c) a
lesser amount determined by the Board of Directors. Accordingly, in April 2001
and April 2000, an additional 250,000 shares, respectively, were added to the
Stock Purchase Plan. During fiscal 2001 and 2000, 112,044 and 38,897 shares,
respectively, were issued under the Stock Purchase Plan.

  1993 STOCK OPTION PLAN

     In May 1999, the Board of Directors approved and adopted an Amended and
Restated 1993 Stock Option Plan (the "1993 Plan"). The maximum number of shares
available for sale under the 1993 Plan was increased to 8,180,000. Beginning in
the year ended March 31, 2001, the number of shares reserved for issuance under
the Plan is subject to an annual increase to be added on the first day of the
Company's fiscal year, equal to the lesser of (a) 1,500,000 shares, (b) 0.5% of
the outstanding shares on such date, or (c) a lesser amount determined by the
Board of Directors. Accordingly on April 1, 2001 and April 1, 2000, 1,418,791
and 1,342,092 additional shares, respectively, were added to the 1993 plan.
Additionally in April 2000, the Board of Directors authorized an increase in the
number of shares reserved for issuance under the amended Plan by 1,400,000
shares and in October 2000, the stockholders of the Company approved this
increase.

  2000 NON-STATUTORY STOCK OPTION PLAN

     In June 2000, the Board of Directors approved and adopted the 2000
Non-Statutory Stock Option Plan (the "NSO Plan"). The number of shares reserved
for issuance under this Plan was 1,600,000. In August

                                       F-18

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2000 and October 2000, the Board approved an additional 700,000 and 1,000,000
shares, respectively, for issuance under the NSO Plan.

  1999 DIRECTOR STOCK OPTION PLAN

     In May 1999, the Board of Directors approved the adoption of the 1999
Director Stock Option Plan (the "Director Plan"). The Director Plan was approved
by the stockholders in June, 1999. The Director Plan provides for the automatic
grant of an option to purchase 5,000 shares of common stock to each non-employee
director on the later of the date of adoption of the Director Plan or the date
on which such person first becomes a director (the "Initial Grant"). After the
Initial Grant, the non-employee director will receive an automatic annual grant
of 2,500 shares of common stock. All shares granted under the Director Plan are
100% vested at the grant date and expire upon the earlier of three years after
the date of grant, or the resignation of the director from the Board of
Directors. During the year ended March 31, 2000, a total of 50,000 shares of
common stock were reserved for issuance under the Director Plan. The number of
shares reserved for issuance under the Director Plan is subject to annual
increases on the first day of the Company's fiscal year, beginning in 2001,
sufficient to bring the number of shares available for future issuance to 50,000
shares. Accordingly, in April 2001 and April 2000, an additional 12,500 and
25,000 shares, respectively, were allocated to the Director Plan.

  SMARTSAN 1998 STOCK OPTION PLAN

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

  STOCK OPTIONS

     Gadzoox, under the various stock option plans (the "Plans") discussed
above, grants stock options for the shares of common stock to employees,
directors and consultants. In accordance with the Plans, all incentive and
non-statutory stock option grants must be at prices of at least 100% to 85%,
respectively, of the fair value of the stock on the date of the grant, as
determined by the Board of Directors. The options are exercisable as determined
by the Board of Directors. Generally, stock options vest ratably over a
four-year period except for options granted to new employees which vest 25% on
the first anniversary of the grant date and vest ratably over the remaining
three years. The options expire upon the earlier of ten years from the date of
grant or thirty days following termination of employment. Stock purchase rights
granted under the Plan must be exercised within ninety days from the date of
grant. Shares purchased pursuant to the grant of a stock purchase right shall be
subject to repurchase, and the repurchase option shall lapse at a minimum rate
of 20% per year.

                                       F-19

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of transactions under the Plans is as follows:



                                                                       OUTSTANDING OPTIONS AND RIGHTS
                                                                       -------------------------------
                                                            SHARES                       WEIGHTED-
                                                          AVAILABLE       NUMBER          AVERAGE
                                                          FOR GRANT     OF SHARES      EXERCISE PRICE
                                                          ----------   ------------   ----------------
                                                                             
Balance at March 31, 1998...............................     457,627     4,224,945         $ 0.423
  Authorized............................................   1,100,000            --              --
  Granted...............................................  (1,119,400)    1,119,400         $ 2.759
  Cancelled.............................................     303,251      (303,251)        $ 1.270
  Exercised.............................................          --      (511,402)        $ 0.235
                                                          ----------    ----------         -------
Balance at March 31, 1999...............................     741,478     4,529,692         $ 0.969
  Authorized............................................     550,000            --              --
  Granted...............................................  (1,403,050)    1,403,050         $33.145
  Cancelled.............................................     163,420      (163,420)        $10.798
  Exercised.............................................          --    (1,810,439)           0.64
                                                          ----------    ----------         -------
Balance at March 31, 2000...............................      51,848     3,958,883         $11.902
  Authorized............................................   6,175,468            --              --
  Granted...............................................  (6,804,326)    6,804,326         $ 9.542
  Cancelled.............................................   2,266,055    (2,266,055)        $15.436
  Exercised.............................................          --    (1,182,861)        $ 0.877
  Expired...............................................     (59,834)           --              --
                                                          ----------    ----------         -------
Balance at March 31, 2001...............................   1,629,211     7,314,293         $10.467
                                                          ==========    ==========         =======


     The following table summarizes the stock options outstanding and
exercisable at March 31, 2001:



                                 OPTIONS OUTSTANDING      OPTIONS EXERCISABLE
                                ----------------------   ---------------------
                                 WEIGHTED-
                                  AVERAGE    WEIGHTED-               WEIGHTED-
                                 REMAINING    AVERAGE                 AVERAGE
    RANGE OF                    CONTRACTUAL  EXERCISE                EXERCISE
 EXERCISE PRICE      NUMBER        LIFE        PRICE      NUMBER       PRICE
-----------------   ---------   -----------  ---------   ---------   ---------
                                (IN YEARS)
                                                      
$ 0.075 - $ 1.875     803,310      7.43       $ 0.883      438,634    $ 0.357
$ 2.000 - $ 4.000     790,666      8.07       $ 2.907      355,807    $ 2.701
$           4.063      76,000      9.90       $ 4.063           --    $    --
$           4.094     911,088      9.57       $ 4.094      101,256    $ 4.094
$           4.125   1,184,000      9.59       $ 4.125       95,896    $ 4.125
$ 4.250 - $ 7.938     863,104      9.48       $ 7.314       83,569    $ 7.816
$ 8.000 - $ 9.500     311,162      8.00       $ 8.840      101,957    $ 9.000
$          11.813   1,232,370      9.29       $11.813      171,780    $11.813
$12.563 - $42.000     958,811      8.96       $32.182      209,836    $33.768
$ 43.063 - $60.75     183,782      8.72       $54.260       76,475    $52.828
                    ---------                            ---------
$  0.075 - $60.75   7,314,293      8.96       $10.864    1,635,210    $10.296
                    =========                            =========


                                       F-20

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  VALUATION OF STOCK OPTIONS

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



                                                              YEAR ENDED MARCH 31,
                                                      -------------------------------------
                                                         2001          2000         1999
                                                      -----------   ----------   ----------
                                                      (IN THOUSANDS EXCEPT LOSS PER SHARE)
                                                                        
Net loss:
  As reported.......................................   $ (92,843)    $(10,361)    $(15,932)
  Pro forma.........................................   $(108,471)    $(14,219)    $(16,129)
Basic net loss per share:
  As reported.......................................   $   (3.32)    $  (0.53)    $  (3.33)
  Pro forma.........................................   $   (3.87)    $  (0.72)    $  (3.37)


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



                                                      YEAR ENDED MARCH 31,
                                          ---------------------------------------------
                                              2001            2000            1999
                                          -------------   -------------   -------------
                                                                 
Volatility..............................      147%           214.5%           0.01%
Risk-free interest rate.................  4.57% - 6.60%   5.27% - 6.66%   4.56% - 6.73%
Dividend yield..........................       --              --              --
Expected lives..........................       4.0            4.18             4.0
Weighted average fair value.............      $9.56          $10.63           $0.49


     The pro forma effect on net loss for the years ended March 31, 2001, 2000,
and 1999 are not representative of the pro forma effect on net loss in future
years for the following reasons: (i) the number of future shares to be issued
under these plans is unknown, and (ii) the assumptions do not take into
consideration pro forma compensation expense related to grants made prior to
January 1, 1995.

  DEFERRED COMPENSATION

     In connection with the grant of certain stock options to employees during
the year ended March 31, 1999, the Company recorded deferred compensation within
stockholders' equity of approximately $3.0 million, representing the difference
between the deemed value of the common stock for accounting purposes and the
option exercise price of these options at the date of grant. The Company
recorded amortization of deferred compensation of $0.6 million, and $1.3
million, and $0.5 million during the years ended March 31, 2001, 2000, and 1999,
respectively. At March 31, 2001, the remaining deferred compensation of
approximately $0.4 million will be amortized as follows: $0.3 million and $0.1
million for the years ended March 31, 2002 and 2003, respectively. The
amortization expense relates to options awarded to employees in all operating
expense categories. The amortization of deferred compensation has not been
separately allocated to these categories. The amount of deferred compensation
expense to be recorded in future periods could decrease if forfeiture for any
accrued but unvested compensation arises from the early termination of an option
holder's service.

                                       F-21

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8.  SALES TO SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION

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

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

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



                                                                  YEAR ENDED
                                                                  MARCH 31,
                                                              ------------------
                                                              2001   2000   1999
                                                              ----   ----   ----
                                                                   
Customer A..................................................   42%    29%    42%
Customer B..................................................   33%    17%    15%
Customer C..................................................   --     33%    10%
Customer D..................................................   --     12%    --


     Revenues by geographic area are as follows.



                                                                  YEAR ENDED
                                                                  MARCH 31,
                                                              ------------------
                                                              2001   2000   1999
                                                              ----   ----   ----
                                                                   
North America (principally the United States)...............   72%    70%    64%
Germany.....................................................   16%    12%    12%
Europe (excluding Germany)..................................    9%     7%     5%
Asia........................................................    3%    11%    19%
                                                              ---    ---    ---
     Total..................................................  100%   100%   100%
                                                              ===    ===    ===


     Identifiable assets located outside the United States were not material at
March 31, 2001, 2000, and 1999.

9.  RESTRUCTURING AND IMPAIRMENT CHARGES

     In the fourth quarter ended March 31, 2001, the Company recorded
restructuring expenses totaling approximately $2.5 million, and an additional
$17.8 million relating to the impairment of long lived assets. These charges
reflect the Company's plan, announced in the fourth quarter, to focus more
resources on the development of open-fabric switch technology products, and to
streamline operations and reduce overall costs. This plan primarily resulted in
the termination and abandonment of the Axxess and Geminix product lines,
reduction of head count, and the implementation of a plan to consolidate all San
Jose, California operations into one building. The Company's research and
development facility in southern California will remain in operation.

                                       F-22

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In March 2001, the Company made the decision to terminate and abandon the
Axxess product line. As a result, the Company incurred approximately $0.3
million of severance costs relating to the termination of 27 employees, and
incurred a further write down of approximately $1.5 million of other assets
associated with the Axxess product line, including property and equipment with
no alternate use and licenses related to software used in the Axxess product
line. This impairment charge included a $1.0 million prepaid royalty fee
relating to a software license agreement that the Company and DataCore Software
Corporation ("DataCore") entered into in 1999. Under the terms of this license
agreement, DataCore and the Company had agreed to work collaboratively to
develop products to address both the hardware and software needs of storage area
networks. The Company intended to integrate DataCore's software with the Axxess
hardware and software products that were under development at the time. Pursuant
to the software license agreement, the Company paid DataCore an upfront loyalty
fee of $1 million during 1999 and 2000. In connection with the termination of
the Axxess product line, the Company decided to write-off the entire $1.0
million prepaid royalty fee. In addition, the Company expensed an additional
$0.7 million relating to future cash outlays that are expected to be incurred
from exiting lease agreements for office space that will no longer be used as a
result of the restructuring and consolidation into its one main facility. The
Company anticipates payment of this amount in six equal monthly payments
commencing April 2001.

     The Geminix product line was acquired with the acquisition of SmartSAN (see
Note 6). With the termination and abandonment of the Geminix product line, the
Company was not going to generate any future cash flows and had no future
alternative use for the intangible assets and other assets acquired that related
to the Geminix product line. Based on a value of $0 assigned by the Company to
the SmartSAN assets, using the discounted cash flow method, the Company expensed
the unamortized acquired intangible assets of SmartSAN, totaling $16.8 million,
in March 2001.

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

     The following table summarizes the Company's restructuring activity for the
year ended March 31, 2001 (in thousands):



                                                      SEVERANCE       EXCESS
                                                     AND BENEFITS   FACILITIES   OTHER ASSETS    TOTAL
                                                     ------------   ----------   ------------   -------
                                                                                    
Restructuring expense..............................     $ 297          $687        $ 1,529      $ 2,513
Cash charge........................................      (297)           --             --         (297)
Non-cash charge....................................        --            --         (1,529)      (1,529)
                                                        -----          ----        -------      -------
Reserve balance, March 31, 2001....................     $  --          $687        $    --      $   687
                                                        =====          ====        =======      =======


                                       F-23

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10.  LEASE AGREEMENT

     As part of the restructuring of the Company, management has determined that
previously leased office space currently under construction will not be utilized
by the Company. In March 2001, management reached an incentive agreement with
the lessor, whereby in exchange for the lessor's efforts to find a suitable
replacement tenant for the office space, the Company issued a warrant to
purchase 50,000 shares of the Company's common stock at $3.00 per share. The
warrant is immediately exercisable, fully vested and nonforfeitable and expires
three years from the date of grant. Management has recorded a prepaid expense of
$113,000 related to the warrant, which will be amortized over the lease period
or expensed in full upon release from the lease agreement. The prepaid expense
amount was determined using the Black-Scholes option pricing model and the
following assumptions: expected life of three years, volatility of 147%,
dividend yield of 0%, and a risk-free interest rate of 4.45%. The Company will
issue an additional warrant to purchase 50,000 shares of common stock to the
lessor that will become exercisable upon the landlord meeting certain timetable
targets to find a new tenant. The Company will value the warrant at the time it
becomes exercisable.

11.  RELATED PARTY TRANSACTIONS

     In January 1998, a Gadzoox executive entered into a loan agreement (the
"Loan") and borrowed approximately $300,000 from seven individuals who are
employed by a key supplier (the "Lenders"). The Loan is collateralized by stock
held by the Gadzoox executive. Additionally, the Gadzoox executive has issued to
the Lenders options to purchase additional shares of the executive's Gadzoox
stock (the "Private Options"). The Private Options were exercised by the Lenders
in July 2000.

     At March 31, 2001, the Company held two notes receivable from two executive
officers totaling $535,000. At March 31, 2000, the Company held no notes
receivable. Loans were extended to these individuals to assists them in their
housing costs in California. The notes bear interest at rates of 6.0% and 6.3%,
and the principal amounts due, plus interest, are forgiven over two and four
year periods, subject to certain conditions included in the terms of the notes.

12.  INCOME TAXES

     Due to the Company's loss position, there was no provision for income taxes
for the years ended March 31, 2001, 2000 and 1999.

     The components of the net deferred tax asset at March 31, 2001 and 2000
were as follows (in thousands):



                                                                2001       2000
                                                              --------   --------
                                                                   
Net operating loss carryforwards............................  $ 39,433   $ 13,207
Cumulative book to tax differences..........................     7,475      3,135
Tax credit carryforwards....................................     5,911      2,994
                                                              --------   --------
                                                                52,819     19,336
Valuation allowance.........................................   (52,819)   (19,336)
                                                              --------   --------
                                                              $     --   $     --
                                                              ========   ========


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

     As of March 31, 2001 Gadzoox had net cumulative operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $108.3 million and $26.9 million, respectively. The Company also
had Federal and state research and development tax credit carryforwards of
approximately $3.1 million and $2.8 million, respectively. The net cumulative
operating loss and credit carryforwards will expire at various

                                       F-24

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

dates beginning in the years 2001 through 2015, if not utilized. Utilization of
net operating losses and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.

13.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following tables set forth the unaudited consolidated statement of
operations data for each of the eight quarterly periods ended March 31, 2001.
The data for the four quarterly periods for the year ended March 31, 2000 are
under the historical shipment method of recognizing revenue to distributors, and
the data for the four quarterly periods for the year ended March 31, 2001 are
under the revised revenue recognition policy for product shipments to
distributors. The unaudited consolidated information has been prepared on a
basis consistent with the audited consolidated financial statements, reflecting
all normal recurring adjustments that are considered necessary for a fair
presentation of the financial position. The quarterly information is as follows
(in thousands):



                                                                 QUARTER ENDED (UNAUDITED)
                                     ---------------------------------------------------------------------------------
                                     JUN 30,   SEP 30,   DEC 31,   MAR 31,   JUN 30,    SEP 30,    DEC 31,    MAR 31,
                                      1999      1999      1999      2000       2000       2000       2000       2001
                                     -------   -------   -------   -------   --------   --------   --------   --------
                                                                                      
CONSOLIDATED STATEMENT OF
  OPERATIONS
Net sales..........................  $ 9,211   $11,081   $12,561   $15,079   $ 10,858   $  8,051   $  7,937   $  6,444
Cost of revenues...................    5,414     6,325     6,903     7,486      5,461     13,702      4,490      8,478
                                     -------   -------   -------   -------   --------   --------   --------   --------
Gross profit (loss)................    3,797     4,756     5,658     7,593      5,397     (5,651)     3,447     (2,034)
                                     -------   -------   -------   -------   --------   --------   --------   --------
Operating expenses:
  Research and development.........    3,917     4,540     4,461     5,303      5,519      8,641      5,836      9,372
  Sales and marketing..............    1,888     1,914     2,742     5,094      5,727      5,989      6,497      5,769
  General and administrative.......      764       866       959     1,698      1,484      2,344      1,885      2,279
  In-process research and
    development....................       --        --        --        --      4,900         --         --         --
  Amortization of acquired
    intangible assets..............       --        --        --        --      1,048      1,048      1,048        698
  Impairment of long lived
    assets.........................       --        --        --        --         --         --         --     17,829
  Restructuring and other
    expenses.......................       --        --        --        --         --         --         --      2,513
  Amortization of deferred
    compensation...................      322       321       321       321        168        169        163        108
                                     -------   -------   -------   -------   --------   --------   --------   --------
Total operating expenses...........    6,891     7,641     8,483    12,416     18,846     18,191     15,429     38,568
                                     -------   -------   -------   -------   --------   --------   --------   --------
Loss from operations...............   (3,094)   (2,885)   (2,825)   (4,823)   (13,449)   (23,842)   (11,982)   (40,602)
Interest and other income
  (expense), net...................     (142)      936     1,027     1,446        885        710        521        216
                                     -------   -------   -------   -------   --------   --------   --------   --------
Loss before cumulative effect of
  change in accounting principle...   (3,236)   (1,949)   (1,798)   (3,377)   (12,564)   (23,132)   (11,461)   (40,386)
Cumulative effect of change in
  accounting principle.............       --        --        --        --     (5,300)        --         --         --
                                     -------   -------   -------   -------   --------   --------   --------   --------
  Net loss.........................  $(3,236)  $(1,949)  $(1,798)  $(3,377)  $(17,864)  $(23,132)  $(11,461)  $(40,386)
                                     =======   =======   =======   =======   ========   ========   ========   ========
  Net loss per basic share before
    cumulative effect of change in
    accounting principle...........  $ (0.58)  $ (0.09)  $ (0.07)  $ (0.13)  $  (0.46)  $  (0.83)  $  (0.41)  $  (1.42)
Cumulative effect of change in
  accounting principle.............       --        --        --        --   $  (0.20)        --         --         --
                                     -------   -------   -------   -------   --------   --------   --------   --------
Net loss per basic share...........  $ (0.58)  $ (0.09)  $ (0.07)  $ (0.13)  $  (0.66)  $  (0.83)  $  (0.41)  $  (1.42)
                                     =======   =======   =======   =======   ========   ========   ========   ========
Shares used in computing loss per
  share............................    5,626    21,199    25,614    26,441     27,125     27,782     27,889     28,411


                                       F-25

                             GADZOOX NETWORKS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The following information below has been included to demonstrate the effect
on the first three quarters of the year ended March 31, 2001 as if the change in
accounting principle had been applied as of the beginning of the year ended
March 31, 2001, and to reconcile the differences with amounts previously
reported for those quarterly periods (in thousands):



                                                                   QUARTER ENDED
                                                     -----------------------------------------
                                                     JUN 30,    SEP 30,    DEC 31,    MAR 31,
                                                       2000       2000       2000       2001
                                                     --------   --------   --------   --------
                                                                          
Net revenues
  As previously reported...........................  $  9,002   $  7,219   $  7,220   $  6,444
  Effect of change in accounting principle.........     1,856        832        717         --
                                                     --------   --------   --------   --------
  As restated in first three quarters and reported
     in fourth quarter.............................  $ 10,858   $  8,051   $  7,937   $  6,444
                                                     --------   --------   --------   --------
Gross profit (loss)
  As previously reported...........................  $  3,779   $ (6,397)  $  2,900   $ (2,034)
  Effect of change in accounting principle.........     1,618        746        547         --
                                                     --------   --------   --------   --------
  As restated in first three quarters and reported
     in fourth quarter.............................  $  5,397   $ (5,651)  $  3,447   $ (2,034)
                                                     ========   ========   ========   ========
Net loss
  As previously reported...........................   (14,182)   (23,878)   (12,008)   (40,386)
  Effect of change in accounting principle.........     1,618        746        547         --
                                                     --------   --------   --------   --------
  Cumulative effect of change in accounting
     principle.....................................    (5,300)        --         --         --
  As restated in first three quarters and reported
     in fourth quarter.............................  $(17,864)  $(23,132)  $(11,461)  $(40,386)
                                                     ========   ========   ========   ========
Net income (loss) per basic share:
Net income (loss) per share before cumulative
  effect of change in accounting principle as
  previously reported..............................  $  (0.52)  $  (0.86)  $  (0.43)  $  (1.42)
  Effect of change in accounting principle.........      0.06       0.03       0.02         --
                                                     --------   --------   --------   --------
  As restated in first three quarters and reported
     in fourth quarter.............................     (0.46)     (0.83)     (0.41)     (1.42)
Cumulative effect of change in accounting
  principle........................................     (0.20)        --         --         --
                                                     --------   --------   --------   --------
Net income (loss) after cumulative effect of change
  in accounting principle..........................  $  (0.66)  $  (0.83)  $  (0.41)  $  (1.42)
                                                     ========   ========   ========   ========
Shares used in computing income (loss) per share:
  Basic............................................    27,125     27,782     27,889     28,411


                                       F-26


                             GADZOOX NETWORKS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS



                                            BALANCE AT
                                            BEGINNING    CHARGED TO COSTS                 BALANCE AT
DESCRIPTION                                 OF PERIOD      AND EXPENSES     DEDUCTIONS   END OF PERIOD
-----------                                 ----------   ----------------   ----------   -------------
                                                                             
Year ended March 31, 1999
  Allowance for returns and doubtful
     accounts.............................   $ 65,000      $    88,535      $    3,535    $  150,000
Year ended March 31, 2000
  Allowance for returns and doubtful
     accounts.............................   $150,000      $   463,667      $   13,667    $  600,000
Year ended March 31, 2001
  Allowance for returns and doubtful
     accounts.............................   $600,000      $   172,000      $  422,000    $  350,000
  Restructuring reserve...................   $     --      $ 2,513,000      $1,826,000    $  687,000
Inventory:
Year ended March 31, 1999
  Inventory reserves......................   $150,000      $    73,000      $   73,000    $  150,000
Year ended March, 31, 2000
  Inventory reserves......................   $150,000      $   150,000      $  150,000    $  150,000
Year ended March 31, 2001
  Inventory reserves......................   $150,000      $10,600,000      $2,485,000    $8,265,000


                                       F-27


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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information regarding our directors is incorporated by reference from
"Election of Directors -- Directors and Nominees" in our Proxy Statement for our
2001 Annual Meeting of Stockholders. The required information concerning
executive officers of the Company is contained in the section entitled
"Executive Officers of the Registrant" in Part I of this Form 10-K.

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's Executive Officers and Directors and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "Commission") and the
National Association of Securities Dealers, Inc. Executive Officers, Directors
and greater than ten percent (10%) stockholders are required by Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file. A late report on Form 4 was filed by Wayne Rickard on May 8, 2001 with
respect to his sales of shares of common stock on November 14, 2000 and November
15, 2000. A late report on Form 4 was filed by William Hubbard on May 8, 2001
with respect to his stock options exercises on April 11, 2000 and September 26,
2000. A report on Form 5 was not filed by Christine Munson with respect to her
grants of options on July 14, 2000 and July 24, 2000. Based solely on its review
of the copies of such forms received by it, or written representations from
certain reporting persons, the Company believes that, other than the exceptions
described in this paragraph, during fiscal 2001, all executive officers and
directors of the Company complied with all applicable filing requirements.

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                        52


                                    PART IV

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

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

     (1) Financial Statements:

       Report of Independent Public Accountants
       Balance Sheets as of March 31, 2001 and 2000
       Statements of Operations for the years ended March 31, 2001, 2000 and
       1999
       Statements of Stockholders' Equity for the years ended March 31, 2001,
       2000 and 1999
       Statements of Cash Flows for the years ended March 31, 2001, 2000 and
       1999
       Notes to Financial Statements

     (2) Financial Statement Schedules:

     The following financial statement schedule of Gadzoox Networks, Inc. for
the years ended March 31, 2001, March 31, 2000 and March 31, 1999 is filed as
part of this Annual Report and should be read in conjunction with the Financial
Statements of Gadzoox Networks, Inc.

        Schedule II -- Valuation and Qualifying Accounts

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

     (3) Exhibits:



NUMBER                        DESCRIPTION OF DOCUMENT
------                        -----------------------
         
 3.1(a)     Amended and Restated Certificate of Incorporation
 3.2(a)     Amended and Restated Bylaws
 4.1(a)     Specimen Common Stock Certificate
 4.2(f)     Registration Rights Agreement between Gadzoox and Societe
            General dated as of June 28, 2001.
 4.3(f)     Registration Rights Agreement between Gadzoox and purchasers
            of Gadzoox common stock dated May 25, 2001
 4.4(g)     Registration Rights Agreement between Gadzoox and purchasers
            of Gadzoox common stock dated August 30, 2001.
10.1(a)     Form of Indemnification Agreement between Gadzoox and each
            of its directors and officers
10.2(a)     Amended and Restated 1993 Stock Plan and form of agreements
            thereunder
10.3(a)     1999 Employee Stock Purchase Plan and form of agreements
            thereunder
10.4(a)     1999 Director Option Plan and form of agreement thereunder
10.5(a)     Agreement for electronic manufacturing services between
            Gadzoox and Sanmina Corporation dated December 29, 1998
10.6(a)     Convertible Subordinated Promissory Note, dated October 12,
            1998, made by Gadzoox and payable to Seagate Technology,
            Inc.
10.7(a)     Change of Control Agreement between Gadzoox and K. William
            Sickler, as amended
10.8(a)     Change of Control Agreement between Gadzoox and Kent
            Bridges.
10.9(a)     Restricted Stock Purchase Agreement between Gadzoox and K.
            William Sickler
10.10(a)    Compaq Computer Corporation Purchase Agreement -- JIT
            Program, entered into as of June 13, 1997, by Compaq
            Computer Corporation and Gadzoox
10.11(a)    First Amended and Restated Registration and Information
            Rights Agreement, dated as of October 12, 1998
10.12(a)    Warrant to purchase shares of Series F Preferred Stock of
            the Gadzoox issued to Comdisco, Inc.
10.13(a)    Warrant to purchase shares of Series G Preferred Stock of
            Gadzoox issued to Comdisco, Inc.


                                        53




NUMBER                        DESCRIPTION OF DOCUMENT
------                        -----------------------
         
10.14(a)    First Amended and Restated Series F, G and H Preferred
            Stockholders' Agreement, dated as of October 12, 1998
10.15(b)    Agreement and Plan of Reorganization between Gadzoox,
            Gadzoox Acquisition Corporation and SmartSAN Systems, Inc.
            dated as of March 2, 2000
10.16(c)    Lease Amendment #2 between Gadzoox and Mission West
            Properties, L.P. II dated as of April 21, 2000
10.17(c)    Lease Agreement and Lease Amendment #1 between Gadzoox and
            Mission West Properties, L.P. II dated August 13, 1998 and
            December 31, 1998, respectively
10.18(d)    Employment, Change of Control and Severance Agreement
            between Gadzoox and Michael Parides dated as of September 1,
            2000
10.19(d)    Employment, Change of Control and Severance Agreement
            between Gadzoox and Ronald G. von Trapp dated as of
            September 29, 2000
10.20(e)    Change of Control Agreement between Gadzoox and Wayne
            Rickard effective as of October 20, 2000
10.21(e)    Change of Control Agreement between Gadzoox and Clark Foy
            effective as of October 20, 2000
10.22(e)    Change of Control Agreement between Gadzoox and Steve Dalton
            effective as of October 20, 2000
10.23(f)    Office Lease between Gadzoox and Irvine Oaks Realty Holding
            Co., Inc. dated as of October 1999
10.24(f)    Loan Agreement between Gadzoox, Clark Foy and Catherine Foy
            dated as of June 26, 2000
10.25(f)    First Amendment to Office Lease between Gadzoox and Oaks
            Realty Holding Co., Inc. dated as of June 30, 2000
10.26(f)    Second Amendment to Office Lease between Gadzoox and Oaks
            Realty Holding Co., Inc. dated as of September 18, 2000
10.27(f)    Change of Control Agreement between Gadzoox and Kristin
            Strout dated as of February 20, 2001
10.28(f)    Lease Amendment Agreement #3 between Gadzoox and Mission
            West Properties, L.P. II dated as of March 23, 2001
10.29(f)    Change of Control Agreement between Gadzoox and Ed Turner
            dated as of March 26, 2001
10.30(f)    Amended and Restated Equity Line Financing Agreement between
            Gadzoox and Societe Generale dated as of October 26, 2001
10.31(f)    Letter Agreement between Gadzoox and Shoreline Pacific
            Institutional Finance dated May 2, 2001
10.32(f)    Terms of Engagement between LSI Logic Corporation and
            Gadzoox dated December 20, 2000
18.1(f)     Letter regarding change in accounting principles
23.1        Consent of Arthur Andersen LLP, Independent Public
            Accountants
24.1(f)     Power of Attorney


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

(a)  Incorporated by reference from Gadzoox's Registration Statement on Form S-1
     (Reg. No. 333-78029), as amended.

(b)  Incorporated by reference from Gadzoox's Current Report on Form 8-K filed
     on March 16, 2000.

(c)  Incorporated by reference from Gadzoox's Annual Report on Form 10-K filed
     on June 29, 2000.

(d)  Incorporated by reference from Gadzoox's Quarterly Report on Form 10-Q/A
     for the quarter ended September 30, 2000 filed on March 30, 2001.

(e)  Incorporated by reference from Gadzoox's Quarterly Report on Form 10Q/A for
     the quarter ended December 31, 2000 filed on March 30, 2001.

(f)  Previously filed.

(g)  Incorporated by reference from Gadzoox's Current Report on Form 8-K filed
     on September 6, 2001.

(b) Reports on Form 8-K

     None.

                                        54


                                   SIGNATURES

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

                                          GADZOOX NETWORKS, INC.

                                          By:      /s/ MICHAEL PARIDES
                                            ------------------------------------
                                                      Michael Parides
                                               President and Chief Executive
                                                           Officer
                                               (Principal Executive Officer)

Dated: November 7, 2001

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



                    NAME                                     TITLE                       DATE
                    ----                                     -----                       ----
                                                                             



             /s/ MICHAEL PARIDES                   President, Chief Executive      November 7, 2001
---------------------------------------------         Officer and Director
               Michael Parides                   (Principal Executive Officer)




            /s/ DAVID P. EICHLER*                 Vice President, Finance and      November 7, 2001
---------------------------------------------       Chief Financial Officer
              David P. Eichler                      (Principal Financial and
                                                      Accounting Officer)




              /s/ MILTON CHANG*                             Director               November 7, 2001
---------------------------------------------
                Milton Chang




             /s/ ROBERT KUHLING*                            Director               November 7, 2001
---------------------------------------------
               Robert Kuhling




              /s/ STEVEN WEST*                              Director               November 7, 2001
---------------------------------------------
                 Steven West




             /s/ SYLVIA SUMMERS*                            Director               November 7, 2001
---------------------------------------------
               Sylvia Summers




          *By: /s/ MICHAEL PARIDES                                                 November 7, 2001
 ------------------------------------------
               Michael Parides
              Attorney-in-fact


                                        55


                                 EXHIBIT INDEX



NUMBER
------
         
 3.1(a)     Amended and Restated Certificate of Incorporation
 3.2(a)     Amended and Restated Bylaws
 4.1(a)     Specimen Common Stock Certificate
 4.2(f)     Registration Rights Agreement between Gadzoox and Societe
            General dated as of June 28, 2001.
 4.3(f)     Registration Rights Agreement between Gadzoox and purchasers
            of Gadzoox common stock dated May 25, 2001
 4.4(g)     Registration Rights Agreement between Gadzoox and purchasers
            of Gadzoox common stock dated August 30, 2001.
10.1(a)     Form of Indemnification Agreement between Gadzoox and each
            of its directors and officers
10.2(a)     Amended and Restated 1993 Stock Plan and form of agreements
            thereunder
10.3(a)     1999 Employee Stock Purchase Plan and form of agreements
            thereunder
10.4(a)     1999 Director Option Plan and form of agreement thereunder
10.5(a)     Agreement for electronic manufacturing services between
            Gadzoox and Sanmina Corporation dated December 29, 1998
10.6(a)     Convertible Subordinated Promissory Note, dated October 12,
            1998, made by Gadzoox and payable to Seagate Technology,
            Inc.
10.7(a)     Change of Control Agreement between Gadzoox and K. William
            Sickler, as amended
10.8(a)     Change of Control Agreement between Gadzoox and Kent
            Bridges.
10.9(a)     Restricted Stock Purchase Agreement between Gadzoox and K.
            William Sickler
10.10(a)    Compaq Computer Corporation Purchase Agreement -- JIT
            Program, entered into as of June 13, 1997, by Compaq
            Computer Corporation and Gadzoox
10.11(a)    First Amended and Restated Registration and Information
            Rights Agreement, dated as of October 12, 1998
10.12(a)    Warrant to purchase shares of Series F Preferred Stock of
            the Gadzoox issued to Comdisco, Inc.
10.13(a)    Warrant to purchase shares of Series G Preferred Stock of
            Gadzoox issued to Comdisco, Inc.
10.14(a)    First Amended and Restated Series F, G and H Preferred
            Stockholders' Agreement, dated as of October 12, 1998
10.15(b)    Agreement and Plan of Reorganization between Gadzoox,
            Gadzoox Acquisition Corporation and SmartSAN Systems, Inc.
            dated as of March 2, 2000
10.16(c)    Lease Amendment #2 between Gadzoox and Mission West
            Properties, L.P. II dated as of April 21, 2000
10.17(c)    Lease Agreement and Lease Amendment #1 between Gadzoox and
            Mission West Properties, L.P. II dated August 13, 1998 and
            December 31, 1998, respectively
10.18(d)    Employment, Change of Control and Severance Agreement
            between Gadzoox and Michael Parides dated as of September 1,
            2000
10.19(d)    Employment, Change of Control and Severance Agreement
            between Gadzoox and Ronald G. von Trapp dated as of
            September 29, 2000
10.20(e)    Change of Control Agreement between Gadzoox and Wayne
            Rickard effective as of October 20, 2000
10.21(e)    Change of Control Agreement between Gadzoox and Clark Foy
            effective as of October 20, 2000
10.22(e)    Change of Control Agreement between Gadzoox and Steve Dalton
            effective as of October 20, 2000
10.23(f)    Office Lease between Gadzoox and Irvine Oaks Realty Holding
            Co., Inc. dated as of October 1999
10.24(f)    Loan Agreement between Gadzoox, Clark Foy and Catherine Foy
            dated as of June 26, 2000





 .25(f)10    First Amendment to Office Lease between Gadzoox and Oaks Realty Holding Co., Inc. dated as
            of June 30, 2000
         
10.26(f)    Second Amendment to Office Lease between Gadzoox and Oaks Realty Holding Co., Inc. dated
            as of September 18, 2000
10.27(f)    Change of Control Agreement between Gadzoox and Kristin Strout dated as of February 20,
            2001
10.28(f)    Lease Amendment Agreement #3 between Gadzoox and Mission West Properties, L.P. II dated as
            of March 23, 2001
10.29(f)    Change of Control Agreement between Gadzoox and Ed Turner dated as of March 26, 2001
10.30(f)    Amended and Restated Equity Line Financing Agreement between Gadzoox and Societe Generale
            dated as of October 26, 2001
10.31(f)    Letter Agreement between Gadzoox and Shoreline Pacific Institutional Finance dated May 2,
            2001
10.32(f)    Terms of Engagement between LSI Logic Corporation and Gadzoox dated December 20, 2000
18.1(f)     Letter regarding change in accounting principles
23.1        Consent of Arthur Andersen LLP, Independent Public Accountants
24.1(f)     Power of Attorney


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

(a)  Incorporated by reference from Gadzoox's Registration Statement on Form S-1
     (Reg. No. 333-78029), as amended.

(b)  Incorporated by reference from Gadzoox's Current Report on Form 8-K filed
     on March 16, 2000.

(c)  Incorporated by reference from Gadzoox's Annual Report on Form 10-K filed
     on June 29, 2000.

(d)  Incorporated by reference from Gadzoox's Quarterly Report on Form 10-Q/A
     for the quarter ended September 30, 2000 filed on March 30, 2001.

(e)  Incorporated by reference from Gadzoox's Quarterly Report on Form 10Q/A for
     the quarter ended December 31, 2000 filed on March 30, 2001.

(f)  Previously filed.

(g)  Incorporated by reference from Gadzoox's Current Report on Form 8-K filed
     on September 6, 2001.

EX-23.1

                                                                    Exhibit 23.1


                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K/A, into the Company's previously filed
Registration Statement No. 333-47362 on Form S-8, No. 333-41726 on Form S-3/A,
No. 333-64798 on Form S-3/A, No. 333-68084 on Form S-8, No. 333-69418 on Form
S-3/A and No. 333-69408 on Form S-3/A.

                                              /s/ Arthur Andersen LLP
                                              -----------------------
                                              Arthur Andersen LLP
San Jose, California
November 5, 2001