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September 18, 2003

Industry SurveysComputers: Networking

THIS ISSUE REPLACES THE ONE DATED MARCH 13 , 2003 .THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR MARCH 2004 .

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Megan Graham-HacketttNetworking Equipment Analyst

CURRENT ENVIRONMENT..................................................................1Networking sales show signs of life

Enterprise markets firming WAN and LAN update Cisco gains share amid downturn 3Com strategy in question Enterasys battles several challenges

INDUSTRY PROFILE...............................................................................6Long-term prospects buoyed by communications demand

Broadband ushers in next wave of industry growth Product sectors show varied results

INDUSTRY TRENDS ................................................................................10Internet/intranet popularity boosts growth Optical networking explodes on the scene Convergence: new technologies, new players M&A alters competitive landscape

HOW THE INDUSTRY OPERATES ..............................................................15The evolution of computer networking Competitive landscape broadens Marketing and product development Distribution options grow

KEY INDUSTRY RATIOS AND STATISTICS ...................................................21HOW TO ANALYZE A COMPUTER NETWORKING COMPANY .......................23

Look beyond financial results Key elements in the income statement Balance sheet hints at future results Valuation metrics to consider

GLOSSARY .............................................................................................28

INDUSTRY REFERENCES.....................................................................30

COMPARATIVE COMPANY ANALYSIS .............................................32

Editor: Eileen M. Bossong-MartinesCopy Editor: Carol A. WoodProduction: GraphMediaStatistician: Sally Kathryn NuttallProduction Coordinator: Paulette Dixon

Subscriber relations: 1-800-852-1641Copyright © 2003 by Standard & Poor’sAll rights reserved.ISSN 0196-4666USPS No. 517-780Visit the Standard & Poor’s web site:http://www.standardandpoors.com

STANDARD & POOR’S INDUSTRY SURVEYS is published weekly. Annualsubscription: $10,500. Reproduction in whole or in part (including inputtinginto a computer) prohibited except by permission of Standard & Poor’s.Executive and Editorial Office: Standard & Poor’s, 55 Water Street, NewYork, NY 10041. Standard & Poor’s is a division of The McGraw-HillCompanies. Officers of The McGraw-Hill Companies, Inc.: Harold McGrawIII, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor,Executive Vice President and General Counsel; Robert J. Bahash, ExecutiveVice President and Chief Financial Officer; Frank D. Penglase, Senior VicePresident, Treasury Operations. Periodicals postage paid at New York, NY10004 and additional mailing offices. POSTMASTER: Send address changesto INDUSTRY SURVEYS, attention Mail Prep, Standard & Poor’s, 55 WaterStreet, New York, NY 10041. Information has been obtained by INDUSTRYSURVEYS from sources believed to be reliable. However, because of thepossibility of human or mechanical error by our sources, INDUSTRYSURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy,adequacy, or completeness of any information and is not responsible for anyerrors or omissions or for the results obtained from the use of suchinformation.

VOLUME 171, NO. 38, SECTION 2 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.

Standard & Poor�s Industry Surveys

While sales for the networking industry didnot stage a robust recovery in the first quar-ter of 2003, several segments showed modestsequential gains. For example, sales of802.11 wireless LAN infrastructure rose 1%in the first quarter of 2003 compared withthe final quarter of 2002, according to theDell’Oro Group, a networking industry mar-ket research firm. High-end routers rose 2%on a sequential basis, and gigabit Ethernetshowed modest quarter-over-quarter salesgrowth. DSL access concentrators saw unitshipments surge 34% sequentially, to registera record quarter. However, mobility infra-structure and optical sales both fell sequen-tially in the first quarter of 2003, by 14%and 4%, respectively.

Anecdotally, networking equipment firmshave also become more hopeful, as businessseems to have stabilized and some regional Belloperating companies (RBOCs) have started tospend on optical equipment for their metropol-itan area networks. However, few industry par-ticipants are declaring a rebound in sales orthat they anticipate more than a very modestrecovery in 2003. The issues that have plaguedthe sector for the past few years — an uncer-tain economy and excess network capacity dueto prior overinvestment — continue to weighon demand.

Enterprise markets firming

Demand for communication equipmentamong enterprise customers (large organiza-tions, including corporations and govern-

ment agencies, among others) dropped 28%in 2001 and fell another 3% in 2002, ac-cording to estimates by the Synergy ResearchGroup, a networking and Internet market re-search firm. Meanwhile, service providers —telecom companies and Internet serviceproviders (ISPs), cable companies, and wire-less communication providers — spent 24%less on communication equipment in 2001than they did in the boom year of 2000, andspending dropped by another 14% in 2002,according to Synergy.

Standard & Poor’s expects enterprise salesto remain relatively stable for full-year 2003,with improved sequential growth in the secondhalf of the year. This forecast is based on ourassumption that U.S. economic growth will ac-celerate in the second half of 2003 and thatthis will spur investment in enterprise net-works. A likely limiting factor on sales growth,in our opinion, will be continued pricing pres-sure in this competitive market.

The outlook for service provider networkinvestments in 2003 is less clear. As men-tioned earlier, some sales activity on the partof RBOC customers occurred in the first halfof 2003, but the sustainability of these in-vestments is in question, given the pricingpressure in the communications industry.There may be some international opportuni-ties for service provider investments, but giv-en the uncertain macroeconomic climate, thisscenario is also highly speculative. Rightnow, it appears to us that Europe is morevulnerable to a further slowing in its econo-my, and thus to weakness in carrier invest-ments, than is Asia.

Looking beyond 2003, Standard & Poor’sbelieves that the industry may witness a re-covery in 2004 and 2005, with annual salesgrowth of 8% to 12%, depending on thepace of economic growth. Furthermore, weconcur with the projection put forth by mostindustry pundits for annual growth of 10%to 15% in the networking equipment indus-try over the next three to five years. Even

CURRENT ENVIRONMENT

Networking sales show signs of life

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CAPITAL EXPENDITURES BY SELECTEDNORTH AMERICAN WIRELINE SERVICE PROVIDERS(In billions of dollars)

2000 2001 2002

Interexchange carriers 26.1 19.4 11.2Incumbent local exchange carriers 42.4 38.0 21.2Emerging carriers 20.2 14.0 0.8

Total 88.7 71.4 33.2

Source: Dell’Oro Group.

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during difficult economic times, carriers mustinvest in certain areas, such as upgrades thatmake networks more efficient or less com-plex and thereby allow carriers to generate abetter return on investment.

In addition, increasing use of the Inter-net will continue to drive demand for net-working equipment. International DataCorp. (IDC), a market research firm inFramingham, Massachusetts, forecasts thatthe number of people using the Internetworldwide will rise from approximately500 million in 2001 to nearly one billionby 2006. Furthermore, the Internet’s grow-ing complexity should also require furtherinvestments in networking infrastructure.New applications in streaming video (bothto desktop computers as well as video-on-demand services to homes) should have keyimplications for networks, in our opinion,as should the growing use — and useful-ness — of wireless devices.

WAN and LAN update

In the following section, we examine mar-ket dynamics and trends in the markets for

wide area network (WAN) and local areanetwork (LAN) equipment.

WAN equipment: still trending lowerWAN equipment sales are projected to fall

19% in 2003, according to data from theDell’Oro Group. This follows two years ofdramatic declines: sales were down 25% in2001 and 25% again in 2002. Prior to that,the market had grown 36% to $15.6 billionin 2000. Indeed, if the Dell’Oro forecastholds true, it means that sales of router andWAN switches in 2003 would be less thanhalf of what they were in 2000.

The router and WAN switch market fellsequentially in each quarter from the firstthrough third quarters of 2001, and thatsame pattern held true in 2002, accordingto the Dell’Oro Group. Seasonal influenceshelped fourth quarter sales improve se-quentially in each of those years. However,Dell’Oro projects a sequential rise of 3% inthe second quarter of 2003, flat sequentialresults for the third quarter, and a 6% se-quential rise in the fourth quarter. These se-quential improvements in sales may indicatea turnaround in demand. For full-year

WORLDWIDE LAN SWITCH MARKET, BY TECHNOLOGY2002–07

2001 2002 F2003 F2004 F2005 F2006 F2007 CAGR (%)

EENNDD--UUSSEERR RREEVVEENNUUEESS ((TTHHOOUUSS.. $$))

10/100 Mbps 10,095 8,406 7,359 6,614 5,858 5,082 4,309 (12.5)Gigabit Ethernet 4,648 5,121 5,960 6,703 7,426 8,123 8,689 11.2 10 Gigabit Ethernet Nil 543 1,242 1,989 2,582 2,974 3,291 43.4 ATM 186 67 24 9 3 Nil Nil NAToken Ring 31 10 2 Nil Nil Nil Nil NA

Total 14,960 14,147 14,587 15,314 15,869 16,179 16,289 2.9 %% CCHHAANNGGEE FFRROOMM PPRREEVVIIOOUUSS YYEEAARR

10/100 Mbps … (16.7) (12.5) (10.1) (11.4) (13.3) (15.2) … Gigabit Ethernet … 10.2 16.4 12.5 10.8 9.4 7.0 … 10 Gigabit Ethernet … NM 128.7 60.2 29.8 15.2 10.7 … ATM … (63.9) (64.0) (64.9) (67.1) NM NM … Token Ring … (69.1) (79.2) NM NM NM NM …

Total … (5.4) 3.1 5.0 3.6 2.0 0.7 … MMAARRKKEETT SSHHAARREE ((%%))

10/100 Mbps 67.5 59.4 50.4 43.2 36.9 31.4 26.5 … Gigabit Ethernet 31.1 36.2 40.9 43.8 46.8 50.2 53.3 … 10 Gigabit Ethernet NM 3.8 8.5 13.0 16.3 18.4 20.2 … ATM … 0.5 0.2 0.1 0.0 NM NM … Token Ring … 0.1 0.0 NM NM NM NM …

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 …

F-Forecast. NA-Not applicable. NM-Not meaningful. CAGR-Compound annual growth rate. Mbps-Megabits per second.ATM-Asynchronous transfer mode.

Source: International Data Corp.

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2003, the Dell’Oro Group expects about3% sales growth for 10 gigabit per second(Gbps) routers, as the capital expenditureenvironment stabilizes and RBOCs raisetheir investments in new Internet protocol(IP) backbone.

LAN equipment: Ethernet switchesto grow moderately

Ethernet switches posted modest salesgrowth of 3% in 2002 and are expected towitness a 5% increase in 2003, accordingto the Dell’Oro Group. This follows explo-sive growth in 2000 and 1999, of 52% and80%, respectively, according to the Del-l’Oro Group, when demand was bolsteredby the Internet buildout. The sales slide of2% for worldwide Ethernet switch rev-enues in 2001 ended this surge, but the de-cline in this sector was much milder thanthat of WAN equipment and other net-working gear segments.

By market sector, Dell’Oro estimates thatLayer 2 switches fell 2% in 2002 after de-clining 12% in 2001, and forecasts a further4% drop in 2003. This category, the largestof all switches in dollar terms, continues tobe pressured by aggressive pricing and a shiftto Layer 3 switches, which offer greaterfunctionality. Indeed, Layer 3 switches grew5% in 2002, and are predicted by the Del-l’Oro Group to jump 14% in 2003. Layer4–7 switch revenues fell 8% in 2002, accord-ing to Dell’Oro, but are expected by the mar-ket research firm to grow 19% in 2003. (Fora more detailed definition of Layer 2–7switches, see the “Industry Trends” and“Glossary” sections of this Survey.)

The LAN switch market is expected to seelong-term growth from the migration to gi-gabit Ethernet and new 10-gigabit Ethernetsolutions. International Data Corp. (IDC)

predicts gigabit Ethernet revenues will expe-rience a compound annual growth rate(CAGR) of 46% between 2002 and 2007,while 10-gigabit Ethernet will show a growthrate of 125% a year. By way of contrast, fastEthernet is expected to grow at a 6.4%CAGR during that period, according to IDC.

Wireless LAN: 802.11 market updateWhile wireless local area networks

(WLANs) are not new, technological ad-vances, better security, and cheaper pricepoints have pushed this networking technol-ogy into the spotlight. The Dell’Oro Groupestimates that WLAN revenues reached near-ly $1.6 billion in 2002, up 13% from 2001,and projects another 14% increase in 2003to $1.85 billion. Recent growth has comelargely from the consumer market, spurredby dramatic decreases in the price of WLANchips over the past year. Going forward,however, many industry forecasters predict alarger role for WLANs in corporate net-works, as efforts to improve security featureshave recently made progress. Prior concernsby enterprise customers over security arenow shifting more toward the managementof these networks.

The market share leader in WLANs, ac-cording to the Dell’Oro Group, was LinksysGroup Inc., with 17.4% share as of the fourthquarter of 2002. However, the second largestvendor, Cisco Systems Inc., acquired Linksysin June 2003. Their combined market share inthe WLAN market was nearly 34% (based onfourth-quarter 2002 data), compared withabout 12% for the next largest competitor,Buffalo Technology UK Ltd.

The market is also expected to get aboost from faster speeds. In June 2003, theInstitute of Electrical and Electronics Engi-neers (IEEE), a global organization that sets

GROWTH OF THE LAN SWITCH MARKET(Year-to-year pecentage change, based on port shipments)

2002-072002 F2003 F2004 F2005 F2006 F2007 CAGR (%)

10 Mbps (60.5) (64.7) (58.2) (57.1) (100.0) NA NA 10/100 Mbps 2.7 5.3 9.2 7.5 6.1 3.8 6.4 Gigabit Ethernet 56.3 57.0 60.2 49.2 37.0 29.0 46.0 10 Gigabit Ethernet NA 334.0 215.6 114.2 50.4 30.9 125.1 ATM (53.0) (55.6) (59.3) (63.1) (100.0) NA NA Token Ring (61.6) (75.9) (100.0) NA NA NA NA

NA- Not available. F-Forecast. CAGR-Compound annual growth rate. Mbps-Megabits per second. ATM-Asynchronous transfer mode.Source: International Data Corp.

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standards for many technologies, approvedthe 802.11g standard. This standard sup-ports speeds of 54 megabits per second(Mbps) at the 2.4 gigahertz (GHz) frequen-cy range, compared with speeds of 10 Mbpsunder the 802.11b standard. There is alsothe 802.11a standard, which also providesspeeds of 54 Mbps, but at the five GHz fre-quency range, which is considered less busythan the 2.4 GHz range, but has a smallertransmission range.

Cisco gains share amid downturn

Although size can hinder a large company’sresponse time, Cisco Systems Inc. was moreadept than its rivals at managing the downturnin the networking equipment market. Alreadythe leading vendor in the enterprise market,Cisco enjoyed accelerated growth in 1999 and2000 as it began to penetrate the market fortelecommunications equipment. In calendar2000, Cisco witnessed year-to-year revenuegrowth of an estimated 59% — impressive fora company that already had annual revenues ofmore than $10 billion. For 2001, however, re-flecting the slide of the worldwide economy,Cisco’s sales fell by roughly 25%, according tocalendar-year estimates by Standard & Poor’s.(Cisco’s fiscal year ends in July).

In the spring of 2002, Cisco began to postpositive year-over-year revenue growth, andwe estimate that it posted revenue growth of6% for the calendar year, well above itspeers. Cisco also maintained gross marginsabove peer levels during the downturn. As ofits April 2003 fiscal quarter, Cisco recordeda gross margin of nearly 71%.

Although Cisco already dominates therouter market, it has been able to add signifi-cantly to its market share. For full-year2002, Cisco held 77.1% of the market, ac-cording to data from the Dell’Oro Group,gaining roughly six percentage points of mar-ket share compared with 2001. In contrast,Cisco’s closest competitor, Juniper NetworksInc., saw its market share fall to 14.7% in2002, from 21.1% in 2001.

In Ethernet switches (excluding wirelessLAN equipment), Cisco also dominates. Cis-co held 68.1% of this market in 2002, upnearly six percentage points from the 62.2%it garnered in 2001. During the same period,the next largest competitor, Nortel, saw itsmarket share narrow to 5.5% from 7.6%.

3Com strategy in question

3Com Corp. has struggled during the net-working equipment demand downturn. Thecompany has restructured several times dur-ing the past few years, attempting to improveits financial position and its market standing.While 3Com’s market share declined in thearea of Layer 2 Ethernet switches to 5.6% in2002 from 7.0% in 2000, it did in fact addto its market share in Layer 3 switches,where it garnered 2.2% market share in2002, up from 0.8% in 2000.

The company’s past restructuring effortsinvolved heavy layoffs. In May 2003, 3Comhad 3,400 employees, down 26% from ayear earlier, and less than half of what it hadin November 2001. Even more dramatically,the May 2003 employment level represents28% of the company’s work force as of No-vember 2000, when it had nearly 12,000full-time employees.

Obviously, 3Com has become a signifi-cantly smaller company over the past severalyears. In fiscal 2001 (ended May 2001),3Com posted revenues of $2.8 billion, down44% from fiscal 2000. In fiscal 2002, rev-enues slid 48% to $1.47 billion, and in fiscal2003, revenues fell another 31%. Standard& Poor’s projects that revenues may shrinkby another 29%, to $722 million in its 2004fiscal year. However, we note that this esti-mate does not include any benefits from thecompany’s recently announced joint venturewith Huawei Technologies (described below).

As a result of its restructuring actions, thecompany managed to become profitable againand to do so earlier than expected. 3Com post-ed a small profit in the fourth quarter of its fis-cal year ended May 2002. Although it brokeeven in the second quarter of fiscal 2003, thecompany sustained losses in the second half ofits fiscal year ended May 2003. Still, the com-pany’s gross margin widened to 44.1% in fiscal2003, from 33.2% in fiscal 2002. 3Com hasinitiated further restructuring efforts to lowerits cost structure, and plans to gain share byleveraging this competitive cost position.

In March 2003, 3Com announced a newjoint venture with Huawei Technologies, anetworking hardware vendor based in Shen-zhen, China. The venture is 51% owned byHuawei and 49% by 3Com. Huawei had inthe past primarily focused on the carriermarket, but had started to focus on the en-

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terprise market with new products. 3Com,meanwhile, in late 2002, announced its plansto re-enter the enterprise market. Huawei’sproduct line in higher end switches androuters would fill out important gaps in3Com’s product portfolio vis-à-vis the enter-prise market. However, execution is criticalto the venture’s success, so at this point, weat Standard & Poor’s have not changed ourfinancial projections for 3Com to incorpo-rate results of this joint venture.

Enterasys battles several challenges

Enterasys Networks Inc., spun off fromCabletron Systems Inc. in August 2001, haslost market share over the past year in Eth-ernet switches. The company has strugglednot only with depressed demand overall fornetworking gear, but also with audits of itsfinancial results — both an internal investi-gation, as well as a review by the Securitiesand Exchange Commission (SEC).

In the Layer 2 combined fixed and mod-ular switch market, the company’s shareslid to 1.0% in 2002, from 1.3% in 2001,and had gotten as low as 0.8% in the firstquarter of 2002, according to data from theDell’Oro Group. Meanwhile, in the Layer 3combined fixed and modular switch market,its share fell sharply to 7.2% in 2002, from13.4% in 2001. The SEC investigation wasannounced in the first quarter of 2002.

While Enterasys did not provide compara-ble calendar 2001 revenue figures, we notethat its calendar 2002 revenues were $484.8million, compared with $774.4 million for itsfiscal year ended March 31, 2001. We be-lieve the decline in revenues reflected notonly the weak economic environment, butalso the company’s market share losses in theLayer 3 Ethernet switch market. The sharpdecline was in contrast with Enterasys’s rev-enue growth of 25% to 30% in the earlypart of 2001. ■

INDUSTRY PROFILE

Long-term prospects buoyedby communications demand

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Estimates vary widely as to the size of theworldwide market for data networkingproducts. For example, Dell’Oro Group, anetworking industry research and consult-ing firm, estimated industry sales at about$63 billion for 2002, including a numberof product categories (listed below). Incontrast, In-Stat/MDR, a technology indus-try market research firm, put the value ofWAN service provider sales at about $147billion for 2002. This definition of themarket includes wireless and wireline infra-structure — voice or data — as well as op-erations support system software.

According to In-Stat’s growth estimates,sales fell 28% in 2002 from $205 billion in2001. For 2003, Standard & Poor’s believesthat networking equipment demand will like-ly be aided by somewhat stable revenues inthe enterprise market this year, and by a re-covery in demand from telecom providers inlate 2003 or 2004. We currently project rev-enue gains of 8% to 12% in 2004 and 2005and believe the market could return to an an-nual growth rate of nearly 15% at somepoint during the next three to five years.

Broadband ushers in next waveof industry growth

A shift in product mix from traditionalshared media hubs to faster performingswitches buoyed industry growth in themid-1990s. Currently, as the dominant traf-fic on telecommunications networks shiftstoward data, the technology for telecommu-nications equipment is expected to make an-other transition: away from circuit-switchtechnology and toward packet-based net-works. Consequently, data networkingequipment vendors are poised to benefitfrom participation in the worldwide marketfor broadband telecommunications equip-ment. The total telecom equipment market

was valued at some $275 billion in 2002,based on data from the InternationalTelecommunications Union (ITU), head-quartered in Geneva, Switzerland.

While this shift in market demand hasbuoyed long-term prospects for networkinghardware sales, there have certainly beensome countervailing pressures in the inter-im. Sales to service providers grew explo-sively for most of 2000, up by about 70%for the year, according to Synergy ResearchGroup, a networking and Internet marketresearch firm. However, the market con-tracted 24% in 2001 because of the weakU.S. economy, as well as telecom bankrupt-cies and tightening telecom capital markets.The sector didn’t fare much better in 2002,when the Dell’Oro Group estimates thatNorth American wireline capital spendingby carriers was down 53% from 2001 to$33.1 billion, and represented 37% of thelevel of spending in 2000.

Recent problems notwithstanding, serviceproviders’ demand for new networking tech-nologies is projected to return to relativelyrobust levels as the surviving companies posi-tion themselves for the broadband era. Thepush for carriers to provide high-speed Inter-net access and to differentiate their services isheightening demand for the industry’s keyequipment areas. Following the recent boomand bust, the market could see rejuvenationin late 2003 or 2004.

Product sectors show varied results

Growth rates within the five main productsegments of the industry vary significantly. Ourdiscussion of these markets is based on the seg-mentation of the networking equipment indus-try as presented by the Dell’Oro Group.

◆ Ethernet switches. Comprised of Ether-net switches, Layers 2–7, as well as wireless

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local area network (LAN) equipment, thismarket approximated $12.4 billion in 2002,up 3% from the previous year. In 2001, saleshad fallen 2%.

◆ Routers. The router category compriseshigh-end as well as low- and midrangerouters, multiservice wide area network(WAN) switches, and broadband aggregationequipment. Revenues for this segmentreached $8.8 billion in 2002, down 25%from 2001. This marked the second consecu-tive year that revenues were down 25%.

◆ Access equipment. Access equipmentincludes customer premises equipment (cableand digital subscriber line, or DSL, modems)and cable and DSL access concentrators.This category’s revenues totaled $4.8 billionin 2002, down 30% from 2001. In contrast,2001 revenues were flat year over year.

◆ Mobility equipment. This category in-cludes infrastructure equipment for wirelesstelecommunications systems, based on globalsystems for mobile communications (GSM)technology, as well as time division multipleaccess (TDMA), code division multiple ac-cess (CDMA), and wideband CDMA (WCD-MA). It recorded revenues of $28.8 billion in2002, down 16.4% year-over-year, and fol-lowed a modest 1.2% decline in 2001.

◆ Optical transport equipment. This seg-ment includes gear for dense wavelength di-vision multiplexing (DWDM) and for theSONET/SDH (synchronous optical

network/synchronous digital hierarchy) mul-tiplexer market. (A detailed description ofDWDM and SONET/SDH technologies fol-lows in the “Industry Trends” section of thisSurvey.) Optical transport equipment rev-enues in 2002 were $7.5 billion, down 53%from the prior year — an even steeper dropthan the 30% decline of 2001.

Ethernet switches change gearsThe market for Ethernet switches has

been one of the industry’s strongest areas forseveral years. Growth was first fueled by themigration from shared media networks toswitched networks. More recently, however,it has reflected the shift within switched net-works, from traditional Ethernet to higher-speed Fast Ethernet and gigabit Ethernet.

According to the Dell’Oro Group, theEthernet switch market grew 80% in 1999and 52% in 2000 (based on manufacturingrevenues). In 2001, as a slump in the U.S.economy weighed on the industry, the world-wide Ethernet switch market fell 2.2% toroughly $12.0 billion. After falling 2% se-quentially (quarter to quarter) to $3.0 billionin the first quarter of 2002, Ethernet switchrevenues grew 4% sequentially in the secondquarter and 1% in the third quarter, but fellagain in the fourth quarter, by 3%. As men-tioned above, revenues rose a modest 3% forfull-year 2002.

The outlook for the Ethernet switch mar-ket in 2003 is for moderate growth of just5% to $13.0 billion, based on Dell’Oro’sforecast. However, the long-term outlook forgrowth in switches remains relatively healthy.Growth should be fueled by demand forhigh-speed networks, which can be facilitat-ed through Fast Ethernet, gigabit Ethernet,and 10-gigabit Ethernet, and by the expan-sion of Ethernet switches from the LAN mar-ket into the MAN/WAN (metropolitan areanetwork/wide area network) market.

Within the Ethernet switch market (in-cluding Wireless LANs), Cisco Systems Inc.clearly dominates. It claimed nearly 61% offourth-quarter 2002 revenues, according toDell’Oro Group data, followed by NortelNetworks Corp. (with market share of4.2%), 3Com Corp. (2.9%), Extreme Net-works Inc. (2.8%), and Enterasys NetworksInc. (formerly Cabletron Systems; 2.7%).Cisco’s revenues for this sector had beengrowing at a healthy rate, posting a high-

WORLDWIDE ETHERNET SWITCH AND WIRELESS LAN MARKET (Ranked by fourth-quarter 2002 revenues)

––––––REVENUES (MIL. $)–––––– MARKET SHARE (%)3Q 4Q 3Q 4Q

2002 2002 % CHG. 2002 2002

Cisco 1,971.2 1,862.2 (5.5) 69.7 60.7 3Com 128.6 127.9 (0.5) 4.5 4.2 Nortel 136.3 99.1 (27.3) 4.8 3.2 Extreme 100.0 89.7 (10.3) 3.5 2.9 Foundry 70.0 86.7 23.9 2.5 2.8 Enterasys 96.1 81.6 (15.1) 3.4 2.7 Hewlett-Packard 65.9 67.7 2.7 2.3 2.2 Alcatel 54.6 45.9 (15.9) 1.9 1.5 Others 205.7 605.7 194.5 7.3 19.8

Total marketrevenues 2,828.4 3,066.5 8.4 100.0 100.0


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teens sequential growth rate in each quarterof 2000. Revenues came under pressure in2001 during a difficult market environment.Then Cisco’s revenues grew for the first threequarters of 2002, outpacing the market’s se-quential growth. In the fourth quarter of2002, however, Cisco’s revenues declined5.5% from the third quarter of 2002, ac-cording to data from the Dell’Oro Group,while the market grew 8.4%. Standard &Poor’s believes this reflected a mix shift aswell as pricing pressure.

Ethernet switches can be divided into cat-egories reflecting their functionality. (Detailsof the open system interconnection, or OSI,reference model are contained in the “Glos-sary” section of this Survey.) Recent resultsfor the various segments are described below:

◆ Layer 2. The Layer 2 market remainsthe largest segment within the Ethernetswitch market. (Layer 2 refers to the datalink layer of the OSI reference model.)Growth in Ethernet switches has beendominated by Layer 2 Fast Ethernet prod-ucts, which have benefited from better af-fordability and performance versus sharedmedia networks.

Growth in Layer 2 switches accelerated inthe second half of 2000, ending the year up31.4%, based on worldwide revenues, ac-cording to the Dell’Oro Group. However, themarket surrendered most of that gain in2001, falling nearly 12% to $6.9 billion, andfell another 2% in 2002 to nearly $6.8 bil-lion. Dell’Oro forecasts another 4% declinein 2003 to $6.5 billion.

◆ Layer 3. By comparison, Layer 3switches, which exhibited strong growth in2000 and modest (1.2%) growth in 2001,are still relatively new and represent a muchsmaller market base. (In the OSI model, Lay-er 3 refers to the network layer.) Switchesthat feature Layer 3 capabilities have a high-er level of functionality than Layer 2 switch-es. They are similar to routers, and thus arecalled routing switches.

With users migrating to Layer 3 switchesfrom Layer 2, Layer 3 switches rose 5% in2002 and are expected to grow another14%, based on Dell’Oro forecasts, to $4.2billion in 2003.

◆ Layers 4–7. The market for Layers 4through 7 (L4–7) switches witnessed explo-sive growth in 2000, up 596% from 1999,before slipping 1.4% in 2001 to $391 mil-lion, according to the Dell’Oro Group. L4–7server switches, or server load balancing(SLB) switches and appliances, help to switchnetwork or Internet traffic optimally amongservers in a group. These smaller switchesare typically used in front-end Web sites,server farms, or cache clusters (which locatefrequently used data close to the end user).They help increase the availability, scalability,and security of the Web site or server farm,as well as improving latency (access time).

This market stalled in 2001 because ofthe slowdown in the service provider marketand increased pricing pressure. However, theDell’Oro Group estimates that L4–7 switchrevenues could grow 12% in 2003, to nearly$1.9 billion, after declining 8% in 2002.

Router slump deepensRouter revenues fell 25% in 2001, ac-

cording to the Dell’Oro Group, after post-ing robust growth of 38% in 1999 and36% in 2000. Following heady investmentsin Internet infrastructure by both corpora-tions and service providers, the industry’sgrowth dynamics corrected sharply due toa weak economy and overinvestment. In-deed, in 2002, router revenues fell another25% as the U.S. economic slowdown con-tinued to pressure the market. In addition,and perhaps a more import influence,North American service providers furtherlowered capital expenditures, which weredown 19% in 2001 versus 2000, and fell an-other 53% in 2002, according to Dell’Oro

WORLDWIDE ROUTER SWITCH MARKET(Ranked by fourth-quarter 2002 revenues)


2002 2002 % CHG. 2002 2002

Cisco 559.7 679.2 21.4 42.9 48.6 Nortel 93.3 212.9 10.1 14.8 15.2 Juniper 128.5 132.3 3.0 9.8 9.5 Lucent 112.2 130.0 15.9 8.6 9.3 Alcatel 109.0 115.0 5.5 8.3 8.2 Redback 12.4 22.6 82.3 0.9 1.6 Marconi 14.7 16.2 10.2 1.1 1.2 Avici 6.4 6.3 (1.6) 0.5 0.5 Others 169.8 83.0 (51.1) 13.0 5.9

Total marketrevenues 1,306.0 1,397.5 7.0 100.0 100.0


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data. High-end routers fell at a faster ratethan low-end routers.

Cisco dominates the router market (whichincludes multiservice WAN switches andbroadband aggregation devices), with rough-ly 49% of sales as of the fourth quarter of2002, according to the Dell’Oro Group. Thecompany appears to have capably managedthe industry downturn, gaining incrementalmarket share of about 10 percentage pointscompared with the fourth quarter of 2001,apparently from all of its peers. Nortel Net-works (15.2% of router sales in fourth quar-ter 2002), Juniper Networks Inc. (9.5%),Lucent Technologies Inc. (9.3%), and Alcatel(8.2%) all posted market share declines overthe one-year period.

The outlook for routers for 2003, accord-ing to Dell’Oro, is for revenues to fall anoth-er 19% to $7.1 billion.

Access gear slips furtherAfter advancing 210% in 2000, access

equipment revenues were flat in 2001, at $6.9billion. In contrast, most of 2000 saw acceler-ated growth, aided by the build-out of high-speed networks to access the Internet. Digitalsubscriber line (DSL) access concentrators andDSL customer premises equipment (CPE) wereparticularly strong that year.

In 2002, access gear revenues declined30% to $4.8 billion, according to the Del-l’Oro Group. The steepest declines were insales of DSL access concentrators and ca-ble and DSL CPE (down 37%, 37% and22%, respectively), despite big volumegains in CPE, as described below. Mean-while, cable access concentrators faredbetter: revenues rose 10%, year to year, to$380 million in 2002.

The Dell’Oro Group projects that the ac-cess market may decline another 6% in2003. At the same time, however, the num-ber of subscribers is expected to continue toincrease. The Dell’Oro group estimates thatthe worldwide cable modem subscriber baserose 52% to 21.9 million at the end of 2002,and forecasts a rise to 30 million by the endof 2003. Meanwhile, the worldwide DSLsubscriber base increased 92% to 33.1 mil-lion at the end of 2002, and Dell’Oro fore-casts an increase to 51.0 million by the endof 2003.

Leading the worldwide access equipmentmarket, according to the Dell’Oro Group,was Alcatel, with 22.2% of the market(based on revenues) as of the fourth quar-ter of 2002. Cisco landed the No. 2 spot,with 9.3% market share, and Thomson(formerly Thomson Multimedia S.A.) fol-lowed with 7.8%.

Despite periodic declines, remote accessproducts in the aggregate should post healthygrowth over the long term. Demand is ex-pected to be buoyed by the growing base ofend users seeking to gain high-speed accessto the Internet, which in turn reflects the ris-ing number of telecommuters, mobile com-puter users, and remote offices that requirefaster access to corporate networks. In addi-tion, recreational users are increasingly seek-ing high-bandwidth speed and applications.

Mobility infrastructure market: revenues still under pressure

In 2001, sales of infrastructure equipmentfor wireless telecom networks fell 1.2% to$34.5 billion, according to the Dell’OroGroup. A 48.6% drop in the TDMA gearmarket offset a 2.9% increase in GSM gearand a 14.9% rise in CDMA gear sales. For2002, Dell’Oro estimated a 56.0% decline inTDMA gear sales, a 17.3% drop in GSMsales, and a 13.9% decrease in CDMAequipment sales. However, WCDMA salesrose 156.6% (off a low base in the prioryear). All together, Dell’Oro estimated a16.4% decline for the mobility infrastructuremarket in 2002.

The reasons for the market decline arewell known. Penetration rates of wirelesshandsets have increased, and the slowdownin subscriber growth is causing fierce pricecompetition. The resulting financial straitsof many wireless carriers have led to delays

WORLDWIDE ACCESS EQUIPMENT MARKET(Ranked by fourth-quarter 2002 revenues)


2002 2002 % CHG. 2002 2002

Alcatel 174.7 283.9 62.5 17.2 22.2 Cisco 104.1 118.9 14.2 10.3 9.3 Thomson 76.2 99.7 30.8 7.5 7.8 Siemens 88.0 98.8 12.3 8.7 7.7 Motorola 81.7 85.6 4.8 8.0 6.7 Others 660.0 776.1 17.6 65.0 60.7

Total market revenues 1,015.0 1,278.6 26.0 100.0 100.0


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in adoption of next-generation equipment.In addition, we’ve heard anecdotal evidenceof some technology glitches, including per-formance and interoperability issues, inrolling out the new equipment. These delayshave also postponed the benefits expectedfrom introducing new equipment at higherprice points.

Telefonaktiebolaget LM Ericsson re-mained the leader in the wireless infrastruc-ture market, with market share of 28.5% inthe fourth quarter of 2002, down from30.5% in the fourth quarter of 2001, accord-ing the Dell’Oro Group. Meanwhile, NokiaCorp., the No. 2 vendor, saw its marketshare jump to 18.7% from 15.9% during thesame period. Nortel Networks followed with11.4% share (up from 8.4%), and LucentTechnologies rounded out the top four with9.6% of the market (down from 10.5%).

Optical service market: boom begets bustAfter heady growth in 1999 and 2000 of

48.5% and 49.6%, respectively, the opticalservice, or transport, market correctedsharply in 2001. According to the Dell’OroGroup, sales declined 30.2% to $16 billionthat year and likely dropped by another53.5% in 2002. Sales in 2003 were projectedto drop another 15.8% to $6.3 billion, or toless than a third of what they were in 2000.

For 2002, the sharpest decline was experi-enced by the DWDM market, which wasdown 62%, followed by a 48% decline inSONET/SDH market, and a 44% drop inoptical switch revenues (which representsonly about 3.6% of the sector).

Nortel reclaimed the leading spot in theoptical transport gear; its market share grewto 19.5% in the fourth quarter of 2002 from14.8% in the year-earlier period. Nortelgrabbed the top spot from Alcatel as of thefourth quarter of 2001, which slipped to theNo. 2 spot, garnering 15.8% of the market(down from 20.7% in the year-earlier quar-ter). Lucent landed third place, with 10.4%of the market, down from 14.0% a year ear-lier. Siemens was No. 4 in the fourth quarterof 2002, with 9.1% of the market (comparedwith 7.9% a year earlier).

INDUSTRY TRENDS

The healthy demand for networking equip-ment seen during much of the 1990s reflectedseveral trends. Contributing factors includedthe proliferation of personal computer (PC)users connected to local area networks (LANs),a significant change in the role of networkingin businesses, and the development of newbandwidth-hungry client/server applications,along with attractive new technologies to sup-port that demand for bandwidth. The surge indemand for networking equipment in 1999and 2000 came mostly from rapid growth ofthe Internet and of private intranets. Othertrends affecting the industry today are the con-vergence of voice, data, and video technology,and continued industry consolidation.

Internet/intranet popularityboosts growth

As their popularity has grown, the Inter-net and intranets (private internal networks

MOBILITY SALES(Ranked by fourth-quarter 2002 revenues)


2002 2002 % CHG. 2002 2002

Ericsson 1,929.1 2,132.8 10.6 31.3 28.5 Nokia 965.5 1,398.0 44.8 15.7 18.7 Nortel 738.9 850.0 15.0 12.0 11.4 Lucent 562.8 719.9 27.9 9.1 9.6 Motorola 559.5 579.5 3.6 9.1 7.7 Alcatel 262.3 523.3 99.5 4.3 7.0 Others 1,148.3 1,280.1 11.5 18.6 17.1

Total market revenues 6,166.4 7,483.6 21.4 100.0 100.0


WORLDWIDE OPTICAL TRANSPORT MARKET(Ranked by fourth-quarter 2002 revenues)


2002 2002 % CHG. 2002 2002

Nortel 271.0 301.0 11.1 16.8 19.5 Alcatel 194.3 244.6 25.9 12.0 15.8 Lucent 254.5 161.5 (36.5) 15.8 10.4 Siemens 198.9 140.3 (29.5) 12.3 9.1 Fujitsu 128.3 112.6 (12.2) 7.9 7.3 Marconi 112.2 93.7 (16.5) 6.9 6.1 Cisco 78.5 88.9 13.2 4.9 5.7 NEC 79.5 62.5 (21.4) 4.9 4.0 Ciena 43.6 55.8 28.0 2.7 3.6 Others 254.1 286.1 12.6 15.7 18.5 Total market

revenues 1,614.9 1,547.0 (4.2) 100.0 100.0


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based on Internet programming standards)have fueled dramatic growth in demand fornetworking equipment. Demand for Internetaccess has come from homes and corpora-tions alike, and Internet service providers(ISPs) have spent hundreds of millions ofdollars to meet it. They have invested in newnetworking equipment — routers, high-speedswitches, and remote access products — toupgrade their networks to meet the explosivegrowth in customers and the demand forhigh-speed connectivity.

Following setbacks in 2001 and 2002, re-flecting the global economic slump and the fall-out from a two-year investment boom,investment in networking gear is likely to beginto recover in 2003 and grow for the next sever-al years, as the Internet gains in popularity. In-ternational Data Corp. (IDC), a technologyindustry market research firm, estimates thatInternet users worldwide will grow from an es-timated 500 million in 2001 to nearly one bil-lion by 2006.

The proliferation of networked PCsThe explosive growth of personal com-

puters over the past two decades and thetrend toward linking them into local andwide area networks (LANs and WANs) havefostered strong demand for networkingproducts. Since the late 1980s, corporateAmerica has steadily abandoned earliercomputer systems in which users were con-nected to a single centralized mainframe orother large host computer. The architecturereplacing this environment is referred to asclient/server computing. In this model, PCs(or “clients”) communicate with servers viaa network; the servers distribute such ser-vices as printing and database access. Net-works facilitate transfers of electronic mailor files between computers.

Meanwhile, advances in PC hardwareand software technology resulted in de-mand for greater network capacity (band-width). But as networks grow in size andusers place greater demands on them, theirperformance degrades. Efforts to counterthis tendency have fueled growth in higher-speed switches and routers.

Corporate networks promise better returnsLocal area networks have proliferated in

the past 15 years, emerging as a critical busi-ness tool. By providing a high-speed commu-

nications link between computers and otherdata processing devices (typically in a smallgeographic area such as an office), a LAN al-lows users to share vital resources like print-ers and information needed to do their jobs.Wide area networks link users over a largergeographic area and typically tie two ormore LANs together.

For large corporations, networked PCs havehelped to streamline operations, improve prof-itability, and increase customer satisfaction. Be-fore the proliferation of LANs and WANs, itwas more difficult for companies to gauge sup-ply and demand. In today’s fiercely competitiveglobal marketplace, it is now virtually manda-tory to be electronically connected to key sup-pliers and customers, whether through a linkedintranet or an Internet connection. Further-more, 24-hour service and support, the normin many industries, is now increasingly enabledthrough these networks. Indeed, with the re-cent momentum in Web-based supply chainmanagement and the deployment of customerrelationship management (CRM) software, thevalue of these networks is increasing.

Networks migrate to faster speedsAs the world is being “wired” — connect-

ed by computer networks — the rule ofthumb is that performance degrades as net-work size and usage increase. The network-ing equipment industry has had to respondwith a steady stream of new technologies tomeet the need for high-speed performance.

Switched networks, the most popular typeof internetworked LANs, have replacedmany networks based on shared bandwidth.In such an environment, the total capacityavailable on the network is divided amongthe users; as more users are added, competi-tion for bandwidth grows and network per-formance suffers.

As the protocol of choice in about 85% ofall existing networks (that is, as the preferredformat for transmitting data between two de-vices), Ethernet tops out at speeds of up to 10megabits (million bits per second, or Mbps).Although this speed is sufficient for relativelysimple network services like printing, it is un-suitable for today’s high-bandwidth tasks suchas real-time video. (See this Survey’s “How theIndustry Operates” section for an explanationof this and other protocols.)

To provide quality service for bandwidth-hungry applications, network vendors are of-

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fering multimedia-focused solutions (like asyn-chronous transfer mode, or ATM) and othernew high-speed switching technologies (like gi-gabit Ethernet). Many networking analysts be-lieve that because of its similarity to theubiquitous Ethernet protocol, gigabit Ethernetwill eventually become the dominant desktopprotocol. Meanwhile, ATM is expected to con-tinue to be used primarily as a backbone tech-nology. ATM is relatively high-cost andcomplex, but it offers the advantages of multi-protocol networking (voice, data, and video),quality of service, and high reliability.

Another trend in networking equipment,intended to help alleviate congestion, is thesegmentation of networks into smallergroups. The rationale here is that if fewerusers compete for transmission time, band-width availability will remain high. However,routers — the devices typically used to seg-ment networks — are expensive. The highprice of routers reflects the inclusion of soft-ware to provide more “intelligence,” or func-tionality, such as the ability to filter messagesand forward them to different places basedon various criteria. These features are neces-sary for the efficient use of the network andfor prioritizing different types of traffic onthe network.

Routers have long dominated in the back-bones of networks. Recently, however, switcheshave been used in some instances to replacerouters in this crucial part of the network. Thereasons for this shift include improvements inthe intelligence of switches and decliningprices. With the emergence of Layer 3 andLayer 4 switching, network managers canachieve the intelligence of routers at the costof switches. Standard & Poor’s expects thedebate to continue, although the industryadage — “switch where you can, routewhere you must” — will likely remain true.

Optical networking explodeson the scene

The traditional voice network is based ona circuit-switch architecture in which signalsare transmitted electrically through a net-work of interconnected switches and copperwires. In contrast, optical networks usefiberoptic cable as the primary medium fortransporting data and photons (units oflight). These new systems offer greater band-width and flexibility in service, while their

scalability enables a more cost-efficient net-work. To support the shift in traffic overtelecom networks to data and bandwidth-hungry applications, many service providershave replaced copper wire with fiberoptic ca-bles. Carriers like WorldCom Inc. and AT&TCorp., as well as new service providers,raced to install fiber to capitalize on Internetdemand from the late 1990s through 2000.At present, after more than a decade of fiberdeployment, many industry pundits believetelecom networks may have ample capacity.

The synchronous optical network (SONET),established in 1985 and used primarily inNorth America, and synchronous digital hier-archy (SDH), used throughout the rest of theworld, are standards for fiberoptic equipmentto translate electrical signals to optical signals.However, SONET/SDH architectures have lim-its: although optical fiber is used as the trans-mission medium, most of the signaling,processing, and switching is performed elec-tronically. Specifically, the electronic signal en-ters the network and is converted to an opticalsignal, which travels across the network to aSONET terminal, and is then converted backto an electronic signal.

During the heyday of networking invest-ments in 2000 and early 2001, carriers con-verted SONET/SDH architectures to supportdense wavelength division multiplexing.DWDM is an optical technology used to in-crease bandwidth over existing fiberoptic back-bones. DWDM was largely enabled by theintroduction of an optical amplifier (the er-bium-doped fiber amplifier, or EDFA), whichamplifies a signal purely in the optical domain;that is, without conversion to an electronicsignal. DWDM enables the use of differentwavelengths on the same fiber, in a senseadding capacity without laying down addi-tional fiber. Other advantages of DWDMare that it’s protocol independent (able totransmit data in Internet protocol, ATM,and SONET/SDH) and bit-rate independent(does not depend on a certain data transferrate to work). These characteristics enablecarriers to offer different services over theirexisting DWDM-based networks.

Convergence: new technologies,new players

Converged networks — networks that cantransmit voice, data, and video traffic over a

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single system — have recently become anarea of focus for the major data networkingequipment providers. By carrying differenttypes of traffic on a single network, compa-nies can substantially decrease the cost ofcommunicating. For example, voice over In-ternet Protocol (VoIP) is emerging as a popu-lar technology: it allows people to use theInternet as the transmission medium forphone calls.

Technologies based on Internet protocol(IP) are attractive not only because of thecost savings they generate, but also becauseof their inherent flexibility, which benefitscarriers as they seek to offer new services. Infact, many industry pundits forecast thatsome 90% of all traffic over carrier networkswill eventually use IP technology.

In anticipation of this shift, traditionaldata networking companies are competingwith traditional voice network equipmentplayers, like Lucent Technologies. As bothdata and telecom equipment suppliersrushed to serve this emerging market, theymade a number of business combinations.These include the 1998 merger betweenBay Networks and Northern Telecom Ltd.(the company has since changed its nameto Nortel Networks Corp.), and the 1999combination of Lucent and Ascend Com-munications. (Details of each are providedin the section below.)

M&A alters competitive landscape

Standard & Poor’s expects acquisitionsto continue to define the competitive land-scape over the next several years. For onething, the industry’s largest players havefound that purchasing small start-up firmsthat specialize in emerging technologies isoften more effective than developing theirown products internally.

Among data networking companies, CiscoSystems has been the most aggressive acquir-er. Cisco consummated 48 acquisitions fromlate 1993 through December 1999, and an-nounced 23 in 2000. Nortel, meanwhile,completed five acquisitions in 1999 andmade nine purchases in 2000.

Reflecting the difficult industry environ-ment, Cisco made only two acquisitions in2001 — Allegro Systems Inc. and AuroraNetics Inc. — while Nortel made just one.For 2002, Cisco intended to make eight to

12 acquisitions, but acquired only five com-panies. Year-to-date through June 2003, Cis-co had acquired three companies.

Much of the consolidation between largetraditional data networking equipment ven-dors and telecom equipment suppliers hasalready occurred. Among these mergers,bellwethers include the $9.1 billion acquisi-tion of Bay Networks by Northern Telecom(now Nortel Networks, as mentioned above)in August 1998 and the Lucent Technologiesacquisition of Ascend Communications, aleader in data networking equipment, for$16 billion in June 1999. Both deals com-bined leaders in the data networking andtelecommunications equipment markets.

During 2000, the industry shifted into over-drive to tap into the burgeoning opportunitiesin fiberoptic gear. Over the seven-month periodbetween October 1999 and May 2000, $11billion in stock and cash was used to grab opti-cal network/component companies.

Some noteworthy deals in 1999 and 2000included Cisco’s purchase of Cerent Corp.(for $6.9 billion) and Monterey Networks(approximately $500 million); both dealswere announced in August 1999. Cisco alsoacquired Pirelli Optical Systems for $2.15billion (announced December 1999), andQeyton Systems (May 2000); the last was aplay on the high-growth opportunity formetropolitan DWDM. Nortel’s acquisitionsincluded Photonic Technologies for US$35.5million (announced in May 2000), CoreTekInc. for $1.43 billion and Xros Inc. for $3.25billion (both June 2000), and Qtera Corp.for $3.25 billion (January 2000).

While industry M&A activity slowed in2001 and 2002, reflecting the overall marketslump in networking gear and the unclearoutlook for its recovery, this environmentcould change in 2003. Companies may takeadvantage of the more reasonable valuationlevels in the current market and, with im-provement anticipated for the overall econo-my, may be ready to take on the task ofintegrating a new company to gain marketshare or enter a new market.

Nortel/Bay Networks mergerreflects convergence

Perhaps no merger in this industry’s his-tory was more criticized than the October1994 combination of SynOptics Communi-cations and Wellfleet Communications to

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form Bay Networks. Opponents arguedthat the two networking pioneers — Syn-Optics in hubs and Wellfleet in routers —would be unable to blend these disparatetechnologies successfully within a single com-pany. The integration was indeed problemat-ic and was made more difficult by distance:the companies were on opposite coasts.

After the merger that created Bay, thecompany acquired other firms and technolo-gies that filled gaps in its product line and letit compete in networking’s emerging growthareas. Nonetheless, poor execution in bring-ing out new products limited Bay’s effective-ness. Specifically, the firm was late to graspthe trend favoring switching products. Thislapse hurt it financially and tarnished its rep-utation as a technology leader in the indus-try. Consequently, it became an attractivetakeover candidate.

The August 1998 Nortel/Bay mergerspeaks directly to the changing landscapeof the data networking industry. It com-bined Northern Telecom, the No. 2 suppli-er of telecommunications equipmentworldwide, with Bay, a leading supplier ofenterprise networking equipment. The mar-riage was designed to allow the two com-panies to take advantage of convergence invoice and data communications. In light ofthe recent downturn, it remains to be seenhow effective this merger will be.

Cabletron joins theacquisition party, then splits

After vowing to expand its product offer-ings exclusively through internal develop-ment, Cabletron began making smallacquisitions in 1996. It subsequently acceler-ated the pace and made some substantialpurchases, with those occurring in 1998 themost definitive. Specifically, Cabletron ac-quired switch routing company Yago Systemsthat year, a deal that further rounded out itsproduct line and gave it the successfulSmartSwitch router.

In August 2001, Cabletron completed arestructuring plan designed to leverage thestrength of its momentum from the success-ful SmartSwitch router family by dividing it-self into four separate entities. Followingthe spinoff of two units, Enterasys Net-works Inc. and Riverstone Networks Inc.,to form new publicly traded companies, Ca-bletron ceased to exist.

Cisco’s acquisition strategy builds networking powerhouse

Since Cisco became a public company in theearly 1990s, most of its revenues have comefrom its successful router business. The compa-ny was not blinded by its success in routers,however. Instead, it has followed the shift awayfrom shared-media LANs (in which routersplay a prominent role) toward networks basedon switching technology. In the new switched-networking model, the router plays a valuablebut less prominent role.

Using an aggressive acquisition strategy,Cisco quickly shifted its focus to this newnetworking model. From 1993 through De-cember 1998, Cisco made about 30 acquisi-tions, with most of its early efforts directedat gaining market share in LAN switching.Because of these acquisitions, Cisco is now aleader in the LAN switching market.

During 2000 and early 2001, Cisco’sstrategy shifted to focus on optical net-working and transport technologies, asmentioned above. Most of the company’sacquisitions announced in 1999 and 2000concentrated on boosting its capabilities inIP+Optical networks, which combine thespeed of optical-based technologies withthe intelligence of IP-based networks. Atthe beginning of the year, the company saidits targets for 2003 would likely be in thestorage, wireless, and security markets.Cisco’s May 2003 acquisition of leadingwireless LAN vendor, Linksys Group, Inc.,was evidence of that commitment.

3Com’s acquisitions, divestitures,and new joint venture

In a shopping spree that began in 1992,3Com Corp.’s largest purchase by far was itsJune 1997 acquisition of U.S. RoboticsCorp., a modem and remote access vendor.For 3Com, this purchase marked a definingmoment: it filled technology gaps in its huband remote access product lines and gave3Com access to large institutional accountsand complementary geographic markets.More important, the merger with U.S. Ro-botics catapulted 3Com into Cisco’s league,making it the only other networking firmwith revenues of more than $5 billion.

After the acquisition, 3Com had a rockyride, with inventory problems, merger inte-gration costs, and margin pressures. 3Comhas since reinvented itself, jettisoning tradi-

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tional data networking equipment in favorof fast-growth, emerging market opportu-nities in broadband access, wireless access,and IP telephony. Currently 3Com is tryingto reassert itself in the enterprise network-ing market through a joint venture agree-ment with Huawei Technologies Co.(which we discuss in the “Current Environ-ment” section of this Survey).

HOW THE INDUSTRY OPERATES

Although computer networking has at-tained widespread strategic importance incorporate America only in the past 15 to20 years, various forms of computer net-works have been around for decades. Overthe years, networks have increased in com-plexity, but their underlying principles arestill simple.

At its most basic, a network consists oftwo or more computers connected by a ca-ble that allows them to exchange informa-tion. Today’s networks are typically farmore complex, involving a collection ofcomputers, printers, and other devices thatcommunicate with each other over sometransmission medium.

Data networking equipment is the hard-ware that constitutes the infrastructure of anetwork. The hardware consists of variousswitches, hubs, routers, network interfacecards (NICs), and other devices, all ofwhich provide communication between thenetwork’s components at varying levels ofspeed and service. Computer techniciansconfigure the network components andstring these items together to create the net-work. Networking firms often sell softwareand provide services for monitoring andmanaging networks.

Demand for data networking equipment,fueled in part by the rapid growth of the In-ternet and intranets (private networks),helped the industry grow from approximate-ly $15 billion in annual sales in 1995 to peakat some $50 billion in 2000, according to In-Stat/MDR. However, the downturn in theeconomy and excess capacity in many net-works, led networking demand to decline16% in 2001, according to In-Stat/MDR.And in 2002, according to the Dell’OroGroup, wireline capital expenditure budgetsfor service providers in North America were

down 53%, causing declines in multiserviceswitches of 37% and a 19% drop in routersales. Still, Standard & Poor’s believes therole of network computing has expanded inthe corporate environment as well as in dailylife, and that the surge in the number ofusers should continue to spur development ofnew technologies to further boost speed andcapacity in today’s networks.

The evolution of computer networking

The first networks were pioneered by IBMCorp. and Digital Equipment Corp. (nowowned by Hewlett-Packard Co.) in the 1960sand 1970s and were designed to support thecomputing environment introduced by themainframe computer. From the 1970s to the1980s, minicomputers and wide area net-works (WANs) characterized networked en-vironments. The personal computer (PC)revolution and local area networks (LANs)ushered in the next major technological shift,which occurred primarily during the 1980sthrough the early 1990s.

Today, the emphasis in the networkingequipment industry is on internetworking.Largely involving high-speed switching androuting, the networking of today is expectedto continue to fuel the industry’s growththrough at least the next several years.Meanwhile, momentum is building for con-verged networks, which combine voice,video, and data in a single network, and arebased on Internet protocol (IP). This emerg-ing growth area appears poised to fuelhealthy demand for networking equipment inthe future.

The mainframe and the minicomputerIn the 1960s, the mainframe was the ma-

jor computing platform in most businesses,and it was the first to dominate network ar-chitecture. Developed by IBM, the propri-etary mainframe-centered network providedsimple and stable connections. Under this en-vironment, IBM’s System Network Architec-ture (SNA) applications ran on themainframe, groups of terminals were at-tached to controllers, and controllers in turnwere connected to the front-end processor bypoint-to-point cables (for local terminals) ortelephone lines (for remote users). Many ofthese simple but effective networks are be-lieved to remain in use.

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In the mid-1970s, with the rising popular-ity of minicomputers, a slightly different ver-sion of computer networking emerged.Compared with large, expensive mainframes,minicomputers provided a more flexible andcost-effective form of computing. Conse-quently, many users began to move key ap-plications and data to these new platforms.

This “changing of the guard” in corpo-rate computing created a need for new net-working solutions. Instead of usingcontrollers and front-end processors toprovide access to corporate information,terminals were attached directly to portson the minicomputers. Digital Equipment,the driving force behind the minicomputerrevolution, introduced the terminal serverto act as an intermediary between termi-nals and the host computer. Terminalservers were connected to minicomputersthrough a 10 Mbps (megabit, or millionbits, per second) Ethernet LAN.

While these changes in networking archi-tectures were subtle, their effects were signifi-cant in that they lessened IBM’s dominanceas a networking provider. The new technolo-gy created room for competitors to enter thefield, and several upstart networking vendorsbegan to offer alternatives to IBM’s versionof networked computing. Even IBM shiftedfrom its mainframe-centered networks, re-placing the point-to-point cables attachingclusters of terminals to mainframes with To-ken Ring local area networks.

The PC and the shared bandwidth eraIn the 1980s, the dramatic inroads made by

the PC meant that more users needed to shareresources and peripheral devices, raising newtechnical questions. The answer was the net-work, which allowed users to share not onlyfiles but also disk drives and printers.

Fundamental to this shift was the growingpopularity of LANs, which joined users in asmall geographic area. WANs, in turn, inter-connect LANs across normal telephone linesand other media. The open systems intercon-nection (OSI) reference model provides theconceptual framework for one computer tocommunicate with another; communicationprotocols make the communication possible.(See the “Glossary” section of this Survey forfurther explanation of OSI.)

Communication protocols describe howinformation from a software application in

one computer moves through a networkmedium to a software application in anothercomputer. They are largely categorized asLAN protocols, WAN protocols, networkprotocols, and routing protocols.

Networking protocols include Xerox’sEthernet and IBM’s Token Ring. These arebased on the concept of shared bandwidth —a configuration in which end users competefor the right to send and retrieve informationover the network.

The shared-bandwidth era spawned ahost of new products that remain criticalcomponents in today’s mainstream net-works. Intelligent hubs (the central wiringdevice for LANs) were introduced to re-place the thick and expensive cables toeach individual terminal.

In the PC’s early years, bandwidth avail-ability was not a major issue, but as moreusers were added to each network, the sys-tems became bogged down. Corporationstried to alleviate congestion by segmentingtheir networks into smaller and smallergroups. The rationale for segmentation isthat if fewer users compete for transmissiontime, bandwidth availability will remainhigh. Bridges and routers, described below,are two common hardware devices used tosegment a network.

◆ Bridges. These boxlike devices providea basic connection between two similar butphysically separate LANs — between twoEthernet networks, for example. Unlikerouters, bridges are protocol-independent —that is, they are able to transmit data in IP,asynchronous transfer mode (ATM), andsynchronous optical network/synchronousdigital hierarchy (SONET/SDH). And theyforward packets (units of data sent across anetwork) without analyzing and re-routingmessages. Compared with routers, bridgesare less costly and somewhat faster, but theyare also less intelligent than routers. Bridgesare usually deployed in small, relatively sim-ple network environments, since they “scale”well — that is, they enable the scope of anetwork to broaden.

◆ Routers. The router is an advanced in-terconnection device to link LANs that usedifferent protocols. For example, it may con-nect a Token Ring network to an Ethernetnetwork. After evaluating and compensating

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for such factors as network congestion andthe distance between a transmission’s sourceand destination, the router picks the bestpath for moving a packet of informationcloser to its destination. Although more reli-able and secure than bridges, routers are alsomore expensive and often slower. Conse-quently, they are generally used in largermultiprotocol networks.

Switching technology boosts bandwidthAlthough bridges and routers have been

used to alleviate network congestion, neitherdevice increases network bandwidth. To usea highway metaphor, a bridge or router canconnect two “roads” (individual networks)to even out traffic along each. They cannot,however, widen either road. Widening theroad — that is, increasing the bandwidth —has become critical as the Internet and agrowing number of intranets place greaterdemands on networks. Switches haveemerged as the fastest-growing solution tomeet this need.

Switches offer dedicated bandwidth toeach user, and thus each device has access tothe network’s full transmission speed. For ex-ample, an Ethernet switch would dedicate 10Mbps of bandwidth to each of 10 users, fora total capacity of 100 Mbps. In contrast, ina nonswitched Ethernet network, the 10users would share a total of 10 Mbps.

The deployment of switches is also ex-tremely cost-effective compared with tradi-tional router solutions; switches cost severalhundred dollars less per port, due mainly totheir limited software make-up and lowersupport costs. Switches that include routingtechnology have become more popular as away to meld the intelligence of routers withthe speed of switches.

In the following section, we briefly discussthe different types of switching available toend-users.

◆ Ethernet switching. Turning 30 yearsold in May 2003, Ethernet now accounts forroughly 85% of all networking connectionsworldwide. Ethernet switches have becomeso widely used because they are relativelylow in cost.

When it was commercially introduced inthe late 1980s, Ethernet switching providedan immediate bandwidth boost. The reasonwas that in a switched environment, an in-

formation packet is sent directly to its desti-nation, allowing the network to be dividedinto multiple smaller segments and providingthe full available bandwidth to each port.

In a traditional Ethernet environment, apacket of data is sent out, or broadcast, overthe entire network. Each Ethernet-equippedcomputer (or station) operates independentlyof all other stations on the network. To senddata, a station first listens to the channel.When the channel is idle, it transmits its datain the form of an Ethernet packet. However,since Ethernet interfaces are equal in theirability to send frames onto the network, it’spossible that two interfaces will sense thatthe network is idle and will attempt to trans-mit simultaneously. When this happens, theEthernet system has a way to sense the “col-lision” of signals, stop the one transmission,and resend; nonetheless, this can result innetwork congestion.

◆ Fast Ethernet. Gaining popularity inthe 1990s, Fast Ethernet offered a tenfoldimprovement over Ethernet, providing amaximum of 100 Mbps of shared band-width. Two Fast Ethernet implementationsare available: 100BaseT and 100VG-Any-LAN. While the latter version is not widelydeployed, 100BaseT has become the FastEthernet standard.

100BaseT owes its success to widespreadsupport from the vendor community, including3Com, Cisco Systems, and others. Another keyadvantage is that it can be implemented onunshielded twisted pair (UTP) cable, that is,ordinary telephone wire. In addition, theconversion from Ethernet to 100BaseT doesnot require installing new adapter cards orswitching hub modules.

However, 100BaseT has a number ofdrawbacks. While it is fine for small groups,its performance degrades when the networkmust support more than 10 users. Second,the protocol awards transmission to users ona first-come, first-served basis. Finally,100BaseT supports a network diameter ofonly 250 meters, about one-tenth of themaximum length of a segment in 10 MbpsEthernet. For connections beyond this dis-tance, additional routers are required.

◆ Gigabit Ethernet. Gigabit Ethernet isamong the latest high-speed switching tech-nologies to be introduced to the networking

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industry. Gigabit Ethernet’s advantages arethat it is fast, relatively inexpensive, fault tol-erant, and compatible with equipment madeby different manufacturers. It is also able toleverage existing Ethernet technologies, en-abling management ease of use and competi-tive cost. Offering network speeds of up toone gigabit (one billion bits) per second, gi-gabit Ethernet compares impressively withFast Ethernet’s 100 Mbps speed. The gigabitEthernet standard was reached in June 1998,and the technology has been gaining momen-tum ever since.

◆ Token Ring switching. Token Ring net-works transmit data (or a “token”) around adefined circular path from computer to com-puter. Each node (or client in the ring) ispolled to see if it has information to send.Only the node that chooses the token is al-lowed to transmit data.

The Token Ring switching process is sim-pler, faster, and less costly than traditionalLAN internetworking devices. However, Eth-ernet switches are even simpler and cheaper.The rise of Ethernet switching has come atthe expense of Token Ring networks.

◆ Fiber distributed data interface (FDDI).FDDI describes a network that is a dual ringarchitecture offering 100 Mbps token-basedtransmission over fiberoptic cable. Its advan-tages include transmission rates of up to 100Mbps over a distance of up to two kilome-ters, built-in network management, and faulttolerance. While finding acceptance for usein highly intensive corporate applications,FDDI has not won greater acceptance in themainstream networking community becauseof its premium price.

◆ Asynchronous transfer mode. ATMsupports speeds of 25 Mbps to 622 Mbps.As Ethernet prices have gone down andspeeds have gone up, the future of ATM re-mains hotly debated.

A key advantage of ATM technology is itsability to transmit voice and video signals aswell as data. The convergence of voice, data,and video technology, a trend long forecastby experts, is finally gaining momentum.With telecommunications companies enteringthe networking arena and traditional net-work companies acquiring companies withvoice and video technology, voice and data

are rapidly converging. Indeed, many tele-phone networks have used ATM in their net-works in the past, attracted by its quality ofservice (QoS) characteristics.

Competitive landscape broadens

In computer networking, as with anyhigh-growth segment of the technology sec-tor, competitive conditions can changequickly and dramatically. In the mid-1990s, four vendors dominated the net-working industry: Cisco Systems, 3ComCorp., Bay Networks (acquired by North-ern Telecom in August 1998), and Ca-bletron Systems Inc. In August 2001,Cabletron essentially split itself up to cre-ate two new companies: Enterasys Net-works Inc. and Riverstone Networks Inc.

The ability of these networking compa-nies to identify and exploit the market op-portunities presented by the technologiesand devices mentioned in the section abovehas been a key factor in determining theircompetitive positions today. For example,all of these companies were early beneficia-ries of the shared-media revolution of the1980s, and each dominated a specific prod-uct area. Bay and Cabletron were leadersin high-end hubs, Cisco in routers, and3Com in network interface cards. However,the competitive landscape began to shift in1996 because Bay and Cabletron were late toembrace new switching technologies.

In the following section, we take a clos-er look at the industry’s competitive struc-ture and the roles that acquisitions andspinoffs have played in shaping the land-scape. (Acquisitions are also discussed inthe “Industry Trends” section of this Sur-vey.) In addition, new technologies havebroadened the field of competitors.

Consolidation leads to spinoffsThe networking equipment industry wit-

nessed significant consolidation in 1997and 1998. Among major moves, Nortel ac-quired Bay Networks in 1998, and LucentTechnologies acquired Ascend Communica-tions. Now, however, some of the largeplayers are looking to spin off their enter-prise data networking divisions as theypursue the high-growth, but long-term, op-portunities envisioned in supplying equip-ment to service providers.

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As part of this new trend, Cabletron Sys-tems, whose fortunes had dramaticallylagged those of its peers in the mid- to late1990s, essentially divided itself into twoseparate publicly traded companies. 3Comsold its LAN and WAN chassis-based net-working gear units (although as of Decem-ber 2002, it appeared to be looking at areturn to that market) as well as its analogmodem business. Meanwhile, Lucent spunoff its enterprise network division. (CalledAvaya Inc., this spinoff was completed inSeptember 2000.)

While other incumbents and start-ups arecertainly a concern to the traditional ven-dors, they have gained only a small share ofthe overall networking industry equipmentmarket. Fiercely competitive market dynam-ics, combined with rapid technologicalchange and growing customer demand for asingle vendor to provide all networking re-quirements, have made it difficult for newentrants to make major inroads.

In the world of technology, however,nothing is ever static. The push for fasternetworks powered by new high-speedswitching technologies, and the convergenceof data and voice networks, have fosteredcompetition and accelerated the role of merg-ers and acquisitions in the industry. The in-dustry’s participants are thus facing newchallenges and challengers, and the competi-tive landscape could drastically change againover the next several years.

Acquisitions and market dynamics areblurring distinctions among the followinggroups of competitors:

◆ Cisco outpaces competitors. By virtueof its size and dominance, Cisco sets thestandard by which all industry competitorsare measured. Since 1994, when the originalBig Four (Bay, Cisco, 3Com, and CabletronSystems) were virtually identical in size, Cis-co has grown at a much faster rate than itspeers. Cisco’s revenues reached $24 billion in2000, compared with less than $4 billion re-ported by 3Com, the next-biggest player atthat time. Indeed, as Cisco penetrated thetelecommunications equipment market, itsrevenue growth in 2000 also outpaced rivalsNortel and Lucent. Even during the down-turn of 2001, Cisco fared better than its ri-vals; its revenues fell to $18.3 billion, versus3Com’s $1.87 billion. And Cisco’s balance

sheet remains strong, with some $20 billionin cash and investments as of April 2003.

This impressive growth record has comefrom the company’s aggressive acquisitionstrategy, effective marketing, and excellentexecution. In recent years, the companysteadily targeted fast-growing new marketsthrough its own technology or via acquisi-tions, pushing its rivals into a constantsearch for a competitive response. While thecompany decelerated its pace of acquisitionsduring 2001, it continues to capitalize on itsposition as an end-to-end networking vendor.Partly thanks to its higher-end mix, the com-pany appears solidly ahead of its peers. Allvendors must react to Cisco’s actions or riskbeing left further behind.

◆ 3Com and other large networkingvendors. 3Com was the second largestplayer in the enterprise market until itsless-than-stellar execution led it to exit thehigh-end LAN and the WAN chassis prod-uct lines in its fiscal year ended May 2001.Some of 3Com’s traditional products arenow being reengineered specifically to tar-get the market for equipment for carriersand Internet service providers.

In June 1997, 3Com merged with U.S.Robotics Corp., the market leader inmodems and remote access technology, in adeal valued at $6.6 billion. The merger cata-pulted 3Com’s revenues upward, significantlyclosing the revenue gap between it and Cis-co, and pushing it further ahead of the restof the pack. For some time after the merger,however, 3Com encountered problems withinventory levels and other transition issues,which caused its growth to slow.

The industry’s other large vendors regular-ly compete head-on with Cisco and 3Comfor corporate customers. Included in thisgroup are Nortel (reflecting its acquisition ofBay), Enterasys Networks, and Alcatel (viaits acquisition of Newbridge Networks inMay 2000).

◆ Niche vendors/start-ups. Niche vendorsare companies that specialize in only a fewsegments or technologies (such as ATM, re-mote access, and so on), as opposed to pro-viding the end-to-end solutions offered bythe major network equipment companies. Inthe past two years, many have been ac-quired, as data communications and telecom-

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munications equipment companies are at-tempting to gain a foothold in the market forconverged networks.

Among the niche vendors that have been ac-quired is Ascend Communications, the largestsuch company, which was purchased by LucentTechnologies in June 1999. (Ascend had ac-quired Cascade Communications in mid-1997.)Lucent, via its ownership of Ascend, is a majorplayer in remote access. Shiva Corp., also a re-mote access vendor, was acquired by IntelCorp. in early 1999. ATM leader FORE Sys-tems was acquired by General Electric Co. plc(since renamed Marconi plc) in June 1999.Many niche vendors witnessed sharply reducedrevenue growth as larger players broadenedtheir product lines and as major customers in-creasingly sought entire network solutions, notjust components.

In addition, start-up companies have re-cently emerged in the networking industry,competing for the service provider market.These include Juniper Networks Inc. andSycamore Networks Inc., as well asFoundry Networks Inc., Redback Net-works Inc., Riverstone Networks (techni-cally a spinoff from Cabletron Systems),and Extreme Networks Inc., all of whichserve certain networking equipment prod-uct categories, and thus lack the productbreadth of major industry players.

◆ Telecommunications equipment compa-nies. As signaled by the acquisitions of BayNetworks by Nortel and Ascend by LucentTechnologies, the convergence of voice, data,and video technologies has the potential totransform the networking industry and itscompetitive landscape.

In this period of rapid technological change,the major telecom equipment companies mustmigrate into data networking or risk falling be-hind the competition. For Cisco and the othernetworking equipment leaders, this is goodnews. Telecom carriers that need networkingequipment represent a new market opportuni-ty. However, Cisco and others will now facemany new competitors. The ability to stay onthe leading edge will be critical as traditionalnetworking companies come up against com-petitors with longer relationships with telecom-munications providers.

◆ Networking divisions of large computerfirms. Large computer vendors like Hewlett-

Packard Co., and more recently, Dell Com-puter Co., as well as semiconductor marketleader Intel Corp. maintain networking hard-ware divisions of varying sizes. In 1999, IBMannounced the purchase of certain network-ing intellectual property by Cisco Systems.However, these divisions have yet to pose aserious threat to the networking giants.

Marketing and product development

In this fast-paced environment, competi-tors must understand the dynamics of thecustomer base to meet the changing needsof the marketplace. New product develop-ment is essential, and transitions to newtechnology present an ongoing challenge.Marketing, product development, and exe-cution of product transitions are criticalparts of the equation.

Networking players are vying for customersin essentially three key market segments. Thefirst consists of enterprise customers, includinglarge corporations, and government and educa-tional organizations. The second is serviceproviders — firms that provide data communi-cation services — including telecommunicationcarriers, cable companies, wireless communica-tion providers, and Internet service providers.The third category comprises small and midsizebusinesses, home offices, and residential users.

Product transitions: key to successFor vendors, growth depends on success-

fully navigating the straits of rapid techno-logical change. Compared with most otherindustries, networking companies typicallyinvest heavily in research and development(R&D) — often 10% or more of sales. Suchoutlays are crucial in that they enable net-work companies to identify new product op-portunities and bring products to market in atimely manner.

Industry participants must be constantlyalert to changes in technology and end-userbuying patterns. The rapid transition toswitching products in recent years serves as agood example of what can happen whencompanies successfully navigate (or miss) keyproduct transitions. Keenly aware of themarketplace shift to switching, Cisco em-barked on a series of acquisitions beginningback in 1994 to boost its exposure to thisfast-growing strategic market. In contrast,Bay Networks was slow in getting new

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switching products to market, and as a re-sult, its revenue growth suffered.

In another segment, the move to higher-speed optical interfaces on fiberoptic equip-ment (OC-192) was missed by LucentTechnologies during 2000, to its financialdetriment. Meanwhile, Nortel was able tocapitalize on the high demand for the gear,and prospered for most of that year (al-though it later suffered from the general tele-com equipment slowdown). Often, when acompany misses an important product transi-tion, it not only leads to lost sales, but it mayalso cause customers to question its long-term vision and future product roadmap.

Forecasting and execution are crucialThe ability to properly forecast demand

and execute manufacturing initiatives iskey to the success of networking hardwarevendors. When the industry has witnessedunexpectedly strong end-user demand forsuch items as network interface cards andswitches, it has placed a premium on ven-dors’ ability to have the right amount ofproduct available at a moment’s notice.Meeting this challenge forces vendors tomake assumptions about the demands ofhundreds of thousands of customers acrossmany geographic markets; the failure to doso can lead to lost sales, as well as an un-desirable inventory mix.

Recently, many networking equipmentvendors have outsourced the manufacturingof certain products to contract manufactur-ers. As demand for networking hardware ac-celerates, this trend appears to be increasing.

Most components used by networkingcompanies in the production process arebased on industry standards and are avail-able from several suppliers. In some in-stances, however, only one source exists,which raises the risk that the supplier will beunable to meet demand for the component ina timely and cost-effective manner.

Distribution options grow

As revenue opportunities in the network-ing industry grow rapidly and become moreglobal, vendors have been forced to use a va-riety of channels to bring products success-fully to the market. Many vendors use atwo-tiered approach: a direct sales force toservice large corporate customers, and dis-

tributors and resellers (or “indirect sellers”)to service smaller corporate accounts and in-ternational customers. Before it spun off En-terasys and Riverstone Networks, Cabletronwas the only exception, relying primarily onits direct sales force. However, the spun-offfirms have broadened their reach via channelreseller agreements.

The two-tiered approach allows forgreater market coverage, but also presentssome challenges. First, products soldthrough resellers typically carry lower mar-gins than those sold through direct chan-nels. Vendors must offset these lowerprofitability levels with increased volumesor lower overhead.

Even more important, companies that relyheavily on indirect sales channels face agreater challenge in gauging end-user de-mand and managing inventories. Failure tomonitor indirect distribution channels prop-erly can result in overly optimistic sales fore-casts and resultant inventory imbalances. Inearly 1998, for example, 3Com had unac-ceptably high inventory levels in its distribu-tion channels due to lower-than-expecteddemand. To combat this surplus, 3Com de-cided to halt production of certain productsfor a short time until the clogged channelscleared. Obviously, the impact on sales wasdramatic and negative.

The Internet is a distribution channelquickly gaining in importance. In fact, CiscoSystems has reported that it books roughly90% of its orders over the Internet.

KEY INDUSTRYRATIOS AND STATISTICS

� Worldwide shipments of personal com-puters. Historically, the proliferation of per-sonal computers (PCs) and its effect onnetworking infrastructures made it impera-tive for the analyst to monitor PC growthlevels. However, with demand for data net-working equipment now coming fromtelecommunications-related markets, themarket for advanced networking gear is lessdirectly related to demand cycles for PCs.

Still, PCs are a variable to consider in pro-jecting demand for networking products. Aslowdown in unit shipments may be a pre-cursor to slowing demand for certain net-working products. This is especially true for

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network interface cards (NICs), which per-mit PCs to be connected to a network.

Worldwide PC shipments are reportedquarterly by various industry research firms,including Gartner Inc. and InternationalData Corp. (IDC). According to IDC data,worldwide PC shipments totaled more than130 million units in 2000, a year-to-year in-crease of 16%. For 2001, however, world-wide PC unit sales declined 4%. For 2002,PC shipments were roughly flat comparedwith 2001 levels (up 1.4%), and Standard &Poor’s expects a 5% rise in 2003.

� Global Sales Report. Issued monthly, theGlobal Sales Report measures the level ofworldwide semiconductor shipments (billings).Created in 1997 to replace the semiconductorbook-to-bill ratio (which covered only NorthAmerica), the report is compiled by the Semi-conductor Industry Association (SIA), an inter-national trade association of semiconductormanufacturing companies. The data are basedon a survey of global semiconductor companiesand reflect a three-month moving average ofsemiconductor shipments.

Because networking hardware vendorsare significant buyers of semiconductorproducts, any notable change in monthlysales can be used to help gauge end-userdemand. If a key semiconductor supplier tothe networking industry reports lowerbillings, it may suggest that networkingvendors are not ordering because of slow-ing demand. Conversely, if billings arehigher, it may reflect increased demand.

Unfortunately, the Global Sales Reportdoes not break out billings by individualtechnology sectors. Analysts must thereforeidentify the main semiconductor suppliers tothe networking industry and determine howtheir shipments compare with the index.

For 1998, the SIA reported that chip saleswere down 8.3%, reflecting weakened de-mand associated with troubled Asian mar-kets. Benefiting from a cyclical recovery inthe industry, the SIA estimated that world-wide semiconductor sales grew 18.9% to$149 billion in 1999. This marked the firsttime since 1995 that global sales achieved adouble-digit growth rate. The SIA estimatedsales in 2000 at $205 billion, up 37%. Signsof an inventory build-up had led analysts toreduce sales projections, but 2000 wound upbeing a much stronger year than originally

anticipated. In 2001, these trends dramatical-ly reversed: worldwide semiconductor salesslumped 32% to $139 billion.

Signs of a turnaround were reflected in theconsistent growth in semiconductor sales dur-ing 2002. The SIA estimates full-year growth in2002 was approximately 1.8%. The trade or-ganization projects a 10.1% rise in worldwidesemiconductor sales for 2003, 16.8% in 2004,5.8% in 2005, and 7.0% in 2006.

� Business capital spending. Large corpo-rations and small office/home office (SOHO)businesses remain the primary drivers of spend-ing on information technology (IT), so theircapital outlays should be monitored closely.

The long-term outlook for business capitalspending on information technology remainshealthy, as businesses worldwide seek pro-ductivity gains to achieve a global competi-tive advantage. Still, unforeseen events affectthe ability of businesses to invest in IT, andthis includes the current steep decline in theU.S. economy, which is also threateningglobal economies. Any prolonged drop in thelevel of business capital spending wouldclearly have a negative impact on spendingfor networking products.

� Real gross domestic product (GDP). Cal-culated quarterly by the U.S. Department ofCommerce, real GDP measures the growth inthe market value of the nation’s output ofgoods and services, adjusted for inflation. Thisimportant statistic sums up the overall healthof the U.S. economy.

Two consecutive quarters of negativegrowth generally signal that a country is in arecession. However, leading economists de-clared that the U.S. economy entered a reces-sion in the spring of 2001, before real GDPgrowth turned negative. The last U.S. reces-sion before that occurred in 1990–91. From1991 through 2000, quarterly real GDPgrowth in the United States ranged from anannualized rate of 0.5% to a high of 8.3%(in the fourth quarter of 1999), marking thenation’s longest period of continuous pros-perity. Real GDP growth was 4.1% in both1999 and 2000 (revised).

According to Standard & Poor’s, real GDPgrowth was 0.3% in 2001, and improved to2.4% in 2002 as the economy pulled out of therecession. We currently project growth of 2.4%in 2003, accelerating to 4.1% in 2004.

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While the growth of U.S. GDP is a key indi-cator in assessing the prospects for demand fortechnology products, the global nature of thenetworking hardware industry also makes itimperative that analysts monitor the economichealth of key trading partners in Europe, Asia,and Latin America.

� Currency exchange rates. The multina-tional nature of the computer industry meansthat the dollar’s value versus other major cur-rencies is of great importance. Cisco and3Com, for example, generate about 50% oftheir sales in international markets. In 1997and much of 1998, the decline of the yen ver-sus the dollar had an impact on the revenues ofthese and other networking companies. Thus,on a continuing basis, revenues transferredfrom Cisco’s Japanese subsidiary to the parentcompany will be hurt when the dollar strength-ens versus the yen, and conversely, they will behelped when the dollar weakens versus the yen.While the U.S. dollar weakened against the yenin recent quarters, the change was not materialto Cisco’s results.

For U.S. networking firms that have oper-ations in international markets, currencyswings affect expenses as well as revenues.Companies thus use hedging techniques tolimit their financial risk. Analysts shouldseek to uncover the true level of business ac-tivity on a constant currency basis.

HOW TO ANALYZE ACOMPUTER NETWORKING COMPANY

Rapid technological change makes it im-perative for investors and analysts to go be-yond traditional quantitative methods whenassessing a networking company’s outlook.Of course, financial statement analysis pro-vides valuable clues about a company’s fu-ture prospects. But it’s also necessary tomake qualitative judgments regarding a com-pany’s fundamental position with respect tocompetition, technology risk, and productand marketing strategies — all within theframework of overall industry trends andprospects. From an equity investment per-spective, an analyst should evaluate a compa-ny’s stock price using a number of valuationmetrics, and can then compare the relativeattractiveness of its shares with those of itspeers and with the industry average.

Look beyond financial results

Several critical questions require analysisbeyond a computer networking company’s fi-nancial statements. Does the company makefull use of new technologies to differentiateitself from its principal competitors? Whatproducts are the principal drivers of revenuesand profits, and are they vulnerable to new-er, faster, and cheaper alternatives? Do thecompany’s product and marketing strategiescoincide with the realities of the market-place? What role do mergers and acquisitionsplay in the company’s business strategy?

Emerging technologiesNeither quantitative nor qualitative as-

sessments of a computer networking compa-ny should ever be perceived as static; theymust be revisited regularly because of theomnipresent threat posed by new technolo-gies. Even companies with strong franchisesmust constantly be alert to technologicalshifts away from traditional products.

The technology industry is littered withcompanies that have lost their once-untouch-able leading edge. Vivid examples includeApple Computer Inc. and Digital EquipmentCorp. — companies that once dominated keycomputer segments, only to see their fortunesdecline as the market shifted toward faster,cheaper, and more functional products. Ap-ple has since staged something of a come-back, though it remains a niche player in thecomputer industry. Digital was acquired byCompaq Computer in 1998. Compaq Com-puter, in turn, was acquired by Hewlett-Packard Co. in 2002.

An analyst should be cognizant of therisks raised by technology transitions longbefore they show up as losses on the incomestatement. For example, beginning in 1996,hub vendors like Bay Networks (now ownedby Nortel Networks) and Cabletron Systems(which split up in August 2001) found thattheir core shared-hub products were beingchallenged by faster switching technologies.During 1997 and much of 1998, these com-panies had several quarters of disappointingfinancial results as they tried to catch upwith the new technologies. Chastened by thisexperience, both Cabletron and Bay devel-oped products to take advantage of newer,faster-growing switching technologies in or-der to compete.

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More recently, router leader Cisco Sys-tems ceded some share to upstart JuniperNetworks in the market for Internet back-bone routers in 2000 and early 2001. Juniperintroduced a high-speed router (supportingOC-192 interfaces, a faster speed optical in-terface) ahead of Cisco. Like many partici-pants in the fiberoptic gear market, Ciscowas caught off guard as the service providermarket shifted aggressively to higher-speednetworks. However, Cisco responded in late2000 with its own high-speed router, and re-gained several points of share from Juniperin 2001 and 2002.

Product and marketing strategiesAnother key step in the analysis is to as-

sess the computer networking firm’s productand marketing strategies. In the industry’sformative years, most companies specializedin one product area. For example, someonewanting to buy a router would go to CiscoSystems or Wellfleet Communications. (Well-fleet became part of Bay Networks, and wasin turn acquired by Nortel Networks in1998.) For hubs, SynOptics (the other half ofBay Networks) and Cabletron Systems werethe two obvious choices.

Today, however, the increasing complexi-ty of networks means many enterprise (orlarge business) customers are demandingthat vendors provide both end-to-end solu-tions and product strategies to handle futurenetworking needs. In response, vendors areincreasingly targeting marketing dollars toprovide their customers with a clear roadmap for each product as part of an overallnetwork strategy. In fact, we note that Ju-niper, which emphasized its position as a“best-of-breed” provider of high-speedrouters, has since broadened it productportfolio through acquisitions.

Acquisitions as a product strategyIn response to fundamental shifts in buying

patterns, the industry has witnessed rapid con-solidation. Acquisitions can give a companynecessary product breadth, but they also pose anew set of challenges. A company must man-age transition and integration issues that canhave a significant impact on its operating re-sults and its competitive position.

For example, in the course of acquiringU.S. Robotics in 1997, 3Com underestimatedthe amount of inventory already in the chan-

nels. The task of clearing out modem inven-tory was made even more difficult becausecustomers were delaying purchases to waitfor the new 56K modem standard. The re-sulting shortfall in revenues caused 3Com toreport earnings far below its expectations.

Analyzing a company’s strategic plans re-garding acquisitions, markets, and productsenables an analyst to gain insight into thatcompany and to gauge its prospects withinthe industry. Is a particular vendor’s strategycentered on an older, more vulnerable tech-nology? Are a company’s acquisitions defen-sive in nature, or are they based on atechnological vision that the firm believeswill be realized over the next several years?Is the end-user community receptive to thecompany’s product strategy?

Crucial comparisonsAbsolute numbers are critical to assessing

any company. However, in the fast-growingcomputer networking industry, comparativeanalysis is even more important. As we dis-cuss below, by looking behind the numbers(growth rates, margin performance, and soon) and regarding them in light of the com-pany’s peers and specific markets, an analystis better able to put these financial metrics inthe proper context.

Some industries would be pleased to re-port sales growth of 10% to 20%; in thefast-growing networking arena, however, thispace of growth is actually at the low end ofthe industry’s long-term average. In 2001,the industry experienced a decline in rev-enues, due in part to a weak U.S. economy.The slowdown may also represent a returnto the networking industry’s trendline de-mand growth, as the market adjusts follow-ing the boom of 1999 and 2000.

If a company grows more slowly than thetrendline over the long term, or underper-forms during a shorter period of boom orbust, the analyst should investigate the cause.There could be several reasons, such as thatthe company is losing market share. An ana-lyst should also consider that a company re-porting revenue growth rates and profitmargins that trail those of its competitorsmay be subject to a greater level of financialrisk as the market matures and its growthrate slows. Alternatively, if a company’sgrowth outpaces the industry average, theanalyst should attempt to determine its cause

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and sustainability. For example, if the accel-erated rate is the result of just one new prod-uct line, it could prove vulnerable tocompetition in the future.

It is critical to assess the growth outlookfor the market segments in which a net-working firm participates. The industryconsists of various product segments, all ofwhich have different growth outlooks. Forexample, the growth projected for routersdiffers markedly from that of LAN switch-es, which in turn contrasts with the marketdemand for hubs, and so on. Each segmentof a company’s business should be com-pared with the projected industry growthrate to determine if it is gaining or losingmarket share.

Customer segment is also important. Forexample, the enterprise market is currentlygrowing at a different rate than the serviceprovider market.

Companies that participate in high-growth industries usually have more oppor-tunities to rebound from mistakes that wouldbe fatal in a slowing or mature industry. Forexample, a firm with below-average salescould be the first to introduce the next greattechnology. Its revenue growth could thenexceed the industry average.

Key elements in the income statement

The income statement is central to compa-ny analysis, as it portrays the operating re-sults of a company over a stated period.Beginning at the top of the income state-ment, analysts should determine short- andlong-term trends in net sales or revenues.Then, a close examination of cost of goodssold and expense line items should be carriedout to reveal the factors that cause net in-come to exceed, track, or fall short of therevenue growth.

Analysts should also ask what factors dif-ferentiate one company from the next: paceof revenue growth, size of profit margins(gross, operating, and net), and the amountof cash on hand. All should be consideredwithin the context of the company’s growthstrategy. Is growth sought internally or viaacquisitions? Also to be taken into considera-tion are the product segments and markets inwhich the company participates. An analysiswith this level of detail will help establishfundamental operational differences between

companies, and suggest where possible im-provements can be made.

When making comparisons between com-panies, analysts should look to all of themeasures outlined below to determine whichcompanies are operating most efficiently.

SalesIdeally, sales in the current period should

show an increase from the year-earlier peri-od. However, a more relevant measure ofsales growth for the networking industryduring periods of strong growth is to consid-er sequential growth from quarter to quarter.Again, these levels should be compared withthose of direct competitors as well as the in-dustry rate. To assist in modeling earningsforecasts, analysts look to patterns of salesgrowth on a sequential basis as a year un-folds, thus indicating seasonally strong quar-ters for a particular company.

MarginsThe gross margin (percentage of sales re-

maining after subtracting the costs of goodssold, materials, labor, overhead, and othercosts) is one of the more important ratios usedto assess technology companies. Any numberof variables — including sales mix, sales vol-ume, component costs, and competitive pricingpressures — can affect gross margins.

For networking vendors in general, the in-dustry’s strength, created by new productsand the consolidation of power among ahandful of vendors, has resulted in attractivegross margins. Gross margins for the majorplayers typically range from near 40% to50%, although certain market conditions orcompany-specific events can cause these lev-els to fluctuate on a short-term basis.

In its fiscal year ended July 2002, industryleader Cisco Systems boasted a gross marginof roughly 61%. Cisco’s above-average mar-gins reflect its dominance of the router mar-ket and the heavy software content found inits routers. (Margins are typically much high-er on software-oriented products than onhardware products.) It should be noted,however, that the networking equipmentslowdown limited Cisco’s gross margin to58.9% in its July 2001 fiscal year.

ExpensesExpense line items — selling, general, and

administrative (SG&A) as well as research

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and development (R&D) costs — should beevaluated against industry norms. During thenetworking industry’s strong growth periodthrough 2000, most vendors increasedstaffing levels at a rapid pace to capture fu-ture growth opportunities. In response to thesubsequent slowdown, companies imple-mented various cost-cutting measures in2001 and 2002, including headcount reduc-tions. This rapid shift in management of ex-penses should help to support margins overthe near term. As the industry enters a recov-ery period in 2003 and 2004, analysts willwatch closely to evaluate the longer-term ef-fects of restructuring programs.

In addition, it’s important to watch thelevel and effectiveness of a company’s spend-ing on R&D, which is an investment in fu-ture product initiatives. Rapid growth inR&D has been the norm in this industry, asall companies seek to sustain a competitiveadvantage and raise barriers to entry. Evenduring the recent downturn, few companiescut R&D in any meaningful way.

ProfitsOperating profit is the net figure after the

cost of goods sold (COGS) and all operatingexpenses are subtracted from net sales. Theoperating profit margin (operating profit di-vided by net sales) summarizes the compa-ny’s ability to make a profit on each salesdollar. For computer networking companies,operating profit margins have been erraticover the past few years. This reflects producttransitions, the severe sales downturn in2001, and continued pressure in 2002, andthe inexact science of matching operating ex-pense growth to sales growth.

Net profit margin (net income divided bytotal sales) reflects a company’s adjustment fornonoperating income and expense items, suchas interest income, interest expense, and taxes.Because many vendors in the networking hard-ware industry are debt-free and typically carrylarge cash balances, nonoperating items are of-ten beneficial to net profit margins.

Return on investmentAny financial statement analysis would be

incomplete without a discussion of return oninvestment (ROI). The two most popularmeasures used to determine ROI are returnon assets (ROA) and return on equity(ROE). Return on assets (net income divided

by average total assets) measures the operat-ing efficiency of an enterprise, or the returnearned on all assets under management’scontrol. Return on equity (net income divid-ed by average total shareholders’ equity)measures the profit earned on shareholders’capital. Although the computations differ,both measures indicate management’s abilityto earn a reasonable profit on the assets andcapital entrusted to them.

In recent years, comparisons of ROA andROE levels in the computer networking indus-try have become extraordinarily complicated.One reason is that the calculation is affected bythe use of one-time write-offs (mostly related toin-process R&D), which have increased in thepast several years because of acquisition activi-ty by major networking vendors. Such write-offs have made consistent, meaningful industryROA and ROE ratios all but impossible to cal-culate. In addition, challenges have arisen dueto the number of restructuring efforts and di-vestitures. Still, an analyst can take the time tocompile a small group of networking compa-nies and examine each company’s financialstatements to determine such nonrecurringitems, exclude them from the figures, and at-tempt to calculate useful ratios.

Balance sheet hints at future results

The balance sheet is a snapshot of a com-pany’s financial condition at a specific mo-ment in time, and analysts can review it todetermine the firm’s financial health. In addi-tion, careful analysis of line items in the cur-rent asset section can provide valuable cluesabout the company’s future prospects.

LiquidityThe level of cash and marketable securities

is usually a good starting point for assessing acompany’s short-term liquidity. Because of thecomputer networking industry’s globalizationand rapid consolidation, most companies re-quire a reasonable amount of cash and cashequivalents for emergency liquidity and growthneeds. The amount will vary from company tocompany. A good rule of thumb is that cashshould equal 10% of total assets; however,most major networking vendors have assem-bled cash balances that exceed this level. Evenduring the recent industry slowdown, compa-nies focused on improving their asset manage-ment to preserve cash levels.

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Another useful liquidity test is the currentratio, which measures the ratio of current as-sets to current liabilities. A healthy current ra-tio, which should always be greater than one,ensures that the company can adequately meetits current liabilities. Any meaningful degrada-tion in these items from previous reporting pe-riods should be viewed with concern.

InventoriesIn the computer networking industry, rapid

product cycles quickly lead to inventory obso-lescence, which means that the size and healthof a company’s inventory position needs to bemonitored constantly. Inventory levels that in-crease faster than the rate of sales growth maybe signaling one of two things. It may be thatthe company is gearing up for heightened busi-ness activity (as in the early stages of a newproduct cycle), or it could be a warning thatexisting products are not selling well.

The inventory turnover ratio (the cost ofgoods sold divided by average inventory val-ue) measures the average rate at which in-ventories move to sales. (Average inventoryequals the value of beginning inventory, plusthe value of ending inventory, divided bytwo.) Any meaningful increase in inventoriesor a decline in the absolute level of inventoryturnover should be investigated.

Accounts receivableA careful analysis of the accounts receivable

line can show how well a company’s productsare selling. A rising level of accounts receivablemay indicate that a significant portion of saleswere made in the last few weeks of the quarter.While many high-technology companies expe-rience this back-ended sales trend during aquarter, such a trend could signal that priceconcessions or generous payment terms had tobe extended to accelerate the sales process. Ad-ditionally, as the networking equipment indus-try becomes more global, accounts receivablecould trend higher as logistical issues create de-lays in the receipt of payments. Nevertheless,the analyst should closely follow the company’slevel of accounts receivable, comparing it withthe industry’s composite rate and watching forany significant deviation from that rate.

Debt loadThe ratio of long-term debt to total capital

should be monitored. Any sudden change in acompany’s attitude toward taking on debt

should be investigated thoroughly. In the past,networking vendors have been able to avoidtapping the debt markets because of theirstrong cash balances, and they have largelyfunded acquisitions through equity or an ex-change of shares. At times when networkingvendors enjoyed healthy valuations versus thebroader market indices, a company’s stock rep-resented strong currency. Currently, however,with the correction in the stock market, thepace of acquisitions has slowed.

Valuation metrics to consider

In evaluating the attractiveness of a com-pany’s stock, there are several measures toconsider, as we discuss below.

Price/earningsThe price/earnings (P/E) ratio, sometimes

called the earnings multiple, is defined ascurrent stock price divided by trailing four-quarter earnings. For a forward projection,one can use the forecasted earnings for thenext four quarters. A variation of this ratio,to reflect earnings growth prospects for agiven company relative to its peers, is re-ferred to as the PEG ratio, or P/E divided bythe company’s projected five-year earningsgrowth rate.

Price/salesThis ratio is derived by dividing the cur-

rent share price of the company by its trail-ing four-quarter revenues on a per sharebasis. This measure is useful in times whenearnings are not available (if the company isoperating at a loss) or earnings forecasts arein question.

Price/cash flowThis ratio is calculated by taking the price

of a company’s stock and dividing by thesum of the past four quarters of cash flow.The most commonly used proxy for a com-pany’s cash flow is referred to as EBITDA(earnings before interest, taxes, depreciation,and amortization). In practice, this ratio iscommonly derived from projected EBITDAfor the next 12 months. This ratio is typical-ly applied in cases where a company’s earn-ings are penalized by high capital intensity. ■

GLOSSARY

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AAssyynncchhrroonnoouuss ttrraannssffeerr mmooddee ((AATTMM)) — A high-speedswitching technology for transmitting multimedia in-formation across a LAN or WAN. ATM divides infor-mation into fixed-length cells and can transmit voice,video, and data traffic simultaneously.

BBaacckkbboonnee — A network’s high-bandwidth, main con-nection path (lines, cables, and connections) thatcarries the most traffic. Smaller data paths, connect-ed by routers or bridges, branch off from the back-bone. On private networks, backbones often areused to carry messages between different depart-ments of a company. On the Internet, backbones linkregional segments of the public network.

BBaannddwwiiddtthh — A measure of the information-bearing ca-pacity of a communications channel, usually denomi-nated in bits per second. Bandwidth variesaccording to the type and method of transmission.

BBrriiddggee — Like a router, a bridge joins two segments ofcabling; it performs limited network traffic-controlfunctions, such as segmenting the network into sub-sets. Local bridges connect physically proximatenetworks. Remote bridges connect geographicallydisparate networks by transmitting data over ordi-nary phone lines or via satellite.

BBrrooaaddccaasstt — The generation and delivery of a packetto all workstations on a network.

CCaabblliinngg — The lines that physically link devices on acomputer network and that allow information to flowfrom one device to another. The two most commontypes of cable used in networks are coaxial cableand standard telephone wire. Fiberoptic cable is alsopopular, because it moves large amounts of informa-tion at extremely high speeds.

CClliieenntt//sseerrvveerr mmooddeell — A model of computing in whichone computer (the server) acts as a central storagearea for data and software programs, which can beaccessed and manipulated by other computers (theclients — usually PCs or workstations) that arelinked to the server via a network.

DDiiggiittaall ssuubbssccrriibbeerr lliinnee ((DDSSLL)) — A high-speed technolo-gy for transmitting high-bandwidth information overordinary copper telephone lines. Individual connec-tions run at speeds from 512 Kbps to 6.1 Mbps. Sev-eral variations of DSL exist; when referring to allforms, the term xDSL is sometimes used.

EEnntteerrpprriissee — Large organizations with complex net-working needs, usually spanning multiple locationsand types of computer systems. Enterprise cus-tomers include corporations, government agencies,utilities, and educational institutions.

EEtthheerrnneett — A 10 Mbps standard for network communica-tions; the most popular standard in LAN networking. Itallows only one device at a time to send data, whichare broadcast over the entire network. Devices con-stantly monitor the network, checking for data packetsdirected to them and ignoring those that aren’t.

FFaasstt EEtthheerrnneett — Also known as 100BaseT, Fast Ethernetis a high-speed version of Ethernet, transmitting atspeeds of 100 Mbps rather than 10 Mbps.

FFiibbeerr ooppttiiccss — A technology in which data are carriedby light rather than electrical energy. Fiberoptic ca-ble, made of thin filaments of glass, can carry up to30,000 times as much data as copper wires.

FFiillee sseerrvveerr — A computer on which applications and/ordata reside. Most servers are “dedicated” — usedonly to control and monitor the network and to pro-vide data, applications, and processing power to net-worked computers.

GGaatteewwaayy — A device for connecting networks that donot use the same architecture (e.g., a network of PCsand a network of workstations and file servers); it’soften a network’s most complex component.

GGbbppss — Gigabits (one billion bits) per second; a data-transfer speed measurement for high-speed networks.

GGiiggaabbiitt EEtthheerrnneett — A high-speed version of Ethernet,with transmission speeds of one Gbps.

HHeeaaddeerr — Control information added to the beginningof a transmitted message; contains the packet ad-dress, destination, and routing instructions.

HHuubb — The site where network cabling intersects. “En-terprise” hubs, which support multiple networks in asingle chassis, are usually found in corporations.“Stackable” hubs are stand-alone wiring concentra-tors that usually support fewer than 25 users each.To add users to a network, more hubs can bestacked on top of those already in place.

IInntteeggrraatteedd sseerrvviicceess ddiiggiittaall nneettwwoorrkk ((IISSDDNN)) — A stan-dard providing fast access to voice and data ser-vices over public digital networks. ISDN offersbandwidth speeds of 128 Kbps to 1.5 Mbps. Thoughslower than DSL, ISDN is a more mature, standard-ized technology that is used worldwide.

IInntteerrnneett pprroottooccooll ((IIPP)) — Specifies packet format andaddressing scheme. IP is like a postal system; apackage dropped in a mailbox can be delivered,though there’s no direct link between sender andrecipient. Most networks combine IP with thehigher-level transport control protocol (TCP),which connects destination and source. TCP/IPconnects two hosts so they can send messagesback and forth.

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IInntteerrnneettwwoorrkk — Two or more networks connected bybridges or routers.

LLaayyeerr 33 sswwiittcchhiinngg — A technology in which high-speedrouting is built into LAN switches. (Its predecessor,Layer 2, doesn’t perform routing.) Because Layer 3’srouting capabilities are built into the hardware,rather than software, it also costs less than high-endrouters.

LLaayyeerr 44 sswwiittcchh — A network device that integratesrouting and switching. When packets are inspectedat Layer 4, forwarding decisions are made based onthe type of application being serviced.

LLooccaall aarreeaa nneettwwoorrkk ((LLAANN)) — Computing devices thatare connected for the purpose of sharing data andperipherals.

MMbbppss — Megabits (one million bits) per second.

MMeettrrooppoolliittaann aarreeaa nneettwwoorrkk ((MMAANN)) — A data networkdesigned for a town or city. It typically covers a larg-er geographic area than a LAN, but smaller than aWAN, and usually features high-speed fiberoptic ca-ble connections or other digital media.

NNeettwwoorrkk iinntteerrffaaccee ccaarrdd ((NNIICC)) — A small component in-stalled in network devices (including file servers,workstations, and printers) to allow them to transmitand receive signals. Also known as an adapter card.

OOppeenn ssyysstteemm iinntteerrccoonnnneeccttiioonn ((OOSSII)) mmooddeell — The OSIreference model was developed by the InternationalStandards Organization and first published in 1978. Itdescribes the process of network communication,facilitates communications among computers fromdifferent manufacturers, and provides a common ba-sis for coordinating international standards. Its sev-en layers, from the bottom up, are as follows:

◆ Layer 1, the physical layer, handles bit transmissionbetween one node and the next. It is a connectionbetween two machines that allows electrical signalsto be exchanged between them.

◆ Layer 2, the data link layer, maintains a reliable com-munication link between adjacent nodes by checkingfor errors.

◆ Layer 3, the network layer, establishes a path for thedata packet traveling along the communication sub-net from the source node to the destination node.

◆ Layer 4, the transport layer, provides reliable datatransportation between a sender and a receiver.

◆ Layer 5, the session layer, establishes, maintains,synchronizes, and manages dialogues or sessionsbetween communicating applications.

◆ Layer 6, the presentation layer, is responsible for thepresentation of information in a way that is meaning-ful to users. This layer establishes the syntax inwhich data are exchanged between the two hosts.

◆ Layer 7, the application layer, provides a means forapplication processes to access the system inter-connection facilities in order to exchange informa-tion. The end user interacts with this layer.

PPaacckkeett — A unit of data sent across a network; alsocalled a datagram. A packet carries an addressheader and control information.

PPrroottooccoollss — Rules regulating the transmission of infor-mation on a computer network. Different systems areemployed to deliver signals from one device to an-other and to prevent packets of information fromcrashing into one another. The network interfacecard usually determines the protocol used in a par-ticular network.

RReeppeeaatteerr — A device that boosts or amplifies a sig-nal traveling along a network, extending the net-work’s reach.

RRoouutteerr — A device that connects two LANs. Routersare similar to bridges, but provide additional func-tionality, such as the ability to filter messages andforward them to different places based on variouscriteria, using address information. The Internet usesrouters to forward packets from one host to another.

SSeerrvviiccee pprroovviiddeerrss — These customers provide datacommunication services, and include telecommuni-cation carriers, Internet service providers, cablecompanies, and wireless communication providers.

TTookkeenn RRiinngg — A networking architecture that operatesat a speed of four or 16 Mbps. Clients in a Token Ringhave the ability to transmit data while they are inpossession of a token (a predetermined formation ofbits) that passes continuously from client to client.

TTooppoollooggyy — The way devices in a computer network arewired together. As with a string of Christmas tree lights,network devices or nodes are attached at points alonga length of cable (often referred to as the backbone).“Ring topology” involves a continuous length of cablethat forms a closed circuit. In “star topology,” each de-vice is attached to a central hub by individual cablesthat radiate out from the hub.

VViirrttuuaall pprriivvaattee nneettwwoorrkk ((VVPPNN)) — A network that supportsprivate data traveling over public IP infrastructure.

VVooiiccee oovveerr IInntteerrnneett PPrroottooccooll ((VVooIIPP)) — Internet telephony;refers to communications services (voice, facsimile,and/or voice-messaging applications) that are trans-ported via the Internet, rather than the public switchedtelephone network (PSTN). The basic steps involved inoriginating an Internet telephone call are conversion ofthe analog voice signal to digital format and compres-sion/translation of the signal into Internet protocol (IP)packets for transmission over the Internet; the processis reversed at the receiving end.

WWiiddee aarreeaa nneettwwoorrkk ((WWAANN)) — A network spread acrossa larger geographic area than a LAN or MAN, inwhich telecommunication links are implemented.

INDUSTRY REFERENCES

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PERIODICALS

CCoommppuutteerr RReesseelllleerr NNeewwssCMP Media LLC600 Community Dr., Manhasset, NY 11030(516) 562-5000Web site: http://www.crn.comWeekly; computer hardware and software news.

CCoommppuutteerrwwoorrllddInternational Data Group500 Old Connecticut Path, Framingham, MA 01701(508) 879-0700Web site: http://www.computerworld.comWeekly; computer hardware and software news.

EElleeccttrroonniicc NNeewwssReed Business Information1101 S. Winchester Blvd., San Jose, CA 95128(408) 243-8838Web site: http://www.e-insite.net/electronicnewsWeekly; news about the semiconductor and the com-puter hardware and software industries.

NNeettwwoorrkk CCoommppuuttiinnggCMP Media LLC600 Community Dr., Manhasset, NY 11030(516) 562-5000Web site: http://www.cmp.com/publistWeekly; covers network computing issues, often from atechnical perspective.

NNeettwwoorrkk WWoorrlldd FFuussiioonnNetwork World, Inc. 118 Turnpike Rd., Southborough, MA 01772(800) 622-1108Web site: http://www.nwfusion.comWeekly; covers network computing issues in business.

PPCC MMaaggaazziinneeZiff-Davis Inc. 28 E. 28 St., New York, NY 10016(212) 503-3500Web site: http://www.pcmag.comBimonthly; provides news coverage of the PC industry.

BOOKS

LLAANN PPrriimmeerr:: TThhee BBeesstt IInnttrroodduuccttiioonn ttoo NNeettwwoorrkkiinngg FFuunnddaammeennttaallss,, 33rrdd eedd.. Greg NunemacherCollingdale, PA: Diane Publishing Co., 1999

MARKET RESEARCH FIRMS

DDeellll’’OOrroo GGrroouupp IInncc..230 Redwood Shores Pkwy., Redwood City, CA 94065(650) 622-9400Web site: http://www.delloro.comSpecializes in business planning and strategic competi-tive analysis in the networking industry.

GGaarrttnneerr IInncc..251 River Oaks Pkwy., San Jose, CA 95134(408) 468-8000Web site: http://www4.gartner.comCovers worldwide markets for various information tech-nology industry sectors.

IInn--SSttaatt//MMDDRR6909 E. Greenway Pkwy., Scottsdale, AZ 85254(480) 483-4440Web site: http://www.instat.comMarket research and analysis focused on technologycompanies.

IInnffoonneettiiccss RReesseeaarrcchh IInncc..255 W. Julian St., Ste. 402, San Jose, CA 95110(408) 298-7999Web site: http://www.infonetics.comMarket research for the networking and telecommuni-cations industries.

IInntteerrnnaattiioonnaall DDaattaa CCoorrpp.. ((IIDDCC))Five Speen St., Framingham, MA 01701(508) 872-8200Web site: http://www.idcresearch.comProvides technology data, analysis, and consulting.

RRHHKK IInncc..601 Gateway Blvd., S. San Francisco, CA 94080(650) 737-9600Web site: http://www.rhk.comMarket research and consulting; specializes in analyz-ing advanced technologies for the public telecommuni-cations network.

SSyynneerrggyy RReesseeaarrcchh GGrroouupp IInncc..1300 E. Missouri Ave., Ste. C200, Phoenix, AZ 85014(602) 287-9097Web site: http://www.synergyresearchgroup.comMarket research firm for the networking and Internetindustries.

TThhee YYaannkkeeee GGrroouupp31 St. James Ave., Boston, MA 02116(617) 956-5000Web site: http://www.yankeegroup.comResearch and consulting; analyzes technology industries,including the Internet, computing, and communications.

DEFINITIONS FOR COMPARATIVE COMPANY ANALYSIS TABLES

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Operating revenuesNet sales and other operating revenues. Excludesinterest income if such income is “nonoperating.”Includes franchised/leased department income forretailers and royalties for publishers and oil and miningcompanies. Excludes excise taxes for tobacco, liquor,and oil companies.

Net incomeProfits derived from all sources, after deductions ofexpenses, taxes, and fixed charges, but before anydiscontinued operations, extraordinary items, anddividend payments (preferred and common).

Return on revenues Net income divided by operating revenues.

Return on assets Net income divided by average total assets. Used inindustry analysis and as a measure of asset-use efficiency.

Return on equity Net income, less preferred dividend requirements,divided by average common shareholder‘s equity.Generally used to measure performance and to makeindustry comparisons.

Current ratioCurrent assets divided by current liabilities. It is ameasure of liquidity. Current assets are those assetsexpected to be realized in cash or used up in theproduction of revenue within one year. Current liabilitiesgenerally include all debts/obligations falling due withinone year.

Debt/capital ratioLong-term debt (excluding current portion) divided bytotal invested capital. It indicates how highly “leveraged”a company might be. Long-term debt are thosedebts/obligations due after one year, including bonds,notes payable, mortgages, lease obligations, andindustrial revenue bonds. Other long-term debt, whenreported as a separate account, is excluded; this accountgenerally includes pension and retirement benefits. Totalinvested capital is the sum of stockholders’ equity, long-term debt, capital lease obligations, deferred incometaxes, investment credits, and minority interest.

Debt as a percent of net working capitalLong-term debt (excluding current portion) divided by thedifference between current assets and current liabilities.It is an indicator of a company’s liquidity.

Price/earnings ratio The ratio of market price to earnings, obtained bydividing the stock’s high and low market price for theyear by earnings per share (before extraordinary items).It essentially indicates the value investors place on acompany’s earnings.

Dividend payout ratioThis is the percentage of earnings paid out in dividends.It is calculated by dividing the annual dividend by theearnings. Dividends are generally total cash paymentsper share over a 12-month period. Although payments areusually calculated from the ex-dividend dates, they mayalso be reported on a declared basis where this has beenestablished to be a company’s payout policy.

Dividend yield The total cash dividend payments divided by the year’shigh and low market prices for the stock.

Earnings per shareThe amount a company reports as having been earnedfor the year (based on generally accepted accountingstandards), divided by the number of shares outstanding.Amounts reported in Industry Surveys excludeextraordinary items.

Tangible book value per shareThis measure indicates the theoretical dollar amount per common share one might expect to receive shouldliquidation take place. Generally, book value isdetermined by adding the stated (or par) value of thecommon stock, paid-in capital, and retained earnings,then subtracting intangible assets, preferred stock atliquidating value, and unamortized debt discount. Thisamount is divided by the number of outstanding shares to get book value per common share.

Share price This shows the calendar-year high and low of a stock’smarket price.

In addition to the footnotes that appear at the bottom ofeach page, you will notice some or all of the following:NA—Not available.NM—Not meaningful.NR—Not reported.AF—Annual figure. Data are presented on an annualbasis.CF—Combined figure. In this case, data are not availablebecause one or more components are combined withother items.

COMPARATIVE COMPANY ANALYSIS

SEPTEMBER 18 , 2003 / COMPUTERS: NETWORKING INDUSTRY SURVEY

32

COMPARATIVE COMPANY ANALYSIS — COMPUTERS: NETWORKING

CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA 1,477.9 2,820.9A 4,333.9A,C 5,772.1A 5,420.4A 617.2A NA NA NA NA 239 457 702 935ADPT § ADAPTEC INC. # MAR 408.1 418.7 582.0D 811.2A 692.4 1,007.3 311.3 2.7 -16.5 -2.5 131 134 187 261 222ADCT * ADC TELECOMMUNICATIONS INC OCT 1,047.7 2,402.8 3,287.9A 1,926.9A 1,379.7 1,164.4 316.5 12.7 -2.1 -56.4 331 759 1,039 609 436ADTN † ADTRAN INC DEC 345.7 387.1 462.9 367.2 286.6 265.3 NA NA 5.4 -10.7 ** ** ** ** NAAFCI † ADVANCED FIBRE COMM INC DEC 344.1 327.6 416.9A 291.6 312.7 267.9 NA NA 5.1 5.0 ** ** ** ** NA

ALN ALLEN TELECOM INC DEC 417.0 394.6 392.6 333.7D 388.0 432.5 296.2A,C 3.5 -0.7 5.7 141 133 133 113 131ANDW * ANDREW CORP SEP 864.8A,C 1,049.5C 1,019.2C 791.8 852.9 869.5D 442.0 6.9 -0.1 -17.6 196 237 231 179 193VOXX § AUDIOVOX CORP -CL A NOV 1,100.4 1,267.7 1,702.3 1,159.5 616.7 639.1 343.9 12.3 11.5 -13.2 320 369 495 337 179AV * AVAYA INC SEP 4,956.0 6,793.0A 7,680.0 8,268.0A,C NA NA NA NA NA -27.0 ** ** ** ** NAAVCT † AVOCENT CORP DEC 260.6A 255.9A 222.4A 107.3 75.6 55.4 NA NA 36.3 1.8 ** ** ** ** NA

BELFB § BEL FUSE INC DEC 95.5 96.0A 145.2 119.5 90.8A 73.5 50.4 6.6 5.4 -0.5 190 191 288 237 180BBOX § BLACK BOX CORP # MAR 605.0A 743.7A 827.0A 499.8A 330.0A 279.8 189.4A 12.3 16.7 -18.6 319 393 437 264 174BRKT § BROOKTROUT INC DEC 73.5 79.8 141.7D 140.7 100.9A 72.2A 12.4 19.5 0.4 -7.9 594 645 1,146 1,138 816CDT § CABLE DESIGN TECH CP -CL A JUL 553.8 763.2 797.8A 684.0 651.7 517.0A NA NA 1.4 -27.4 ** ** ** ** NACCBL § C-COR.NET CORP JUN 265.7A 223.3 281.1A 171.3 152.1 131.9D 52.2 17.7 15.0 19.0 509 428 539 328 292

CIEN * CIENA CORP OCT 361.2 1,603.2A 858.8 482.1A 508.1A 373.8 NA NA -0.7 -77.5 ** ** ** ** NACSCO * CISCO SYSTEMS INC JUL 18,915.0 22,293.0 18,928.0A 12,154.0A 8,458.8 6,440.2 339.6 49.5 24.0 -15.2 5,569 6,564 5,573 3,579 2,491CTV † COMMSCOPE INC DEC 598.5 738.5 950.0 748.9A 571.7 599.2 NA NA 0.0 -19.0 ** ** ** ** NACMVT * COMVERSE TECHNOLOGY INC # JAN 735.9 1,270.2 1,225.1A 872.2 696.1A 280.3 37.5A 34.7 21.3 -42.1 1,962 3,387 3,267 2,326 1,856CRTO § CONCERTO SOFTWARE INC DEC 99.5A 94.3 94.3 92.4 88.9A 76.8 30.6 12.5 5.3 5.5 325 308 308 301 290

GLW * CORNING INC DEC 3,164.0D,F 6,272.0A,F 7,161.7A,F 4,782.5A,F 3,532.4D,F 3,554.3A,C 3,744.0F -1.7 -2.3 -49.6 85 168 191 128 94DGII § DIGI INTERNATIONAL INC SEP 101.5A 130.4A,C 132.5 193.5 182.9A 165.6 57.8 5.8 -9.3 -22.1 176 226 229 335 317HLIT § HARMONIC INC DEC 186.6 203.8 263.0A 184.1 83.9A 74.4 NA NA 20.2 -8.4 ** ** ** ** NAHRS † HARRIS CORP JUN 1,875.8 1,955.1 1,807.4 1,743.5D 3,877.4 3,797.2 3,004.0 -4.6 -13.2 -4.1 62 65 60 58 129INTL § INTER-TEL INC -SER A DEC 381.5A 385.7A 402.7A 314.2 274.5 223.6 78.8 17.1 11.3 -1.1 484 489 511 399 348

JDSU * JDS UNIPHASE CORP JUN 1,098.2 3,232.8A 1,430.4A 282.8A 175.8A 107.0A NA NA 59.3 -66.0 ** ** ** ** NALU * LUCENT TECHNOLOGIES INC SEP 12,321.0 21,294.0C,D 33,813.0A,C 38,303.0A 30,147.0A 26,360.0A NA NA -14.1 -42.1 ** ** ** ** NAMCDTA † MCDATA CORP -CL A DEC 328.3 344.4A 248.7 95.3 36.5 NA NA NA NA -4.7 ** ** ** ** NAMOT * MOTOROLA INC DEC 26,679.0 30,004.0 37,580.0A 30,931.0 29,398.0 29,794.0 13,303.0 7.2 -2.2 -11.1 201 226 282 233 221NWK § NETWORK EQUIPMENT TECH INC # MAR 122.1C 101.5 144.3 225.7A 263.8 308.7 218.8 -5.7 -16.9 20.2 56 46 66 103 121

PCTI § PC-TEL INC DEC 48.8 41.0 97.2A 76.3 33.0A NA NA NA NA 19.1 ** ** ** ** NAPLT † PLANTRONICS INC # MAR 337.5 311.2A 401.0 315.0 286.3 236.1 112.3D 11.6 7.4 8.5 301 277 357 281 255PLCM † POLYCOM INC DEC 466.0A 383.2A 331.3 200.1A 111.7A 46.6 NA NA 58.5 21.6 ** ** ** ** NAPWAV † POWERWAVE TECHNOLOGIES INC DEC 384.9 300.3A 447.4 292.5 100.2A 119.7 NA NA 26.3 28.2 ** ** ** ** NAQCOM * QUALCOMM INC SEP 3,039.6 2,679.8 3,196.8A 3,937.3 3,347.9 2,096.4 106.4 39.8 7.7 13.4 2,856 2,518 3,004 3,700 3,146

SFA * SCIENTIFIC-ATLANTA INC JUN 1,671.1A 2,512.0 1,715.4 1,243.5 1,181.4 1,168.2A,C 580.8 11.1 7.4 -33.5 288 432 295 214 203SCMM § SCM MICROSYSTEMS INC DEC 177.7 184.9 157.8A 127.3 85.0A 27.8 NA NA 45.0 -3.9 ** ** ** ** NASYMM § SYMMETRICOM INC JUN 72.6 152.7 107.6A 76.9D 120.6 144.4 68.8 0.5 -12.8 -52.4 106 222 156 112 175TLAB * TELLABS INC DEC 1,317.0 2,206.0 3,387.4A,C 2,319.5A 1,660.1 1,203.5 258.6 17.7 1.8 -40.3 509 853 1,310 897 642TLGD § TOLLGRADE COMMUNICATIONS INC DEC 58.6 82.2 114.4 61.1 46.3 45.4 NA NA 5.2 -28.8 ** ** ** ** NA

VSAT § VIASAT INC # MAR 185.0 195.6A 164.4A 75.9 71.5 64.2 NA NA 23.6 -5.4 ** ** ** ** NA

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC 484.8 415.3H 1,071.5A 1,459.6 1,411.3A 1,377.3A 418.2 1.5 -18.8 16.7 116 99 256 349 337NTAP * NETWORK APPLIANCE INC # APR 892.1 798.4 1,006.2A 579.3 289.4 166.2 NA NA 39.9 11.7 ** ** ** ** NARSTNE RIVERSTONE NETWORKS INC # FEB 69.6 210.8 98.3 23.1 3.3A NA NA NA NA -67.0 ** ** ** ** NA

Operating Revenues

Million $ Compound Growth Rate (%) Index Basis (1992 = 100)

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includesother (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

Ticker Company Yr. End 2002 2001 2000 1999 1998 1997 1992 10-Yr. 5-Yr. 1-Yr. 2002 2001 2000 1999 1998


33

CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA -596.0 -969.9 615.6 403.9 30.2 38.6 NA NA NA ** -1,545 -2,515 1,596 1,047ADPT § ADAPTEC INC. # MAR -15.4 -196.7 42.6 170.8 -13.3 181.9 49.4 NM NM NM -31 -398 86 346 -27ADCT * ADC TELECOMMUNICATIONS INC OCT -1,145.0 -1,287.7 868.1 87.6 146.7 108.8 21.0 NM NM NM NM NM 4,129 417 698ADTN † ADTRAN INC DEC 24.8 17.3 120.8 50.9 40.3 40.2 NA NA -9.2 43.0 ** ** ** ** NAAFCI † ADVANCED FIBRE COMM INC DEC 31.8 165.5 77.6 250.3 27.2 36.8 NA NA -2.9 -80.8 ** ** ** ** NA

ALN ALLEN TELECOM INC DEC 6.8 -1.8 10.8 -5.2 -5.5 24.0 19.9 -10.2 -22.3 NM 34 -9 54 -26 -28ANDW * ANDREW CORP SEP 10.5 61.6 79.6 30.4 103.8 107.8 25.0 -8.3 -37.2 -83.0 42 247 319 122 416VOXX § AUDIOVOX CORP -CL A NOV -14.3 -8.2 25.0 27.2 3.0 21.0 5.8 NM NM NM -245 -141 430 468 51AV * AVAYA INC SEP -666.0 -352.0 -375.0 186.0 NA NA NA NA NA NM ** ** ** ** NAAVCT † AVOCENT CORP DEC 10.7 -320.5 -130.6 21.2 15.7 10.5 NA NA 0.5 NM ** ** ** ** NA

BELFB § BEL FUSE INC DEC 0.6 -12.2 32.2 21.3 15.2 8.9 18.9 -29.4 -42.0 NM 3 -64 170 112 80BBOX § BLACK BOX CORP # MAR 48.7 62.0 64.2 48.9 38.1 30.9 6.6 22.1 9.5 -21.5 734 935 968 736 575BRKT § BROOKTROUT INC DEC -5.0 -10.4 12.9 19.2 0.3 2.7 1.2 NM NM NM -412 -851 1,061 1,574 27CDT § CABLE DESIGN TECH CP -CL A JUL 3.6 23.5 54.9 39.6 40.5 36.0 NA NA -37.0 -84.7 ** ** ** ** NACCBL § C-COR.NET CORP JUN -41.9 -7.8 14.5 10.5 7.3 4.3 2.3 NM NM NM -1,839 -343 634 459 321

CIEN * CIENA CORP OCT -1,597.5 -1,794.1 81.4 -3.9 53.2 112.9 NA NA NM NM ** ** ** ** NACSCO * CISCO SYSTEMS INC JUL 1,893.0 -1,014.0 2,668.0 2,096.0 1,350.1 1,048.7 84.4 36.5 12.5 NM 2,243 -1,202 3,162 2,484 1,600CTV † COMMSCOPE INC DEC -67.2 27.9 84.9 68.1 39.2 37.5 NA NA NM NM ** ** ** ** NACMVT * COMVERSE TECHNOLOGY INC # JAN -129.5 54.6 249.1 170.3 111.5 43.5 4.9 NM NM NM -2,648 1,117 NM 3,483 2,281CRTO § CONCERTO SOFTWARE INC DEC -8.0 -1.3 4.6 12.0 8.5 18.4 -3.5 NM NM NM NM NM NM NM NM

GLW * CORNING INC DEC -1,780.0 -5,498.0 409.5 511.0 327.5 408.9 266.3 NM NM NM -668 -2,065 154 192 123DGII § DIGI INTERNATIONAL INC SEP -12.8 0.1 -16.8 3.2 -0.1 -15.8 11.4 NM NM NM -112 1 -147 28 -1HLIT § HARMONIC INC DEC -76.9 -166.4 -1,654.0 23.7 -21.5 4.9 NA NA NM NM ** ** ** ** NAHRS † HARRIS CORP JUN 82.6 21.4 25.0 49.9 133.0 207.5 87.5 -0.6 -16.8 286.0 94 24 29 57 152INTL § INTER-TEL INC -SER A DEC 38.6 13.0 -28.9 27.1 9.0 14.7 3.0 29.0 21.4 196.3 1,274 430 -954 895 298

JDSU * JDS UNIPHASE CORP JUN -8,738.3 -56,121.9 -904.7 -171.1 -81.1 -18.9 NA NA NM NM ** ** ** ** NALU * LUCENT TECHNOLOGIES INC SEP -11,826.0 -14,170.0 1,681.0 3,458.0 970.0 541.0 NA NA NM NM ** ** ** ** NAMCDTA † MCDATA CORP -CL A DEC -10.0 -8.7 30.8 -1.6 -5.1 NA NA NA NA NM ** ** ** ** NAMOT * MOTOROLA INC DEC -2,485.0 -3,937.0 1,318.0 817.0 -962.0 1,180.0 576.0 NM NM NM -431 -684 229 142 -167NWK § NETWORK EQUIPMENT TECH INC # MAR -8.9 -37.4 -20.8 -40.1 -7.1 14.4 -11.1 NM NM NM NM NM NM NM NM

PCTI § PC-TEL INC DEC 6.2 -58.2 6.1 7.0 0.5 NA NA NA NA NM ** ** ** ** NAPLT † PLANTRONICS INC # MAR 41.5 36.2 73.6 64.5 55.3 39.2 -5.2 NM 1.1 14.4 NM NM NM NM NMPLCM † POLYCOM INC DEC 26.8 -27.7 49.2 29.4 14.8 -1.1 NA NA NM NM ** ** ** ** NAPWAV † POWERWAVE TECHNOLOGIES INC DEC 4.1 -20.5 45.7 20.3 -3.0 16.2 NA NA -24.0 NM ** ** ** ** NAQCOM * QUALCOMM INC SEP 359.7 -530.8 670.2 200.9 108.5 91.9 -4.1 NM 31.4 NM NM NM NM NM NM

SFA * SCIENTIFIC-ATLANTA INC JUN 104.4 333.7 155.8 102.3 80.8 60.6 16.3 20.4 11.5 -68.7 641 2,050 957 629 496SCMM § SCM MICROSYSTEMS INC DEC -49.1 -68.3 -4.7 9.1 -5.0 1.1 NA NA NM NM ** ** ** ** NASYMM § SYMMETRICOM INC JUN -5.7 28.8 5.0 2.8 -1.5 13.5 1.3 NM NM NM -424 2,145 375 207 -114TLAB * TELLABS INC DEC -313.1 -182.0 760.0 559.1 398.3 263.7 16.9 NM NM NM -1,858 -1,080 4,509 3,317 2,363TLGD § TOLLGRADE COMMUNICATIONS INC DEC 3.4 13.7 27.5 10.6 7.0 6.9 NA NA -13.4 -75.5 ** ** ** ** NA

VSAT § VIASAT INC # MAR -9.6 2.2 10.3 7.9 6.3 5.3 NA NA NM NM ** ** ** ** NA

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC -102.5 -615.1 -606.0 464.3 -245.4 -35.0 83.5 NM NM NM -123 -737 -726 556 -294NTAP * NETWORK APPLIANCE INC # APR 76.5 3.0 74.9 73.8 35.6 21.0 NA NA 29.5 2421.3 ** ** ** ** NARSTNE RIVERSTONE NETWORKS INC # FEB -148.7 -30.7 -65.8 -37.4 -185.0 NA NA NA NA NM ** ** ** ** NA

Net Income

Million $ Compound Growth Rate (%) Index Basis (1992 = 100)

Ticker Company Yr. End 2002 2001 2000 1999 1998 1997 1992 10-Yr. 5-Yr. 1-Yr. 2002 2001 2000 1999 1998

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.


34

Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998

CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA NM NM 14.2 7.0 NA NM NM 11.2 9.4 NA NM NM 17.0 13.5ADPT § ADAPTEC INC. # MAR NM NM 7.3 21.1 NM NM NM 3.3 13.6 NM NM NM 5.1 20.5 NMADCT * ADC TELECOMMUNICATIONS INC OCT NM NM 26.4 4.5 10.6 NM NM 30.8 5.9 13.1 NM NM 41.7 8.1 17.6ADTN † ADTRAN INC DEC 7.2 4.5 26.1 13.9 14.1 4.7 3.2 21.9 11.9 13.8 5.7 4.0 29.0 16.1 18.2AFCI † ADVANCED FIBRE COMM INC DEC 9.3 50.5 18.6 85.8 8.7 2.7 14.5 7.6 41.5 9.4 3.6 20.0 10.6 55.0 11.1

ALN ALLEN TELECOM INC DEC 1.6 NM 2.7 NM NM 0.8 NM 2.3 NM NM 1.6 NM 4.5 NM NMANDW * ANDREW CORP SEP 1.2 5.9 7.8 3.8 12.2 1.1 7.4 10.7 4.5 15.1 1.5 10.8 15.5 6.1 20.4VOXX § AUDIOVOX CORP -CL A NOV NM NM 1.5 2.3 0.5 NM NM 5.1 7.2 1.0 NM NM 9.2 14.0 1.6AV * AVAYA INC SEP NM NM NM 2.2 NA NM NM NM NA NA NM NM NM NA NAAVCT † AVOCENT CORP DEC 4.1 NM NM 19.8 20.8 1.9 NM NM 23.9 24.4 2.1 NM NM 25.9 25.7

BELFB § BEL FUSE INC DEC 0.6 NM 22.2 17.8 16.8 0.4 NM 21.9 18.6 16.3 0.4 NM 25.6 21.4 18.8BBOX § BLACK BOX CORP # MAR 8.0 8.3 7.8 9.8 11.6 7.6 9.5 11.6 14.0 17.7 9.9 14.1 19.8 21.7 23.8BRKT § BROOKTROUT INC DEC NM NM 9.1 13.6 0.3 NM NM 11.5 20.3 0.5 NM NM 16.2 30.0 0.7CDT § CABLE DESIGN TECH CP -CL A JUL 0.6 3.1 6.9 5.8 6.2 0.6 3.9 9.1 7.2 8.7 1.0 7.1 19.3 16.0 18.0CCBL § C-COR.NET CORP JUN NM NM 5.1 6.1 4.8 NM NM 7.9 12.4 10.0 NM NM 10.0 18.8 15.9

CIEN * CIENA CORP OCT NM NM 9.5 NM 10.5 NM NM 9.5 NM 10.4 NM NM 12.1 NM 12.7CSCO * CISCO SYSTEMS INC JUL 10.0 NM 14.1 17.2 16.0 5.2 NM 11.2 17.7 18.8 6.8 NM 14.0 22.3 23.7CTV † COMMSCOPE INC DEC NM 3.8 8.9 9.1 6.9 NM 3.5 13.0 13.0 8.3 NM 5.7 25.9 28.1 22.2CMVT * COMVERSE TECHNOLOGY INC # JAN NM 4.3 20.3 19.5 16.0 NM 2.0 12.5 14.3 15.0 NM 3.8 25.6 31.2 34.7CRTO § CONCERTO SOFTWARE INC DEC NM NM 4.9 13.0 9.6 NM NM 4.6 12.7 10.4 NM NM 6.3 16.9 13.8

GLW * CORNING INC DEC NM NM 5.7 10.7 9.3 NM NM 3.4 8.9 6.7 NM NM 6.2 25.7 23.7DGII § DIGI INTERNATIONAL INC SEP NM 0.1 NM 1.6 NM NM 0.1 NM 1.7 NM NM 0.1 NM 2.6 NMHLIT § HARMONIC INC DEC NM NM NM 12.9 NM NM NM NM 19.1 NM NM NM NM 25.1 NMHRS † HARRIS CORP JUN 4.4 1.1 1.4 2.9 3.4 4.3 1.0 0.9 1.5 3.6 7.3 1.7 1.7 3.1 8.3INTL § INTER-TEL INC -SER A DEC 10.1 3.4 NM 8.6 3.3 15.2 5.5 NM 12.4 4.6 25.7 9.9 NM 17.5 6.3

JDSU * JDS UNIPHASE CORP JUN NM NM NM NM NM NM NM NM NM NM NM NM NM NM NMLU * LUCENT TECHNOLOGIES INC SEP NM NM 5.0 9.0 3.2 NM NM 3.8 10.6 3.8 NM NM 8.5 36.2 21.7MCDTA † MCDATA CORP -CL A DEC NM NM 12.4 NM NM NM NM 11.0 NM NA NM NM 12.7 NM NAMOT * MOTOROLA INC DEC NM NM 3.5 2.6 NM NM NM 3.3 2.5 NM NM NM 7.5 5.7 NMNWK § NETWORK EQUIPMENT TECH INC # MAR NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM

PCTI § PC-TEL INC DEC 12.6 NM 6.3 9.2 1.5 4.6 NM 3.8 8.0 NA 5.6 NM 4.6 11.8 NAPLT † PLANTRONICS INC # MAR 12.3 11.6 18.3 20.5 19.3 20.4 16.7 36.5 41.2 35.8 28.7 23.0 52.8 66.2 77.4PLCM † POLYCOM INC DEC 5.7 NM 14.9 14.7 13.2 2.8 NM 16.5 24.3 24.9 3.5 NM 20.6 35.3 35.3PWAV † POWERWAVE TECHNOLOGIES INC DEC 1.1 NM 10.2 6.9 NM 1.1 NM 14.8 11.4 NM 1.3 NM 18.8 16.8 NMQCOM * QUALCOMM INC SEP 11.8 NM 21.0 5.1 3.2 5.9 NM 12.6 5.7 4.5 7.0 NM 16.0 10.5 11.0

SFA * SCIENTIFIC-ATLANTA INC JUN 6.2 13.3 9.1 8.2 6.8 5.3 17.6 11.0 10.2 9.2 7.1 24.5 16.0 14.9 13.9SCMM § SCM MICROSYSTEMS INC DEC NM NM NM 7.2 NM NM NM NM 4.6 NM NM NM NM 5.4 NMSYMM § SYMMETRICOM INC JUN NM 18.9 4.7 3.6 NM NM 19.9 4.2 2.5 NM NM 26.8 5.8 3.4 NMTLAB * TELLABS INC DEC NM NM 22.4 24.1 24.0 NM NM 28.0 28.1 28.3 NM NM 32.5 32.6 34.5TLGD § TOLLGRADE COMMUNICATIONS INC DEC 5.7 16.6 24.0 17.4 15.1 2.3 9.8 27.8 18.3 14.9 2.4 10.4 30.5 20.6 16.6

VSAT § VIASAT INC # MAR NM 1.1 6.2 10.4 8.8 NM 1.1 8.9 14.1 13.6 NM 1.3 11.5 19.1 18.9

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC NM NM NM 31.8 NM NM NM NM 19.6 NM NM NM NM 28.7 NMNTAP * NETWORK APPLIANCE INC # APR 8.6 0.4 7.4 12.7 12.3 6.3 0.3 9.2 15.7 15.4 8.3 0.4 11.7 19.1 18.6RSTNE RIVERSTONE NETWORKS INC # FEB NM NM NM NM NM NM NM NM NM NA NM NM NM NM NA

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.


35

Current Ratio Debt / Capital Ratio (%) Debt as a % of Net Working Capital


CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA 3.3 2.5 4.6 2.9 NA 3.4 0.1 0.3 0.9 NA 5.9 0.2 0.3 1.4ADPT § ADAPTEC INC. # MAR 3.6 6.2 4.4 3.9 6.6 29.3 43.1 22.8 20.8 22.5 38.7 56.8 34.5 34.4 26.8ADCT * ADC TELECOMMUNICATIONS INC OCT 1.7 2.2 2.5 2.5 2.3 1.5 0.2 0.6 0.9 0.3 3.7 0.4 1.0 1.8 0.6ADTN † ADTRAN INC DEC 7.4 9.2 6.6 8.0 9.8 10.2 10.1 10.0 9.4 17.6 24.6 23.0 19.4 27.6 33.2AFCI † ADVANCED FIBRE COMM INC DEC 3.5 3.5 3.4 3.3 6.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ALN ALLEN TELECOM INC DEC 2.4 2.7 2.6 2.7 2.9 16.5 35.0 35.5 33.0 33.4 38.9 86.3 101.5 94.4 96.4ANDW * ANDREW CORP SEP 2.0 3.1 3.0 3.8 3.7 1.6 6.2 10.7 9.1 6.9 5.6 10.6 18.8 16.0 11.9VOXX § AUDIOVOX CORP -CL A NOV 2.4 2.4 3.1 3.1 3.4 4.3 1.9 6.0 33.3 14.1 4.9 2.2 6.9 42.0 18.8AV * AVAYA INC SEP 1.7 1.4 1.3 1.9 NA 100.0 36.3 48.3 0.0 NA 95.3 66.6 92.2 0.0 NAAVCT † AVOCENT CORP DEC 6.9 7.1 8.7 9.3 18.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

BELFB § BEL FUSE INC DEC 8.1 7.2 5.5 5.5 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0BBOX § BLACK BOX CORP # MAR 2.7 2.9 2.1 2.5 2.7 8.9 13.2 24.2 28.2 0.1 41.7 52.6 89.3 90.9 0.3BRKT § BROOKTROUT INC DEC 4.6 3.9 3.0 3.3 1.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0CDT § CABLE DESIGN TECH CP -CL A JUL 3.7 1.5 3.0 2.2 2.7 21.8 1.5 30.9 38.6 34.4 54.5 5.5 70.8 104.9 77.9CCBL § C-COR.NET CORP JUN 4.4 5.9 5.5 2.3 2.6 0.6 0.7 0.7 5.5 9.7 0.8 1.0 0.8 10.6 20.2

CIEN * CIENA CORP OCT 7.3 8.6 4.7 5.1 6.9 35.6 28.3 0.0 0.0 0.0 59.7 44.6 0.0 0.0 0.0CSCO * CISCO SYSTEMS INC JUL 2.1 1.6 2.1 1.5 2.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0CTV † COMMSCOPE INC DEC 5.8 5.3 3.6 3.2 2.9 26.2 23.4 36.1 39.7 45.1 85.7 96.4 107.8 135.0 193.4CMVT * COMVERSE TECHNOLOGY INC # JAN 5.9 6.5 5.5 3.6 4.1 19.3 26.3 41.1 29.7 52.1 22.1 29.6 48.4 35.3 58.7CRTO § CONCERTO SOFTWARE INC DEC 1.7 3.3 3.5 3.5 4.1 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0

GLW * CORNING INC DEC 2.3 2.1 2.4 1.3 1.2 45.5 44.6 26.8 35.1 30.9 184.8 211.1 147.7 346.4 423.7DGII § DIGI INTERNATIONAL INC SEP 3.7 4.8 4.5 2.6 1.7 3.2 4.6 5.9 6.6 8.0 8.0 7.4 9.1 15.4 29.4HLIT § HARMONIC INC DEC 1.4 1.9 3.1 4.2 2.8 1.1 1.0 0.0 0.0 0.9 2.3 2.2 0.0 0.0 1.2HRS † HARRIS CORP JUN 2.7 2.7 2.9 1.3 1.7 19.8 25.6 21.6 23.9 30.5 38.9 50.5 35.7 229.6 91.7INTL § INTER-TEL INC -SER A DEC 2.8 2.4 2.0 2.0 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

JDSU * JDS UNIPHASE CORP JUN 3.8 3.6 3.0 3.1 3.6 0.2 0.1 0.2 0.0 0.0 0.4 0.6 3.1 0.0 0.0LU * LUCENT TECHNOLOGIES INC SEP 1.4 1.6 2.0 1.9 1.4 258.1 20.1 10.1 23.5 30.3 176.2 55.2 29.0 41.0 66.0MCDTA † MCDATA CORP -CL A DEC 5.3 7.3 8.2 1.9 2.4 0.3 0.2 0.4 3.8 10.7 0.5 0.3 0.4 7.4 22.5MOT * MOTOROLA INC DEC 1.7 1.8 1.2 1.3 1.2 40.6 39.3 19.2 15.3 16.4 104.8 118.9 131.7 87.4 125.9NWK § NETWORK EQUIPMENT TECH INC # MAR 5.4 4.6 4.6 3.8 4.2 17.7 15.8 12.8 11.8 9.6 23.7 23.1 16.5 17.9 14.0

PCTI § PC-TEL INC DEC 7.4 4.2 5.0 4.4 1.9 0.0 0.0 0.0 0.0 49.3 0.0 0.0 0.0 0.0 105.0PLT † PLANTRONICS INC # MAR 3.1 2.9 3.5 2.4 2.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0PLCM † POLYCOM INC DEC 2.5 2.3 5.2 2.7 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0PWAV † POWERWAVE TECHNOLOGIES INC DEC 6.0 5.0 3.5 3.3 1.8 0.0 0.1 0.0 0.0 19.9 0.0 0.1 0.0 0.0 50.0QCOM * QUALCOMM INC SEP 5.8 5.9 5.8 3.4 1.7 1.7 0.0 0.0 18.4 40.0 2.9 0.0 0.0 31.4 101.3

SFA * SCIENTIFIC-ATLANTA INC JUN 3.9 3.9 3.0 3.1 2.8 0.6 0.0 0.0 0.1 0.2 0.9 0.0 0.0 0.1 0.2SCMM § SCM MICROSYSTEMS INC DEC 2.7 3.3 4.1 5.7 7.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0SYMM § SYMMETRICOM INC JUN 4.6 4.2 3.1 4.7 3.8 5.9 5.6 7.5 9.1 8.8 9.5 8.2 11.6 12.1 15.1TLAB * TELLABS INC DEC 6.0 6.1 5.6 6.5 5.7 0.0 0.1 0.1 0.1 0.2 0.0 0.2 0.1 0.2 0.3TLGD § TOLLGRADE COMMUNICATIONS INC DEC 13.8 11.9 14.1 6.8 10.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

VSAT § VIASAT INC # MAR 2.5 2.9 3.4 3.6 3.8 0.0 0.1 0.0 0.7 3.3 0.0 0.2 0.0 0.9 4.0

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC 1.1 1.4 3.1 1.8 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0NTAP * NETWORK APPLIANCE INC # APR 3.2 3.2 2.9 4.7 6.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0RSTNE RIVERSTONE NETWORKS INC # FEB 6.3 5.8 5.3 2.8 3.5 37.9 31.8 0.0 0.0 0.4 71.7 58.7 0.0 0.0 2.6



36

Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA-NA NM-NM NM-NM 30-11 46-20 NA NM NM 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0ADPT § ADAPTEC INC. # MAR NM-NM NM-NM NM-19 35-11 NM-NM NM NM 0 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0ADCT * ADC TELECOMMUNICATIONS INC OCT NM-NM NM-NM 41-13 NM-58 39-14 NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0ADTN † ADTRAN INC DEC 53-23 68-40 26-5 42-12 34-15 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0AFCI † ADVANCED FIBRE COMM INC DEC 54-30 14-6 92-13 15-2 NM-11 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

ALN ALLEN TELECOM INC DEC 73-23 NM-NM 63-28 NM-NM NM-NM 0 NM 0 NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0ANDW * ANDREW CORP SEP NM-49 36-17 43-17 62-30 25-9 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0VOXX § AUDIOVOX CORP -CL A NOV NM-NM NM-NM 62-6 26-4 49-23 NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0AV * AVAYA INC SEP NM-NM NM-NM NM-NM NA-NA NA-NA NM NM NM NA NA 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA NA-NAAVCT † AVOCENT CORP DEC NM-49 NM-NM NM-NM 34-11 30-10 0 NM NM 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

BELFB § BEL FUSE INC DEC NM-NM NM-NM 15-5 18-7 14-4 400 NM 7 5 0 1.2-0.7 1.1-0.5 1.3-0.4 0.7-0.3 0.0-0.0BBOX § BLACK BOX CORP # MAR 23-11 24-13 27-12 25-10 19-10 4 0 0 0 0 0.4-0.2 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0BRKT § BROOKTROUT INC DEC NM-NM NM-NM 47-7 12-6 NM-NM NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CDT § CABLE DESIGN TECH CP -CL A JUL NM-55 41-19 23-11 18-8 23-7 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CCBL § C-COR.NET CORP JUN NM-NM NM-NM NM-18 79-12 25-11 NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

CIEN * CIENA CORP OCT NM-NM NM-NM NM-78 NM-NM NM-16 NM NM 0 NM 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CSCO * CISCO SYSTEMS INC JUL 84-31 NM-NM NM-90 NM-69 NM-39 0 NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CTV † COMMSCOPE INC DEC NM-NM 51-28 30-9 35-12 26-11 NM 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CMVT * COMVERSE TECHNOLOGY INC # JAN NM-NM NM-50 80-40 61-18 28-12 NM 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0CRTO § CONCERTO SOFTWARE INC DEC NM-NM NM-NM NM-18 29-7 59-8 NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

GLW * CORNING INC DEC NM-NM NM-NM NM-72 65-22 32-16 NM NM 50 36 51 0.0-0.0 1.7-0.2 0.7-0.2 1.6-0.6 3.1-1.6DGII § DIGI INTERNATIONAL INC SEP NM-NM NM-NM NM-NM 81-27 NM-NM NM NM NM 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0HLIT § HARMONIC INC DEC NM-NM NM-NM NM-NM NM-9 NM-NM NM NM NM 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0HRS † HARRIS CORP JUN 31-19 NM-65 NM-61 64-29 33-16 16 63 115 152 52 0.8-0.5 1.0-0.5 1.9-1.0 5.3-2.4 3.2-1.6INTL § INTER-TEL INC -SER A DEC 18-9 39-13 NM-NM 27-11 84-28 6 9 NM 4 12 0.7-0.3 0.7-0.2 0.6-0.1 0.3-0.1 0.4-0.1

JDSU * JDS UNIPHASE CORP JUN NM-NM NM-NM NM-NM NM-NM NM-NM NM NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0LU * LUCENT TECHNOLOGIES INC SEP NM-NM NM-NM NM-23 74-41 NM-50 NM NM 15 7 21 0.0-0.0 1.2-0.3 0.7-0.1 0.2-0.1 0.4-0.1MCDTA † MCDATA CORP -CL A DEC NM-NM NM-NM NM-NM NA-NA NA-NA NM NM 0 NA NA 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA NA-NAMOT * MOTOROLA INC DEC NM-NM NM-NM NM-26 NM-46 NM-NM NM NM 26 36 NM 2.2-0.9 1.5-0.6 1.0-0.3 0.8-0.3 1.3-0.7NWK § NETWORK EQUIPMENT TECH INC # MAR NM-NM NM-NM NM-NM NM-NM NM-NM NM NM NM NM NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

PCTI § PC-TEL INC DEC 35-14 NM-NM NM-25 41-16 NA-NA 0 NM 0 0 NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 NA-NAPLT † PLANTRONICS INC # MAR 30-13 71-21 38-15 22-11 26-12 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0PLCM † POLYCOM INC DEC NM-24 NM-NM NM-38 75-13 43-9 0 NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0PWAV † POWERWAVE TECHNOLOGIES INC DEC NM-44 NM-NM NM-20 78-16 NM-NM 0 NM 0 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0QCOM * QUALCOMM INC SEP NM-49 NM-NM NM-55 NM-19 43-24 0 NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

SFA * SCIENTIFIC-ATLANTA INC JUN 42-15 32-8 95-25 50-17 27-11 6 2 4 5 6 0.4-0.1 0.3-0.1 0.1-0.0 0.3-0.1 0.5-0.2SCMM § SCM MICROSYSTEMS INC DEC NM-NM NM-NM NM-NM NM-57 NM-NM NM NM NM 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0SYMM § SYMMETRICOM INC JUN NM-NM 16-3 79-27 72-33 NM-NM NM 0 0 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0TLAB * TELLABS INC DEC NM-NM NM-NM 41-20 56-23 44-15 NM NM 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0TLGD § TOLLGRADE COMMUNICATIONS INC DEC NM-26 50-15 77-7 21-8 23-9 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

VSAT § VIASAT INC # MAR NM-NM NM-NM NM-25 57-8 26-9 NM 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC NM-NM NM-NM NM-NM 11-3 NM-NM NM NM NM 0 NM 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0NTAP * NETWORK APPLIANCE INC # APR NM-23 NM-NM NM-NM NM-38 92-25 0 0 0 0 0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0RSTNE RIVERSTONE NETWORKS INC # FEB NM-NM NM-NM NA-NA NA-NA NA-NA NM NM NA NA NA 0.0-0.0 0.0-0.0 NA-NA NA-NA NA-NA




37

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)

CCOOMMMMUUNNIICCAATTIIOONNSS EEQQUUIIPPMMEENNTT‡‡COMS † 3COM CORP # MAY NA -1.71 -2.81 1.77 1.12 NA 5.19 7.28J 11.44J 8.94J 7.00-3.79 11.50-3.37 119.75-6.94 53.75-20.00 51.13-22.94ADPT § ADAPTEC INC. # MAR -0.14 -1.92 0.43 1.65 -0.12 4.65 4.80 6.34 5.84 7.47 18.49-3.60 16.90-7.20 63.56-8.00 57.75-17.44 39.50-7.88ADCT * ADC TELECOMMUNICATIONS INC OCT -1.44 -1.64 1.20 0.15 0.27 0.91 2.39J 3.78J 2.08J 1.44 5.76-1.02 21.81-2.63 49.00-15.25 18.94-8.59 10.50-3.94ADTN † ADTRAN INC DEC 0.65 0.45 3.13 1.33 1.03 11.64 11.36 11.22 10.41 6.04 34.34-14.90 30.65-17.85 80.50-16.56 55.50-15.75 34.75-15.63AFCI † ADVANCED FIBRE COMM INC DEC 0.38 2.03 0.97 3.25 0.36 10.16 10.21 10.15 8.20 3.54J 20.55-11.30 29.00-11.88 89.38-12.75 47.50-6.75 44.75-4.03

ALN ALLEN TELECOM INC DEC 0.14 -0.06 0.38 -0.19 -0.21 4.40 3.86 3.78 3.81 4.30 10.23-3.26 21.75-6.63 24.00-10.56 12.38-4.50 21.13-4.69ANDW * ANDREW CORP SEP 0.12 0.76 0.98 0.37 1.18 4.09 6.85 6.22 5.63 5.75 24.88-5.84 27.38-13.19 42.06-17.00 22.88-11.00 30.06-10.38VOXX § AUDIOVOX CORP -CL A NOV -0.65 -0.38 1.17 1.43 0.16 13.76 14.33 14.85 10.71 8.89 11.53-5.95 14.13-5.90 72.50-7.38 36.50-5.75 7.81-3.63AV * AVAYA INC SEP -2.44 -1.33 -1.39 NA NA -0.40 0.79 1.99 NA NA 12.73-1.12 19.24-8.50 26.00-10.00 NA-NA NA-NAAVCT † AVOCENT CORP DEC 0.24 -7.22 -3.92 0.94 0.72 5.78 5.14 4.80 4.16 3.13 28.07-11.86 40.13-12.00 71.88-18.75 32.44-10.09 21.55-6.95

BELFB § BEL FUSE INC DEC 0.05 -1.13 3.04 2.03 1.47 11.25 10.75 12.29 9.34 7.26 27.80-16.90 39.94-18.55 44.94-14.88 37.38-13.38 20.31-5.63BBOX § BLACK BOX CORP # MAR 2.46 3.11 3.40 2.74 2.19 5.07 5.08 2.68 2.33 4.87 55.87-28.02 73.25-39.33 92.25-40.50 68.75-26.38 41.00-21.50BRKT § BROOKTROUT INC DEC -0.41 -0.85 1.09 1.76 0.03 5.51 5.79 6.79J 7.19J 4.63J 6.95-3.61 11.50-2.72 50.75-8.00 20.81-9.88 22.75-9.63CDT § CABLE DESIGN TECH CP -CL A JUL 0.08 0.54 1.29 0.92 0.93 6.48 6.40 5.56 5.97J 5.36J 15.27-4.40 21.90-10.45 29.75-14.00 16.63-7.25 21.50-6.42CCBL § C-COR.NET CORP JUN -1.24 -0.24 0.48 0.57 0.40 5.78 5.57 6.62 3.28 2.67 19.45-2.75 15.20-4.97 57.00-8.44 45.44-6.88 10.00-4.44

CIEN * CIENA CORP OCT -4.37 -5.75 0.29 -0.01 0.26 2.89 5.80 2.79 1.87 2.22 17.30-2.41 108.00-9.20 151.00-22.69 37.28-6.81 46.19-4.06CSCO * CISCO SYSTEMS INC JUL 0.26 -0.14 0.39 0.32 0.22 3.33 3.07 3.14 1.71 1.14J 21.84-8.12 44.50-11.04 82.00-35.16 53.59-22.47 24.44-8.58CTV † COMMSCOPE INC DEC -1.10 0.53 1.66 1.34 0.80 6.03 7.20 3.98 2.02 0.41 23.65-6.12 26.80-14.75 50.13-15.25 46.38-15.88 20.75-8.75CMVT * COMVERSE TECHNOLOGY INC # JAN -0.69 0.30 1.54 1.18 0.84 8.25J 8.68J 7.33J 4.62J 2.78J 28.28-6.65 124.75-15.03 123.88-61.81 72.50-21.67 23.83-9.79CRTO § CONCERTO SOFTWARE INC DEC -0.66 -0.11 0.35 0.89 0.60 3.01 5.72 6.00 5.47 4.83 10.20-3.85 14.88-7.20 39.00-6.13 25.50-5.94 35.50-4.75

GLW * CORNING INC DEC -1.85 -5.89 0.48 0.67 0.47 2.14 3.39 3.56 2.51 1.72 11.15-1.10 72.19-6.92 113.29-34.33 43.02-14.92 15.23-7.63DGII § DIGI INTERNATIONAL INC SEP -0.65 0.00 -1.12 0.22 -0.01 3.58 5.96 7.50J 8.52J 8.34J 7.15-1.60 10.40-3.60 15.13-4.63 17.75-6.00 29.50-8.56HLIT § HARMONIC INC DEC -1.29 -2.84 -34.06 0.84 -0.93 0.47 2.29J 5.11J 4.75J 1.85J 14.15-1.01 17.30-2.75 157.50-5.25 100.88-7.44 9.50-3.81HRS † HARRIS CORP JUN 1.25 0.32 0.34 0.63 1.68 13.90 13.67 17.52 19.04 17.43 38.70-24.09 37.00-20.80 39.38-20.75 40.63-18.25 55.31-27.56INTL § INTER-TEL INC -SER A DEC 1.58 0.53 -1.10 1.05 0.34 5.98 5.11 4.55 5.80 5.15 28.98-14.98 20.90-6.81 46.38-6.19 28.13-11.50 28.50-9.50

JDSU * JDS UNIPHASE CORP JUN -6.50 -51.40 -1.27 -0.54 -0.29 1.43 2.78 2.61 5.62J 0.71J 10.34-1.58 64.94-5.12 153.42-37.00 88.75-7.41 8.94-3.91LU * LUCENT TECHNOLOGIES INC SEP -3.51 -4.18 0.52 1.14 0.37 -1.42 3.23J 7.73J 4.42J 2.10J 7.50-0.55 21.13-5.00 77.50-12.19 84.19-47.00 56.94-18.36MCDTA † MCDATA CORP -CL A DEC -0.09 -0.08 0.31 -0.02 -0.06 3.99 4.17J 4.13J 0.32J 0.29J 33.88-4.11 76.25-7.15 141.38-39.38 NA-NA NA-NAMOT * MOTOROLA INC DEC -1.09 -1.78 0.61 0.45 -0.54 4.16 6.07J 8.49J 8.89J 6.78 17.12-7.30 25.13-10.50 61.54-15.81 49.83-20.85 21.96-12.79NWK § NETWORK EQUIPMENT TECH INC # MAR -0.39 -1.69 -0.96 -1.86 -0.33 5.07 5.48 7.11 7.90 10.83 6.10-2.60 7.06-2.15 12.50-4.50 14.81-7.31 20.63-8.00

PCTI § PC-TEL INC DEC 0.31 -3.02 0.34 1.33 0.21 5.57 5.46 7.34 5.77 1.79 10.78-4.43 12.50-6.38 98.00-8.44 54.00-21.63 NA-NAPLT † PLANTRONICS INC # MAR 0.92 0.77 1.49 1.30 1.11 3.07 2.79 3.52 2.16 1.77 28.00-12.41 54.99-16.00 56.00-21.83 29.17-14.38 29.00-13.08PLCM † POLYCOM INC DEC 0.27 -0.33 0.69 0.45 0.27 5.77 3.26 4.73 1.65 0.89 39.09-6.44 42.60-10.75 72.25-26.00 33.63-5.97 11.56-2.50PWAV † POWERWAVE TECHNOLOGIES INC DEC 0.06 -0.33 0.75 0.34 -0.06 4.88 4.77 4.81 2.71 1.24 20.77-2.62 60.56-8.75 75.38-15.29 26.69-5.60 7.65-1.88QCOM * QUALCOMM INC SEP 0.47 -0.71 0.93 0.34 0.20 6.48 5.64 6.28 4.44J 1.66 53.34-23.21 89.38-38.31 200.00-51.50 185.03-6.53 8.42-4.72

SFA * SCIENTIFIC-ATLANTA INC JUN 0.67 2.06 0.99 0.67 0.51 7.92 9.20J 7.63J 4.77J 4.00J 28.18-10.10 65.80-15.75 94.00-24.41 33.25-11.06 13.97-5.88SCMM § SCM MICROSYSTEMS INC DEC -3.15 -4.46 -0.32 0.65 -0.38 6.19 8.01 9.58 11.82 10.99 16.85-3.20 34.25-4.55 130.50-23.75 104.13-37.25 89.00-23.00SYMM § SYMMETRICOM INC JUN -0.25 1.23 0.22 0.12 -0.07 4.21 4.58 3.55 3.55 3.57 9.22-2.38 19.88-4.00 17.33-5.83 8.58-3.92 8.50-2.67TLAB * TELLABS INC DEC -0.76 -0.44 1.86 1.39 1.07 4.28 5.55 6.26 4.85 3.40 17.47-4.00 67.13-8.98 76.94-37.63 77.25-32.38 46.56-15.69TLGD § TOLLGRADE COMMUNICATIONS INC DEC 0.26 1.05 2.18 0.92 0.60 6.70 6.60 9.49 4.91 3.93J 37.80-6.77 52.50-15.25 168.88-16.06 19.69-7.06 13.88-5.50

VSAT § VIASAT INC # MAR -0.37 0.09 0.48 0.49 0.40 4.93 4.96 4.86 2.81 2.29 17.15-3.91 23.88-9.38 52.50-12.00 27.75-3.91 10.19-3.50

OOTTHHEERR CCOOMMPPAANNIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT CCOOMMPPUUTTEERR NNEETTWWOORRKKIINNGG OOPPEERRAATTIIOONNSSETS ENTERASYS NETWORKS INC DEC -0.57 -3.24 -3.40 2.62 -1.47 1.04 1.42 6.84J 11.70J 6.33J 11.20-0.78 24.50-4.90 52.75-11.25 29.31-7.19 17.13-6.63NTAP * NETWORK APPLIANCE INC # APR 0.23 0.01 0.23 0.25 0.13 2.75 2.39 2.21 1.54 1.02 27.95-5.18 74.98-6.00 152.75-33.88 45.94-9.53 12.00-3.25RSTNE RIVERSTONE NETWORKS INC # FEB -1.21 -0.27 -13.96 -0.40 NA NAJ 3.00 1.96 NA NA 21.10-0.46 24.10-4.89 NA-NA NA-NA NA-NA


Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.

Information has been obtained from sources believed to be reliable, but its accuracy and completeness and that of the opinions based thereon are not guaranteed. Printed in the United States of America. Industry Surveys is a publication of Standard & Poor'sEquity Research Department. This Department operates independently of and has no access to information obtained by S&P's Corporate Bond Rating Department, which may, through its regular operations, obtain information of a confidential nature.

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