UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 000-26041

F5 NETWORKS, INC.Networks, Inc.

401 Elliott Ave West

(206) 272-5555

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

     As of December 24, 2001,6, 2002, the aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $419,815,413$250,224,378 based on the closing sales price of the Registrant’s Common Stock on the Nasdaq National Market.

     As of December 24, 2001,6, 2002, the number of shares of the Registrant’s Common Stock outstanding was 24,992,055.

     Portions of the Registrant’s definitive proxy statement relating to its 20022003 annual meeting of shareholders, to be held on March 7, 2002,February 13, 2003, are incorporated by reference into Part III hereof.

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F5 NETWORKS, INC.

FISCAL YEAR 2001ANNUAL REPORT ON FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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Forward-Looking Statements

     The statements contained in this report that are not purely historical are forward-looking statements. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies and intentions and are generally identified by the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading “Risk Factors” below and in other documents we file from time to time with the Securities and Exchange Commission. All forward-looking statements included in this report are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements.

PART I

Item 1.     Business.Business

Description of Business

     F5 Networks provides integrated products and services to manage, control and optimize Internet traffic and content.traffic. Our five core products, the BIG-IP® IP Application Switch & Controller, 3-DNS® Controller, GLOBAL-SITE™ Controller, EDGE-FX® Cache, and the SEE-IT™ Network Manager,BIG-IP Link Controller, help manage traffic and content to servers and network devices in a way that maximizes availability and throughput. Our unique iControl™ Architecture integrates our products together and also allows our customers to integrate them with other third party products. Our solutions address many elements required for successful Internet and Intranet business applications, including high availability, high performance, intelligent load balancing, fault tolerance, security, and streamlined manageability, and global data management and content control. By enhancing Internet performance availability and content distribution, our solutions enable our customers and partners to maximize the use of the Internet in their business.manageability.

Industry Background

     Significant growth inSince the numberlate 1990’s, businesses have responded to the power, flexibility and economy of Internet users coupled withProtocol (IP) based networks by deploying new IP-based applications, upgrading their client-server applications to new IP-enabled versions, and IP-enabling legacy applications. During the increased availabilitynext several years, this process will likely accelerate as Web Services enable businesses to build applications quickly and easily by integrating software modules available from many different sources. In addition, the growth of powerfulInternet usage will continue to be driven by new toolsapplications such as Voice Over IP (VOIP) and equipmentthe increasing popularity of mobile Internet access through wireless devices such as cell phones, PDAs and notebook computers.

     Internet Protocol specifies that enable the development, processing and distribution ofall data transmitted across the Internet must be split into packets. In addition to its contents or payload, which corresponds to the Application Layer (Layer 7) of the Open Systems Interconnect (OSI) Reference Model, each packet has leda header that identifies the source and destination of the packet. The OSI Reference Model is the framework that describes and defines how networked systems communicate with one another. In the simplest implementation of the OSI Model, header information is added to the contents at the source computer and processed and stripped by the destination computer. In common practice, however, these functions are performed by network routers and switches that the contents (email message, Web page, transaction data, etc.) pass through enroute from source to destination. In addition, as more and more organizations have begun to deploy a proliferationgrowing variety of Internet-basedIP-enabled applications, there has been increasing demand for Layer 7 technology that can read the entire contents of a packetized transmission and services, such as e-commerce, e-mail, electronic file transfersmake intelligent decisions, based on a dynamic set of business rules, about how to handle the transmission and online interactive applications. Recently, increases inwhere to route it to ensure the numberavailability and optimal performance of Internet users, the use of broadband service, the number of Web sites using sophisticated business applications, servers, and the richnessnetwork.

     Because the functions performed at Layers 2 - 4 are generally predictable and largely repetitive, nearly all devices designed for Layer 2 - 4 processing are hardware-based and optimized for speed. Most manufacturers of Internet content itself, together with unpredictableLayer 7 devices have also opted for hardware-based solutions, limiting the ability of their products to adapt to the rapidly changing requirements of Layer 7 traffic have increasedmanagement.

     Through the complexityend of Internet service delivery and strained network infrastructures.

     An increasing number2000, the bulk of businesses relytraffic on the Internet as a fundamental commercewas Web (HTTP) traffic. With the growth of online banking, brokerage accounts and communication tool. Failure of these businesses to deliver expected availability and performance for their Internet-based applications can result in a significant cost to the organization.

     To support the dramatic increases in Internet traffic and complexity, many organizations have aggressively expanded network server capacity. In this environment, organizations often deploy multiple servers in a group, or array, which contains individual application-specific servers or redundant servers that operate together as a virtual large server. Server arrays can reduce single points of failure and be a cost-effective way to increase the potential capacity of the system by providing the flexibility to add additional servers to the array as needed. The practice of deploying server arrays in geographically dispersed sites to help prevent system failure and direct traffic more efficiently is also a growing trend.

     Along with their benefits, server arrays and geographically dispersed sites have increasedother financial services the need for intelligent traffic and content management devices to optimize server availability and performance. Intelligent traffic management devices identify which server, whether local or remote, is best able to handle user requests. They also read and interpret user requests and route those requests toguarantee the most responsive server or to serverssecurity of

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     Currently, many available Internet traffic and content management products are extensionsAs the growth of hardware-based switches, which lack the robust functionality requiredIP-enabled business applications accelerates, there is an emerging need for technology to manage the increasing complexityflow of requestsapplication traffic both within corporate Intranets and responses that characterize business activity onacross the Internet. These products are typically not designed to address application availability, nor do they meet the manageability and scalability required by organizations that depend on the Internet as a fundamental commerce and communications tool. As a result, we believe they do not measure up to the demands of today’s rapidly changing Internet environment.

F5 Solution

     F5 is a leading innovator for Internet and e-Business optimization and automation. We believe our products deliver the secure and high-performance Internet traffic and content infrastructure businesses need to succeed.

     Our intelligentCurrent traffic management products monitorhave provided functionality and flexibility to manage locallyWeb (HTTP) traffic. F5 products differentiate by their capability to intercept, inspect and geographically dispersed servers,act on the contents of traffic from other types of IP-enabled applications, such as database applications, Customer Relationship Management (CRM) applications, Enterprise Resource Planning (ERP) applications, Web Services, and intelligently direct traffic to the server best able to handle the user request. Our content management products help ensure new and updated content is replicated uniformly across all servers and is readily accessible to all users. As components of our integrated iControl Architecture, our solutions ensure Internet quality control by providing the following key benefits:VOIP.

     High system availability.Our integrated suite of products works with servers deployedWe are an industry leader in a redundant server array over a local or wide area network to enhance network performanceApplication Traffic Management, enabling enterprises and reduce single points of failure. Our traffic management products continuously monitor network performance to enable real-time detection of server, application and content degradation or failure. Based on this information, our solutions automatically direct user requests to functioning servers and applications. Our products also enable network administrators to deploy new servers and take individual servers offline for routine maintenance without disrupting service to end users.

Increased performance. Our products provide a significant performance improvement over other current approaches. Our traffic and content management products monitor server and application response time and verify content. This information is used to intelligently direct user requests to the server with the fastest response time. They also read and interpret individual requests and can direct those requests to specific servers, arrays or sites based on predetermined rules defined by network managers. As a complement to these products, our cache servers improve performance by capturing and storing content at points between network servers and end-users, where content can be accessed more quickly. By intelligently directing traffic throughout the network, our solutions reduce server overload conditions that may cause performance degradation.

Cost-effective scalability.Our solutions enable more efficient utilization of existing server capacity by intelligently directing traffic among servers. This capability allows organizationsproviders to optimize the capacityany mission-critical IP-based application or web service, providing secure and predictable delivery of existing servers and, asapplication traffic volume dictates, cost-effectively expand server capacity through incremental additions of relatively low cost servers rather than upgrading to larger, more expensive servers. Our solutions can be used with multiple heterogeneous hardware platforms, allowing organizations to protect their investments in their legacy hardware installations as well as integrate future hardware investments. In addition, strategic deployment ofan unpredictable environment. Through our cache products can reduce the load on network servers and minimize the need to add more expensive production server capacity.

Easier network manageability. Our products collect information that can be used to facilitate network management and planning from a central location. Leveraging our products’ strategic location in the network, our solutions collect data that is crucial for traffic analysis and apply proprietary trend and analysis tools that synthesize this data so that network managers can forecast network requirements more accurately. In addition,

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Enhanced network control.Our solutions enable organizations to prioritize and arrange network traffic based on specific rules defined by network managers. For example, our products may be configured to direct traffic over the most cost-efficient communication links or, alternatively, to deliver the most rapid response to requests.

Strategy

     Our objective is to be the leading provider of integrated Internet traffic and content management solutions designed to optimize network availability and performance. Key components of our strategy to achieve this objective include:

Offer complete secure Internet traffic and content management solutions.We plan to continue expanding our existing suite of products to provide complete Internet traffic and content management solutions. We also intend to continue investing in our professional services group to provide the installation, training and support services required to help our customers optimize their use of our integrated traffic and content management products.

Invest in technology to continue to meet customer needs.Our current technology platform has been designed to quickly and easily expand the features and functionalities of our suite of products and support the development of additional products that address the complex and changing needs of our customers. We intend to maintain our level of investment in research and development to provide our customers with complete secure Internet traffic and content management solutions that meet their needs.

Expand sales channels and geographic scope of sales.We plan to continue to invest in the expansion of our sales channels. In addition to maintaining a strong direct sales force, we intend to further expand our indirect sales channels through leading industry resellers, original equipment manufacturers, systems integrators, Internet service providers and other channel partners. We are also seeking to aggressively develope our international sales capabilities, particularly in selected countries in the European and Asia Pacific markets.

Build and expand relationships with strategic partners.We capitalize on products, technologies and channels that may be available through partners. We currently have OEM relationships with Dell Computer Corporation, Nokia and Enterasys Networks. In addition, we have created significant go-to-market relationships with key independent software vendors (ISV’s) such as Microsoft, Oracle, and BEA through our iControl Architecture which enables these partners to incorporate programmatic interfaces to our Internet and content management products in their software programs. We plan to continue to seek relationships with partners that will enable us to increase the market opportunity for our products and technologies.

Leverage our market leadership to continue to build the F5 brand.We intend to continue building brand awareness that positions us as one of the leading providers of intelligent Internet traffic and content management solutions. Our goal is for the F5 brand to be synonymous with superior network performance, high quality customer service and ease of use. To achieve these objectives, we plan to continue using a broad range of marketing programs, including active tradeshow participation, advertising in print publications, direct marketing, high-profile Web events, our Internet site and joint partner marketing programs.

Products and Technology

     We have developed the BIG-IP® IP Application Switch & Controller, 3-DNS®, GLOBAL-SITE™, the EDGE-FX™ Cache and the SEE-IT™ Network Manager as an integrated suite of Internet traffic and content management products that facilitate high performance, high availability and scalable access to network server arrays located at a single site or across multiple, geographically dispersed sites. Our unique iControl Architecture integrates our traffic and content management products, provides an interface between third party solutions and our suite of Internet traffic and content management products through anopen iControl™ Application Programming Interface (API), third-party applications and enables total integrationnetwork devices can take an active role in shaping IP network traffic, delivering application aware networks that allow customers to direct traffic based on their exact business requirements.

     Our unique technology inspects IP traffic down to the packet payload level and controlcan direct traffic according to the needs of each application. Its powerful offloading, inspection and processing of application-level transactions is faster than any other product on the market. It is also the first solution that can automatically respond to, act upon and prevent ever changing application security threats — providing a coordinated line of defense while making the most of existing network security products.

     The result for customers is that best-practice architectures can be built quickly and inexpensively, without buying more servers, deploying multiple products to handle different applications, or attempting to build these functions in the applications themselves. Enterprises and Service Providers can readily adapt to changing business demands and conditions quickly and cost-effectively. In this way our products reduce implementation risks, improve reliability and lower IT costs while creating a network that is truly “application-aware.”

F5 Products

     Our core product is the BIG-IP Controller for local-area application traffic management. BIG-IP software runs on a variety of Intel-based hardware platforms, including IP application switches and server appliances manufactured by us, our original equipment manufacturers (OEM’s), and blade servers manufactured by server vendors such as Dell, Fujitsu-Siemens, Hewlett-Packard, IBM and RLX Technologies.

     In terms of the OSI Reference Model, the core of BIG-IP is sophisticated software that manages IP traffic at Layer 7, also known as the application layer. F5’s BIG-IP application switches also perform Layer 2/3 switching and industry-leading Layer 4 switching. But it is the superior performance and functionality of the BIG-IP Layer 7 traffic management software that distinguishes it from competing products sold by Cisco Systems, Nortel Networks, and others.

     In contrast to the tasks associated with Layers 2 - 4, Layer 7 (which encompasses Layer 5 & 6 functions as well) is complex and variable. Switching devices for Layers 2 - 4 merely ensure that packets of information sent over the Internet Infrastructure.arrive at the destination to which they are addressed, and that they are reassembled in the correct sequence. In many ways, the kinds of functions carried out at Layers 2 - 4 are analogous to those carried out by the postal service in picking up and delivering mail. Layer 7 corresponds to the content of the mail and the interaction between the sender and receiver.

4     Our other products include 3-DNS Controller and BIG-IP Link Controller. 3DNS allows enterprises with geographically dispersed Web sites to direct traffic to a particular Web site in accordance with customized business rules or to redirect traffic to an available Web site if one of their sites becomes overloaded

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     OurIn early 2001, we recognized a growing need for traffic management products that could not only communicate with one another but with the increasing number and variety of IP-enabled enterprise applications being deployed by large organizations.

     In response to that need, we published the iControl SOAP/XML interface in a free Software Development Kit (SDK) that allows customers and Independent Software Vendors (ISVs) to modify their programs to communicate with our products. This enabled the applications themselves to control the flow of traffic on the network without human intervention. The use of iControl reduces or eliminates the need for human involvement, significantly reducing the cost of performing basic network functions and dramatically reducing the likelihood of error. Adding this extra functionality to their products is attractive to ISVs, and since the introduction of the iControl SDK, we have formed relationships with dozens of software developers including Microsoft, Oracle, BEA, Tivoli (Japan), Hewlett Packard, Siebel, and Computer Associates. Although we do not derive revenue from iControl itself, the sale of iControl-enabled ISV products helps promote and often leads directly to the sale of our products.

     Currently, we manufacture two lines of systems: server appliances and IP application switches.

Server Appliances

     Server appliances were our original products and continue to account for a little more than half of our systems revenue. The BIG-IP 520 and 3-DNS Controllers run540 server appliances are equipped with Intel-processors for high-speed Layer 4/7 processing and are designed to accommodate add-in cards for fast, integrated SSL encryption and decryption.

     Since integrated SSL acceleration was introduced as a feature in our platforms in early 2000, it has been an important driver of system sales. By offloading compute-intensive SSL processing from servers to our traffic management systems, customers can free up valuable server space for other applications. In addition, decrypting transmissions in conjunction with Layer 7 traffic management allows BIG-IP to inspect the contents and send them to the best available server based on onethe nature of two platforms,the contents and any rules that apply.

IP Application Switches

     We introduced our existing Internet protocol (IP) server appliance or our newfirst IP application switch, the BIG-IP 5000. Our content management products, EDGE-FX and GLOBAL-SITE, continue5000, in September 2001 in response to customer demand for systems with an increased number of ports (allowing them to be delivered on our existingconnected to many different types of network devices) and integrated Layer 2/3 switching and SSL processing capability. In January 2002, we introduced a mid-range version of the IP server appliances. SEE-IT is a stand-alone software application.

     BIG-IP® 5000 isApplication switch called BIG-IP 2000. In October 2002, we introduced an upgraded and expanded line of IP application switch uniquelyswitches, including the high-end BIG-IP 5100, the BIG-IP 2400 mid-range product with integrated Layer 4 switching on an ASIC developed by our hardware team, and the BIG-IP 1000 low-end switch.

F5 Technology

     From our inception, we have been committed to the belief that the complexity of Layer 7 traffic management requires a software solution. When we were founded in 1996, our initial products were designed to manageload-balance Internet traffic across multiple Web servers. Shortly after our first products were introduced, we began adding health checking and other high-availability features that distinguished our products from hardware-based products manufactured by competitors who emphasized speed over functionality. In late 1999, for currentexample, we introduced BIG-IP’s patented “cookie persistence” capability, a key feature of the software that establishes a link between a user and next generation Web servicesa specific server and applications. The BIG-IP 5000 combinesenables the benefits of BIG-IP’s performance-leadinguser to return to that server if he/she leaves or the connection is broken before a transaction is completed.

     As IP traffic has evolved and the demands placed on Layer 7 software capabilities, integrated secure sockets layer (SSL) processing, and high port density (4 gigabit and 24 fast ethernet ports) for scale and economy. The BIG-IP 5000 enables the network infrastructure to accommodate the increasing demands placed upon the network to support complex Web applications, data/ voice/ video convergence, and mobile computing, with vastly simplified management and complete security. The BIG-IP 5000® provides all-in-one Internet traffic management combining: load balancing, content switching, traffic management, gigabit ethernet switching, SSL acceleration/ Web accelerationhave increased, our software-based technology has enabled us to adapt quickly. When Session Initiation Protocol (SIP), a new

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     The fact that dramatically lowers total cost of ownership and reduces management complexities for enterprises and service providers.

Our ongoing investment in technology is focused on achieving continuous performance enhancements, increased functionality, enhanced ease of use and increased product integration. The following table describes of our current traffic and content management products.

IControl API. IControl is an API (application program interface) that offers a complete and cohesive architectural solution for the distribution, delivery, and control of both content and applications. Allall of our products are software-based differentiates us from competing products in a number of other important ways. First, our software can be easily ported to Intel-based hardware platforms other than those manufactured by us. This has enabled us to license the software to OEM partners, who resell it on their own products. In addition, it has created an opportunity for us to sell products that run on blade servers and manage traffic across all the blades. Currently, BIG-IP Blade Controller has been approved to run on blades manufactured by Dell, Fujitsu-Siemens, Hewlett-Packard, and RLX Technologies.

     From a network administrator’s perspective, one of the key benefits of a software-based solution is the ability to write scripts that incorporate specific business rules into the software. For example, if an organization has three help desks located in Bombay, San Francisco and London, all email requests for help can be directed to a single 3DNS device that has been scripted to redirect the requests to different help desks at different times of the day. Similarly, a BIG-IP device managing traffic to an eCommerce Web site can be scripted to recognize transmissions from preferred customers and route them to a server that will expedite their transactions.

     One of the most important features of our software-based products is “application awareness.” During development, BIG-IP, 3DNS, and our other products were designed using a common architecture, called iControl, with a common interface that allows them to be iControl enabled. IControl integratescommunicate with one another. That in itself distinguishes our products togetherfrom others in the market. With the release of BIG-IP Version 4.5 in October 2002, we expanded the “application awareness” of our technology, introducing a new set of capabilities that further distance our products from the competition’s by providing the first application traffic management solution on the market. Key features of this new technology are:

Universal Inspection Engine (UIE) — UIE enables BIG-IP to examine the entire contents of a transmission and also allows integrationidentify any value within the header and payload. UIE can recognize virtually any piece of data (such as a cell phone number, a membership ID, an access code, etc.) in any stream of application data, including SOAP/ XML (Simple Object Access Protocol/ Extensible Markup Language), the standard protocols that enable Web Services to communicate with third party products. This architecture allows network managers to configure all components in a network infrastructure through a single policy that can be centrally managed. Our most recent version supports two different transport protocols (COBRA and SOAP) to meet the needs of different types of businesses.one another.

     EDGE-FX Cache.iRules EDGE-FX is a leading Internet cache server— Using the iControl interface, network administrators and applications themselves can write commands that can be deployed as a standalone devicetell BIG-IP to direct, persist, or integrated with our other products. EDGE-FX consists of software loadedfilter traffic based on a pre-configured, industry standard hardware platform. EDGE-FX accelerates access to Web content by storing frequently requested data at strategic points in a computer network, making it quickly available to Internet users. As a standalone device, EDGE-FX may be installed in virtually any network infrastructure. Integrated with our

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     EDGE-FX also supports a streaming media extention option, which enables support for Real Networks, Microsoft Windows Media or Apple/ Quicktime media types. This option enables the device to provide live or on-demand serving of streaming media. As a media enabled cache product, EDGE-FX is a strategic component in the roll out of private content distribution networks to enterprise customers. EDGE-FX helps enable applications such as corporate communications, travel-less training and other content based uses of the network.

     EDGE-FX supports several flexible deployment options to conserve bandwidth and server resources while accelerating content to Internet users.

	•	Forward Proxy or Transparent Proxy.EDGE-FX can be deployed in front of Web browsers for internal user access. EDGE-FX can be positioned as a forward proxy cache, making it valuable for enterprise Intranets. Instead of sending requests for Web content directly to the origin server, browsers are configured to send requests directly to the cache thereby reducing bandwidth utilization costs.
	•	Reverse Proxy.When deployed in front of Web servers for external user access, EDGE-FX offloads client requests from the Web server, eliminating the danger of server traffic surges and reducing the number or size of servers required.

		Designed for massive scalability, multiple EDGE-FX caches can be managed with the BIG-IP Cache Controller to enable cache farm load balancing, replication of content across multiple caches, and Layer 7 management of cached objects.

GLOBAL-SITE Controller.GLOBAL-SITE, a content delivery appliance, has been designed to help organizations automate the distribution and synchronization of content and applications to local and geographically dispersed sites. GLOBAL-SITE was developed to work with our other products to intelligently deploy both program and data files to arrays of heterogeneous servers as well as the EDGE-FX Cache. GLOBAL-SITE consists of our proprietary software which is loaded on a pre-configured, industry-standard hardware platform. GLOBAL-SITE’s configuration database allows administrators to define standard rules for content deployment as well as accommodate unique content distribution events as needed.values identified by UIE.

     SEE-IT Network Manager.Dynamic Security Control Architecture (DSCA) SEE-IT is a software application based on F5’s iControl— DCSA provides centralized security enforcement that communicates with F5 productsenables networks to help improve the managementrespond quickly and functionality of an organization’s network, thereby driving down the total cost of ownership. SEE-IT uses data collected by F5 productsadapt easily to perform monitoring of the F5 appliances, as well as crucial traffic analysis management functions. By reviewing historical patterns, network administrators can build predictive models and forecast usage, which helps them to intelligently plan and budget for additional server and bandwidth capacity. SEE-IT consists of the following capabilities:

	•	Real-time monitoringthat displays key data on network traffic in easy-to-read graphical illustrations, thereby enabling network administrators to quickly obtain information regarding network and server performance, including data about server status and traffic, number of connections, active and inactive IP addresses and the availability of individual applications.
	•	Forward-looking trend and analysis toolsthat use the information generated by F5’s products to project future network and server needs. Network managers and system administrators can use these

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		tools to create “what if?” scenarios to help forecast the need for additional servers, interface upgrades and other network capacity requirements.
	•	Configuration managementallows users to assure that configurations and policies are implemented on each of the F5 devices. Users can simply and confidently deploy configuration or policy updates to respond to the data obtained through the monitoring capabilities.
	•	Application level viewssimplifies the task of understanding the purpose of each piece of networking gear that is deployed. SEE-IT allows users to “organize” the F5 gear to view the network based on the application they are meant to support.

3-DNS Controller.     3-DNS is an intelligent wide area traffic management appliance that manages and distributes user requests across wide area networks. 3-DNS consists of our proprietary software, which we load on a pre-configured, industry-standard hardware platform. Like BIG-IP, 3-DNS functions with multiple heterogeneous hardware platforms and supports a wide variety of network protocols, including Web, e-mail, audio, video, database and file transfer protocol, and manages traffic for network devices such as firewalls, cache servers and multimedia servers.

     When an end-user request is received from a local domain name server or DNS, 3-DNS collects network information and communicates with each site in the network to determine the site with the fastest response time. 3-DNS, integrated with BIG-IP, sends the request to the BIG-IP at the site. BIG-IP then directs the request to the individual server best able to handle it. Although organizations can deploy a single 3-DNS in their network configuration, multiple 3-DNS Controllers are often deployed within the network to provide redundancy to help ensure network availability and performance for end users. Additional 3-DNS features include:

	•	Dynamic load balancingoptimizes use of available network resources across wide area networks.
	•	User-defined production rulesallow organizations to pre-configure traffic distribution decisions according to their specific user requirements.
	•	Secure server protectionoffers security features for wide area networks similar to those BIG-IP provides for local area networks.

BIG-IP Controller.BIG-IP is an intelligent local traffic management appliance consisting of our proprietary software on a pre-configured, industry-standard hardware platform. Situated between a network’s routers and server array, BIG-IP continuously monitors the array of local servers to ensure application availability and performance and automatically directs user requests to the server best able to handle these requests. By quickly detecting application and server failures, and directing service toward those servers and applications that are functioning properly, BIG-IP is designed to shield users from system failures and provide timely responses to user requests and data flow. BIG-IP offers a comprehensive selection of load balancing algorithms that lets network managers choose a load balancing configuration that best suits their organization’s particular needs. In addition, BIG-IP actively queries and checks content received from applications. If a server and application are responding to users’ requests with incorrect content, BIG-IP redirects requests to those servers and applications that are responding properly, thereby helping to ensure the quality of content.

     BIG-IP is compatible with any system that uses the standard Internet communication protocol or IP, and can operate with multiple, heterogeneous hardware platforms. This enables organizations to leverage their existing infrastructure without limiting their options to meet future network needs. BIG-IP supports a wide variety of network protocols, including Web, e-mail, audio, video, database and file transfer protocol. BIG-IP also manages traffic for network devices such as firewalls that prevent unauthorized access to a network system, cache servers that store frequently accessed Web content and multimedia servers. BIG-IP’s ability to intelligently distribute traffic across server arrays reduces the need for increasingly larger and more expensive servers to accommodate increases in network traffic. This configuration also reduces the single point of failure inherent with a single large server and allows for the orderly addition of new servers or the routine maintenance or upgrades of servers without disrupting service to the end user.

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     BIG-IP’s unique Layer 7 switching capability enables the successful delivery of business-critical applications with 24/7 availability, scalability, and high performance. Examining traffic at Layer 7 allows intelligent quality of service (QoS) through routing and management decisions made based on application information. BIG-IP enables the use of all of its Layer 7 features simultaneously without imposing limitations on the length of the URL, cookie, or location of the cookie – providing intelligent, granular management of web sites without performance degradation. Additional BIG-IP features include:

	•	Infrastructure Securitysecurity threats. — BIG-IP provides an additional layer of security protecting against unauthorized access of the network.
	•	Application Security — BIG-IP can be configured to deny any file-based attack like “codered” in a matter of seconds, limiting exposure to an attack.
	•	Web Acceleration — BIG-IP enables servers to support more user requests, thus helping businesses cost effectively scale their Web infrastructure.
	•	Secure Application Acceleration — Secure sockets layer (SSL)as a means for securing applications has moved off the Web server and onto BIG-IP as a standard deployment practice. F5 will soon offer a higher level of security via its BIG-IP FIPS.
	•	BIG-IP FIPS —hardware option and Controller products extend SSL processing capabilities into a specific niche of customers that are either required by law (government agencies) or have adopted on their own accord (financial and health care institutions) FIPS-based products. BIG-IP is the only Internet traffic management product that supports an integrated FIPS 140-1 Level 3 solution.
	•	Session Persistenceenables server arrays to support e-commerce and other applications by allowing users to re-establish a secure connection with a specific server to complete an unfinished transaction.
	•	Quality of Service — Rate shaping allows priority levels to be assigned to specific types of traffic ensuring a quality user experience.
	•	Packet filteringenables content providers to direct network traffic to servers based on criteria set by network managers to ensure networks are being used efficiently.

Product Development

     We believe that ourOur future success depends on our ability to build uponmaintain technology leadership in application traffic management by constantly improving our current technology platform, expandproducts and by developing new products to meet the features and functionalitieschanging needs of our suite of Internet traffic and content management products and develop additional products that maintain our technological competitiveness.customers. Our product development group, which is divided along product lines, employs a standard process for the design, development, documentation and quality control of software and systems designed to meet these goals.

     Product development also engages in technology partnerships with software and component manufacturers that allow us to integrate industry standard technology with our Internet trafficown products. During the past two years, we have had a close working relationship with Broadcom Corporation, which manufactures the Layer 2/3 switches and SSL ASICs used in our family of application switches. We also have a technology partnership with Nokia focused on developing technology for mobile content management solutions. Each product linedelivery networks.

     Our software engineering group is headed by a lead architect, wholocated in our headquarters in Seattle, Washington. Our hardware engineering group is responsible for developinglocated in Spokane, Washington. Electronic communication allows the technology behind the product. To help develop the technology, the lead architects workmembers of both teams to collaborate closely with our customers to better understand their requirements. Software engineers who help design and build the products, and technicians, who perform test engineering, configuration management, quality assurance and documentation functions, complete our product development teams. The test engineering team evaluates the overall quality of our products. The overall product team determines whether they are ready for release.one another on specific projects.

     Our product development expenses for fiscal 2002, 2001, and 2000 and 1999 were $18.0 million, $17.4 million, and $14.5 million, and $5.6 million, respectively. Going forward, weDuring fiscal 2003, We expect our productto continue to increase research and development expenses as our future success is dependent on the continued enhancement of our current products and our ability to remain consistent with fiscal 2001.develop new, technologically advanced products that meet the changing needs of our customers.

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Customers

     Our target customers include the Global 1000 corporate enterprises, large e-commerce sites, Internet service providers and high-traffic Internet or intranet Web sites. DuringPrior to fiscal 2001, no single reseller orour customer exceeded 10%base was comprised primarily of Internet Service Providers, Web hosting companies and Internet startups engaged in eCommerce. In the first half of fiscal 2001, we began focusing our marketing and sales efforts on large enterprises, which currently account for the majority of our net revenue or our accounts receivable balance. During fiscal 2000revenue. Although we do not target specific vertical markets, enterprise customers in Financial Services, Manufacturing, Transportation and 1999,

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     Brett L. Helselhas served as our Senior Vice President of Product Development and Chief Technology Officer since December 2000. He served as our Senior Vice President of Product Development from February 2000 to December 2000 and as our Vice President of Product Development and Chief Technology Officer from May 1998 to FebruaryJanuary 2000. From April to May 1998, Mr. Helsel served as our Vice President of Advanced Product Architecture. From March 1997 to March 1998, Mr. Helsel served as Vice President, Product Development, for Cybersafe, Inc., a provider of enterprise-wide network security solutions. From April 1994 to October 1997, Mr. Helsel served as Site Development Manager for Wall Data, a host connectivity software company. Mr. Helsel holds a B.S. in Geophysics and Oceanography from the Florida Institute of Technology.

     Jeff Pancottinehas served as our Senior Vice-President of Marketing and Business Development since October 2000. He joined F5 Networks from RealNetworks, a consumer software and Internet content aggregation company, where he served as Senior Vice-President of Sales and Marketing for the Company’s Media Systems Division from April 2000 to October 2000. Prior to that, Mr. Pancottine was the Vice-President of Business Marketing at Intel Corporation from November 1999 to April 2000. Mr. Pancottine has had more than 15 years of worldwide systems marketing experience with a variety of server companies, including Sequent Computer Systems from June 1997 to November 1999, where he held the position of Vice-President of Global Marketing. He also led the server and storage marketing organization while at Sun Microsystems from October 1996 to June 1997 after Sun’s purchase of Cray Research’s Commercial Systems Division, where he introduced the highly successful UE10000 Starfire server. Previous to Sun Jeff was the Vice President of Marketing at Cray Research, a supercomputer systems vendor, responsible for commercial systems from June 1993 to June 1996 and the Vice President of Product Marketing at Sequoia Systems, a Unix fault-tolerant systems vendor, from 1988 to 1993. Jeff holds a Master of Engineering in Computer Science from Cornell University, and a Bachelor of Science in Computer Science from the University of California at Riverside.

     Edward J. Eameshas served as our Senior Vice President of Business Operations and Vice President of Global Services since January 2001 and as our Vice President of Professional Services from October 2000 to January 2001. From September 1999 to October 2000, Mr. Eames served as Vice President of e-Business Services for IBM. From June 1992 to September 1999, Mr. Eames served as the European Services Director and the Worldwide Vice President of Customer Service for Sequent Computer Systems, Inc., a manufacturer of high-end open systems, which was sold to IBM in September 1999. From November 1987 to June 1992, Mr. Eames served as the Regional Service Manager in the UK for Sun Micro Systems. Mr. Eames holds a Higher National Diploma in Business Studies from Bristol Polytechnic and in 1994 completed the Senior Executive Program at the London Business School.

     Joann M. Reiterhas served as our Vice President and General Counsel since April 2000, and as General Counsel from April 1998 through April 2000. She has served as our Corporate Secretary since June 1999. From September 1997 through March 1998 Ms. Reiter served as Director of Operations for Excell Data Corporation, an information technology consulting and system integration services company. From September 1992 through September 1997 she served as Director of Legal Services and Business Development for CellPro, Inc. a medical device manufacturer. Prior to that time Ms. Reiter was employed at the law firm of Perkins Coie. She holds a JD from the University of Washington and is a member of the Washington State Bar Association.

     Jeffrey S. Husseyco-founded F5the Company in February 1996 and has been our Chairmanserved as a director since that time. From February 1996 through August 2002, Mr. Hussey was also Chairman of the Board, and from February 1996 to July 2000, our Chief Executive Officer and President. He served as our Chief Strategist from July 2000 to September 2001. From February 1996 to July 2000, Mr. Hussey servedthrough October 2001 and as our Chief Executive Officer and President. Fromtreasurer from February 1996 to March 1999, Mr. Hussey also served as our Treasurer.1999. From June 1995 to February 1996, Mr. Hussey served aswas Vice President of Alexander Hutton Capital L.L.C., an investment banking firm. From September 1993 to July 1995, Mr. Husseyhe served as President of Pacific Comlink, an inter-exchange carrier providing frame relay and Internet access services to the Pacific Rim, which he founded in September 1993. Mr. Hussey holds a B.A. in Finance from Seattle Pacific University and an M.B.A. from the University of Washington.

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     Alan J. Higginsonhas served as one of our directors since May 1996. Mr. Higginson has been the President and CEO of Hubspan, Inc., an ebusiness infrastructure provider, since August 2001. From November 1995 to November 1998, Mr. Higginson served as President of Atrieva Corporation, a provider of advanced data backup and retrieval technology. From May 1990 to November 1995, Mr. Higginson served as Executive Vice President of Worldwide Sales and Marketing for Sierra On-line, a developer of multimedia software for the home personal

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     Karl D. Guelichhas served as one of our directors since June 1999. Mr. Guelich has been in private practice as a certified public accountant since his retirement from Ernst & Young in 1993, where he served as the Area Managing Partner for the Pacific Northwest offices headquartered in Seattle from October 1986 to November 1992. Mr. Guelich holds a B.S. degree in Accounting from Arizona State University.

     Keith D. Grinsteinhas served as one of our directors since December 1999. He also serves as board chair for Coinstar, Inc., a coin counting machine company, and as lead outside director for Nextera, Inc. an economics-consulting firm. Mr. Grinstein has been the Vice Chairmanis a partner of Second Avenue Partners, a venture capital fund. Mr. Grinstein’s past experience includes serving as president, chief executive officer and vice chair of Nextel International, Inc. since September 1999.From January 1996 to February 1999, Mr. Grinstein served as President, Chief Executive Officer and as a director of Nextel International, Inc, an international cellular service subsidiary of Nextel Communication. From January 1991 to December 1995, Mr. Grinstein was Presidentpresident and Chief Executive Officerchief executive officer of the aviation communications divisionAviation Communications Division of AT&T Wireless Services Inc, a cellular phone services subsidiary of AT&T. Mr. Grinstein had a number of positions at(formerly McCaw Cellular and its subsidiaries, include Vice President, General Counsel and Secretary of LIN Broadcasting Company, a subsidiary of McCaw Cellular, and Vice President and Assistant General Counsel of McCaw Cellular. He is currently on the board of directors for the Ackerley Group, a media and entertainment company.Communications.) Mr. Grinstein received a BA from Yale University and a JD from Georgetown University.

     Kenny J. Frerichshas served as one of our directors since July 2001. Mr. Frerichs has been the Vice President, Business Development for Nokia Internet Communications, a network security and virtual private network solutions provider, since July 2001 and Nokia’s General Manager of VPN products from March 2000 to July 2001. From March 1998 to March 2000, Mr. Frerichs served as President and CEO for Network Alchemy, a Santa Cruz based startup that developed clustered Virtual Private Networks solutions, which was acquired by Nokia in March 2000. From January 1997 to March 1998, Mr. Frerichs served as Vice President of Worldwide Sales for Wallop Software, an intranet-based business application software company. From January 1994 to January 1997, Mr. Frerichs served as Vice President, North American Sales for TGV Software, a supplier of Internet software products, which was acquired by Cisco Systems. Mr. Frerichs holds a B.S. in Computer Science from Texas A&M University. Mr. Frerichs was designated by Nokia Finance International, B.V. (NFI) pursuant to the Investor Rights Agreement entered into in connection with NFI’s investment in the Company. This agreement required the Company to appoint a designee of NFI to the board upon NFI’s investment and to nominate a designee of NFI for election by the Company’s shareholders.

Item 2.Properties.	Properties

     Our principal administrative, sales, marketing, research and research development facilities are located in Seattle, Washington and consist of two buildings totaling approximately 195,000 square feet. In April 2000, we entered into a lease agreement on two buildings for the buildings.our corporate headquarters. The lease commenced in July 2000 on the first building; and the lease on the second building commenced in October 2000. The leases for both buildings expire in 2012 with an option for renewal. The second building consists of approximately 110,000 square feet and has been fully subleased until 2012. We also lease office space for our fieldhardware development, sales and support personnel in EasternSpokane, Washington, California, New Jersey, Washington DC, Virginia,New York, Hong Kong, Singapore, Thailand, Taiwan, Japan, Korea, Australia, IndiaGermany, France, and the United Kingdom. We currently have surplus office space of approximately 14,000 square feet which we have subleased until 2003 and approximately 110,000 square feet which we have subleased until 2012.

Item 3.     Legal Proceedings.Proceedings

     OnIn July and August 8, 2001, a series of putative securities class action captioned Atlas v. F5 Networks, Inc. et al., Civil Action No. 01-CV-7342, waslawsuits were filed in the United States District Court, for the Southern District of New York against thecertain investment banking firms that underwrote ourthe Company’s initial and secondary public offerings, the Company and some of the Company’s officers and directors. These cases, which have been consolidated underIn re F5 Networks, Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that the registration statements for the Company’s June 4, 1999 initial public offering F5 Networks, and several of our officers and directors.September 30, 1999 secondary offering failed to disclose certain alleged improper actions by the underwriters for the offerings. The consolidated amended complaint alleges violations ofclaims against the F5 defendants under Sections 11 and 15 of the Securities Act of 1933, and Sectionunder Sections 10(b) and Rule 10b-5 promulgated thereunder and Section 20(a) of

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     We are not aware of any additional pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, operating results, or financial condition. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third-party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

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

     No matters were submitted to a vote of shareholders during the fourth quarter of our fiscal year.

PART II

Item 5.     Market for Registrant’s Common Stock and Related Shareholder Matters.

Market Prices and Dividends on Common Stock

     Our common stock is traded on the Nasdaq National Market (symbol: FFIV) and has been traded on Nasdaq since our initial public offering in June of 1999.. The following table sets forth the high and low sales prices of our common stock as reported on Nasdaq.stock.

     As of December 27, 20016, 2002 there were 11726,028,285 holders of record of our common stock, although we believe the number of beneficial holders of our common stock to be substantially greater.

     Our policy has been to reinvest earningsretain cash to fund future growth. Accordingly, we have not paid dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

     On June 26, 2001, we entered into a Common Stock and Warrant Purchase Agreement with Nokia Finance International B.V. (“NFI”). Under this Agreement, we issued and sold to NFI (i) 2,466,421 shares of common stock and (ii) warrants (the “Warrants”) to purchase additional shares of common stock. We received total proceeds of $34.9 million, net of $1.8$1.75 million in estimatedof issuance costs from the sale of these shares and the Warrants. The Warrants allow NFI to purchase additional shares of common stock to increase

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Item 6.     Selected Financial Data.	Selected Financial Data

     The following selected financial data are derived from our historical financial statements. The information set forth below should be read in conjunction with our financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” (in thousands, except per share data).

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Financial Statements and NotesNotes.

Results of Operations

Overview

     Net revenues.Total net revenues declined 1%increased 1.0% in fiscal 2002 from fiscal 2001, compared to a decrease of 1.0% in fiscal 2001 from fiscal 2000, compared to an2000. The increase of 290% in fiscal 20002002 was due to higher product sales resulting from fiscal 1999.a modest recovery in demand for our products. The increased product sales were partially offset by a decrease in service revenues resulting from changes in pricing and a higher percentage of our channel partners providing maintenance and installation services to end-users. The decrease in fiscal 2001 revenues, compared to fiscal 2000, was primarily due to lower product sales as a result of a downturn in the US economy in fiscal 2001. Our reduced product sales were partially offset by an increase in service revenues resulting from maintenance renewals for our installed base of products. The increase in fiscal 2000 revenues was due to an expansion of indirect sales programs and an increase in our installed base service revenues.

     International revenues represented 33%32%, 19%,33% and 8%19% of total sales in fiscal 2002, 2001 and 2000, and 1999, respectively. The decrease in international sales as a percentage of net revenues was primarily due to lower sales in Japan during fiscal 2002. Fiscal 2001 was the first complete fiscal year for which we had subsidiaries in the Asia Pacific region whichthat contributed to the increase in our international sales.sales as a percentage of net revenues compared to fiscal 2000. We plan to continue to make significant investments in ourexpect international operations, particularly in the European and Asia Pacific markets. International revenues are expected tosales will continue to represent a significant portion of our net revenues, although we cannot be assuredprovide assurance that these revenuesinternational sales as a percentage of net revenues will remain at their current levels.

     Revenues from the sale of our products and software licenses are recognized, net of allowances for estimated returns, when the product has been shipped and the customer is obligated to pay for the product. Estimated sales returns are based on historical experience by product and are recorded at the time revenues are recognized. Services revenue for installation is recognized when the product has been installed at the customer’s site. Revenues for customer support are recognized on a straight-line basis over the service contract term. Consulting services are customarily billed at fixed rates, plus out-of-pocket expenses, and revenues from consulting services are recognized at the end of the quarter in which they are performed.

     Sales of our BIG-IP products represented 64%, 62%64%, and 73%62% of total net revenues in fiscal 2002, 2001 2000, and 1999,2000, respectively, and we expect to derive a significant portion of our net revenues from sales of BIG-IP in the future. During fiscal 2002 and 2001 no single reseller or customer exceeded 10% of net revenue or our accounts receivable balance. During fiscal 2000, and 1999, one of our resellers, Exodus Communications, accounted for 14% and 22% of net revenue and 8% and 16% of our accounts receivable balance, respectively. In association with Exodus filing Chapter 11 bankruptcy, we recorded a non-recurring adjustment to our bad-debt expense of $1.75 million and a charge of $226,000 in cost of goods sold related to anticipated inventory lease payments not received by Exodus during fiscal 2001.

     Total cost of net revenues, as a percentage of total revenues, increased to 42.4% in fiscal 2001 from 30.0% in fiscal 2000 and 25.9% in fiscal 1999. The increase in fiscal 2001, compared to the prior year, relates to a non-recurring inventory reserve charge, costs associated with platform changes, a decrease in average selling price as a result of a change in product mix and an increase in personnel costs. The increase in fiscal 2000 was the result of higher production costs associated with hardware configuration enhancements and increased personnel costs, including training and consulting.

     Total operating expenses were $90.6 million, $63.2 million, and $25.5 million in fiscal 2001, 2000, and 1999, respectively. The 43.3% increase in total operating expense in fiscal 2001, compared to the prior year, is primarily the result of our continued investment in international operations, additional personnel costs, facilities costs, an increase in bad debt as a result of our relationship with Exodus and non-recurring restructuring charges. The 147.9% increase in operating expense in fiscal 2000, compared to the prior year, is primarily a result of an increase in total headcount to 496 from 187 at the end of fiscal 1999.

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Revenues (in thousands):

Net revenues.Net revenues consist of sales of our products, which include software licenses, and services. Services include revenue from installation, service and support agreements provided as part of the initial product sale, sales of extended service and support contracts, and training.balance.

     Product revenues.Product revenues were $78.6$82.6 million for the fiscal year ended September 30, 20012002 compared to $78.6 million for the year ended September 30, 2001, and $88.0 million for the year ended September 30, 2000 and $23.4 million for2000. The 5.0% increase in fiscal year 2002 was primarily the year ended September 30, 1999.result of strong sales in North America, partially offset by decreased sales in Japan. The 10.6% decrease in fiscal year 2001, compared to fiscal 2000, was primarily the result of reduced demand for our products in the US due to a general slow down in the US economy. Product revenues for fiscal year 2000 increased 275.7% from the prior year as a result of an expansion in indirect sales programs and a higher volume of unit sales from the direct sales force.

     Service revenues.Service revenues were $25.7 million for the fiscal year ended September 30, 2002 compared to $28.7 million for the fiscal year ended September 30, 2001, compared toand $20.7 million for the year ended September 30, 20002000. Service revenue decreased by 10.6% in fiscal year 2002 primarily due to changes in pricing and $4.4 million fora larger percentage of our resellers providing maintenance and installation to end-users, partially offset by an increase in the year ended September 30, 1999. Servicerenewal of service and support contracts by existing customers. The 39.1% increase in service revenues increased by 39.1% in fiscal year 2001, and 369.1% incompared to fiscal year 2000. These increases2000, was primarily resulted fromdue to an increase in the installed base of our products and the renewal of service and support contracts by our current customers.contracts.

     Customers who purchase our products can utilize our installation services and an initial customer support contract, typically covering a 12-month period. We generally combine the software license, installation, and customer support elements of our products into a package with a single price. We allocate a portion of the sales price to each element of the bundled package based on their respective fair values when the individual elements are sold separately. Customers may also purchase consulting services and renew their initial customer support contract.

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     Gross Margin (in thousands):

Cost of net revenues.Cost of net revenues consists primarily of outsourced hardware components and manufacturing costs, fees for third-party software products integrated into our products, service and support personnel and an allocation of our facilities and depreciation expenses.

     Cost of product revenues.Cost of product revenues increased 34.8%decreased 39.1% to $20.2 million for the year ended September 30, 2002 from $33.2 million for the year ended September 30, 2001 from $24.7 million for the year ended September 30, 2000.2001. The cost of product revenues for fiscal 2000 represents a 341.8% increase over cost of product revenues of $5.6 million for the year ended September 30, 1999.totaled $24.7 million. Cost of product revenues increaseddecreased as a percent of net product revenue to 24.5% for fiscal year 2002 from 42.3% for fiscal year 2001 fromand 28.0% for fiscal year 20002000. The decrease in fiscal 2002 was primarily the result of lower excess inventory charges and 23.8% forlower manufacturing costs partially offset by increased warranty costs. Further, in fiscal year 1999.2002, we unified our supply chain with a single contract manufacturer and as result have improved our manufacturing efficiencies as well as realized lower component costs. The increase in fiscal 2001, compared to fiscal 2000, was primarily the result of costs associated with product platform changes and an increase in personnel costs. The increase in fiscal 2000 was the result$4.9 million of higher production costs associated with hardware configuration enhancements and also changescharges related to obsoleteexcess inventory and purchase commitments. The cost of raw materials may fluctuate in the future, which could have a negative impact on our gross margin.

     Cost of service revenues. Cost of service revenues increaseddecreased to $10.2 million for fiscal 2002 from $12.3 million for fiscal 2001 from $7.92001. The cost of service revenues for fiscal 2000 and $1.6 million for fiscal 1999.totaled $7.9 million. Cost of service revenues increaseddecreased as a percent of net service revenues to 39.8% for fiscal year 2002 from 42.7% for fiscal year 2001. The decrease in fiscal 2002 relates primarily to improved operational efficiencies and a decrease in headcount and related costs. Cost of service revenues increased to 42.7% in fiscal 2001 fromcompared to 38.3% for fiscal year 2000 and 36.7% for fiscal year 1999.2000. The increase in cost of service revenue in fiscal 2001, and 2000, compared to the prior years,fiscal 2000, is due to an increase in customer base and an increase in personnel and the related costs.

Provision for excess inventory.Due to changes in current market conditions and a revision of our sales forecast, a review was made of our inventory needs and an assessment of our future purchase commitments during fiscal 2001. As a result, we determined two provisions for excess inventory and future purchase commitments would be recorded. The first provision for excess inventory was charged to cost of revenues in the amount of $3.9 million, which consisted of a $3.1 million inventory valuation allowance and approximately $800,000 of future purchase commitments. As of September 30, 2001, $1.5 million of this reserve had been utilized. The second provision for excess inventory was in the amount of $1.0 million. This charge is associated with charge is associated with the changes in the configuration of our EDGE-FX Cache product, which will increase the functionality of the product. These costs are associated with updating both existing inventory and product previously sold to customers, as well as costs to fulfill existing purchase commitments and have been included in cost of revenues for the for the fiscal year ended September 30, 2001. As of September 30, 2001, $232,000 of this reserve had been utilized.

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     Operating expenses (in thousands):

     Sales and marketing. Sales and marketing expenses consist primarily of salaries, commissions and related benefits of our sales and marketing staff, costs of our marketing programs, including public relations, advertising and trade shows, and an allocation of our facilities and depreciation expenses. Sales and marketing expenses decreased less than 1.0% to $50.6 million in fiscal 2002 from $50.8 million in fiscal 2001. The decrease in fiscal 2002 relates primarily to lower trade show and promotional activities and decreased business travel expenses partially offset by increased by 37.6%personnel costs as we continued to expand our international operations. Sales and marketing expenses increased to $50.8 million in fiscal 2001 from $36.9 million in fiscal year 2000. In fiscal 2000, sales and marketing expenses increased by 173% from $13.5 million in fiscal 1999. The increase in fiscal 2001, compared to the prior year,fiscal 2000, was due to an increase in headcount and the related costs, an increase inand increased advertising and promotional activities including activities related to new product launches. The increase in fiscal 2000 was primarily due to a significant increase in headcount from the prior year.activities. We expect to continue increasingto increase sales and marketing expenses in order to grow net revenues and expand our brand awareness.

     Research and development.Research and development expenses consist primarily of salaries and related benefits for our product development personnel and an allocation of our facilities and depreciation expenses. Research and development expenses increased by 20.4%3.2% to $18.0 million in fiscal 2002, from $17.4 million in fiscal 2001 fromand $14.5 million, and in fiscal 2000 by 156% from $5.6 million in fiscal 1999.year 2000. The increase in fiscal 2002 relates primarily to increased personnel related costs and expenses related to the development of new products. The increase in fiscal year 2001, compared to fiscal 2000, relates primarily to personnel related costs and an increase in facilities costcosts related to the new Spokane office. TheWe expect to continue to increase in fiscal 2000, compared to the prior period, is also due to a significant increase in headcount. Ourresearch and development expenses as our future success is dependent in large part on the continued enhancement of our current products and our ability to develop new, technologically advanced products that meet the sophisticatedchanging needs of our customers. We expect research and development expenses to remain at a consistent level with fiscal 2001.

     General and administrative. General and administrative expenses consist primarily of salaries, benefits and related costs of our executive, finance, information technology, human resource and legal personnel, third-party professional service fees, bad debt charges and an allocation of our facilities and depreciation expenses. General and administrative expenses decreased 19.9% to $15.0 million in fiscal 2002 from $18.8 million in fiscal 2001. The decrease in fiscal 2002 is primarily due to lower bad debt charges and lower facilities expenses resulting from the sublease of one of our buildings, partially offset by an increase in professional services related to patent prosecution and other activities related to our intellectual property. General and administrative expenses increased by 93.0%to $18.8 million in fiscal 2001 to $18.8 million from $9.7 million in fiscal year 2000. These expenses increased in fiscal year 2000 by 151.4% from $3.9 million for fiscal year 1999. The increasesincrease in fiscal 2001, were duecompared to fiscal 2000, related primarily to an increase in bad debt expense due to the relationship withbankruptcy filing by Exodus Communications and an increase in headcount and other payroll related costs. The fiscal 2000 increase was primarily due to increases in the general and administrative headcount.

     Restructuring charge.charges.During the first fiscalthird quarter of 2001,fiscal 2002, we recorded a restructuring charge of $1.1$2.8 million in connection with managementmanagement’s decision to bring operating expenses in line withexit the business

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     UnearnedAmortization of unearned compensation.We have recorded a total of $8.3 million of stock compensation costs since our inception through September 30, 2001.2002. These charges represent the difference between the exercise price and the deemed fair value of certain stock options granted to our employees and outside directors. These options generally vest ratably over a four-year period. We are amortizing these costs using an accelerated method as prescribed by FASB interpretation No. 28 (“FIN No. 28”) and have recorded stock compensation charges of $0.4 million, $2.6 million, $2.1 million and $2.5$2.1 million for the years ended September 30, 2002, 2001 2000 and 1999,2000, respectively.

     We expect to recognize amortization expense related to unearned compensation of approximately $443,000 and $83,000 during the years ended September 30, 2002 and 2003, respectively. We cannot guarantee, however, that we will not accrue additional stock compensation costs in the future or that our current estimate of these costs will prove accurate.16

Other Income and Taxes (in thousands):

     Other income, net.Other income, net, consists primarily of earnings on our cashinterest income and cash equivalent balancesforeign currency transaction gains and short-term investments.losses. Other income, net, decreased 30.0%29.7% to $1.4 million in fiscal 2002 from $2.0 million in fiscal year 2001 fromand $2.9 million in fiscal year 2000. Other income increased by 444.0% in fiscal 2000 from $0.6 million in fiscal year 1999. These fluctuationsThis decrease is primarily relatedue to declining interest income of $2.6 million for fiscal year 2001, $3.2 million for the fiscal year 2000rates and $0.5 million for the fiscal year 1999.investment income.

     IncomeProvision for income taxes. The income tax provision of $489,000 reported in fiscal 2002 is due to foreign income taxes related to our international operations. The income tax provision increased to $4.1 million in fiscal 2001 from $2.1 million in fiscal 2000 and zero in fiscal 1999.2000. The increase in the provision for income taxes was caused by our decision to provide for a full valuation allowance against itsnet deferred tax assets in fiscal year 2001. FASB Statement 109 provides for the recognition of deferred tax assets if it is more likely than not that those deferred tax assets will be realized. Based on the available evidence at the time, the valuation allowance was partially reversed in fiscal year 2000 for the assets we considered realizable. In fiscal year 2001, the changes in the current economic environment caused us reevaluate the need to provide for a full valuation allowance. Based on the weight of all the available positive and negative evidence, we determined that a full valuation allowance should be provided to completely offset the net deferred tax assets.

Quarterly Results of Operations (unaudited)

     The following tables present our unaudited quarterly results of operations for the eight quarters ended September 30, 2001 in dollars and as a percentage of net revenues. You should read the following tables in

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