UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                        to                                         

Commission file number: 001-33347

Aruba Networks, Inc.

Delaware		02-0579097
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s common stock, par value $0.0001, outstanding as of June 4, 2008 was 82,583,060.

 

 

ARUBA NETWORKS, INC.
INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of April 30, 2008 and July 31, 2007			3
Consolidated Statements of Operations for the three and nine months ended April 30, 2008 and 2007			4
Consolidated Statements of Cash Flows for the nine months ended April 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			44
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Item 1 — Consolidated Financial Statements

ARUBA NETWORKS, INC.

		April 30,				July 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	41,476			$	42,570
Short-term investments			56,350				62,430
Accounts receivable, net			28,562				23,722
Inventory			16,522				8,991
Deferred costs			2,881				3,217
Prepaids and other			5,291				2,432
Total current assets			151,082				143,362
Property and equipment, net			6,887				3,709
Goodwill			7,655				—
Intangible assets, net			20,262				3,912
Deferred costs			336				722
Other assets			768				428
Total assets		$	186,990			$	152,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	6,775			$	2,201
Accrued liabilities			18,623				15,317
Income taxes payable			542				281
Deferred revenue			22,451				16,067
Total current liabilities			48,391				33,866
Deferred revenue			6,762				5,780
Other long-term liabilities			139				—
Total liabilities			55,292				39,646
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock: $0.0001 par value; 10,000 shares authorized at April 30, 2008 and July 31, 2007, no shares issued and outstanding at April 30, 2008 and July 31, 2007			—				—
Common stock: $0.0001 par value; 350,000 shares authorized at April 30, 2008 and July 31, 2007; 82,474 and 76,927 shares issued and outstanding at April 30, 2008 and July 31, 2007			8				8
Additional paid-in capital			243,074				213,545
Accumulated other comprehensive income			51				29
Accumulated deficit			(111,435	)			(101,095	)
Total stockholders’ equity			131,698				112,487
Total liabilities and stockholders’ equity		$	186,990			$	152,133

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Revenues
Product		$	35,478			$	29,777			$	108,105			$	71,545
Professional services and support			6,287				3,816				19,109				8,593
Ratable product and related professional services and support			841				1,068				2,767				5,675
Total revenues			42,606				34,661				129,981				85,813
Cost of revenues
Product			11,236				8,921				34,077				24,784
Professional services and support			1,650				1,138				5,853				3,443
Ratable product and related professional services and support			294				397				986				2,088
Total cost of revenues			13,180				10,456				40,916				30,315
Gross profit			29,426				24,205				89,065				55,498
Operating expenses
Research and development			9,762				6,890				27,148				17,752
Sales and marketing			21,230				16,240				61,755				39,194
General and administrative			4,730				4,889				13,325				10,897
Acquisition related severance expense			197				—				197				—
Total operating expenses			35,919				28,019				102,425				67,843
Operating loss			(6,493	)			(3,814	)			(13,360	)			(12,345	)
Other income (expense), net
Interest income			854				567				3,474				876
Interest expense			—				(22	)			—				(85	)
Other income (expense), net			(324	)			(5,935	)			258				(9,185	)
Total other income (expense), net			530				(5,390	)			3,732				(8,394	)
Loss before provision for income taxes			(5,963	)			(9,204	)			(9,628	)			(20,739	)
Provision for income taxes			260				82				712				293
Net loss		$	(6,223	)		$	(9,286	)		$	(10,340	)		$	(21,032	)
Net loss per common share, basic and diluted		$	(0.08	)		$	(0.26	)		$	(0.13	)		$	(0.99	)
Shares used in computing basic and diluted net loss per common share			80,644				36,363				78,922				21,207
Stock-based compensation expense included in above:
Cost of revenues		$	161			$	62			$	464			$	202
Research and development			1,458				858				4,226				1,576
Sales and marketing			1,839				1,042				6,248				2,193
General and administrative			794				2,499				2,612				3,993

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

(in thousands)

		Nine months ended
		April 30,
		2008				2007
Cash flows from operating activities
Net loss		$	(10,340	)		$	(21,032	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			3,436				1,384
Provision for doubtful accounts			149				210
Write downs for excess and obsolete inventory			823				1,108
Compensation related to stock options and share awards			13,550				6,549
Net realized gains on short term investments			(21	)			—
Stock issued to charitable foundation			—				1,415
Non-cash interest expense			—				45
Accretion of purchase discounts on short-term investments			(2,011	)			—
Change in carrying value of preferred stock warrants			(715	)			8,992
Loss on disposal of fixed assets			—				5
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			(4,101	)			(5,573	)
Inventory			(9,380	)			(4,588	)
Prepaids and other			(2,755	)			(317	)
Deferred costs			721				1,600
Other assets			(339	)			(152	)
Accounts payable			3,991				3,183
Deferred revenue			5,690				289
Other current and noncurrent liabilities			3,438				2,264
Income taxes payable			261				90
Net cash provided by (used in) operating activities			2,397				(4,528	)
Cash flows from investing activities
Purchases of short-term investments			(85,657	)			—
Proceeds from sales and maturities of short-term investments			93,790				—
Purchases of property and equipment			(3,961	)			(3,028	)
Cash paid in purchase acquisition, net of cash acquired			(16,030	)			—
Net cash used in investing activities			(11,858	)			(3,028	)
Cash flows from financing activities
Repayments on equipment loan obligations			—				(546	)
Cash received under stock issuance agreement			—				2,104
Proceeds from issuance of redeemable convertible preferred stock, net			—				10,597
Proceeds from initial public offering, net			—				91,809
Proceeds from issuance of common stock			10,014				3,996
Repurchase of common stock under stock repurchase program			(1,649	)			—
Net cash provided by financing activities			8,365				107,960
Effect of exchange rate changes on cash and cash equivalents			2				59
Net (decrease)/ increase in cash and cash equivalents			(1,094	)			100,463
Cash and cash equivalents, beginning of period			42,570				9,263
Cash and cash equivalents, end of period		$	41,476			$	109,726
Supplemental disclosure of cash flow information
Income taxes paid		$	232			$	177
Interest paid		$	—			$	35
Supplemental disclosure of non-cash investing and financing activities
Reclassification of warrant liability to equity upon initial public offering		$	—			$	9,933
Reclassification of non-current liability to equity upon initial public offering		$	—			$	3,500
Common stock issued in purchase acquisition		$	7,852			$	—

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

1. The Company and its Significant Accounting Policies

The Company

     Aruba Networks, Inc. (the “Company”) was incorporated in the state of Delaware on February 11, 2002. The Company securely delivers the enterprise network to users with user-centric networks that expand the reach of traditional port-centric networks. The products the Company licenses and sells include the ArubaOS modular operating system, optional value-added software modules, a centralized mobility management system, high-performance programmable Mobility Controllers, wired and wireless access points, wireless intrusion detection tools, spectrum analyzers, and endpoint compliance solutions. The Company has offices in North America, Europe, the Middle East and the Asia Pacific region and employs staff around the world.

Basis of Presentation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The accompanying statements are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed on October 12, 2007. The July 31, 2007 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles(“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). They do not include all of the financial information and footnotes required by GAAP for complete financial statements. The Company believes the unaudited consolidated financial statements have been prepared on the same basis as its audited financial statements as of and for the year ended July 31, 2007 and include all adjustments necessary for the fair statement of the Company’s financial position as of April 30, 2008, its results of operations for the three and nine months ended April 30, 2008 and 2007, and its cash flows for the nine months ended April 30, 2008 and 2007. The results for the three and nine months ended April 30, 2008 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending July 31, 2008.

     During the three months ended October 31, 2007, the Company determined that the fair values assigned to certain warrants to purchase preferred stock issued to non-employees were not computed correctly as of the initial public offering (“IPO”) closing date when they automatically converted to warrants to purchase common stock which resulted in $715,000 of excess warrant expense being recognized in other income (expense), net in the third fiscal quarter of 2007. During the first fiscal quarter of 2008, the Company corrected the valuation of these warrants resulting in the inclusion of other income of $715,000 within other income (expense), net and a reduction of additional paid-in capital of $715,000. In addition, during the three months ended October 31, 2007, the Company determined that stock-based compensation related to its employee stock purchase plan was understated by $48,000 and $87,000 in the third and fourth fiscal quarters of 2007, respectively. During the first fiscal quarter of 2008, the Company corrected these errors resulting in the inclusion of $135,000 of additional stock-based compensation within the consolidated statement of operations for the three months ended October 31, 2007. The Company and its Audit Committee concluded that these errors were not material to the third and fourth fiscal quarters of 2007, the year ended July 31, 2007 or the estimated results for the year ending July 31, 2008, and therefore, the corrections were recorded in the first fiscal quarter of 2008.

Significant Accounting Policies

     Other than the adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (“FIN 48”), there have been no significant changes in the Company’s accounting policies during the nine months ended April 30, 2008 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K filed on October 12, 2007.

2. Acquisition

     On March 20, 2008, the Company completed its acquisition of AirWave Wireless, Inc. (“AirWave”). AirWave designs and sells specialized software to centrally manage large, multi-vendor wireless LAN, mesh, and WiMAX networks. The acquisition will add to the Company’s product offerings by providing a leading multi-vendor management solution.

     This transaction was accounted for as a business combination and the results of the acquired business have been included in the consolidated financial statements since the date of the acquisition. The accompanying condensed consolidated financial statements reflect the total purchase price for AirWave of approximately $24.6 million which consists of the following (in thousands):

Common stock (1,518,774 shares at $5.17 per share)		$	7,852
Vested portion of assumed unvested options			150
Cash			16,326
Transactions costs			265
Total consideration		$	24,593

     The purchase price was allocated to the assets acquired and liabilities assumed based on management’s preliminary estimates of their fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. These estimates are subject to adjustment based on the final allocation of the purchase price.

     The following table summarizes the purchase price allocation (in thousands, except estimated useful lives):

						Estimated
						Useful Lives
Cash and cash equivalents		$	560
Current assets			978
Property and equipment			96
Non-current assets			15
Total tangible assets acquired			1,649
Amortizable intangible assets:
Existing and core technology/ patents			8,900			4 years
Customer contracts			4,600			6 years
Support agreements			2,700			5 years
Tradenames/trademarks			600			5 years
Non-compete agreements			700			2 years
Goodwill			7,655
Total assets acquired			26,804
Current liabilities			(1,738	)
Non-current liabilities			(473	)
Total liabilities assumed			(2,211	)
Total		$	24,593

     The purchased intangible assets have a weighted average useful life of 4.6 years from the date of acquisition.

     The following unaudited pro forma financial information presents the combined results of operations for the Company and AirWave as if the acquisition had occurred at August 1, 2007 and 2006. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the acquisition actually taken place on August 1, 2007 or 2006, and should not be taken as indicative of future consolidated operating results (unaudited, in thousands, except per share amounts):

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
		(in thousands)								(in thousands)
Revenues		$	43,323			$	37,148			$	134,932			$	91,399
Net loss		$	(7,463	)		$	(10,039	)		$	(15,223	)		$	(24,473	)
Net income per share- basic & diluted		$	(0.09	)		$	(0.27	)		$	(0.19	)		$	(1.08	)

3. Goodwill and Other Intangible Assets

     In accordance with Financial Accounting Standards Board Interpretation No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”), goodwill originating from an acquisition will not be amortized and will be tested for impairment on an annual basis and between annual tests based on certain circumstances. In general, goodwill is not deductible for tax purposes. Purchased intangible assets are being amortized on a straight-line basis over a period of two to seven years.

     The following table presents details of the Company’s total purchased intangible assets:

		Estimated				Gross				Accumulated				Net
As of April 30, 2008		Useful Lives				Value				Amortization				Value
										(in thousands)
Intangible Assets, net
Existing Technology		4 years				$	9,283			$	(692	)		$	8,591
Patents/Core Technology		4 years					3,046				(227	)			2,819
Customer Contracts			6 to 7 years				5,083				(140	)			4,943
Support Agreements			5 to 6 years				2,717				(63	)			2,654
Tradenames/Trademarks		5 years					600				(13	)			587
Non-Compete Agreements		2 years					712				(44	)			668
Total						$	21,441			$	(1,179	)		$	20,262

		Estimated				Gross				Accumulated				Net
As of July 31, 2007		Useful Lives				Value				Amortization				Value
										(in thousands)
Intangible Assets, net
Existing Technology		4 years				$	2,583			$	(20	)		$	2,563
Patents/Core Technology		4 years					846				(7	)			839
Customer Contracts		7 years					483				(2	)			481
Support Agreements		6 years					17				—				17
Non-Compete Agreements		2 years					12				—				12
Total						$	3,941			$	(29	)		$	3,912

     During the three and nine months ended April 30, 2008, the Company recorded $0.7 million and $1.2 million, respectively, of amortization expense related to its purchased intangible assets.

     The estimated future amortization expense of purchased intangible assets as of April 30, 2008 is as follows:

		Amount
		(in thousands)
Remaining three months of fiscal 2008		$	1,234
Year Ending July 31,
2009			4,937
2010			4,804
2011			4,555
2012			2,917
Thereafter			1,815
Total		$	20,262

4. Net Loss Per Common Share

     Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period that are not subject to vesting provisions. Diluted net loss per common share is calculated by giving effect to all potentially dilutive common shares, including options, common stock subject to repurchase, warrants and redeemable convertible preferred stock. The following table sets forth the computation of net loss per share:

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
		(in thousands, except per share data)								(in thousands, except per share data)
Net loss		$	(6,223	)		$	(9,286	)		$	(10,340	)		$	(21,032	)
Weighted-average common shares outstanding net of weighted-average common shares subject to repurchase			80,644				36,363				78,922				21,207
Basic and diluted net loss per common share		$	(0.08	)		$	(0.26	)		$	(0.13	)		$	(0.99	)

     The following outstanding options, common stock subject to repurchase, restricted stock awards, and warrants to purchase shares of common stock were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect:

		April 30,
		2008				2007
		(in thousands)
Options to purchase common stock			20,624				21,695
Common stock subject to repurchase			708				1,464
Restricted stock awards			3,287				—
Warrants to purchase common stock			—				677

5. Short-Term Investments

     Short-term investments consist of the following:

						Gross				Gross
		Cost				Unrealized				Unrealized				Fair
		Basis				Gains				Losses				Value
						(in thousands)
Balance at April 30, 2008
Auction rate securities		$	504			$	2			$	—			$	506
Corporate bonds and notes			9,265				—				(22	)			9,243
U.S. government agency securities			37,358				79				(15	)			37,422
Asset-backed securities			802				1				—				803
Commercial paper			8,370				6				—				8,376
Total short-term investments		$	56,299			$	88			$	(37	)		$	56,350

		Cost				Unrealized				Unrealized				Fair
		Basis				Gains				Losses				Value
						(in thousands)
Balance at July 31, 2007
Auction rate securities		$	5,209			$	—			$	—			$	5,209
Corporate bonds and notes			832				—				—				832
U.S. government agency securities			47,387				23				—				47,410
Asset-backed securities			4,518				5				—				4,523
Commercial paper			4,455				1				—				4,456
Total short-term investments		$	62,401			$	29			$	—			$	62,430

     The cost basis and fair value of available-for-sale securities, by contractual maturity, are as follows:

		Cost				Fair
		Basis				Value
		(in thousands)
April 30, 2008
One year or less		$	40,212			$	40,260
Over one year			16,087				16,090
Total short-term investments		$	56,299			$	56,350

		Cost				Fair
		Basis				Value
		(in thousands)
July 31, 2007
One year or less		$	48,722			$	48,737
Over one year			13,679				13,693
Total short-term investments		$	62,401			$	62,430

     Unrealized gains and losses are recorded as a component of cumulative other comprehensive income (loss) in stockholders’ equity. If these investments are sold at a loss or are considered to have other than temporarily declined in value, a charge to operations is recorded. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in other income (expense), net.

     The following table summarizes the fair value and gross unrealized losses of the Company’s investments with unrealized losses aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position:

		Less than 12 Months
		Fair				Unrealized
		Value				Loss
		(in thousands)
April 30, 2008
Corporate bonds and notes		$	9,243			$	(22	)
U.S. government agencies			14,624				(15	)
Total short-term investments		$	23,867			$	(37	)

     There were no securities in an unrealized loss position greater than twelve months as of April 30, 2008, and there were no securities in an unrealized loss position as of July 31, 2007.

     The Company invests in securities that are rated investment grade or better. The Company has determined that unrealized losses are temporary as the duration of the decline in value of investments has been short, the extent of the decline, in both dollars and as a percentage of cost, is not significant, and the Company has the ability to hold the investments until recovery, if necessary.

6. Balance Sheet Components

     The following tables provide details of selected balance sheet items:

		April 30,				July 31,
		2008				2007
		(in thousands)
Accounts Receivable, net
Trade accounts receivable		$	29,084			$	24,229
Less: Allowance for doubtful accounts			(522	)			(507	)
Total		$	28,562			$	23,722

		April 30,				July 31,
		2008				2007
		(in thousands)
Inventory
Raw materials		$	686			$	543
Work in process			274				167
Finished goods			15,562				8,281
Total		$	16,522			$	8,991

		April 30,				July 31,
		2008				2007
		(in thousands)
Accrued Liabilities
Compensation and benefits		$	7,322			$	7,017
Inventory			3,597				3,444
Other			7,704				4,856
Total		$	18,623			$	15,317

7. Property and Equipment, net

     Property and equipment, net consists of the following:

		Estimated				April 30,				July 31,
		Useful Lives				2008				2007
						(in thousands)
Property and Equipment, net
Computer equipment		2 years				$	5,574			$	3,846
Computer software		2 years					3,168				1,587
Machinery and equipment		2 years					4,830				3,454
Furniture and fixtures		5 years					893				426
Leasehold improvements		2-5 years					537				232
Total property and equipment, gross							15,002				9,545
Less: Accumulated depreciation and amortization							(8,115	)			(5,836	)
Total property and equipment, net						$	6,887			$	3,709

8. Deferred Revenue

     Deferred revenue consists of the following:

		April 30,				July 31,
		2008				2007
		(in thousands)
Deferred Revenue
Product		$	5,580			$	2,587
Professional services and support			15,070				10,021
Ratable product and related services and support			1,801				3,459
Total deferred revenue, current			22,451				16,067
Professional services and support, long-term			5,702				3,618
Ratable product and related services and support, long-term			1,060				2,162
Total deferred revenue, long-term			6,762				5,780
Total deferred revenue		$	29,213			$	21,847

     Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred professional services and support revenue primarily represents customer payments made in advance for support contracts. Support contracts are typically billed on an annual basis in advance and revenue is recognized ratably over the support period.

     Deferred ratable product and related services and support revenue consists of revenue on transactions where Vendor Specific Objective Evidence (“VSOE”) of fair value of support has not been established and the entire arrangement is being recognized ratably over the support period, which typically ranges from one year to five years. Typically, the Company’s sales involve multiple elements, such as sales of products that include support, training and/or consulting services. When a sale involves multiple elements, the Company allocates the entire fee from the arrangement to each respective element based on its VSOE of fair value and recognizes revenue when each element’s revenue recognition criteria are met. VSOE of fair value for each element is established based on the sales price the Company charges when the same element is sold separately. If VSOE of fair value cannot be established for the undelivered element of an agreement, when the undelivered element is support, the entire amount of revenue from the arrangement is deferred and recognized ratably over the period that the support is delivered.

9. Income Taxes

     For the three and nine months ended April 30, 2008 and 2007, the Company generated operating losses. Accordingly, the Company’s tax provision for these periods relates primarily to franchise tax and foreign income tax.

     The Company uses the asset and liability method of accounting for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards, if it is more likely than not that the tax benefits will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. To the extent deferred tax assets cannot be recognized under the preceding criteria, a valuation allowance is established.

     As of the year ended July 31, 2007, the Company had $55.5 million of federal and $49.6 million of state net operating loss carryforwards available to reduce future taxable income which will begin to expire in 2022 and 2013 for federal and state tax purposes, respectively. The Company also had research and credit carryforwards of $2.3 million for federal and $2.0 million for state income tax purposes as of July 31, 2007.

     Based on the available objective evidence, including the fact that the Company has generated losses since inception, management believes it is more likely than not that the deferred tax assets will not be realized. Accordingly, management has applied a full valuation allowance against its deferred tax assets.

     Effective August 1, 2007, the Company adopted FIN 48. FIN 48 provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The cumulative effect of adopting FIN 48 is recorded as an adjustment to the opening balance of accumulated deficit on the adoption date. As a result of the implementation of FIN 48, the Company did not record any changes to the liability for unrecognized tax benefits related to tax positions taken in prior periods, and no corresponding change in accumulated deficit was recorded. Additionally, the Company did not make any reclassifications between current taxes payable and long-term taxes payable upon adoption of FIN 48.

     At the adoption date of August 1, 2007, the Company had $1.9 million of unrecognized tax benefits, none of which would affect its income tax expense if recognized to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. There was no material change to the Company’s unrecognized tax benefits at April 30, 2008.

     The Company recognizes interest and penalties related to income tax matters as part of the provision for income taxes. To date, the Company has incurred no such charges.

     The Company files annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in various foreign jurisdictions. The Company remains subject to tax authority review for all jurisdictions for all years.

10. Stock Benefit Plans and Common Stock

     In April 2002, the Company’s board of directors adopted the 2002 Stock Plan (“2002 Plan”). In December 2006, the Company’s board of directors approved the 2007 Equity Incentive Plan (“2007 Plan”) and the Employee Stock Purchase Plan (“ESPP”). As provided by the 2007 Plan, all remaining shares reserved for issuance under the 2002 Plan were transferred to the 2007 Plan upon the closing of the IPO.

Stock Option Activity

     The following table summarizes information about stock options outstanding:

						Options Outstanding
										Weighted
										Average				Weighted
		Shares								Exercise				Average				Aggregate
		Available for				Number of				Price				Fair Value				Intrinsic
		Grant				Shares				per Share				per Share				Value
Balance at July 31, 2007			3,358,925				21,917,611			$	3.66
Shares reserved for issuance			3,846,366				—
Restricted stock awards granted			(3,266,846	)			—
Restricted stock awards cancelled			137,300				—
Options granted			(2,692,505	)			2,692,505				8.60			$	3.82
Options granted in purchase acquisition			—				155,409				0.72			$	4.63
Options exercised			—				(2,935,360	)			1.77							$	38,412,165
Options repurchased			8,000				—				0.21
Options cancelled			1,206,139				(1,206,139	)			5.20
Balance at April 30, 2008			2,597,379				20,624,026			$	4.46

     The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the fair value of the Company’s common stock on the date of each option exercise.

     The following table summarizes information about non-vested restricted stock awards:

						Weighted Average
						Grant Date
		Shares				Fair Value
Balance at July 31, 2007			270,700			$	17.43
Awards granted			3,266,846				6.95
Awards vested			(113,724	)			16.14
Awards cancelled			(137,300	)			15.23
Balance at April 30, 2008			3,286,522			$	7.15

     The estimated fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date. Stock-based compensation expense recognized for restricted stock awards was $1.2 million and $3.2 million for the three and nine months ended April 30, 2008, respectively.

Employee Stock Purchase Plan Activity

     During the three months ended April 30, 2008, 518,767 shares were purchased at an average per share price of $4.58. At April 30, 2008, there were 3,296,241 shares available to be issued under the ESPP. Compensation expense recognized in connection with the ESPP for the three and nine months ended April 30, 2008 was $0.7 million and $2.1 million, respectively.

     During the three months ended April 30, 2008, the Company modified the terms of certain existing awards under its ESPP pursuant to the reset provisions of the plan. Consequently, the Company will recognize $2.6 million in incremental stock-based compensation expense over the vesting period. The Company recognized $0.4 million in incremental stock-based compensation expense arising from the award modification for the three and nine months ended April 30, 2008.

Fair Value Disclosures

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:

Employee Stock Options

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Assumptions
Risk-free interest rate			2.4	%			4.6	%			3.3	%			4.7	%
Expected term (in years)			4.3				4.3				4.3				4.3
Dividend yield			—				—				—				—
Volatility			51	%			48	%			51	%			53	%
Weighted average fair value of options granted		$	2.44			$	3.60			$	3.87			$	2.53

Employee Stock Purchase Plan

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Assumptions
Risk-free interest rate		1.5% to 1.6%					5.0	%		1.5% to 4.2%					5.0	%
Expected term (in years)			0.5 to 2.0				0.4				0.5 to 2.0				0.4
Dividend yield			—				—				—				—
Volatility		47% to 65%					45	%		43% to 65%					45	%
Weighted average fair value of stock purchase rights granted		$	2.13			$	3.11			$	2.43			$	3.11

     The expected term of the stock-based awards represents the period of time that the Company expects such stock-based awards to be outstanding, giving consideration to the contractual term of the awards, vesting schedules and expectations of future employee behavior. The Company gave consideration to its historical exercises, the vesting term of its options, the post vesting cancellation history of its options and the options’ contractual terms. The contractual term of options granted from inception of the Company through August 16, 2007 was generally 10 years. On August 17, 2007, the Company’s Compensation Committee revised its 2007 Plan to provide for a contractual term of seven years on all option grants on or after such date. Given the Company’s limited operating history, the Company then compared this estimated term to those of comparable companies from a representative peer group selected based on industry data to determine the expected term. The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group that the Company selected based on industry data. As required by SFAS 123R, the Company made an estimate of expected forfeitures, and is recognizing stock-based compensation only for those equity awards that it expects to vest. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Constant Maturity rate as of the date of grant.

Stock-based Expenses

     Total stock-based compensation was $4.3 million and $13.6 million, for the three and nine months ended April 30, 2008, respectively, and $4.5 million and $8.0 million for the three and nine months ended April 30, 2007, respectively. The Company did not capitalize stock-based compensation during the three and nine months ended April 30, 2008 due to the amount qualifying for capitalization being immaterial.

     The Company recorded no tax benefit related to stock-based compensation during the three and nine months ended April 30, 2008, since the Company currently maintains a full valuation allowance on its deferred tax assets.

Shares Subject to Repurchase

     Certain common stock option holders have the right to exercise unvested options, subject to the right of the Company to repurchase unvested shares of common stock received upon exercise, in the event of a voluntary or involuntary termination of the shareholder’s employment. The cash received from these exercises is initially recorded as a liability and is subsequently reclassified to common stock as the shares vest. As of April 30, 2008 and July 31, 2007, respectively, a total of 707,963 and 1,046,599 shares of common stock were subject to repurchase by the Company at the original exercise price of the related stock option. The corresponding exercise value of $1.0 million and $1.4 million as of April 30, 2008 and July 31, 2007, respectively, is recorded in accrued liabilities. For the nine months ended April 30, 2008, the non-vested shares activity was as follows:

Non-Vested Shares		Shares
Non-vested as of July 31, 2007			1,046,599
Early exercise of options			130,863
Vested			(461,499	)
Forfeited			(8,000	)
Non-vested as of April 30, 2008			707,963

Stock Repurchase Program

     On February 26, 2008, the Company announced a stock repurchase program for up to $10.0 million worth of the Company’s common stock. The Company is authorized until February 26, 2010, to make purchases in the open market and any such purchases will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the price of the Company’s common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. During the three months ended April 30, 2008, the Company purchased 313,000 shares under this program for an aggregate purchase price of $1.6 million. The Company was authorized to purchase up to an additional $8.4 million worth of shares under this program as of April 30, 2008. The Company’s policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in capital.

Warrants

     In August 2007, the Company issued 556,583 shares of common stock in connection with a cashless or net exercise of warrants to purchase 519,389 shares of common stock at exercise prices ranging from $0.67 to $2.13 per share. As of April 30, 2008, there were no warrants outstanding.

11. Comprehensive Income (Loss)

     Comprehensive income (loss) includes the following:

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
		(in thousands)								(in thousands)
Net loss		$	(6,223	)		$	(9,286	)		$	(10,340	)		$	(21,032	)
Change in unrealized gain/(loss) on short-term investments			(192	)			—				21				—
Comprehensive loss		$	(6,415	)		$	(9,286	)		$	(10,319	)		$	(21,032	)

12. Segment Information and Significant Customers

     The Company operates in one industry segment selling fixed and modular mobility controllers, wired and wireless access points, and related software and services.

     FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. The Company and its Chief Executive Officer evaluate performance based primarily on revenue in the geographic locations in which the Company operates. Revenue is attributed by geographic location based on the ship-to location of the Company’s customers. The Company’s assets are primarily

located in the United States of America and not allocated to any specific region. Therefore, geographic information is presented only for total revenue.

     The following presents total revenue by geographic region:

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
		(in thousands)								(in thousands)
United States		$	28,081			$	24,751			$	87,234			$	57,400
Europe, Middle East and Africa			8,565				4,781				23,736				14,457
Asia Pacific			4,390				2,549				13,503				7,293
Rest of World (including Japan)			1,570				2,580				5,508				6,663
Total		$	42,606			$	34,661			$	129,981			$	85,813

13. Commitments and Contingencies

Legal Matters

     On August 27, 2007, Symbol Technologies, Inc. and Wireless Valley Communications, Inc., both Motorola subsidiaries, filed suit against the Company in the Federal District Court of Delaware asserting infringement of U.S. Patent Nos. 7,173,922; 7,173,923; 6,625,454; and 6,973,622. The Company filed its response on October 17, 2007, denying the allegations and asserting counterclaims. The complaint seeks unspecified monetary damages and injunctive relief. Although the Company intends to vigorously defend against these claims, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert management’s attention from operating the Company’s business. Because of the inherent uncertainties of litigation, the outcome of this action could be unfavorable. At this time, the Company is unable to estimate the potential financial impact this action could have on the Company.

     The Company could become involved in additional litigation from time to time relating to claims arising out of its ordinary course of business. Other than described above there were no claims as of April 30, 2008 that, in the opinion of management, might have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Lease Obligations

     The Company leases office space under noncancelable operating leases with various expiration dates through August 2012. The terms of certain operating leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the respective lease periods and has accrued for rent expense incurred but not paid.

     Future minimum lease payments under noncancelable operating leases are as follows:

		Operating
		Leases
		(in thousands)
Remaining three months of fiscal 2008		$	635
Year Ending July 31, 2009			3,116
2010			3,236
2011			968
2012			150
Thereafter			—
Total minimum payments		$	8,105

Employment Agreements

     The Company has signed various employment agreements with certain executives pursuant to which if their employment is terminated without cause, the executives are entitled to receive certain benefits, including, but not limited to, accelerated stock option vesting.

Warranties

     The Company provides for future warranty costs upon product delivery. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the Company does business. In the case of hardware, the warranties are generally for 12-15 months from the date of purchase and the Company warrants that its hardware products will substantially conform to the Company’s published specifications.

     The Company warrants that any media on which its software products are recorded will be free from defects in materials and workmanship under normal use for a period of 90 days from the date the products are delivered to the end customer. The warranty reserve is based on historical experience of similar products and to date, the Company has not experienced significant warranty related returns.

     The warranty reserve is included as a component of accrued liabilities on the balance sheet. Changes in the warranty reserve are as follows:

		Warranty
		Amount
		(in thousands)
Balance as of July 31, 2007		$	85
Provision			53
Obligations fulfilled during period			(19	)
Balance as of April 30, 2008		$	119

Noncancelable Purchase Commitments

     The Company outsources the production of its hardware to a third-party contract manufacturer. In addition, the Company enters into various inventory related purchase commitments with this contract manufacturer and a supplier. The Company had $4.9 million and $8.3 million in noncancelable purchase commitments with these providers as of April 30, 2008 and July 31, 2007, respectively. The Company expects to sell all products that it has committed to purchase from these providers.

Indemnification

     In its sales agreements, the Company may agree to indemnify its indirect sales channels and end-user customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date the Company has not paid any amounts to settle claims. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of April 30, 2008 and July 31, 2007.

14. Recent Accounting Pronouncements

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”, which amends SFAS No. 157 to exclude accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13, “Accounting for Leases”. In February 2008, the FASB also issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS 157 until the first quarter of fiscal 2010 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for the Company beginning on August 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS 157 on its consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for the Company beginning on August 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS 159 on its consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination. The Company is required to adopt SFAS 141(R) effective August 1, 2009. The Company is currently evaluating the potential impact of this statement.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). This statement establishes accounting and reporting standards for noncontrolling interests in consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. Based on the Company’s current operations, it does not expect that the adoption of SFAS 160 will have a material impact on its financial position or results of operations.

     In April 2008, the FASB issued a FASB Staff Position on SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of this statement.

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

     In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” “will,” “intend,” “potential,” and similar expressions or the negative of these terms are intended to identify forward-looking statements. These statements include, among other things, statements concerning our expectations:

	•		that revenues from our indirect channels will continue to constitute a substantial majority of our future revenues and an increasingly greater proportion of our future revenues;
	•		that international revenues will increase in absolute dollars and as a percentage of total revenues in future periods as we expand into international locations and introduce our products in new markets;
	•		that, as our customer base grows, we expect the proportion of our revenues represented by support revenues to increase;
	•		that we will strategically hire employees throughout the company and invest in research and development;
	•		that we will continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position;
	•		that research and development expenses will increase on an absolute dollar basis and as a percentage of revenue compared with the third quarter of fiscal 2008;
	•		that we will continue to invest heavily in our sales and marketing efforts, and in particular, that we will increase the number of sales personnel worldwide, which we believe will generate future business;
	•		that sales and marketing expenses will continue to be our most significant operating expense and will increase on an absolute dollar basis and as a percentage of revenue compared with the third quarter of fiscal 2008;
	•		that we will incur significant additional accounting and legal costs related to defending ourselves against claims made by outside parties and compliance with SEC rules and regulations, in addition to other public company costs;
	•		that general and administrative expenses will increase on an absolute dollar basis and as a percentage of revenue compared with the third quarter of fiscal 2008;
	•		that ratable product and related professional services and support revenues will decrease in absolute dollars and as a percentage of total revenues in future periods;
	•		that, as we expand internationally, we plan to continue to hire additional technical support personnel to support our growing international customer base;
	•		regarding the sufficiency of our existing cash, cash equivalents, marketable securities and cash generated from operations; and
	•		that we will have adequate resources and expertise in place to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,

as well as other statements regarding our future operations, financial condition and prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

  The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this report.

Overview

     We securely deliver the enterprise network to users, wherever they work or roam, with user-centric networks that expand the reach of traditional port-centric networks. User-centric networks integrate adaptive wireless local area networks (“WLANs”), application

continuity services, and identity-based security into a cohesive, high-performance system that can be deployed as an overlay to existing enterprise networks. Adaptive WLANs deliver high-performance, follow-me connectivity so users are always connected. Application continuity services enable follow-me applications that can be seamlessly accessed across WLANs and cellular networks. Identity-based security associates access policies with users, not ports, to enable follow-me security that is enforced regardless of access method or location. The products we license and sell include the ArubaOS operating system, optional value-added software modules, a centralized mobility management system, high-performance programmable Mobility Controllers, wired and wireless access points, wireless intrusion detection tools, spectrum analyzers, and endpoint compliance solutions.

     Our products have been sold to more than 4,300 end customers worldwide (not including customers from Alcatel-Lucent or customers acquired from the acquisition of AirWave Wireless Inc.), including some of the largest and most complex global organizations. We have now implemented a two tier distribution model in most areas of the world including the US, with value-added distributors (“VADs”) providing our portfolio of products plus a variety of supporting services to a diverse number of value-added resellers (“VARs”). Our focus continues to be management of our channel eco-system including selection and growth of high prospect partners; activation of our resellers thru active training and field collaboration; evolution of our channel programs in consultation with our partners; and deriving full value from our VADs in the services and leverage they can provide.

     Our ability to increase our product revenues will depend significantly on continued growth in the market for enterprise mobility solutions, continued acceptance of our products in the marketplace, our ability to continue to attract new customers, our ability to compete against more established companies in the market and our ability to continue to sell into our installed base of existing customers. Our growth in support revenues is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth, if any, will be directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product and channel mix, average selling prices, costs of our products and general economic conditions. Our ability to attain profitability will also be affected by our ability to effectively implement and generate incremental business from our distribution model, most notably from our two-tier distribution model, and by the extent to which we invest in our sales and marketing, research and development, and general and administrative resources to grow our business and general economic conditions.

     On March 20, 2008, we completed our acquisition of AirWave Wireless, Inc. (“AirWave”) for an aggregate purchase price of approximately $24.6 million which included 1,518,774 shares of our common stock, valued at $7.9 million,, and approximately $16.3 million in cash. AirWave designs and sells specialized software to centrally manage large, multi-vendor wireless local area networks (“LAN”), mesh, and WiMAX networks.

     We were incorporated in Delaware in 2002 and are headquartered in Sunnyvale, California. We have offices in North America, Europe, the Middle East and Asia Pacific, and employ staff around the world.

Revenues, Cost of Revenues and Operating Expenses

Revenues

     We derive our revenues from sales of our ArubaOS operating system, controllers, wired and wireless access points, application software modules, and professional services and support. Professional services revenues consist of consulting and training services. Consulting services primarily consist of installation support services. Training services are instructor led courses on the use of our products. Support revenues typically consist of software updates, on a when and if available basis, telephone and internet access to technical support personnel and hardware support. We provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period.

     We only began recognizing product revenues upon delivery using the residual method for transactions in which all other revenue recognition criteria are met, in the three months ended January 31, 2006. As we have not been able to establish vendor specific objective evidence (“VSOE”) on our prior services and support offerings, all transactions prior to the three months ended January 31, 2006 continue to be recognized ratably over the support period. See “Critical Accounting Policies — Revenue Recognition.”

     Our revenue growth has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers. We believe the market for our products has grown due to the increased demand of business enterprises to provide secure mobility to their users.

     Each quarter, our ability to meet our product revenue expectations is dependent upon (1) new orders received, shipped, and recognized in a given quarter, (2) the amount of orders booked but not shipped in the prior quarter, and (3) the amount of deferred revenue entering a given quarter. Our product deferred revenue is comprised of revenue associated with product orders that have shipped but where the terms of the agreement contain acceptance language or other terms that require that the revenue be deferred until all revenue recognition criteria are met, as well as those customer contracts that we entered into prior to our establishment of VSOE of fair value. We typically ship products shortly after the receipt of an order, which is common in our industry, and our ability to meet our forecasted product revenue is dependent on our ability to convert our sales pipeline into product revenues from orders received and shipped within the fiscal quarter.

     We sell our products directly through our sales force and indirectly through VADs, VARs, distributors and original equipment manufacturers (“OEMs”). We expect revenues from indirect channels to continue to constitute a substantial majority of our future revenues and an increasingly greater proportion of our future product revenues.

     We sell our products to channel partners and end customers located in the Americas, Europe, the Middle East, Africa and Asia Pacific. Shipments to our channel partners that are located in the United States are classified as U.S. revenue regardless of the location of the end customer. We continue to expand into international locations and introduce our products in new markets, and we expect international revenues to increase in absolute dollars and as a percentage of total revenues in future periods. For more information about our international revenues, see Note 12 of Notes to Consolidated Financial Statements.

     In 2005, we began to sell our products to Alcatel-Lucent, one of our OEMs, which, in turn, sells our products under its own brand name. Alcatel-Lucent accounted for 11.8% and 10.8% of our revenues for the three and nine months ended April 30, 2008, respectively, and 10.2% and 13.8% for the three and nine months ended April 30, 2007, respectively.

Cost of Revenues

     Cost of product revenues consists primarily of manufacturing costs for our products, shipping and logistics costs, and expenses for inventory obsolescence and warranty obligations. We utilize third parties to manufacture our products and perform shipping logistics. We have outsourced the substantial majority of our manufacturing, repair and supply chain operations. Accordingly, the substantial majority of our cost of revenues consists of payments to Flextronics, our contract manufacturer. Flextronics manufactures our products in China and Singapore using quality assurance programs and standards that we jointly established. Manufacturing, engineering and documentation controls are conducted at our facilities in Sunnyvale, California and Bangalore, India. Cost of product revenues also includes amortization expense from our purchased intangible assets.

     Cost of professional services and support revenues is primarily comprised of the personnel costs of providing technical support, including personnel costs associated with our internal support organization. In addition, we employ a third-party support vendor to complement our internal support resources, the costs of which are included within costs of professional services and support revenues.

Gross Margin

     Our gross margin has been, and will continue to be, affected by a variety of factors, including:

	•		the proportion of our products that are sold through direct versus indirect channels;
	•		new product introductions and enhancements both by us and by our competitors;
	•		product mix and average selling prices;
	•		demand for our products and services;
	•		our ability to attain volume manufacturing pricing from Flextronics and our component suppliers;
	•		losses associated with excess and obsolete inventory; and
	•		growth in our headcount and other related costs incurred in our customer support organization.

Going forward, our gross margin will also be adversely affected by amortization expense from our purchased intangible assets.

     Due to higher discounts given to the indirect channel, our overall gross margins for indirect channel sales are typically lower than those associated with direct sales. We expect product revenues from our indirect channel to increase as a proportion of our total product revenues, which, by itself, negatively impacts our gross margins. However, over the past several quarters we have experienced a favorable change in our product mix as we sold more higher-margin products, which contributed to improved overall gross margins.

Operating Expenses

     Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation for all employees.

     We grew from approximately 441 employees at July 31, 2007 to approximately 552 employees at April 30, 2008, including approximately 55 employees from our AirWave acquisition. We expect to continue to strategically hire employees throughout the company as well as invest in research and development.

     Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe it is essential to maintaining our competitive position. We expect research and development expenses to increase on an absolute dollar basis and as a percentage of revenue compared to the third quarter of fiscal 2008.

     Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers and are expensed as incurred.

     We plan to continue to invest heavily in sales and marketing by increasing the number of sales personnel worldwide with the intent to add new customers and increase penetration within our existing customer base, expand our domestic and international sales and marketing activities, build brand awareness and sponsor additional marketing events. We expect future sales and marketing expenses to continue to be our most significant operating expense. Generally, sales personnel are not immediately productive, and thus, the increase in sales and marketing expenses that we experience as we hire additional sales personnel is not expected to immediately result in increased revenues and reduces our operating margins until such sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. We expect sales and marketing expenses to increase on an absolute dollar basis and as a percentage of revenue compared to the third quarter of fiscal 2008.

     General and administrative expenses primarily consist of personnel and facilities costs related to our executive, finance, human resource, information technology and legal organizations, and fees for professional services. Professional services consist of outside legal, audit, Sarbanes-Oxley and information technology consulting costs. We expect that we will incur significant additional accounting and legal costs related to compliance with rules and regulations implemented by the Securities and Exchange Commission and defending ourselves against claims made by outside parties, as well as additional insurance, investor relations and other costs associated with being a public company. We expect general and administrative expenses to increase on an absolute dollar basis and as a percentage of revenue, compared to the third quarter of fiscal 2008.

Stock-Based Expense

     Effective August 1, 2006, we began measuring and recognizing expense for all stock-based payments at fair value, in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, (“SFAS 123R”). We recognized $4.3 million and $13.6 million of stock-based expense for the three and nine months ended April 30, 2008, respectively, and $4.5 million and $8.0 million for the three and nine months ended April 30, 2007, respectively.

Other Income (Expense), net

     Other income (expense), net includes interest income on cash balances, interest expense and losses or gains on conversion of non-U.S. dollar transactions into U.S. dollars. Cash has historically been invested in money market funds and marketable securities. The largest component of other income (expense), net in fiscal 2007 was the adjustment to record our outstanding preferred stock warrants to fair value. Subsequent to our initial public offering (“IPO”), we are no longer required to remeasure these warrants to fair value. During the first fiscal quarter of 2008, we determined that the fair values assigned to certain warrants to purchase preferred stock issued to non employees were not computed correctly as of the IPO closing date when they automatically converted to warrants to purchase common stock, which resulted in $715,000 of excess warrant expense being recognized in other income (expense), net in the third quarter of fiscal 2007. During the first quarter of fiscal 2008, we corrected the valuation of these warrants resulting in the inclusion of other income of $715,000 within other income (expense), net and a reduction of additional paid-in-capital of $715,000. Management and our Audit Committee concluded that the error was not material to the third quarter of fiscal 2007, the year ended July 31, 2007 or the estimated results for the year ending July 31, 2008, and therefore, the correction was recorded in the first quarter of fiscal 2008.

Critical Accounting Policies

     Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, stock-based compensation, inventory valuation, allowances for doubtful accounts and income taxes.

Revenue Recognition

     Our revenues are derived primarily from two sources: (1) product revenue, including hardware and software products, and (2) related professional services and support revenue. Support typically includes software updates, on a when and if available basis, telephone and internet access to technical support personnel and hardware support. We provide our customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Revenues for support services are recognized on a straight-line basis over the service contract term, which is typically between one year and five years.

     We account for revenues in accordance with Statement of Position No. 97-2, Software Revenue Recognition, and all related amendments and interpretations (“SOP 97-2”) because our products are integrated with software that is essential to their functionality and because we provide unspecified software upgrades and enhancements related to the equipment through support agreements.

     Typically, our sales involve multiple elements, such as sales of products that include support, training and/or consulting services. When a sale involves multiple elements, we allocate the entire fee from the arrangement to each respective element based on its VSOE of fair value and recognize revenue when each element’s revenue recognition criteria are met. VSOE of fair value for each element is established based on the sales price we charge when the same element is sold separately. If VSOE of fair value cannot be established for the undelivered element of an agreement, when the undelivered element is support, the entire amount of revenue from the arrangement is deferred and recognized ratably over the period that the support is delivered. Prior to the second quarter of fiscal 2006, we had not been able to establish VSOE of fair value in accordance with SOP 97-2 at the outset of our arrangements. Accordingly, prior to the second quarter of 2006, we recognized revenue for the entire transaction ratably over the support period, as the only undelivered element was typically support.

     Beginning in the second quarter of fiscal 2006, we were able to establish VSOE of fair value at the outset of our arrangements as we established a new support and services pricing policy, with different services and support offerings than were previously sold. We also began selling support services separately from our arrangements in the form of support renewals. Accordingly, beginning in the second quarter of fiscal 2006, we began recognizing product revenues upon delivery using the residual method, for transactions where all other revenue recognition criteria were met. As we had not been able to establish VSOE on our prior services and support offerings, all transactions prior to the second quarter of fiscal 2006 continue to be recognized ratably over the support period.

     We recognize revenue only when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Additionally, we recognize revenue from indirect sales channels upon persuasive evidence provided by our indirect channel customers of a sale to the end customer. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

Stock-Based Compensation

     Effective August 1, 2006, we adopted SFAS No. 123R using the modified prospective transition method, which requires the measurement and recognition of compensation expense beginning August 1, 2006 for all share-based payment awards made to employees and directors based on estimated fair values. This methodology requires the use of subjective assumptions in implementing SFAS 123R, including expected stock price volatility and the estimated term of each award. Under SFAS 123R, we estimate the fair value of stock options granted using the Black-Scholes option-pricing model and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. This model also utilizes the fair value of our common stock and requires that, at the date of grant, we use the expected term of the stock-based award, the expected volatility of the price of our common stock over the expected term, risk free interest rates and expected dividend yield of our common stock to determine the estimated fair value. We determine the amount of stock-based compensation expense based on awards that we ultimately expect to vest, reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense includes awards granted prior to, but not yet vested as of July 31, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for awards granted subsequent to July 31, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In addition, compensation expense includes the effects of awards modified, repurchased or cancelled since the adoption of SFAS 123R. For purposes of SFAS 123R, employee stock-based compensation related to both unvested awards granted prior to August 1, 2006 and awards granted on or after August 1, 2006 are being amortized on a straight-line basis, which is consistent with the methodology used historically for pro forma purposes under SFAS 123.

     The fair value of each option and employee stock purchase right was estimated on the date of grant using the Black-Scholes model with the following average assumptions:

Employee Stock Options

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Assumptions
Risk-free interest rate			2.4	%			4.6	%			3.3	%			4.7	%
Expected term (in years)			4.3				4.3				4.3				4.3
Dividend yield			—				—				—				—
Volatility			51	%			48	%			51	%			53	%
Weighted average fair value of options granted		$	2.44			$	3.60			$	3.87			$	2.53

Employee Stock Purchase Plan

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Assumptions
Risk-free interest rate		1.5% to 1.6%					5.0	%		1.5% to 4.2%					5.0	%
Expected term (in years)		0.5 to 2.0					0.4			0.5 to 2.0					0.4
Dividend yield			—				—				—			—
Volatility		47% to 65%					45	%		43% to 65%					45	%
Weighted average fair value of stock purchase rights granted		$	2.13			$	3.11			$	2.43			$	3.11

     We account for equity instruments issued in exchange for the receipt of goods or services from non-employees in accordance with the consensus reached by the EITF in Issue No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Costs are measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services or on the date performance is complete, using the Black-Scholes model.

Inventory Valuation

     Inventory consists of hardware and related component parts and is stated at the lower of cost or market. Cost is computed using the standard cost, which approximates actual cost, on a first-in, first-out basis. We record inventory write-downs for potentially excess inventory based on forecasted demand, economic trends and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in cost of product revenues in the period the revision is made. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Inventory write-downs amounted to $0.3 million and $0.8 million in the three and nine months ended April 30, 2008, respectively, and $0.3 million and $1.1 million for the three and nine months ended April 30, 2007, respectively.

Allowances for Doubtful Accounts

     We record a provision for doubtful accounts based on historical experience and a detailed assessment of the collectibility of our accounts receivable. In estimating the allowance for doubtful accounts, our management considers, among other factors, (1) the aging of the accounts receivable, including trends within and ratios involving the age of the accounts receivable, (2) our historical write-offs, (3) the credit-worthiness of each customer, (4) the economic conditions of the customer’s industry, and (5) general economic conditions. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet their financial obligations to us, we record a specific allowance against amounts due from the customer, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. The allowance for doubtful accounts was $522,000 and $507,000 at April 30, 2008 and July 31, 2007, respectively.

Income Taxes

     We use the asset and liability method of accounting for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards, if it is more likely than not that the tax benefits will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences, research and credit carryforwards and net operating loss carryforwards are deductible. To the extent deferred tax assets cannot be recognized under the preceding criteria, a valuation allowance is established.

     Based on the available objective evidence, including the fact that we have generated losses since inception, management believes it is more likely than not that the deferred tax assets will not be realized. Accordingly, management has applied a full valuation allowance against our deferred tax assets.

     Effective August 1, 2007, we adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109, (“FIN 48”). This interpretation requires us to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained. As a result of the implementation of FIN 48, we did not record any changes to the liability for unrecognized tax benefits related to tax positions taken in prior periods, and no corresponding change in accumulated deficit. Additionally, we did not make any reclassifications between current taxes payable and long-term taxes payable upon adoption of FIN 48. See Note 9 of Notes to Consolidated Financial Statements for a further discussion regarding the adoption of FIN 48.

Results of Operations

     The following table presents our historical operating results as a percentage of revenues for the periods indicated:

		Three months ended								Nine months ended
		April 30,								April 30,
		2008				2007				2008				2007
Revenues:
Product			83.3	%			85.9	%			83.2	%			83.4	%
Professional services and support			14.7	%			11.0	%			14.7	%			10.0	%
Ratable product and related professional services and support			2.0	%			3.1	%			2.1	%			6.6	%
Total revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues:
Product			26.3	%			25.7	%			26.2	%			28.9	%
Professional services and support			3.9	%			3.4	%			4.5	%			4.0	%
Ratable product and related professional services and support			0.7	%			1.1	%			0.8	%			2.4	%
Gross margin			69.1	%			69.8	%			68.5	%			64.7	%
Operating expenses:
Research and development			22.9	%			19.9	%			20.9	%			20.7	%
Sales and marketing			49.8	%			46.8	%			47.5	%			45.7	%
General and administrative			11.1	%			14.1	%			10.2	%			12.7	%
Acquisition related expenses			0.5	%			0.0	%			0.2	%			0.0	%
Operating margin			(15.2	%)			(11.0	%)			(10.3	%)			(14.4	%)
Other income (expense), net			1.2	%			(15.6	%)			2.9	%			(9.8	%)
Loss before income taxes			(14.0	%)			(26.6	%)			(7.4	%)			(24.2	%)
Provision for income taxes			0.6	%			0.2	%			0.5	%			0.3	%
Net loss			(14.6	%)			(26.8	%)			(7.9	%)			(24.5	%)