This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly, our expectations regarding results of operations, the general economic environment, our ability to expand our market penetration, our ability to expand our distribution channels, customer acceptance of our products, our ability to meet the expectations of our customers, product demand and revenue, cash flows, product gross profits, our expectations to continue to develop new products and enhance existing products, our expectations regarding the amount of our research and development expenses, our expectations relating to our selling, general and administrative expenses, our efforts to achieve additional operating efficiencies and to review and improve our business systems and cost structure, our expectations to continue investing in technology, resources and infrastructure, our expectations concerning the availability of products from suppliers and contract manufacturers, anticipated product costs and sales prices, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding the rationalization of our workforce and facilities, and our expectations regarding materials and inventory management. These forward-looking statements involve risks and uncertainties. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in the section entitled "Risk Factors" in this Report, our Annual Report on Form 10-K for the fiscal year ended June 28, 2009, and other filings we have made with the Securities and Exchange Commission. These risk factors, include, but are not limited to: fluctuations in demand for our products and services; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development of new technology and products; customer response to our new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; and a dependency on third parties for certain components and for the manufacturing of our products.

Business Overview

We develop and sell network infrastructure equipment and offer related services contracts for extended warranty and maintenance to our enterprise, data center and metropolitan telecommunications service provider customers. Substantially all of our revenue is derived from the sale of our networking equipment and related service contracts. In the first quarter of fiscal 2010, our revenues decreased $23.2 million, gross profit decreased $14.7 million, operating profit decreased $5.7 million and net loss increased $7.1 million as compared to the first quarter of fiscal 2009.

We believe that considering the following key developments will assist investors in understanding our operating results for the three months ended September 27, 2009.

Supply Chain Constraints

We use our forecast of expected demand to determine our material requirements. Lead times for materials and components we order vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. In the fourth quarter of fiscal 2009, customer orders exceeded our forecast, especially with respect to certain products. In addition, our contract manufacturers and their component suppliers had significantly reduced their capacity due to the world-wide economic slowdown, and therefore lead times significantly increased during the first fiscal quarter across our supply chain as our contract manufacturers and their component suppliers struggled to meet increasing demands. As a result, we were therefore unable to deliver products based on customer requests. This adversely effected our revenue and sales for the first quarter of fiscal 2010 since we were unable to deliver products in a timely manner and certain customers cancelled orders or chose other vendors based on product availability. We continue to work both externally and internally to manage our forecast and supply chain in light of our customers' demands as accurately as possible.

Impact of the Global Economic Developments.

In addition to issues with our supply chain, we believe that the credit market crisis, global recession and other challenges affecting economic conditions in the United States and other parts of the world were the significant drivers of our financial performance during the first quarter of fiscal 2010. We believe that limited access to credit, conservative purchasing patterns and delays or cancellation of IT infrastructure plans in the face of continued uncertainty regarding the global economy, will continue to negatively impact demand for networking solutions, including Ethernet equipment.

Increasing Demand for Bandwidth

While economic conditions have limited demand for networking equipment, we believe that the continued increase in demand for bandwidth will drive future demand for high performance Ethernet solutions. Wide-spread adoption of electronic communications in all aspects of our lives, proliferation of next generation converged mobile devices, deployment of triple-play services to residences and the rapidly growing adoption of internet "cloud" solutions offer our customers the opportunity to reduce expenses, improve efficiency and/or increase revenue. In order to realize the benefits of these developments, customers require additional bandwidth and high performance from their network infrastructure at affordable prices. As the economy recovers, we believe that the Ethernet segment of the networking equipment market will resume growth as enterprise, data center and carrier customers continue to recognize the performance and operating cost benefits of Ethernet technology.

Increased Product Breadth

We believe that continued success in our marketplace will depend on our ability to develop new and enhanced products employing leading-edge technology.

Industry Developments

The market for network infrastructure equipment is highly competitive and dominated by a few large companies. The difficult economic climate has further driven consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wireless and voice applications. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, independent Ethernet switch vendors are being acquired or merged with larger, adjacent market vendors to enable them to deliver complete and broad solutions. As a result, we believe that, as an independent Ethernet switch vendor, we must provide products that, when combined with the products of our large strategic partners, create compelling solutions for end user customers.

We have taken and plan to continue to take other steps to manage our business in the current economic environment. For example, we have managed our contingent work force, scheduled shutdown weeks, reduced travel and other discretionary spending, and restricted all hiring activities.

Restructuring

On October 22, 2009, we completed a reorganization to streamline our operations and reduce recurring costs. As part of this restructuring, we reduced our workforce by approximately 70 employees or almost 9 percent of our worldwide workforce. We expect to take a one-time charge of approximately $4.2 million in our second fiscal quarter, almost all of which will be a one-time cash severance charge.

Results of Operations

During the first quarter of fiscal 2010, we experienced the following results:

• Net revenues of $66.3 million compared to net revenues of $89.5 million in the first quarter of fiscal 2009.

• Total gross margin of 55.5% of net revenues, compared to 57.4% in the first quarter of fiscal 2009.

• Operating loss of $5.2 million compared to operating income of $0.5 million in the first quarter of fiscal 2009.

• Net loss of $5.5 million compared to net income of $1.6 million in the first quarter of fiscal 2009.

• Cash provided by operating activities was $4.1 million for the three months ending September 27, 2009. Cash and cash equivalents, short-term investments and marketable securities increased by $3.3 million in the three months ended September 27, 2009 to $130.7 million from $127.4 million as of June 28, 2009, primarily as a result of $4.1 million cash provided by operating activities, $0.2 million cash received from issuance of common stock, offset by $1.2 million in capital expenditures.

Net Revenues

The following table presents net product and service revenues for the three
month period ended September 27, 2009 and September 28, 2008, respectively
(dollars in thousands):



                                             Three Months Ended
                          September 27,    % of Net       September 28,    % of Net
                              2009         Revenues           2008         Revenues
     Net Revenue:
     Product             $        50,759      76.55 %    $        74,349       83.0 %
     Service                      15,550      23.45 %             15,177       17.0 %

     Total net revenue   $        66,309     100.00 %    $        89,526     100.00 %

Net revenues were $66.3 million in the first quarter of fiscal 2010 and $89.5 million in the first quarter of fiscal 2009, representing a decrease of $23.2 million or 26% in the first quarter of fiscal 2010 from the first quarter of fiscal 2009. Product revenue was $50.8 million for the first quarter of fiscal 2010 compared to $74.3 million for the first quarter of fiscal 2009, a decrease of $23.5 million, or 32%. The decrease in product revenue in the first quarter of fiscal 2010 was primarily due to weakness in the U.S. economy and a result of our inability to deliver products based on customers' requests. Our inability to deliver products resulted from our reduction in inventory in the fourth quarter of fiscal 2009 and increased lead times in our supply chain in the first quarter of fiscal 2010. The impact resulted in loss of customer orders and inability to recognize revenue on certain customer orders.

Service revenue was $15.6 million for the first quarter of fiscal 2010 compared to $15.2 million for the first quarter of fiscal 2009, an increase of $0.4 million, or 3%. The increase in service revenue was primarily due to improved execution in the EMEA maintenance renewal business, resulting in higher maintenance renewal rates.

We operate in three regions: North America, which includes the United States, Canada and Central America; EMEA, which includes Europe, Middle East, Africa and South America; and APAC which includes Asia Pacific and Japan. The following table presents the total net revenue geographically for the three month period ended September 27, 2009 and September 28, 2008 (dollars in thousands):

                                              Three Months Ended
                           September 27,    % of Net       September 28,    % of Net
                               2009         Revenues           2008         Revenues
     Net Revenues:
     North America        $        26,899       40.6 %    $        35,657       39.8 %
     EMEA                          28,058       42.3 %             41,575       46.5 %
     APAC                          11,352       17.1 %             12,294       13.7 %

     Total net revenues   $        66,309      100.0 %    $        89,526      100.0 %

In the first quarter of fiscal 2010, North America revenues were $26.9 million, a decrease of $8.8 million, or 25% from the first quarter of fiscal 2009. Product revenues decreased $8.9 million or 34% and service revenues increased $0.1 million or 2% compared to the year ago quarter. The decrease in the North America revenues was primarily the result of issues with our ability to fulfill customer orders due to our supply chain challenges coupled with continued weakness in the U.S. economy.

In the first quarter of fiscal 2010, EMEA revenues were $28.1 million, a decrease of $13.5 million, or 33%, from the first quarter of fiscal 2009. Product revenues decreased $14.0 million or 38% and service revenues increased $0.5 million or 10% compared to a year ago quarter. The decrease in EMEA revenue was primarily driven by issues with our ability to fulfill customer orders due to our supply chain challenges and a weaker metropolitan telecommunications service provider market.

In the first quarter of fiscal 2010, APAC revenues were $11.4 million, a decrease of $0.9 million or 8% from first quarter of fiscal 2009. Product revenues decreased $0.7 million or 7% and service revenues decreased $0.2 million or 15% compared to a year ago quarter. We have been rebuilding our management team in APAC over the past few quarters and have seen improved execution. The decrease in APAC revenues was primarily due to weakness in the APAC economy, offset by stronger management execution contributing to improved performance in China and Japan.

The level of sales to any one customer may vary from period to period; however, we expect that significant customer concentration will continue for the foreseeable future. Tech Data and Ericsson AB accounted for 13.6% and 10.5%, respectively of the Company's revenue in the first quarter of fiscal 2010. Ericsson AB, Tech Data and Westcon accounted for 12.8%, 10% and 10%, respectively, of the Company's revenue in the first quarter of fiscal 2009.

Cost of Revenues and Gross Profit

The following table presents the gross profit on product and service revenues
and the gross profit percentage of product and service revenues for the first
quarter of fiscal 2010 and first quarter of fiscal 2009 (dollars in thousands):



                                              Three Months Ended
                           September 27,     Gross         September 28,     Gross
                               2009         Margin %           2008         Margin %
     Gross profit:
     Product              $        27,041       53.3 %    $        44,216       59.5 %
     Service                        9,729       62.6 %              7,216       47.5 %

     Total gross profit   $        36,770       55.5 %    $        51,432       57.4 %

Gross profit was $36.8 million in the first quarter of fiscal 2010, a decrease of $14.6 million or 29% from $51.4 million in the first quarter of fiscal 2009.

Cost of product revenue includes costs of raw materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations, charges for excess and obsolete inventory, royalties under technology license agreements, and internal costs associated with manufacturing overhead, including management, manufacturing engineering, quality assurance, development of test plans, and document control. We outsource substantially all of our manufacturing and supply chain management operations, and we conduct quality assurance, manufacturing engineering, document control and distribution at our facility in Santa Clara, California. Accordingly, a significant portion of our cost of product revenue consists of payments to our primary contract manufacturers, Flextronics International, Ltd. located in Guadalajara, Mexico, Alpha Networks, located in Hsinchu, Taiwan and Benchmark Electronics, Inc, located in Huntsville, Alabama, U.S.A.

Product gross profit in the first quarter of fiscal 2010 was $27.0 million, representing a decrease of $17.2 million or 39% from the first quarter of fiscal 2009. As a percentage of revenue, product gross margin decreased 6.2 percentage points. The decrease in product gross profit was primarily driven by lower sales volume of $9.0 million due to supply chain constraints, $10.7 million due to competitive pricing, higher excess and obsolescence costs of $0.7 million primarily related to excess component chips of specific products that are approaching end of life and higher warranty costs of $0.6 million related to a failure in one of our products, offset by a decrease of $3.8 million primarily related to distribution, lower royalty and lower operating expenses.

Our cost of service revenues consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support under customer service contracts. Service gross profit was $9.7 million in the first quarter of fiscal 2010, an increase of $2.5 million or 35% from $7.2 million in the first quarter of fiscal 2009. As a percentage of service revenues, service gross margin grew 15.0 percentage points. The increase in service gross profit in the first quarter of fiscal 2010 was primarily due to lower repair costs due to improved quality, lower operating expenses due to cost controls and an increase in service maintenance revenue in EMEA. These items resulted in a $1.6 million increase in service gross profit. In addition, service gross profit was positively impacted by the use of written down inventory of $0.9 million. As we have now fully depleted the remaining balance of written down inventory in the first quarter of fiscal 2010, service gross profit is not expected to be positively impacted by this benefit in future periods.

Our product and service gross profits are variable and dependent on many factors, some of which are outside of our control. Some of the primary factors affecting gross profit include demand for our products, changes in our pricing policies and those of our competitors, and the mix of products sold. Our gross profit may be adversely affected by increases in material or labor costs, increases in warranty expense or the cost of providing services under extended service contracts, heightened price competition, obsolescence charges and higher inventory balances. In addition, our gross profit may fluctuate due to the mix of distribution channels through which our products are sold, including the effects of our two-tier distribution model.

Sales and Marketing Expenses

Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well as trade shows and promotional expenses. Sales and marketing expenses decreased to $21.6 million for the first quarter of fiscal 2010 from $25.9 million for the first quarter of fiscal 2009, a decrease of $4.3 million, or 17%. This decrease was primarily driven by lower commission expense of $1.5 million due to lower sales volume, lower salaries and wages of $1.4 million primarily driven by lower variable compensation expense and lower general sales and marketing expenses of $1.4 million due to cost controls.

Research and Development Expenses

Research and development expenses consist principally of salaries and related personnel expenses, consultant fees and prototype expenses related to the design, development and testing of our products. Research and development expenses decreased to $13.6 million for the first quarter of fiscal 2010 from $ 16.6 million for the first quarter of fiscal 2009, a decrease of $3.0 million or 18%. The decrease was primarily due to lower salaries and benefits of $2.0 million primarily due to lower headcount and lower variable compensation expense, lower project spending of $1.2 million on engineering projects, and higher stock based compensation. We expense all research and development costs as incurred.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, legal fees, professional fees and other general corporate expenses. General and administrative expenses decreased to $7.2 million for the first quarter of fiscal 2010 from $8.4 million for the first quarter of fiscal 2009, a decrease of $1.2 million, or 14%. This decrease was primarily due to lower professional fees of $0.7 million, lower salaries and wages of $0.4 million primarily due to lower variable compensation expense and higher stock based compensation.

Restructuring, Net

During the first quarter of fiscal 2010, we recorded restructuring net expense reversals to restructuring, net, of $0.5 million. We did not have any restructuring charges in the first quarter of fiscal 2009.

Restructuring, net, in the first quarter of fiscal 2010 were:

• $0.5 million reversal of restructuring expense due to higher projected sublease receipt from a sublease renewal arrangement.

• $0.1 million reversal of restructuring expense related to the settlement of employment termination benefits incurred in the third fiscal quarter of 2009.

These reversals were offset by a charge of $0.1 million due to termination of a sublease arrangement resulting from the sublessee's bankruptcy filing.

Share-based Compensation Costs

Share-based compensation expense recognized in the financial statements by line
item caption is as follows (dollars in thousands):



                                                               Three Months Ended
                                                    September 27,              September 28,
                                                        2009                       2008
Cost of product revenue                            $            72            $           (40 )
Cost of service revenue                                         75                         32
Sales and marketing                                            296                        175
Research and development                                       375                        151
General and administrative                                     322                         94

Total share-based compensation expense                       1,140                        412
Share-based compensation cost capitalized
in inventory                                                    (4 )                      (26 )

Total share-based compensation cost                $         1,136            $           386

The fair value of each option award and Employee Stock Purchase Plan ("ESPP") is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the table in Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The expected term of ESPP represents the contractual life of the ESPP purchase period. The risk-free rate based upon the estimated life of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on both the implied volatilities from traded options on our stock and historical volatility on our stock.

The expected volatility used to estimate the fair value of the options was based on a combination of the historical volatility on our stock and the implied volatility. We used the straight-line method for expense attribution, estimated forfeitures, and only recognized expense for those shares expected to vest. Our estimated forfeiture rate in the first quarter of fiscal 2010, based on our historical forfeiture experience, is approximately 9%.

The Black-Scholes-Merton option valuation model requires the input of highly subjective assumptions, including the expected life of the share-based award and stock price volatility. The assumptions used in calculating the fair value of share-based compensation represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, our share-based compensation expense could have been materially different. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be materially different.

Interest Income

Interest income was $0.3 million in the first quarter of fiscal 2010 as compared to $1.4 million in the first quarter of fiscal 2009, a decrease of $1.1 million or 77%. The decrease was due to decreased funds available for investments and decreased interest rates earned on investments. The decrease in funds available for investment was a result of cash expenditure of $101.4 million in connection with the repurchase of 28,571,428 shares of common stock in the first quarter of fiscal 2009. Average interest yield in the first quarter of fiscal 2010 was 1.3% as compared to 2.5 % in the first fiscal quarter of 2009.

Interest Expense

Interest expense in the first quarter of fiscal 2010 and first quarter of fiscal 2009 was immaterial and was primarily related to interest amortization of technology agreements.

Other Income / (Expense), Net

Other income (expense) net, was expense of $0.2 million in the first fiscal quarter of 2010 as compared to income of $0.5 million in the first quarter of fiscal 2009, a decrease in income of $0.7 million. The decrease in other income (expense), net was primarily due to $0.8 million fluctuation in foreign exchange losses from $0.6 million gain in the first quarter of fiscal 2009 to $0.2 million loss in the first quarter of fiscal 2010 as a result of the weakening U.S. dollar as compared to the EURO and other foreign currencies.

Other income (expense), net, for the first quarter of fiscal 2010 also includes an unrealized loss of $4.5 million on our ARS from trading securities offset by a $4.5 million gain associated with the fair value of the Put Option related to our acceptance of the UBS Rights offer to repurchase our ARS. See further discussions below under Capital Resources and Financial Condition.

Provision for Income Taxes

We recorded income tax provisions of $0.4 million and $0.8 million for the first quarter of fiscal 2010 and the first quarter of fiscal 2009, respectively. The income tax provisions for the three months ended September 27, 2009 and September 28, 2008 consisted of U.S. alternative minimum tax, taxes on foreign income and U.S. state income taxes. The income tax provisions for both quarters were calculated based on the results of operations for the three month periods ended September 27, 2009 and September 28, 2008, and may not reflect the annual effective rate. Since we have net operating loss carry forwards to offset U.S. taxable income, we are not using an annual effective tax rate to apply to the taxable income for the quarter.

We have provided a full valuation allowance for our US net deferred tax assets. We initially recorded this charge during fiscal 2003, after assessing both negative and positive evidence when measuring the need for a valuation allowance. For the current quarter, evidence, such as the current worldwide . . .