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, 2007

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

For the transition period from                      to                     

Aruba Networks, Inc.

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

1322 Crossman Ave.
Sunnyvale, California 94089-1113
(408) 227-4500
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

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 o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ

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, 2007 was: 76,903,329.

 

 

Aruba Networks, Inc.

INDEX

				Page No.
		PART I. FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements
		Consolidated Balance Sheets as of April 30, 2007 and July 31, 2006			3
		Consolidated Statements of Operations for the three and nine months ended April 30, 2007 and April 30, 2006			4
		Consolidated Statements of Cash Flows for the nine months ended April 30, 2007 and April 30, 2006			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.		Controls and Procedures		33
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		34
Item 1A.		Risk Factors		34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.		Defaults Upon Senior Securities		48
Item 4.		Submission of Matters to a Vote of Security Holders		48
Item 5.		Other Information		48
Item 6.		Exhibits		48
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Item 1 – Consolidated Financial Statements

ARUBA NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

		April 30,				July 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	109,726			$	9,263
Accounts receivable, net			18,659				13,296
Inventory			9,573				6,093
Deferred costs			2,756				3,360
Prepaids and other			1,974				1,758
Total current assets			142,688				33,770
Property and equipment, net			3,610				1,971
Deferred costs			964				1,960
Other assets			468				316
Total other assets			5,042				4,247
Total assets		$	147,730			$	38,017
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable		$	7,568			$	4,385
Accrued liabilities			10,517				8,062
Income taxes payable			306				216
Equipment loans payable			108				613
Deposit for Series D redeemable convertible preferred stock			—				19,329
Deferred revenue			13,414				11,637
Total current liabilities			31,913				44,242
Deferred revenue			5,315				6,803
Other long-term liabilities			—				1,963
Total liabilities			37,228				53,008
Redeemable convertible preferred stock: $.0001 par value; 0 and 46,445 shares authorized at April 30, 2007 and July 31, 2006; 0 and 45,108 shares issued and outstanding at April 30, 2007 and July 31, 2006; liquidation preference: $0 and $58,213 at April 30, 2007 and July 31, 2006			—				58,009
Stockholders’ equity (deficit)
Preferred Stock: $.0001 par value; 10,000 and 0 shares authorized at April 30, 2007 and July 31, 2006; no shares issued and outstanding at April 30, 2007 and July 31, 2006			—				—
Common Stock: $.0001 par value; 350,000 and 95,440 shares authorized at April 30, 2007 and July 31, 2006; 76,769 and 15,257 shares issued and outstanding at April 30, 2007 and July 31, 2006			8				2
Additional paid-in capital			208,239				6,075
Deferred stock-based compensation			—				(2,364	)
Accumulated deficit			(97,745	)			(76,713	)
Total stockholders’ equity (deficit)			110,502				(73,000	)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)		$	147,730			$	38,017

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
Revenues:
Product		$	29,777			$	13,308			$	71,545			$	26,352
Professional services and support			3,816				969				8,593				1,409
Ratable product and related professional services and support			1,068				6,673				5,675				20,844
Total revenues			34,661				20,950				85,813				48,605
Cost of revenues:
Product			8,921				5,278				24,784				10,428
Professional services and support			1,138				779				3,443				1,584
Ratable product and related professional services and support			397				2,288				2,088				8,668
Total cost of revenues			10,456				8,345				30,315				20,680
Gross profit			24,205				12,605				55,498				27,925
Operating expenses:
Research and development			6,890				3,760				17,752				10,377
Sales and marketing			16,240				8,664				39,194				23,585
General and administrative			4,889				1,639				10,897				4,029
Total operating expenses			28,019				14,063				67,843				37,991
Operating loss			(3,814	)			(1,458	)			(12,345	)			(10,066	)
Other income (expense), net
Interest income			567				145				876				451
Interest expense			(22	)			(78	)			(85	)			(254	)
Other income (expense), net			(5,935	)			(52	)			(9,185	)			(673	)
Total other income (expense), net			(5,390	)			15				(8,394	)			(476	)
Loss before income tax provision and cumulative effect of change in accounting principle			(9,204	)			(1,443	)			(20,739	)			(10,542	)
Income tax provision			82				82				293				88
Loss before cumulative effect of change in accounting principle			(9,286	)			(1,525	)			(21,032	)			(10,630	)
Cumulative effect of change in accounting principle			—				—				—				66
Net loss		$	(9,286	)		$	(1,525	)		$	(21,032	)		$	(10,564	)
Shares used in computing net loss per common share, basic			36,363				11,740				21,207				10,706
Net loss per common share, basic		$	(0.26	)		$	(0.13	)		$	(0.99	)		$	(0.99	)
Shares used in computing net loss per common share, diluted			36,363				11,740				21,207				10,706
Net loss per common share, diluted		$	(0.26	)		$	(0.13	)		$	(0.99	)		$	(0.99	)
Stock-based expense included in above:
Cost of revenues		$	62			$	10			$	202			$	24
Research and development			858				71				1,576				195
Sales and marketing			1,042				209				2,193				593
General and administrative			2,499				65				3,993				164

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		April 30,
		2007				2006
Cash flows from operating activities
Net loss		$	(21,032	)		$	(10,564	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,384				1,133
Provision for doubtful accounts			333				227
Write downs for excess and obsolete inventory			1,108				601
Compensation related to stock options and share awards			6,549				976
Net realized gains on short-term investments			—				(1	)
Stock issued to charitable foundation			1,415				—
Non-cash interest expense			45				132
Change in carrying value of preferred stock warrant liability			8,992				606
Loss on disposal of fixed assets			5				—
Changes in operating assets and liabilities:
Accounts receivable			(5,696	)			(1,805	)
Inventory			(4,588	)			(3,606	)
Prepaids and other			(317	)			(475	)
Deferred costs			1,600				2,427
Other assets			(152	)			(190	)
Accounts payable			3,183				(3	)
Deferred revenue			289				85
Other current and noncurrent accrued liabilities			1,966				360
Income taxes payable			90				134
Net cash used in operating activities			(4,826	)			(9,963	)
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments			—				900
Purchases of property and equipment			(3,028	)			(1,689	)
Net cash used in investing activities			(3,028	)			(789	)
Cash flows from financing activities
Repayments on equipment loan obligations			(546	)			(924	)
Deposit for Series D redeemable convertible preferred stock, net			—				19,232
Cash received under stock issuance agreement			2,104				810
Proceeds from issuance of redeemable convertible preferred stock, net			10,597				—
Proceeds from initial public offering, net			92,613				—
Proceeds from issuance of common stock			3,490				354
Net cash provided by financing activities			108,258				19,472
Effect of exchange rate changes on cash and cash equivalents			59				(6	)
Net increase in cash and cash equivalents			100,463				8,714
Cash and cash equivalents, beginning of period			9,263				4,293
Cash and cash equivalents, end of period		$	109,726			$	13,007
Supplemental disclosure of cash flow information
Income taxes paid		$	177			$	107
Interest paid			35				114
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				—
Reclassification of preferred stock warrants to liability			—				340

See Notes to Consolidated Financial Statements.

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 markets and sells its Aruba Mobile Edge Architecture, which allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to their network resources. This architecture also enables network access and prioritized application delivery based on an end-user’s organizational role and authorization level. The Aruba Mobile Edge Architecture consists of the ArubaOS modular operating system, optional value-added software modules, a centralized mobility management system, high performance programmable mobility controllers, and wired and wireless access points.

     The Company manufactures and markets controllers, wired and wireless access points, and an advanced mobility software suite and began shipping its first products in June 2003. The Company has offices in North America, Europe, the Middle East and the Asia Pacific region and employs staff around the world.

Initial Public Offering

     In March 2007, the Company completed its initial public offering, or IPO, of common stock in which it issued and sold 9,200,000 shares of common stock, including 1,200,000 shares sold pursuant to the underwriters’ exercise of their over-allotment option, at a public offering price of $11.00 per share. The Company raised a total of $101.2 million in gross proceeds from the IPO, or approximately $91.8 million in net proceeds after deducting underwriting discounts and commissions of $7.1 million and other offering costs of $2.3 million. As of April 30, 2007, $804,000 in offering costs remain unpaid and these costs are expected to be paid in the Company’s fourth quarter. Upon the closing of the IPO, all shares of outstanding convertible preferred stock automatically converted into 49,681,883 shares of common stock and 318,181 shares of the Company’s common stock were issued under a stock issuance agreement with Microsoft. Subsequent to the IPO and the associated conversion of the Company’s outstanding convertible preferred stock to common stock, warrants to purchase 677,106 shares of convertible preferred stock were converted to warrants to purchase an equivalent number of shares of the Company’s common stock and the related carrying value of such warrants was reclassified to common stock and additional paid-in-capital, and the warrants are no longer subject to remeasurement.

     The Company’s Certificate of Incorporation, as restated on March 30, 2007, authorizes the issuance of 350,000,000 shares of common stock with $0.0001 par value per share.

Significant Accounting Policies

Basis of Presentation

     The consolidated financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries. All intercompany transactions and balances 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 Registration Statement on Form S-1 filed on March 26, 2007. The July 31, 2006 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or 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, 2006 and include all adjustments necessary for the fair statement of the Company’s financial position as of April 30, 2007, its results of operations for the three and nine months ended April 30, 2007 and April 30, 2006, respectively, and its cash flows for the nine months ended April 30, 2007 and April 30, 2006, respectively. All adjustments are of a normal recurring nature. The results for the three and nine months ended April 30, 2007 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending July 31, 2007. To date, there have been no differences between net loss and comprehensive loss.

     The Company’s significant accounting policies are disclosed in the Company’s Registration Statement on Form S-1 filed with the SEC on March 26, 2007. The Company’s significant accounting policies did not materially change during the nine months ended April 30, 2007.

Stock-Based Compensation

     Effective August 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”), using the modified prospective transition method, which requires the measurement and recognition of compensation expense based on estimated fair values beginning August 1, 2006 for all share-based payment awards made to employees and directors. The adoption of SFAS 123R did not affect previously reported periods. Therefore, the Company’s financial statements for the prior periods do not reflect any restated amounts. Under SFAS 123R, the Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula 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 common stock and requires that, at the date of grant, the Company use the expected term of the stock-based award, the expected volatility of the price of its common stock, the risk free interest rate and the expected dividend yield of its common stock to determine the estimated fair value. The Company determined the amount of stock-based compensation expense in the nine months ended April 30, 2007, based on awards that it ultimately expected 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 is being amortized on a straight-line basis, which is consistent with the methodology used historically for pro forma purposes under SFAS 123.

     The Company accounts for equity instruments issued in exchange for the receipt of goods or services from non-employees in accordance with the consensus reached by the Emerging Issues Task Force (“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 pricing model.

2. Change in Accounting Principle

     On June 29, 2005, the Financial Accounting Standards Board, or FASB, issued Staff Position 150-5, Issuer’s Accounting under FASB Statement No. 150 (“SFAS 150”) for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (“FSP 150-5”). FSP 150-5 requires the Company to

classify its outstanding preferred stock warrants as liabilities on its balance sheet and record adjustments to the value of its preferred stock warrants in its statements of operations to reflect their fair value at each reporting period. The Company previously accounted for such warrants in accordance with EITF 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 (“EITF 96-18”).

     The Company adopted FSP 150-5 in the first quarter of fiscal 2006 and recorded the cumulative effect of the change in accounting principle as of August 1, 2005, which resulted in a gain of $66,000, or $0.01 per share. In the three months ended April 30, 2007 and 2006, the Company recorded $5.9 million and $22,000, respectively, of additional expense as other expense, net to reflect the further increase in fair value during the period. In the nine months ended April 30, 2007 and 2006, the Company recorded $9.0 million and $606,000, respectively, of additional expense as other expense, net to reflect the increase in fair value during the period. Subsequent to the IPO and the associated conversion of the Company’s outstanding convertible preferred stock to common stock, the warrants to purchase shares of convertible preferred stock were converted to warrants to purchase an equivalent number of shares of the Company’s common stock and the related carrying value of such warrants was reclassified to common stock and additional paid-in-capital, and the warrants are no longer subject to remeasurement.

3. 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 potential dilutive common shares, including options, common stock subject to repurchase, warrants and redeemable convertible preferred stock.

     The following outstanding options, common stock subject to repurchase, warrants to purchase and shares of redeemable convertible preferred 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,
		2007				2006
		(In thousands)
Options to purchase common stock			21,695				13,012
Common stock subject to repurchase			1,464				3,502
Redeemable convertible preferred stock			—				45,108
Convertible preferred and common stock warrants			677				677

4. Balance Sheet Components

     The following tables provide details of selected balance sheet items:

		April 30,				July 31,
		2007				2006
		(In thousands)
Accounts Receivable, Net
Trade accounts receivable		$	19,193			$	13,648
Less: Allowance for doubtful accounts			(534	)			(352	)
Total		$	18,659			$	13,296

		April 30,				July 31,
		2007				2006
		(In thousands)
Inventory
Raw materials		$	584			$	449
Work in process			338				9
Finished goods			8,651				5,635
Total		$	9,573			$	6,093

		April 30,				July 31,
		2007				2006
		(In thousands)
Accrued Liabilities
Compensation and benefits		$	4,064			$	2,427
Inventory			1,441				755
Preferred stock warrants			—				941
Other			5,012				3,939
Total		$	10,517			$	8,062

5. Property and Equipment, Net

     Property and equipment, net consists of the following:

		Estimated				April 30,				July 31,
		Useful Lives				2007				2006
						(In thousands)
Property and Equipment, Net
Computer equipment		2 years				$	3,547			$	2,093
Computer software		2 years					1,347				830
Machinery and equipment		2 years					3,310				2,562
Furniture and fixtures		5 years					419				223
Leasehold improvements		2-5 years					200				106
							8,823				5,814
Less: Accumulated depreciation and amortization							(5,213	)			(3,843	)
Total						$	3,610			$	1,971

     Depreciation and amortization expense totaled approximately $542,000 and $1.4 million in the three and nine months ended April 30, 2007, respectively, and $414,000 and $1.1 million in the three and nine months ended April 30, 2006, respectively.

6. Deferred Revenue

     Deferred revenue consists of the following:

		April 30,				July 31,
		2007				2006
		(In thousands)
Deferred Revenue
Product		$	2,324			$	1,108
Professional services and support			7,285				3,674
Ratable product and related services and support			3,805				6,855
Total deferred revenue, current			13,414				11,637
Professional services and support, long-term			2,453				1,175
Ratable product and related services and support, long-term			2,862				5,628
Total deferred revenue, long-term			5,315				6,803
Total deferred revenue		$	18,729			$	18,440

     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.

     At April 30, 2007, the Company had $6.7 million in deferred revenue associated with ratable product and professional services and support revenues, of which it expects $1.0 million will be amortized to revenue in the fiscal fourth quarter and $3.5 million, $1.4 million and $800,000 will be amortized to revenue in fiscal 2008, 2009 and 2010, respectively.

7. Income Taxes

     For the three and nine months ended April 30, 2007 and April 30, 2006, the Company generated operating losses. Accordingly, the Company’s tax provision for these periods relates primarily to foreign and state provisions for 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, 2006, the Company had $55.4 million of Federal and $50.3 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.

     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 net deferred tax assets will not be realized. Accordingly, management has applied a full valuation allowance against its net deferred tax assets.

8. Stock Benefit Plans and Common Stock

     In December 2006, in connection with the IPO, the Company’s board of directors approved the 2007 Equity Incentive Plan and the 2007 Employee Stock Purchase plan (“ESPP”).

     As provided by the 2007 Equity Incentive Plan, 3,881,664 shares, representing all remaining shares reserved for issuance under the 2002 Plan were transferred to the 2007 Plan upon the closing of the IPO.

     Additionally, the Company’s 2007 Equity Incentive Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year, beginning with fiscal 2008, equal to the lesser of:

	•		5% of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year; or
	•		15,000,000 shares.

     A total of 1,000,000 shares have been reserved for issuance under the 2007 Employee Stock Purchase Plan.

     In July 2005, the Company entered into a Stock Issuance Agreement with Microsoft, a customer, pursuant to which the Company agreed to issue Microsoft the number of shares of its common stock determined by dividing up to $3.5 million by the actual per share public offering price in the event of a firmly underwritten initial public offering (“IPO”) or up to $5.0 million of consideration in connection with a change of control occurring prior to an IPO based on the cumulative level of purchases by Microsoft. Accordingly, the amount of consideration was not fixed but rather increased directly with the cumulative level of product purchases. Upon the closing of the IPO, 318,181 shares of the Company’s common stock were issued under the stock issuance agreement. We recognized revenue related to product and support sales to Microsoft of $3.7 million during the quarter ended April 30, 2007, which included amounts in excess of $3.5 million that were previously deferred due to the stock issuance agreement.

Stock Option Plan:

     Prior to the IPO, incentive and nonstatutory stock options were granted at prices not less than 100% and 85%, respectively, of the estimated fair value of the stock at the date of grant. Subsequent to the IPO, incentive and nonstatutory stock options may be granted at prices not less than 100% of the closing price of the stock on the Nasdaq Global Market as of the date of grant. For options granted to an employee who owns more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the estimated value of the stock at the date of grant. Options generally vest over a four year period and expire no later than ten years after the date of grant.

Employee Stock Purchase Plan:

     Under the Employee Stock Purchase Plan, the Company can grant stock purchase rights to all eligible employees during a 2 year offering period with purchase dates at the end of each 6-month purchase period. The first offering period under the ESPP commenced in March 2007. Shares are purchased through employees’ payroll deductions, up to a maximum of 15% of employees’ compensation for each purchase period, at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at the first trading day of the applicable offering period or the purchase date. No participant may purchase more than $25,000 worth of common stock in any one calendar year. The ESPP is compensatory and resulted in compensation expense accounted for under SFAS123R.

Stock Option Activity:

     The following table summarizes information about stock options outstanding:

						Options Outstanding
										Weighted								Weighted
										Average				Weighted				Average
		Shares								Exercise				Average				Remaining				Aggregate
		Available for				Number of				Price				Fair Value				Contractual				Intrinsic
		Grant				Shares				per Share				per Share				Term (Years)				Value
Balance at July 31, 2006			3,013,607				14,992,764			$	1.70
Shares reserved for issuance			9,800,000				—				—
Issuance of share awards			(73,790	)			—				—
Options granted			(9,742,000	)			9,742,000				5.33
Options exercised			—				(2,301,662	)			1.72
Shares repurchased			161,009				—				0.32
Options cancelled			738,200				(738,200	)			1.87
Balance at April 30, 2007			3,897,026				21,694,902			$	3.32
Options vested as of April 30, 2007							3,062,246			$	1.18			$	0.94				8.00			$	38,261,430
Options vested and expected to vest as of April 30, 2007(1,2)							19,318,022				3.27								9.00				200,867,309
Options exercisable as of April 30, 2007							13,124,444				1.81								8.68				155,712,272

     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. During the three and nine months ended April 30, 2007, the aggregate intrinsic value of stock option awards exercised was $2.5 million and $7.9 million, respectively.

Fair Value Disclosures:

     The weighted average fair value per share of options granted in the three and nine months ended April 30, 2007 was $3.60 and $2.53, respectively. The weighted average fair value of employee stock purchase rights granted in the three and nine months ended April 30, 2007 was $3.11 per share.

     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:

		Three Months Ended				Nine Months Ended
		April 30, 2007				April 30, 2007
Employee Stock Options
Risk-free interest rates			4.61	%			4.66	%
Expected term (in years)			4.30				4.30
Dividend yield			0	%			0	%
Volatility			48	%			53	%

		Three and Nine Months Ended
		April 30, 2007
Employee Stock Purchase Plan
Risk-free interest rates			5.03	%
Expected term (in years)			0.4
Dividend yield			0	%
Volatility			45	%

     The total fair value of options and share awards vested in the nine months ended April 30, 2007 was $4.6 million.

     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 term of 10 years. 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 for the three and nine months ended April 30, 2007 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.

Shares Subject to Repurchase:

     Certain common stock option holders have the right to exercise unvested options, subject to a repurchase right held by the Company, in the event of a voluntary or involuntary termination of employment of the stockholder.

     At April 30, 2007 and July 31, 2006, there were 1,463,743 and 2,245,724 shares, respectively, subject to repurchase under all common stock repurchase agreements. The cash received from the sale of these shares is initially recorded as a liability and is subsequently reclassified to common stock as the shares vest. At April 30, 2007 and July 31, 2006, there was $1.9 million and $1.4 million, respectively, recorded in accrued liabilities and other long-term liabilities related to the issuance of these shares.

     The activity of non-vested shares for the nine months ended April 30, 2007 as a result of early exercise of options granted to employees is as follows:

Non-Vested Shares		Shares
Non-vested as of July 31, 2006			2,245,686
Early exercise of options			1,575,203
Vested			(2,196,137	)
Forfeited			(161,009	)
Non-vested as of April 30, 2007			1,463,743

Stock-based Expenses:

     Total stock-based compensation in the three months ended April 30, 2007 and 2006 was $4.5 million and $355,000, respectively. Total stock-based compensation in the nine months ended April 30, 2007 and 2006 was $8.0 million and $976,000, respectively. The Company elected not to capitalize stock-based compensation during the three and nine months ended April 30, 2007 due to these amounts being immaterial.

     As a result of adopting SFAS 123R on August 1, 2006, during the three and nine months ended April 30, 2007, the Company’s net loss was $2.2 million and $4.7 million greater, respectively, than if the Company had continued to account for stock-based compensation under APB 25, and its basic and diluted net loss per share for the three and nine months ended April 30, 2007 was higher by $0.06 and $0.22, respectively. The Company recorded no tax benefit related to these options during the nine months ended April 30, 2007, since the Company currently maintains a full valuation allowance on its net deferred tax assets. In future periods, stock-based compensation expense may increase as the Company amortizes expense related to previously issued stock-based compensation awards and issues additional equity-based awards to continue to attract and retain key employees.

     In the three and nine months ended April 30, 2007, the Company modified the terms of 5,209 and 244,126 shares, respectively, underlying certain outstanding options held by certain former employees. As a result of the modification to the terms of these stock awards, the Company recognized additional compensation expense of $36,000 and $451,000 for the three and nine months ended April 30, 2007, respectively.

     During the three and nine months ended April 30, 2007, the Company issued fully vested stock awards of 20,000 and 41,500 shares, respectively, to employees. During the three and nine months ended April 30, 2006, the Company issued fully vested stock awards of 0 and 1,500 shares, respectively, to employees. The estimated fair value of the awards measured on the award date was $160,000 and $210,000 for the three and nine months ended April 30, 2007, respectively, and $0 and $2,000 for the three and nine months ended April 30, 2006, respectively.

     During the three and nine months ended April 30, 2007, the Company issued fully vested stock awards of 6,659 and 32,290 shares, respectively, to consultants. During the three and nine months ended April 30, 2006, the Company issued fully vested stock awards of 4,050 and 16,050 shares, respectively, to consultants. The estimated fair value of the awards measured on the date of the awards was $66,000 and $149,000 for the awards granted during the three and nine months ended April 30, 2007, respectively, and $9,000 and $24,000 for the awards granted during the three and nine months ended April 30, 2006, respectively.

     During the three and nine months ended April 30, 2007, the Company granted fully vested stock options to purchase 0 and 2,000 shares of common stock, respectively, to consultants of the Company at an exercise price of $2.33 per share. During the three and nine months ended April 30, 2006, the Company granted fully vested stock options to purchase 0 and 15,000 shares of common stock, respectively, to a consultant of the Company at an exercise price of $1.00 per share. The estimated fair value of the options

measured on the date of grant, using the Black-Scholes option pricing model with a contractual life of 10 years, volatility of 56% and a risk-free interest rate of 4.84% was $0 and $4,000 for options issued during the three and nine months ended April 30, 2007, respectively. The estimated fair value of the options measured on the date of grant, using the Black-Scholes option pricing model with a contractual life of 10 years, volatility of 70% and a risk-free interest rate of 4.10% was $0 and $19,000 for options issued during the three and nine months ended April 30, 2006, respectively. Since the stock options were fully vested, they were expensed in full at the time of grant.

     During the three and nine months ended April 30, 2007, the Company granted stock options to purchase 0 and 10,000 shares, respectively, to consultants in exchange for services. These options vest over a period of up to four years and have an exercise price of $3.63 per share. During the three and nine months ended April 30, 2006, the Company granted stock options for the right to purchase 5,000 shares to consultants in exchange for services. These options vest over a period of up to four years and have an exercise price of $2.65 per share. The Company recognizes stock compensation expense on a straight line basis over the vesting periods of the underlying awards based on an estimate of their fair value using the Black-Scholes option pricing model. The fair value of stock options granted to non-employees is re-measured at each reporting date. The stock-based compensation expense related to these grants will fluctuate as the estimated fair value of the common stock fluctuates over the period from the grant date to the vesting date. The Company recorded stock-based compensation expense related to these awards which continue to vest of $237,000 and $300,000 during the three and nine months ended April 30, 2007, respectively. The Company recorded stock-based compensation expense related to these awards which continue to vest of $79,000 and $263,000 during the three and nine months ended April 30, 2006, respectively.

     In March 2007, the Company contributed 100,000 shares of fully vested common stock to a charitable foundation. The aggregate cash consideration for these shares was $10, and $1.4 million in fair value was recorded within stockholders’ equity and general and administrative expenses during the three months ended April 30, 2007.

Prior to the Adoption of SFAS 123R:

     Prior to August 1, 2006, the Company accounted for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), Financial Accounting Standards Board (“FASB”) Interpretation No. 44 Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25 (“FIN 44”) and FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, and had adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”).

     Had the expenses for the Company’s stock-based compensation plans been determined based on the fair value of the options at the grant date of the awards consistent with the provisions of SFAS 123, our net loss would have been increased to the pro forma amounts indicated below:

		Three Months Ended				Nine Months Ended
(in thousands, except per share amounts)		April 30, 2006				April 30, 2006
Net loss, as reported		$	(1,525	)		$	(10,564	)
Add: Employee stock-based compensation expense included in reported net loss			274				782
Less: Total employee stock-based compensation expense determined under the fair value method			(703	)			(1,577	)
Pro forma, net loss		$	(1,954	)		$	(11,359	)
Basic and diluted net loss per share
As reported		$	(0.13	)		$	(0.99	)
Pro forma		$	(0.17	)		$	(1.06	)

     The weighted average fair value per share of options granted in the three and nine months ended April 30, 2006 was $1.26 and $1.17, respectively.

     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:

		Three Months Ended				Nine Months Ended
		April 30, 2006				April 30, 2006
Employee Stock Options
Risk-free interest rates			4.74	%			4.42	%
Expected term (in years)			4.00				4.00
Dividend yield			0	%			0	%
Volatility			70	%			70	%

     The expected term of the stock-based awards represents the period of time that the Company expects such stock-based awards to be outstanding. The computation of expected volatility for the nine months ended April 30, 2006 was based on the historical volatility of comparable companies from a representative peer group that the Company selected based on industry data. 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.

9. 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 (in thousands):

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(In thousands)
United States		$	24,751			$	15,718			$	57,400			$	35,319
Europe, the Middle East and Africa			4,781				2,587				14,457				4,964
Asia Pacific			2,549				1,731				7,293				5,316
Rest of World			2,580				914				6,663				3,006
		$	34,661			$	20,950			$	85,813			$	48,605

     In the three months ended April 30, 2007, three customers accounted for 11%, 10% and 10%, respectively, of revenue. In the three months ended April 30, 2006, one customer accounted for 14% of revenue. For the nine months ended April 30, 2007 and April 30, 2006, one customer accounted for 14% and 15% of revenue, respectively. Two customers accounted for 11% and 18%, respectively, of accounts receivable at April 30, 2007. One customer accounted for 22% of accounts receivable at July 31, 2006.

10. Commitments and Contingencies

     Legal Matters

     From time to time, third parties assert claims against the Company arising from the normal course of business activities. There are no claims as of April 30, 2007 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. Rent expense for the three months ended April 30, 2007 and 2006 was $358,000 and $227,000, respectively, and $1.2 million and $586,000 for the nine months ended April 30, 2007 and 2006, respectively.

     Future minimum lease payments under noncancelable operating leases, including lease commitments entered into as of April 30, 2007, and payments on equipment loans are as follows:

		Equipment				Operating
		Loans				Leases
		(In thousands)
Year Ending July 31,
Remaining three months of fiscal 2007		$	110			$	270
2008			—				656
2009			—				464
2010			—				426
2011			—				232
Thereafter			—				12
Total minimum payments			110			$	2,060
Less: Amount representing interest			(2	)
Present value of minimum loan payments			108
Less: Current portion			(108	)
Long-term portion		$	—

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, 2006		$	35
Provision			39
Settlements made			(3	)
Balance as of April 30, 2007		$	71

     Guarantees and Indemnifications

     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 $5.7 million and $4.6 million in noncancelable purchase commitments with these providers as of April 30, 2007 and July 31, 2006, respectively. The Company expects to sell all products which it has committed to purchase from these providers.

     The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company has an officer and director insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. 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, 2007 and July 31, 2006.

     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 or defend lawsuits. 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, 2007 and July 31, 2006.

11. Recent Accounting Pronouncements

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for the Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2008 fiscal year, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently assessing the impact, if any, of adopting this standard on the Company’s financial position, cash flows and results of operations. In May 2007, the FASB issued FASB Staff Position FIN 48-1, “Definition of ‘Settlement’ in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on how a company should

determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective upon initial adoption of FIN 48, which the Company will adopt in the first quarter of fiscal year 2008.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Company is required to adopt SFAS 157 effective August 1, 2008. The Company does not believe the adoption of SFAS 157 will have a material effect on its financial position, cash flows or results of operations.

     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. The Company is required to adopt SFAS 159 effective August 1, 2008. The Company does not expect the adoption of this new standard will have a material effect on its financial position, cash flows or results of operations.

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. These statements include, among other things, statements concerning our expectations:

	•		that revenues from our indirect channels will continue to constitute a majority of our future revenues and an increasing proportion of our future product 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 services revenues to increase;
	•		that we expect a modest impact on our gross margins as product revenues from our indirect channel may increase and represent a greater proportion of our future product revenues;
	•		that we will hire a significant number of new employees in future periods;
	•		that our future research and development, sales and marketing, general and administrative, and stock-based compensation expenses will increase;
	•		that we will continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position;
	•		that we will continue to invest significantly in our sales and marketing efforts, which we believe will generate future business;
	•		that we will incur significant additional accounting and legal costs related to compliance with SEC rules and regulations, in addition to other public company costs;
	•		regarding the amounts of the remaining deferred revenue associated with ratable product and professional services and support revenues that we expect to amortize over future periods;
	•		regarding the sufficiency of our existing cash, cash equivalents, marketable securities and cash generated from operations;

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 I, 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 were founded in 2002 with the intention to develop a new approach to enabling secure enterprise mobility, which we refer to as our Aruba Mobile Edge Architecture. We believed that end-users and IT departments were demanding mobility solutions, but traditional approaches were limited by security, application performance and scalability challenges. Our architecture allows end-users to roam to different locations within an enterprise campus or office building while maintaining secure and consistent access to all of their network resources. Our architecture also enables IT managers to establish and enforce policies that control network access and prioritize application delivery based on an end-user’s organizational role and authorization level. The Aruba Mobile Edge Architecture consists of the ArubaOS operating system, optional value-added software modules, a centralized mobility management system, high-performance programmable mobility controllers, and wired and wireless access points.

     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.

     We began commercial shipments of our products in June 2003. Since that time, our products have been sold to more than 2,400 end customers worldwide, including some of the largest and most complex global organizations.

     In March 2007, we completed our initial public offering, or IPO, of common stock in which we issued and sold 9,200,000 shares of our common stock, including 1,200,000 shares sold pursuant to the underwriters’ exercise of their over-allotment option, at an issue price of $11.00 per share. We raised a total of $101.2 million in gross proceeds from the IPO, or approximately $91.8 million in net proceeds after deducting underwriting discounts and commissions of $7.1 million and other offering costs of $2.3 million. As of April 30, 2007, $804,000 in offering costs remain unpaid and these costs are expected to be paid in our fourth quarter. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 49,681,883 shares of common stock and 318,181 shares of our common stock were issued to Microsoft in consummation of a stock issuance agreement that we entered into with Microsoft in June 2005. Subsequent to the IPO and the associated conversion of our outstanding convertible preferred stock to common stock, warrants to purchase 677,106 shares of convertible preferred stock were converted to warrants to purchase an equivalent number of shares of our common stock and the related carrying value of such warrants was reclassified to common stock and additional paid-in-capital, and the warrants are no longer subject to remeasurement. Our Certificate of Incorporation, as restated on March 30, 2007, authorizes the issuance of 350,000,000 shares of common stock with $0.0001 par value per share. In March 2007, we contributed 100,000 shares of common stock to a charitable foundation. The aggregate cash consideration for these shares was $10, the par value of the common stock, and $1.4 million in fair value was recorded within stockholders’ equity and general and administrative expenses during the three months ended April 30, 2007.

     Our product revenue growth rate will depend significantly on continued growth in the market for enterprise mobility solutions, our ability to continue to attract new customers and our ability to compete against more established companies in the market. Our growth in professional services and 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 the extent to which we invest in our sales and marketing, research and development, and general and administrative resources to grow our business.

     We have outsourced the significant 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.

Revenues, Cost of Revenues and Operating Expenses

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

     Our revenues have grown rapidly since we began commercial shipments of our products in June 2003. Comparisons of our revenues since then are significantly affected by the fact that 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 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 to more than 2,400 end customers as of April 30, 2007, 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.

     We sell our products directly through our sales force and indirectly through VARs, distributors and 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 9 of Notes to Consolidated Financial Statements.

     In 2005, we began to sell our products to Alcatel-Lucent, one of our OEMs that sells our products under its own brand name. For the nine months ended April 30, 2007 and April 30, 2006, Alcatel-Lucent accounted for 14% and 15% of our revenues, 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. 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, during fiscal 2006, we hired 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; and
	•		growth in our headcount and other related costs incurred in our customer support organization.

     Due to higher discounts given to the indirect channel, our overall gross margins on indirect channel transactions are typically lower than those associated with direct transactions. We expect a modest impact on our gross margins in the future as product revenues from our indirect channel increase as a proportion of our total product revenues.

     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 282 employees at July 31, 2006 to approximately 410 employees at April 30, 2007. We expect to continue to hire a significant number of new employees to support our growth. The timing of these additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue, in any particular period. Assuming our revenues continue to grow, we expect each of the operating expenses described below will continue to grow in absolute dollars, and each may continue to grow as a percentage of revenues in the near term, as we continue to invest in our sales and marketing and research and development efforts prior to realizing additional revenue from these investments.

     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.

     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.

     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, and 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, as well as additional insurance, investor relations and other costs associated with being a public company.

     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, or SFAS 123R. For the three months ended April 30, 2007 and 2006, we recognized $4.5 million and $355,000, respectively, in stock-based expense. For the nine months ended April 30, 2007 and 2006, we recognized $8.0 million and $976,000, respectively, in stock-based expense.

          Other Income (Expense), net. Other income (expense), net includes interest income on cash balances, interest expense on our outstanding debt 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. The largest component of other income (expense), net in the three and nine months ended April 30, 2007 and the three and nine months ended April 30, 2006, was the adjustment to record our outstanding preferred stock warrants at fair value. As described below, subsequent to our IPO, we are no longer required to remeasure these warrants to fair value.

Our Relationship with Microsoft

     Our strategic relationship with Microsoft began in June 2005, when Microsoft chose our products for a worldwide deployment, pursuant to which Microsoft has installed our products in various sites in the United States, Asia and Europe. As part of the relationship, we support Microsoft’s Network Access Protection (NAP) architecture for enterprise security and provide interoperability with Microsoft products such as the Internet Authentication Server (IAS) and Network Policy Server (NPS). In addition, we entered into a stock issuance agreement with Microsoft, pursuant to which, upon the closing of our initial public offering, we issued 318,181 shares of our common stock to Microsoft with a value of $3.5 million, based on the initial public offering price. We recognized revenue related to product and support sales to Microsoft of $3.7 million during the quarter ended April 30, 2007, which included amounts in excess of $3.5 million that were previously deferred due to the stock issuance agreement.

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, fair value of warrants to purchase convertible preferred stock, 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. Software updates provide 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, or 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, we recognized revenue on our transactions’ entire arrangement fees prior to the second quarter of fiscal 2006 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. 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, Share-Based Payment, or SFAS 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 life 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 determined the amount of stock-based compensation expense in the nine months ended April 30, 2007, 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.

     Had the expenses for our stock-based compensation plans in fiscal 2006 been determined based on the fair value of the options at the grant date of the awards consistent with the provisions of SFAS 123 for the periods set forth below, our net loss would have been increased to the pro forma amounts indicated below:

		Three Months Ended				Nine Months Ended
		April 30, 2006				April 30, 2006
Net loss, as reported		$	(1,525	)		$	(10,564	)
Add: Employee stock-based compensation expense included in reported net loss			274				782
Less: Total employee stock-based compensation expense determined under the fair value method			(703	)			(1,577	)
Pro forma, net loss		$	(1,954	)		$	(11,359	)
Basic and diluted net loss per share
As reported		$	(0.13	)		$	(0.99	)
Pro forma		$	(0.17	)		$	(1.06	)

          As a result of adopting SFAS 123R on August 1, 2006, during the three and nine months ended April 30, 2007, our net loss was $2.2 million and $4.7 million greater than if we had continued to account for stock-based compensation under APB 25, and our basic and diluted net loss per share for the three and nine months ended April 30, 2007 was higher by $0.06 and $0.22, respectively.

     The weighted average fair value of options granted in the three and nine months ended April 30, 2007 was $3.60 and $2.53, respectively, based on the provisions of SFAS 123R. The weighted average fair value of options granted in the three and nine months ended April 30, 2006 was $1.26 and $1.17, respectively, based on the provisions of SFAS 123. The weighted average fair value of employee stock purchase rights granted in the three and nine months ended April 30, 2007 was $3.11 per share.

     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,
		2007				2006				2007				2006
Risk-free interest rates			4.61	%			4.74	%			4.66	%			4.42	%
Expected term (in years)			4.30				4.00				4.20				4.00
Dividend yield			0	%			0	%			0	%			0	%
Volatility			48	%			70	%			55	%			70	%

Employee Stock Purchase Plan

		Three and Nine Months Ended
		April 30, 2007
Risk-free interest rates			5.03	%
Expected term (in years)			0.4
Dividend yield			0	%
Volatility			45	%

     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.

Fair Value of Warrants to Purchase Convertible Preferred Stock

     On June 29, 2005, the FASB issued Staff Position 150-5, Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable, or FSP 150-5. FSP 150-5 requires us to classify our outstanding preferred stock warrants as liabilities on our balance sheet and record adjustments to the value of our preferred stock warrants in our statement of operations to reflect their fair value at each reporting period. We previously accounted for such warrants in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Good or Services, or EITF 96-18.

     We adopted FSP 150-5 in the first quarter of fiscal 2006 and accounted for the cumulative effect of the change in accounting principle as of August 1, 2005. The impact of the change in accounting principle was to record a cumulative gain of $66,000, or $0.01 per share, as of August 1, 2005. In the three months ended April 30, 2007 and 2006, we recorded $5.9 million and $22,000, respectively, of additional expense as other expense, net to reflect the further increase in fair value during the period. In the nine months ended April 30, 2007 and 2006, we recorded $9.0 million and $606,000, respectively, of additional expense as other expense to reflect the further increase in fair value during the period. Upon the closing of our initial public offering, these warrants were converted into warrants to purchase shares of our common stock and, as a result, were no longer subject to FSP 150-5. At that time, the then-current aggregate fair value of these warrants was reclassified from current liabilities to additional paid-in capital, a component of stockholders’ deficit, and we ceased to record any related periodic fair value adjustments.

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 $299,000 and $1.1 million in the three and nine months ended April 30, 2007, respectively, and $193,000 and $601,000 in the three and nine months ended April 30, 2006, 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 $534,000 and $352,000 at April 30, 2007 and July 31, 2006, 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 become 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 net deferred tax assets will not be realized. Accordingly, management has applied a full valuation allowance against our net deferred tax assets.

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,
		2007				2006				2007				2006
Revenues:
Product			85.9	%			63.5	%			83.4	%			54.2	%
Professional services and support			11.0				4.6				10.0				2.9
Ratable product and related professional services and support			3.1				31.9				6.6				42.9
Cost of revenues:
Product			25.7				25.2				28.9				21.4
Professional services and support			3.4				3.7				4.0				3.3
Ratable product and related professional services and support			1.1				10.9				2.4				17.8
Gross margin			69.8				60.2				64.7				57.5
Operating expenses:
Research and development			19.9				18.0				20.7				21.4
Sales and marketing			46.8				41.4				45.7				48.5
General and administrative			14.1				7.8				12.7				8.3
Operating margin			(11.0	)			(7.0	)			(14.4	)			(20.7	)
Other income (expense), net			(15.6	)			0.1				(9.8	)			(1.0	)
Loss before income tax provision and cumulative effect of change in accounting principle			(26.6	)			(6.9	)			(24.2	)			(21.7	)
Income tax provision			0.2				0.4				0.3				0.2
Loss before cumulative effect of change in accounting principle			(26.8	)			(7.3	)			(24.5	)			(21.9	)
Cumulative effect of change in accounting principle			—				—				—				0.2
Net loss			(26.8	)%			(7.3	)%			(24.5	)%			(21.7	)%

Revenues

     The following table presents our revenues, by revenue source, for the periods presented:

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(In thousands)
Total revenues		$	34,661			$	20,950			$	85,813			$	48,605
Type of revenues:
Product			29,777				13,308				71,545				26,352
Professional services and support revenues			3,816				969				8,593				1,409
Ratable product and related professional services and support			1,068				6,673				5,675				20,844
Revenues by geography:
United States			24,751				15,718				57,400				35,319
Europe, the Middle East and Africa			4,781				2,587				14,457				4,964
Asia Pacific			2,549				1,731				7,293				5,316
Rest of World			2,580				914				6,663				3,006

     Prior to the second quarter of fiscal 2006, we recognized revenue from sales of our products ratably over the term of the support contract with each customer, which is typically one to five years. Beginning in the second quarter of fiscal 2006, when we were able to establish VSOE of fair value, we began recognizing revenue upon shipment of our products, for transactions where all other criteria for revenue recognition were satisfied. Professional services and support revenues primarily represent fees for support contracts and are recognized ratably over the contractual period, which is typically one to five years. Because of the change in the timing of our revenue recognition in the second quarter of fiscal 2006, comparisons of the absolute dollar growth in our revenues on a year-over-year basis for the nine months ended April 30, 2007 are not meaningful.

Three Months Ended April 30, 2007 Compared to the Three Months Ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006.

     In the three months ended April 30, 2007, total revenues increased 65% over the three months ended April 30, 2006 due to a $19.3 million increase in product and related professional services and support sales to new and existing customers, partially offset by a $5.6 million decrease in ratable product and related professional services and support revenues. In the nine months ended April 30, 2007, total revenues increased 77% over the nine months ended April 30, 2006 due to a $52.4 million increase in product and related professional services and support sales to new and existing customers, partially offset by a $15.2 million decrease in ratable product and related professional services and support revenues

     The decrease in ratable product and related professional services and support revenues in the three months ended April 30, 2007 compared to the three months ended April 30, 2006 and in the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006 was due to the run-off in the amortization of deferred revenue associated with those customer contracts that we entered into prior to our establishment of VSOE of fair value. We expect ratable product and related professional services and support revenues to continue to decrease in absolute dollars and as a percentage of total revenues in future periods. At April 30, 2007, we had $6.7 million in deferred revenue associated with ratable product and professional services and support revenues, of which we expect $1.0 million will be amortized to revenue in our fiscal fourth quarter and $3.5 million, $1.4 million and $800,000 will be amortized to revenue in fiscal 2008, 2009 and 2010, respectively.

     In the three and nine months ended April 30, 2007 and April 30, 2006, we derived more than 75% of our product revenues from indirect channels, which consist of value-added resellers, OEMs and other distributors. We expect to continue to derive a significant majority of our product revenues from indirect channels as a result of our focus on expanding our indirect channel sales, as evidenced by our recently announced partnership with Westcon.

     We generated 28% of our revenues in the three months ended April 30, 2007 from shipments to locations outside the United States, compared to 25% in the three months ended April 30, 2006. In the nine months ended April 30, 2007, we generated 33% of our revenues from shipments to locations outside the United States, compared to 27% in the nine months ended April 30, 2006. 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.

     Substantially all of our customers purchase support when they purchase our products. The increase in professional services and support revenues is a result of increased product and first year support sales combined with the renewal of support contracts by existing customers. As our customer base grows, we expect the proportion of our revenues represented by support revenues to increase.

Cost of Revenues and Gross Margin

     The following table presents our revenues and cost of revenues, by revenue source, for the periods presented:

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(Dollars in thousands)
Total revenues		$	34,661			$	20,950			$	85,813			$	48,605
Cost of product			8,921				5,278				24,784				10,428
Cost of professional services and support			1,138				779				3,443				1,584
Cost of ratable product and related professional services and support			397				2,288				2,088				8,668
Total cost of revenues			10,456				8,345				30,315				20,680
Gross profit		$	24,205			$	12,605			$	55,498			$	27,925
Gross margin			69.8	%			60.2	%			64.7	%			57.5	%

Three Months Ended April 30, 2007 Compared to the Three Months Ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006

     The increase in cost of product revenues in the three months ended April 30, 2007 compared to the three months ended April 30, 2006, as well as in the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006, was due to increased shipments of our products to customers. The substantial majority of our cost of product revenues consists of payments to Flextronics, our contract manufacturer. For the nine months ended April 30, 2007 and the nine months ended April 30, 2006, payments to Flextronics and Flextronics-related costs constituted more than 75% of our cost of product revenues.

     Cost of professional services and support revenues increased during these periods as we added more technical support headcount domestically and abroad to support our growing customer base. Cost of ratable product and related support and services decreased during this period consistent with the decrease in ratable product and related professional services and support revenues.

     As we expand internationally, we may incur additional costs to conform our products to comply with local laws or local product specifications. In addition, as we expand internationally, we plan to continue to hire additional technical support personnel to support our growing international customer base.

     Gross margins improved in the three months ended April 30, 2007 compared to the three months ended April 30, 2006, as well as in the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006, due to the following factors:

	•		an increase in our revenues, which grew at a higher rate than the associated costs primarily as a result of economic efficiencies we were able to gain with Flextronics, our contract manufacturer, and efficiencies gained in our internal manufacturing operation;
	•		the recognition in the three months ended April 30, 2007 of revenue from two of our customers, which was recorded at nearly 100% gross margin, as the substantial majority of the cost of revenues associated with this revenue was recognized in prior periods. Primarily as a result of these one-time items, which we do not expect to recur, gross margins were positively impacted by approximately 3% in the three months ended April 30, 2007; and
	•		a favorable channel mix with a lower percentage of indirect channel sales. However, we expect indirect channel sales to increase as a proportion of product revenues in the future. This may have a modest adverse impact on gross margins in the future.

Research and Development Expenses

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(Dollars in thousands)
Research and development expenses		$	6,890			$	3,760			$	17,752			$	10,377
Percent of total revenue			19.9	%			18.0	%			20.7	%			21.4	%

Three Months Ended April 30, 2007 Compared to the Three Months Ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006

     In the three months ended April 30, 2007, research and development expenses increased 83% over the three months ended April 30, 2006, primarily due to an increase of $2.0 million in personnel and related costs as a result of increased headcount, $787,000 in stock-based expense as a result of our adoption of FAS 123R on August 1, 2006 and $181,000 in purchases of design equipment and services. For the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006, research and development expenses increased 71% primarily due to an increase of $4.9 million in personnel and related costs, $1.4 million in stock-based expense and $379,000 in purchases of design equipment and services.

Sales and Marketing Expenses

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(Dollars in thousands)
Sales and marketing expenses		$	16,240			$	8,664			$	39,194			$	23,585
Percent of total revenue			46.8	%			41.4	%			45.7	%			48.5	%

     Three Months Ended April 30, 2007 Compared to the Three Months Ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006

In the three months ended April 30, 2007, sales and marketing expenses increased 87% over the three months ended April 30, 2006, primarily due to an increase of $3.0 million in personnel and related costs as a result of increased headcount, $1.5 million in sales commissions as a result of increased revenues, $1.2 million related to marketing programs, $833,000 in stock-based expense as a result of our adoption of FAS 123R on August 1, 2006 and $485,000 in travel and entertainment expenses. For the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006, sales and marketing expenses increased 66% primarily due to an increase of $5.8 million in personnel and related costs as a result of increased headcount, $3.7 million in sales commissions as a result of increased revenues, $2.5 million related to marketing programs, $1.6 million in stock-based expense and $1.1 million in travel and entertainment expenses.

General and Administrative Expenses

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(Dollars in thousands)
General and administrative expenses		$	4,889			$	1,639			$	10,897			$	4,029
Percent of total revenue			14.1	%			7.8	%			12.7	%			8.3	%

Three Months Ended April 30, 2007 Compared to the Three Months ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006

     In the three months ended April 30, 2007, general and administrative expenses increased 198% over the three months ended April 30, 2006, primarily due to an increase of $2.4 million in stock-based expense as a result of our adoption of FAS 123R on August 1, 2006, $647,000 in personnel and related costs as a result of increased headcount, and $122,000 in professional fees associated with legal and audit services. For the nine months ended April 30, 2007 compared to the nine months ended April 30, 2006, general and administrative expenses increased 171% primarily due to an increase of $3.8 million in stock-based expense, $2.0 million in personnel and related costs as a result of increased headcount, and $751,000 in professional fees associated with legal and audit services.

Other Income (Expense), Net

     Other income (expense), net consists primarily of interest income, interest expense, expense for warrants issued in connection with equipment loans, and foreign currency exchange gains and losses.

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2007				2006				2007				2006
		(In thousands)
Other income (expense), net:
Interest income		$	567			$	145			$	876			$	451
Interest expense			(22	)			(78	)			(85	)			(254	)
Other income (expense), net			(5,935	)			(52	)			(9,185	)			(673	)
Total other income (expense), net		$	(5,390	)		$	15			$	(8,394	)		$	(476	)

Three Months Ended April 30, 2007 Compared to the Three Months Ended April 30, 2006 and the Nine Months Ended April 30, 2007 Compared to the Nine Months Ended April 30, 2006

     In the three months ended April 30, 2007 compared to the three months ended April 30, 2006, other expense, net increased primarily due to an increase in warrant expense of $5.9 million resulting from FSP 150-5, which requires us to classify our preferred stock warrants as liabilities and adjust the carrying value to fair value each period, partially offset by an increase of $422,000 in interest income due to rising average cash balances. For the nine months ended April 30, 2007, other expense, net increased compared to the nine months ended April 30, 2006, primarily due to an increase of $8.4 million in non-cash warrant expense, partially offset by an increase of $425,000 in interest income due to rising average cash balances.

Liquidity and Capital Resources

		As of April 30,				As of July 31,
		2007				2006
		(In thousands)
Working capital (deficit)		$	110,775			$	(10,472	)
Cash and cash equivalents			109,726				9,263

		Nine Months Ended
		April 30,
		2007				2006
		(In thousands)
Cash used in operating activities		$	(4,826	)		$	(9,963	)
Cash used in investing activities			(3,028	)			(789	)
Cash provided by financing activities			108,258				19,472