Extreme Networks
Annual Report 2010

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 27, 2010OR ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to .Commission file number 000-25711 Extreme Networks, Inc.(Exact name of Registrant as specified in its charter) Delaware 77-0430270(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)3585 Monroe StreetSanta Clara, California 95051(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 579-2800 Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common stock, $.001 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes ¨ No ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large Accelerated Filer ¨ Accelerated Filer xNon-Accelerated Filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $256.4 million as of December 27, 2009, thelast business day of the Registrant’s most recently completed second fiscal quarter, based upon the per share closing price of the Registrant’s common stockas reported on The Nasdaq Global Market reported on such date. This calculation does not reflect a determination that certain persons are affiliates of theRegistrant for any other purpose.90,749,782 shares of the Registrant’s Common stock, $.001 par value, were outstanding as of August 16, 2010.DOCUMENTS INCORPORATED BY REFERENCEPart III incorporates by reference from the definitive proxy statement for the Company’s 2010 Annual Meeting of Stockholders to be filed with theCommission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Table of ContentsEXTREME NETWORKS, INC.FORM 10-KINDEX PageForward Looking Statements 3 PART I 3Item 1. Business 3Item 1A. Risk Factors 14Item 1B. Unresolved Staff Comments 26Item 2. Properties 26Item 3. Legal Proceedings 26Item 4. Removed and Reserved 29 PART II 30Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30Item 6. Selected Financial Data 32Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48Item 8. Financial Statements and Supplementary Data 50Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 85Item 9A. Controls and Procedures 85Item 9B. Other Information 86 PART III 88Item 10. Directors, Executive Officers and Corporate Governance 88Item 11. Executive Compensation 88Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 88Item 13. Certain Relationships and Related Transactions, and Director Independence 88Item 14. Principal Accountant Fees and Services 88 PART IV 89Item 15. Exhibits and Financial Statement Schedules 89SIGNATURES 92 2Table of ContentsFORWARD LOOKING STATEMENTSThis annual report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, particularly, our expectations regarding results of operations, our ability to expand our market penetration, our ability toexpand our distribution channels, customer acceptance of our products, our ability to meet the expectations of our customers, product demand and revenue,cash flows, product gross margins, our expectations to continue to develop new products and enhance existing products, our expectations regarding theamount of our research and development expenses, our expectations relating to our selling, general and administrative expenses, our efforts to achieveadditional operating efficiencies and to review and improve our business systems and cost structure, our expectations to continue investing in technology,resources and infrastructure, our expectations concerning the availability of products from suppliers and contract manufacturers, anticipated product costsand sales prices, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding therationalization of our workforce and facilities and our expectations regarding materials and inventory management. These forward-looking statementsinvolve risks and uncertainties, and the cautionary statements set forth below and those contained in the section entitled “Risk Factors” identify importantfactors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution investors that actualresults may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in this Form 10-K and otherfilings we have made with the Securities and Exchange Commission. More information about potential factors that could affect our business and financialresults is set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”PART IItem 1. BusinessOverviewExtreme Networks, Inc., together with its subsidiaries, (collectively referred to as Extreme and as we, us and our) is a leading provider of networkinfrastructure equipment and services for enterprises, data centers, and metropolitan telecommunications service providers. Our customers include businesses,hospitals, schools, hotels, telecommunications companies and government agencies around the world. Since we were established in 1996 through to thepresent day, we have had a single technology vision of “Ethernet Everywhere” – a unifying network strategy that uses Ethernet technology to simplify eachelement and component of the network, and, through simplification, provide services at a lower cost. As networks internal to businesses and the Internetbecome more and more pervasive and critical to a wide variety of business and social communications, the volume and the demands of applications, data,users and devices on networks continue to increase. Our vision of “Ethernet Everywhere” helps us design and deliver easily deployable, highly scalable,secure and comprehensively managed networks which are reliable, fast, flexible and cost-effective. We primarily sell our products through an ecosystem ofour channel partners who combine our Ethernet products with their offerings to create compelling information technology solutions for end user customers.Industry BackgroundBusinesses, governments, educational institutions, service providers, data center operators and other organizations have become highly dependent ontheir internal networks and the Internet. In fact, modern society is significantly dependent upon the Internet and the myriad of services and systems to whichit provides access. The Internet and internal business networks serve as a central communications infrastructure that connect internal and external sites anddeliver data, voice and video communications to a dramatically increasing number of users. Over the course of the past ten years, the wide adoption of theInternet Protocol (or “IP”) has enabled the spread of high speed networks from educational facilities and corporations out to residences around the globe. In 3Table of Contentsaddition, IP enabled devices as diverse as servers, printers, laptops, desk phones, televisions, residential networks, cell phones and various wireless devicesare now connected to both “hard-wired” and wireless Ethernet networks over which IP information flows. A variety of critical computing applications that arecentral to business and communications, such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Sales Force Automation(SFA), large enterprise data warehouses, and sophisticated e-commerce and e-business applications depend upon high-speed, reliable networks.Communication in today’s world operates through the existence of business-to-business and business-to-consumer Ethernet network connectivity. Lookingahead, the continued explosive growth of peer-to-peer networking will continue to drive the ever increasing demand for network connectivity and capacity.The networking industry has evolved significantly over the past 10 years. We believe that the following trends have and will continue to influence theindustry as it continues to rapidly evolve to meet network demands: • Increasing Demand for Bandwidth. As the volume of users, devices, applications and data increases, more network capacity is required. Thiscapacity is usually measured in ‘bits of data per second’ or bandwidth. The following factors, among others, are driving increased demand forbandwidth: • wide-spread adoption of electronic communications in all aspects of our lives; • proliferation of next generation converged mobile devices; • broad, global, deployment of “triple-play” services (residential telephone, data and television services delivered over one network); and • delivery and rapidly growing adoption of internet “cloud” solutions or software-as-a-service business applications and processes. • Adoption and Evolution of the Converged Network. An essential characteristic of the networks that support business and residential users oftoday and into the future is their ability to support multiple communication flows over the same physical infrastructure. With data, voice andvideo traffic being delivered to a broader range of end-devices over both wired and wireless networks, the communications infrastructure is acritical component which allows enterprises and service providers to offer unique and innovative services for their users and customers. Theadoption of Voice-over-IP (VoIP) and the continued proliferation of video applications demonstrate that the trend towards deploying fullyconverged networks will continue to gain momentum. • Carrier Ethernet. As a result of the move towards converged delivery of data, voice and video for both residences and businesses in parallel withincreasing competition to provide these services, telecommunication service providers are seeking to broaden their market reach while reducingoperational cost and complexity. The legacy infrastructure solutions of SONET/SDH, Frame Relay, ATM and MPLS are not delivering therequired organizational flexibility or the operating expense efficiencies. As a result, we believe service providers will turn to Ethernet in order todeliver cost-effective scale, performance and flexibility. Further, technologies such as Provider Backbone Transport (PBT) and ProviderBackbone Bridging Traffic Engineering (PBT-TE) are emerging and receiving growing interest within the service provider community as theyseek to evaluate new lower cost, lower complexity solutions. When these new technologies are combined with standards for the inter-connectivity between two service providers or “network peers,” service providers are able to broaden their market reach at a lower operating costper connected service consumer. • Deployments of Next Generation Data Centers. The ever increasing volume of on-line information the flexibility offered by “cloud” solutions,and the availability of technologies to reduce the overall cost of data center deployment and operation are leading enterprises and serviceproviders to build next generation data centers. With the availability of virtualization technologies to lower the overall cost, size and powerconsumption of the physical data center, the bandwidth and reliability demands of the 4Table of Contents data center network have evolved significantly. In conjunction with the rise of virtualization, the latest generation of server technology has tentimes the Ethernet performance of prior solutions. These technology drivers are creating the need for the network ‘backbone’ to also scale by asimilar factor. These factors are driving the deployment of next generation Ethernet technology in the data center. • Increasing Expectations for Improved Price/Performance. The growing demand for bandwidth together with the availability of higherperformance solutions has caused enterprises and service providers to expect significantly improved performance at lower prices. The arrival andadoption of equipment that can transport data at 10 Gigabit-per-second connection speeds, soon to be followed by equipment offering 40Gigabit and 100 Gigabit connection speeds, is resulting in the expectation for lower price per network port. • Vendor Consolidation. Consolidation of vendors within the Ethernet networking market and between adjacent markets (storage, security,wireless & voice applications) continues to gain momentum. We believe that the underpinning technology for all of these adjacent markets isEthernet. As a result, we believe that there will be continued mergers between adjacent market vendors to enable them to deliver complete andbroad solutions to customers.The Extreme Networks StrategyOur goal is to be the provider of innovative, business relevant and compelling network solutions that create an improved applications and servicesinfrastructure for enterprises, data centers and metropolitan service providers. We seek to provide our customers with a best-of-breed alternative to single-sourced, highly proprietary networking equipment from larger competitors.Key elements of our strategy include: • Provide simple, easy-to-use, high-performance, cost-effective switching solutions. We offer simple, easy-to-use, high performance and cost-effective switching solutions that meet the specific demands of the following customers: • Enterprises, including large or medium sized businesses, schools, hospitals, hotels and government agencies, use our products to operatelocal area networks (“LANs”) or wireless local area networks (“WLANs”). • Data Center Operators use our products to deploy next generation virtualized and high density server infrastructure solutions. • Metropolitan Telecommunication Service Providers use our products to operate metropolitan area networks that providetelecommunications services to mid-sized geographic areas such as a city, greater metropolitan area or rural community.We focus our development efforts specifically on “converged networks” which must reliably deliver data, voice and video to users. • Expand market penetration. We continue to market our products to new customers in multiple market segments. While the majority of ourbusiness is with enterprise customers, we continue to leverage our technology development, service, support and business infrastructureresources to address the metropolitan service provider and data center markets. • Extend switching technology leadership. Our technological leadership is based on innovative switching technology, the depth and focus of ourmarket experience and the ExtremeXOS operating system – the software that runs on all of our Ethernet switches. We intend to invest ourengineering resources to continue to create leading-edge technologies that will increase the performance and functionality of our products and asa direct result, the value of the Extreme Networks solution to our current and future customers. 5®Table of Contents • Leverage and expand multiple distribution channels. We distribute our products through select distributors, a large number of resellers andsystem-integrators worldwide and our large strategic partners. We maintain a field sales force to support our channel partners and to sell directlyto certain strategic accounts. As an independent Ethernet switch vendor, we seek to provide products that, when combined with the offerings ofour channel partners, create compelling solutions for end user customers. • Maintain and extend our Strategic Relationships. We have established strategic relationships with a number of industry-leading vendors to bothprovide increased and enhanced routes to market, but also to collaboratively develop unique solutions. • Provide high-quality customer service and support. We seek to enhance customer satisfaction and build customer loyalty through high-qualityservice and support. This includes a wide range of standard support programs that provide the level of service our customers require, fromstandard business hours to global 24-hour-a-day, 365-day-a-year real-time response support.ProductsThe following key benefits of our products allow our customers to operate highly scalable, secure and comprehensively managed networks which arereliable, fast, flexible and cost-effective. • High Availability. Customers can choose to deploy redundant management modules, hot swappable line cards, redundant power supplies and fantrays delivering high hardware availability; a modular operating system (ExtremeXOS) for high system availability; and a variety of link-levelresiliency protocols including Ethernet Automatic Protection Switching (EAPS), for high service availability. Developed by Extreme Networks,EAPS is an open protocol that allows network managers to configure their network infrastructure so that critical network communications can bererouted within 50 milliseconds in the event of a network outage with most topologies. This level of high-speed communications ‘reroute’ensures that mission critical and demanding applications, including voice and video, maintain service delivery in the event of network outage. • Quality of Service (“QOS”). We offer a versatile and flexible QoS solution that allows network operators to assign the appropriate amount ofbandwidth to mission critical applications and in doing so control the overall experience and the service-level of the communication flows. Wehave substantial experience with communication quality controls, starting with our introduction to the market of the first broad QoS controls forEthernet. • Comprehensive Security. Our security solution delivers the capabilities required by our customers – a network that has security at its heart ratherthan added as an overlay or afterthought. Our security solution, which combines secure switches with our powerful security rules engine, enablescustomers to implement unified wired and wireless network access and IP Telephony in a secure environment. CLEAR-Flow, our wire-speedsecurity rules engine, helps detect and mitigate many security anomalies, including denial of service attacks. • Ease of Management. We offer a suite of network management tools that allow network operators to monitor and manage the network in anautomated fashion. Software developers can interact directly with our products using a standards-based Application Programming Interface (API)and the industry standard eXtensible Markup Language (XML) to manage the network and optimize application performance. • Power efficient operations. Our portfolio of switching hardware has been created with power consumption in mind. Our switches are designed torequire less power to perform the network traffic switching function, and where Power over Ethernet (PoE) solutions have been deployed withinthe customers’ network, features within the Extreme XOS operating system can intelligently control the delivery of power to the attacheddevices. 6Table of ContentsOur product categories include: • Stackable Ethernet switching systems. Our Summit product family delivers Ethernet connectivity for the network edge, aggregation and core.Within the Summit family are products that offer a range of connection speeds (from 10 Megabit to 10 Gigabit), various physical presentations(copper and fiber) and options to deliver Power-over-Ethernet or unpowered standard Ethernet ports. The Summit products in conjunction withour ExtremeXOS operating system provide the features, performance and reliability required by our customers to deploy, operate and manageconverged networking infrastructure. • Modular Ethernet switching systems. Our Black Diamond and Alpine products deliver modular or chassis-based Ethernet connectivitysolutions for enterprises, data centers and service providers. These products have a range of management and line cards that allow our customersto flexibly configure and re-purpose the systems to meet specific needs. As with our Summit products, the Black Diamond and Alpine products inconjunction with our Extreme XOS operating system and our centralized management software product provide the density, performance andreliability required to serve in environments with demanding applications. • Wireless Ethernet controllers and access points. In addition to our wired Ethernet switch portfolio, we offer our SummitWM family of wirelessnetwork controllers and associated Altitude™ access points to enable the deployment of nomadic and mobile converged network applications.Our wireless access products offer a full range of performance options including 802.11b/g to 802.11n. • Centralized Management software. To provide a central configuration, status and alerting capability we offer our EpiCenter managementsoftware system. This system provides the ability to deploy, configure, monitor and support our complete range of switching technology toenable our customers to reduce the overall cost of network administration and operations. This software system can exist as a standalonemanagement solution or it can operate as part of a larger infrastructure management environment.Sales, Marketing and DistributionWe conduct our sales and marketing activities on a worldwide basis through a distribution channel utilizing distributors, resellers and our field salesorganization. We primarily sell our products through an ecosystem of channel partners who combine our Ethernet products with their offerings to createcompelling information technology solutions for end user customers. We utilize our field sales organization to support our channel partners and to sell directto end-user customers, including some large global accounts.Strategic Relationships. We have strategic relationships with Motorola Inc., Dell, Inc., Ericsson Enterprise AB, Nokia Siemens Networks and otherswho sell our products as part of an overall solution.Distributors. We have established several key relationships with leading distributors in the electronics and computer networking industries. Each ofour distributors primarily resells our products to resellers. The distributors enhance our ability to sell and provide support to resellers, who may benefit fromthe broad service and product fulfillment capabilities offered by these distributors. One distributor, Tech Data Corporation, accounted for 12%, 11% and 11%of our net revenue in fiscal years 2010, 2009 and 2008, respectively. Distributors are generally given the right to return a portion of inventory to us for thepurpose of stock rotation and participate in various cooperative marketing programs to promote the sale of our products and services. We defer recognition ofrevenue on all sales to distributors who maintain inventory of our products until the distributors sell the product, as evidenced by monthly “sales-out” reportsthat the distributors provide to us, provided other revenue recognition criteria are met. (See “Revenue Recognition” in Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.) 7®®®Table of ContentsResellers. We rely on many resellers worldwide that sell directly to end-user customer. Our resellers include regional networking system resellers,resellers who focus on specific vertical markets, value added resellers, network integrators and wholesale resellers. We provide training and support to ourresellers and our resellers generally provide the first level of contact to end-users of our products. Our relationships with resellers are generally on a non-exclusive basis. Our resellers are not given rights to return inventory and do not automatically participate in any cooperative marketing programs. Wegenerally recognize product revenue from our reseller and end-user customers at the time of shipment, provided other revenue recognition criteria are met.When significant obligations or contingencies remain after products are delivered, such as installation or customer acceptance, revenue and related costs aredeferred until such obligations or contingencies are satisfied. (See “Revenue Recognition” in Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.)Field Sales. We have trained our field sales organization to support and develop leads for our resellers and to establish and maintain key accounts andstrategic end user customers. To support these objectives, our field sales force: • assists end-user customers in finding solutions to complex network system and architecture problems; • differentiates the features and capabilities of our products from competitive offerings; • continually monitors and understands the evolving networking needs of enterprise and service provider customers; • promotes our products and ensures direct contact with current and potential customers; • assists our resellers to drive to closure business opportunities; and • monitors the changing requirements of our customers.As of June 27, 2010, our worldwide sales and marketing organization consisted of 302 individuals, including directors, managers, sales representatives,and technical and administrative support personnel. We have domestic sales offices located in 13 states and international sales offices located in 23countries.International salesInternational sales are an important portion of our business. In fiscal 2010, sales to customers outside of North America accounted for 60% of ourconsolidated net revenue, compared to 61% in fiscal 2009 and 56% in fiscal 2008. These sales are conducted primarily through foreign-based distributorsand resellers managed by our worldwide sales organization. In addition, we have direct sales to end-user customers, including large global accounts. Theprimary markets for sales outside of North America are countries in Europe and Asia. (See “Net Revenue” in Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations.)Long-Lived AssetsSee Note 2 of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our long-livedassets.MarketingWe continue to develop and execute on a number of marketing programs to support the sale and distribution of our products by communicating thevalue of our solutions to our existing and potential customers, our distribution channels and our resellers. Our marketing efforts include participation inindustry tradeshows, technical conferences and technology seminars, preparation of competitive analyses, sales training, and publication of technical andeducational articles in industry journals, a publicly available website, promotions, web-based training courses, advertising and public relations. We alsosubmit our products for independent product testing and evaluation. 8Table of ContentsBacklogOur products are often sold on the basis of standard purchase orders that are cancelable prior to shipment without significant penalties. In addition,purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in customer requirements andmanufacturing capacity. Our business is characterized by seasonal variability in demand and short lead-time orders and delivery schedules. Actual shipmentsdepend on the then-current capacity of our contract manufacturers and the availability of materials and components from our vendors. We believe that only asmall portion of our order backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not material. Accordingly, wedo not believe that backlog at any given time is a meaningful indicator of future revenue.SeasonalityLike many of our competitors, we historically have experienced seasonal fluctuations in customer spending patterns, which generally adversely affectour first and third fiscal quarters. This pattern should not be relied upon, however, as it has varied in the past.Customer Service and SupportOur customers seek high reliability and maximum uptime for their networks. To that extent, we provide the following service offerings: • Support services for end-users, resellers and distributors. We meet the service requirements of our customers and channel partners through ourTechnical Assistance Centers, or TACs, located in Santa Clara, California; Utrecht, Netherlands; Research Triangle Park, North Carolina; andTokyo, Japan. Our TAC engineers and technicians assist in diagnosing and troubleshooting technical issues regarding customer networks.Development engineers work with the TACs to resolve product functionality issues specific to each customer. • Professional services. We provide consultative services to improve customer productivity in all phases of the network lifecycle – planning,design, implementation, operations and optimization management. Our network architects develop and execute customized hardwaredeployment plans to meet individualized network strategies. These activities may include the management and coordination of the design andnetwork configuration, resource planning, staging, logistics, migration and deployment. We also provide customized training and operationalbest practices documentation to assist customers in the transition and sustaining of their networks. • Education. Our classes cover a wide range of topics such as installation, configuration, operation, management and optimization – providingcustomers with the necessary knowledge and experience to successfully deploy and manage our products in various networking environments.Classes may be scheduled and available at numerous locations worldwide. We deliver training using our staff, on-line training classes andauthorized training partners. In addition, we make much of our training materials accessible free-of-charge on our internet site for customers andpartners to use in self-education. We believe this approach enhances the market’s ability to learn and understand the broad array of advantages ofour products.ManufacturingWe outsource the majority of our manufacturing and supply chain management operations as part of our strategy to maintain global manufacturingcapabilities and to reduce our costs. We conduct quality assurance, manufacturing engineering, document control and test development at our main campusin Santa Clara, California. This approach enables us to reduce fixed costs and to flexibly respond to changes in market demand.We have a relationship with Flextronics International, Ltd. for the manufacture of some of our products in Guadalajara, Mexico. Flextronics’manufacturing processes and procedures are ISO 9001 certified. We determine the components that are incorporated in our products and select theappropriate suppliers of such components. 9Table of ContentsWe also maintain a relationship with Alpha Networks, Inc. headquartered in Hsinchu, Taiwan. Alpha Networks is a global networking Original DesignManufacturer (ODM) leader with core competencies in areas such as Ethernet, LAN/MAN, Wireless, Broadband and VoIP. Alpha Networks’ manufacturingprocesses and procedures are ISO 9001 certified. We partner with Alpha Networks to design and build some of our products.We have a relationship with Benchmark Electronics Huntsville Inc. for the manufacture of some of our products in Huntsville, Alabama. Benchmarkmanufacturing processes and procedures are ISO 9001 certified. We determine the components that are incorporated in our products and select theappropriate suppliers of such components.Our wireless products are supplied under an OEM supply agreement with Symbol Technologies, Inc, a subsidiary of Motorola, Inc.(“Motorola”). Motorola rebrands and customizes the wireless products for us to resell to customers. Motorola’s manufacturing processes and procedures areISO 9001 certified. Motorola has made ongoing supply and support commitments during the term of the agreement and is required to provide support for adefined period of time after any termination of the agreement.These manufacturers utilize automated testing equipment to perform product testing and burn-in with specified tests. Together we rely uponcomprehensive inspection testing and statistical process controls to assure the quality and reliability of our products.We use our forecast of expected demand to determine our material requirements. Lead times for materials and components vary significantly, anddepend on factors such as the specific supplier, contract terms and demand for a component at a given time. We order most of our materials and componentson an indirect basis through our contract manufacturer. Purchase commitments with our manufacturers are generally on a purchase order basis.Research and DevelopmentThe success of our products to date is due in large part to our focus on research and development. We believe that continued success in the marketplacewill depend on our ability to develop new and enhanced products employing leading-edge technology. Accordingly, we are undertaking development effortswith an emphasis on increasing the reliability, performance and features of our family of products, and designing innovative products to reduce the overallnetwork operating costs of customers.Our product development activities focus on solving the needs of enterprises, data centers, and service providers. Current activities include thecontinuing development of our innovative switching technology aimed at extending the capabilities of our products. Our ongoing research activities cover abroad range of areas, including, in particular, 10 Gigabit and higher-speed Ethernet, Metro and Internet routing, network security, network managementsoftware, datacenter equipment broadband access equipment and wireless networking equipment.We continued to enhance the functionality of our modular operating system (ExtremeXOS) which has been designed to provide high reliability andavailability. This allows us to leverage a common operating system across different hardware and network chipsets.As of June 27, 2010, our research and development organization consisted of 205 individuals. Research and development efforts are conducted inseveral locations, including Santa Clara, California; Raleigh, North Carolina; and Chennai, India. Our research and development expenses in fiscal years2010, 2009 and 2008 were $49.4 million, $58.2 million and $65.3 million, respectively. 10Table of ContentsCompetitionThe market for network switches, which is part of the broader market for networking equipment, is extremely competitive and characterized by rapidtechnological progress, frequent new product introductions, changes in customer requirements and evolving industry standards. We believe the principalcompetitive factors in the network switching market are: • expertise and familiarity with network protocols, network switching and network management; • product performance, features, functionality and reliability; • price/performance characteristics; • timeliness of new product introductions; • adoption of emerging industry standards; • customer service and support; • size and scope of distribution network; • brand name; • breadth of product offering; • access to customers; and • size of installed customer base.We believe that we compete with our competitors with respect to many of the foregoing factors. However, the market for network switching solutions isdominated by a few large companies, particularly Cisco Systems, Inc. In addition to Cisco Systems, we compete with public and private companies that offerswitching solutions or provide alternative networking solutions, including, Alcatel-Lucent, Brocade Communications Systems, Inc., Hewlett-PackardCompany, Huawei Technologies Corporation, Juniper Networks, Inc. and Siemens Enterprise Communications GmBH & Co. KG. Most of these competitorshave longer operating histories, greater name recognition, larger customer bases, broader product lines and substantially greater financial, technical, sales,marketing and other resources.Intellectual PropertyWe rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.Based on our commitment to build a patent portfolio, we have in process a number of patent applications relating to our proprietary technology in the UnitedStates and in selected other countries. With respect to trademarks, we have a number of pending and registered trademarks in the United States and abroad.We enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to, and distribution of,our software, documentation and other proprietary information. In addition, we provide our software products to end-user customers primarily under “shrink-wrap” license agreements. These agreements are not negotiated with or signed by the licensee, and thus these agreements may not be enforceable in somejurisdictions. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products ortechnology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.EnvironmentWe maintain compliance with various regulations related to the environment, including the Waste Electrical and Electronic Equipment and Restrictionof the Use of Certain Hazardous Substances in Electrical and 11Table of ContentsElectronic Equipment regulations adopted by the European Union. Further, we are committed to energy efficiency in our product lines. For example, certainof our products consume far less power than offerings from our major competitors. Accordingly, we believe this is an area that affords us a competitiveadvantage for our products in the marketplace. To date, our compliance efforts with various U.S. and foreign regulations related to the environment has nothad a material effect on our operating results.EmployeesAs of June 27, 2010, we employed 740 people, including 302 in sales and marketing, 205 in research and development, 62 in operations, 96 incustomer support and service, and 75 in finance and administration. We have never had a work stoppage and no personnel are represented under collectivebargaining agreements. We consider our employee relations to be good.We believe that our future success depends on our continued ability to attract, integrate, retain, train and motivate highly qualified personnel, andupon the continued service of our senior management and key personnel. None of our executive officers or key employees is bound by an employmentagreement which mandates that the employee render services for any specific term. The market for qualified personnel is competitive, particularly in the SanFrancisco Bay Area, where our headquarters is located.OrganizationWe were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. Our corporate headquarters are located at3585 Monroe Street, Santa Clara, CA 95051 and our telephone number is (408) 579-2800. We electronically file our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the Securities ExchangeCommission. The public can obtain copies of our SEC filings from our website found at www.extremenetworks.com free of charge, or on the SecuritiesExchange Commission’s website at www.sec.gov. The public may also read or copy any materials we file with the Securities Exchange Commission at theSecurities Exchange Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on theoperation of the Public Reference Room by calling the Securities Exchange Commission at 1-800-SEC-0330.Our corporate governance guidelines, the charters of our audit committee, our compensation committee and our nominating and corporate governancecommittee and our code of ethics policy (including code of ethics provisions that apply to our principal executive officer, principal financial officers,controller and senior financial officers) are available on our website at www.extremenetworks.com under “Corporate Governance.” These items are alsoavailable to any stockholder who requests them by calling (408) 579-2800.Executive Officers of the RegistrantThe following table sets forth information regarding our executive officers as of August 20, 2010: Name Age PositionBob L. Corey 59 Executive Vice President and Chief Financial Officer, Acting Chief Executive OfficerPaul A. Hooper 47 Chief Marketing OfficerSuresh K. Gopalakrishnan 47 Vice President, EngineeringMichael L. Seaton 46 Vice President, Worldwide Sales and ServicesDiane C. Honda 45 Senior Vice President, General Counsel and SecretaryJustin A. DiMacchia 67 Vice President, Corporate ControllerBob L. Corey. Mr. Corey is Acting Executive Chief Executive Officer, as well as the Senior Vice President and Chief Financial Officer of ExtremeNetworks. Prior to joining Extreme Networks, Mr. Corey served on our 12Table of Contentsboard of directors, from 2003 to 2009, and was the chairman of our audit committee. Prior to Extreme Networks, Mr. Corey served as Executive Vice Presidentand Chief Financial Officer for Thor Technologies, Inc., a provider of enterprise provisioning software, from May 2003 until January 2006. OracleCorporation acquired Thor Technologies in November 2005. Mr. Corey served as Executive Vice President and Chief Financial Officer of Documentum, Inc.,a provider of enterprise content management software, from May 2000 to August 2002. Mr. Corey served as Senior Vice President of Finance andAdministration and Chief Financial Officer for Forte Software, Inc., a provider of software development tools and services, from May 1998 to April 2000. InFebruary 1999, Mr. Corey was elected to its Board of Directors prior to Forte Software’s acquisition by Sun Microsystems in October 1999. Mr. Corey alsoserved as Chairman of the Board of Directors of Interwoven, Inc., a publicly-traded provider of enterprise content management software, until its acquisitionby Autonomy Corporation plc in March 2009 and continues to serve on the Board of Directors of Veraz Networks, a publicly-traded provider of IP softswitches, media gateways and digital compression products. Mr. Corey holds a Bachelors of Administration with a concentration in accounting fromCalifornia State University at Fullerton.Paul A. Hooper. Mr. Hooper serves as Extreme Networks’ Chief Marketing Officer. Hooper, a 15 year veteran of the High Tech industry, overseesExtreme Networks worldwide marketing efforts, where he leads the strategic focus of solutions and technical marketing, global field marketing and corporatecommunications. Prior to that, he served as Vice President and General Manager for the Volume Products Group, responsible for the strategy, productdevelopment and business management for Extreme Networks’ Summit family of fixed configuration switches, the BlackDiamond 8800 family of modularswitches, wireless LAN solution and security solutions. Hooper also serves as Extreme Networks executive sponsor for data center and enterprise LANinitiatives. Prior to that, as Extreme Networks Chief Information Officer, Mr. Hooper oversaw the strategic use of IT systems and adherence to corporatecompliance for data throughout a globally distributed business. Specifically, Mr. Hooper led the planning, procurement and ongoing support of businessapplications, network infrastructure and related services supporting more than 800 employees across 50 countries. Prior to joining Extreme Networks,Mr. Hooper served as vice president of information technology at myCFO, Inc., where he was responsible for the Enterprise Applications and Infrastructure forthe fast-growing Financial Services and Advisory company. Mr. Hooper has also held senior-level IT positions with JDS Uniphase, NetscapeCommunications and Sun Microsystems.Suresh K. Gopalakrishnan. Mr. Gopalakrishnan leads the Company’s engineering team and is responsible for all technology strategy and productdevelopment for Extreme Networks. Mr. Gopalakrishnan leverages a rich background in business strategy, marketing, systems engineering and productdevelopment to this role. Mr. Gopalakrishnan previously held the roles of vice president and general manager of Scalable Products Group where he wasresponsible for Extreme Networks’ carrier business; vice president and general manager of Emerging Product Group where he was responsible for ExtremeNetworks’ wireless and security business; Chief Marketing Officer of Extreme Networks where he was responsible for worldwide marketing, productmanagement and solutions marketing; as well as vice president and general manager of Converged Systems, where he was responsible for IP Telephonyalliances. Prior to joining Extreme Networks, Mr. Gopalakrishnan was the executive vice president of engineering at Riverstone Networks and served as thedirector of corporate strategy at Cabletron Systems. Mr. Gopalakrishnan has also held management positions at Sun Microsystems and engineering positionsat Hewlett Packard. Mr. Gopalakrishnan is a member of the Board of Expert Advisors of the California Emerging Technology Fund (CETF) and has been anadjunct faculty member at University of Idaho and Santa Clara University. He holds a Ph.D. in Electrical Engineering from the University of Idaho.Mike L. Seaton. Mr. Seaton serves as Vice President for Worldwide Sales and Services at Extreme Networks, an organization that includes worldwidesales, channels and global customer support serving enterprise, data center and carrier customers. Mr. Seaton, a 20 year industry veteran, previously held therole of Vice President and General Manager of Worldwide Services for Extreme Networks, where he oversaw the delivery of technical support, education,advanced technical and professional services. Prior to that, Mr. Seaton was the Vice President of Sales Operations and Strategic Alliances, where he wasresponsible for ensuring that 13Table of Contentsthe benefit of combined solutions and a strategic relationship realized by Extreme Networks joint business partners and customers worldwide. Prior to joiningExtreme Networks, Mr. Seaton held various positions at AT&T, Lucent Technologies and Avaya throughout his career. Mr. Seaton’s experience ishighlighted by programming, services, sales, sales management, sales leadership, operations and internal business consulting. Mr. Seaton holds a Bachelor ofGeneral Studies with a concentration in Mathematics and Computer Science from the University of Michigan and an MBA from Florida State University.Diane C. Honda. Ms. Honda serves as our Senior Vice President, General Counsel and Secretary. She has been employed by the Company sinceNovember 2004, and prior to her current positions was Vice President and Associate General Counsel. She previously held legal or business positions withSpeedera Networks, Inc., Riverstone Networks, Inc., Legato Systems, Inc., and Hewlett-Packard Company. She received a bachelor’s in science in AppliedMath Computer Science and Industrial Management from Carnegie Mellon University and a J.D. from Santa Clara University School of Law.Justin A. DiMacchia. Mr. DiMacchia serves as our Vice President, Controller. He has been employed by Extreme Networks since August 2004, andprior to his current positions was Director of Internal Audit. He has held various positions in Extreme Networks’ finance group, including Interim VicePresident Corporate Controller. Before joining Extreme Networks, Mr. DiMacchia held various Financial Management positions with increasingresponsibility while at Palm, Inc. Prior to Palm, Inc., he was the Vice President Chief Financial Officer of The Appletree Companies. Mr. DiMacchiacommenced his career with Arthur Andersen & Co and is a Certified Public Accountant in California.Item 1A. Risk FactorsThe following is a list of risks and uncertainties which may have a material and adverse effect on our business, financial condition or results ofoperations. The risks and uncertainties set out below are not the only risks and uncertainties we face, and some are endemic to the networking industry.We Cannot Assure You That We Will Be Profitable in the Future Because A Number of Factors Could Negatively Affect Our Financial Results.Although we reported profits for fiscal 2010, we have reported losses in some of our prior fiscal years. In addition, in years when we reported profits, wewere not profitable in each quarter during those years. We anticipate continuing to incur significant sales and marketing, product development and generaland administrative expenses. A high percentage of these expenses are fixed in the short term, so any delay in generating or recognizing revenue could resultin a loss for a quarter or full year. Even if we are profitable, our operating results may fall below the expectations of public market analysts or investors, whichcould cause the price of our stock to fall.We may experience challenges or delays in generating or recognizing revenue for a number of reasons and our revenue and operating results havevaried significantly in the past and may vary significantly in the future due to a number of factors, including, but not limited to, the following: • we are dependent upon obtaining orders during a quarter and shipping those orders in the same quarter to achieve our revenue objectives; • acceptance provisions in customer contracts; • our ability to deliver installation or inspection services by the end of the quarter; • changes in general and/or specific economic conditions in the networking industry; • seasonal fluctuations in demand for our products and services, particularly in Asia and Europe; • the level of attrition of our employees, and of our sales force in particular; 14Table of Contents • a disproportionate percentage of our sales occurring in the last month of the quarter; • our ability to ship products by the end of a quarter; • reduced visibility into the implementation cycles for our products and our customers’ spending plans; • our ability to forecast demand for our products, which in the case of lower-than-expected sales, may result in excess or obsolete inventory inaddition to non-cancelable purchase commitments for component parts; • sales to the telecommunications service provider market, which represent a significant source of large product orders, are especially volatile anddifficult to forecast; • product returns or the cancellation or rescheduling of orders; • our ability to develop, introduce, ship and support new products and product enhancements and manage product transitions; • announcements and new product introductions by our competitors; • our ability to develop and support relationships with enterprise customers, service providers and other potential large customers; • our ability to achieve targeted cost reductions; • fluctuations in warranty or other service expenses actually incurred; • our ability to obtain sufficient supplies of sole- or limited-source components for our products on a timely basis; • increases in the prices of the components that we purchase; • decreases in the prices of the products that we sell; • our ability to manage and maintain our relationships with our manufacturing partners including our ability to achieve and maintain desiredproduction volumes and quality levels for our products; • the mix of products sold and the mix of distribution channels through which products are sold; • impairment charges associated with long-lived assets; • restructuring costs associated with adjustments to the size of our operations; • costs relating to possible acquisitions and the integration of technologies or businesses; • the effect of amortization of purchased intangibles resulting from new transactions; • costs relating to the recognition of share-based payments; and • the potential future adoption of certain accounting standards new to our business.Due to the foregoing factors, period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance.Intense Competition in the Market for Networking Equipment Could Prevent Us from Increasing Revenue and Achieving Profitability.The market for network switching solutions is intensely competitive and dominated primarily by Cisco Systems and a few other large companies. Mostof our competitors have longer operating histories, greater name recognition, larger customer bases, broader product lines and substantially greater financial,technical, sales, marketing and other resources. As a result, these competitors are able to devote greater resources to the development, promotion, sale andsupport of their products. In addition, they have larger distribution channels, stronger brand names, access to more customers, a larger installed customer baseand a greater ability to make 15Table of Contentsattractive offers to channel partners and customers than we do. For example, we have encountered, and expect to continue to encounter, many potentialcustomers who are confident in and committed to the product offerings of our principal competitors, including Cisco Systems. Accordingly, these potentialcustomers may not consider or evaluate our products. When such potential customers have considered or evaluated our products, we have in the past lost, andexpect in the future to lose, sales to some of these customers as large competitors have offered significant price discounts to secure these sales.The pricing policies of our competitors impact the overall demand for our products and services. Some of our competitors are capable of operating atsignificant losses for extended periods of time, increasing pricing pressure on our products and services. If we do not maintain competitive pricing, thedemand for our products and services, as well as our market share, may decline. From time to time, we may lower the prices of our products and services inresponse to competitive pressure. When this happens, if we are unable to reduce our component costs or improve operating efficiencies, our revenue andmargins will be adversely affected.Our Success is Dependent on Our Ability to Continually Introduce New Products and Features that Achieve Broad Market Acceptance.The network equipment market is characterized by rapid technological progress, frequent new product introductions, changes in customer requirementsand evolving industry standards. If we do not regularly introduce new products in this dynamic environment, our product lines will become obsolete. Thesenew products must be compatible and interoperate with products and architectures offered by other vendors. We have and may in the future experience delaysin product development and releases, and such delays have and could in the future adversely affect our ability to compete and our operating results.When we announce new products or product enhancements that have the potential to replace or shorten the life cycle of our existing products,customers may defer or cancel orders for our existing products. These actions could have a material adverse effect on our operating results by unexpectedlydecreasing sales, increasing inventory levels of older products and exposing us to greater risk of product obsolescence.Even if we introduce new switching products, alternative technologies could achieve widespread market acceptance and displace the Ethernettechnology on which we have based our product architecture. For example, developments in routers and routing software could significantly reduce demandfor our products. As a result, we may not be able to achieve widespread market acceptance of our current or future new products.The Unfavorable Economic Environment Has and May Continue to Negatively Impact our Business and Operating Results.The challenges and uncertainty currently affecting global economic conditions may negatively impact our business and operating results in thefollowing ways: • customers may delay or cancel plans to purchase our products and services; • customers may not be able to pay, or may delay payment of, the amounts that they owe us which may adversely affect our cash flow, the timingof our revenue recognition and the amount of revenue; • increased pricing pressure may result from our competitors aggressively discounting their products; • accurate budgeting and planning will be difficult due to low visibility into future sales; • forecasting customer demand will be more difficult increasing the risk of either excess and obsolete inventory if our forecast is too high orinsufficient inventory to meet customer demand if our forecast is too low; and • our component suppliers and contract manufacturers have been negatively affected by the economy which may result in product delays andchanges in pricing and service levels.If global economic conditions do not show continued improvement, we believe that we will experience material adverse impacts to our business andoperating results. 16Table of ContentsClaims of Infringement by Others May Increase and the Resolution of Such Claims May Adversely Affect Our Operating Results.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents, copyrights(including rights to “open source” software), and other intellectual property rights. Because of the existence of a large number of patents in the networkingfield, the secrecy of some pending patents and the issuance of new patents at a rapid pace, it is not possible to determine in advance if a product orcomponent might infringe the patent rights of others. Because of the potential for courts awarding substantial damages and the lack of predictability of suchawards, it is not uncommon for companies in our industry to settle even potentially unmeritorious claims for very substantial amounts. Further, the entitieswith whom we have or could have disputes or discussions include entities with extensive patent portfolios and substantial financial assets. These entities areactively engaged in programs to generate substantial revenue from their patent portfolios and are seeking or may seek significant payments or royalties fromus and others in our industry.Litigation resulting from claims that we are infringing the proprietary rights of others has resulted and could in the future result in substantial costs anda diversion of resources, and could have a material adverse effect on our business, financial condition and results of operations. We have received noticesfrom entities alleging that we may be infringing their patents, and we are currently parties to patent litigation as described under Part I, Item 3, LegalProceedings. Without regard to the merits of these or any other claims, an adverse court order or a settlement could require us, among other actions, to: • stop selling our products that incorporate the challenged intellectual property; • obtain a royalty bearing license to sell or use the relevant technology, which license may not be available on reasonable terms or available at all; • pay damages; or • redesign those products that use the disputed technology.In addition, our products include so-called “open source” software. Open source software is typically licensed for use at no initial charge, but imposeson the user of the open source software certain requirements to license to others both the open source software as well as modifications to the open sourcesoftware. Our use of open source software subjects us to certain additional risks for the following reasons: • open source license terms may be ambiguous and may result in unanticipated obligations regarding our products; • open source software cannot be protected under trade secret law; • suppliers of open-source software do not provide the warranty, support and liability protections typically provided by vendors who offerproprietary software; and • it may be difficult for us to accurately determine the developers of the open source code and whether the acquired software infringes third-partyintellectual property rights.We believe that even if we do not infringe the rights of others, we will incur significant expenses in the future due to disputes or licensing negotiations,though the amounts cannot be determined. These expenses may be material or otherwise adversely affect our operating results.Our Operating Results May be Negatively Affected by Defending or Pursuing Claims or Lawsuits.We have and may in the future pursue or be subject to claims or lawsuits in the normal course of our business. In addition to the intellectual propertylawsuits described above, we are currently parties to securities and contract litigation as described in “Item 3. Legal Proceedings.” Regardless of the result,litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal 17Table of Contentsproceedings are difficult to predict. An unfavorable resolution of a lawsuit in which we are a defendant could result in a court order against us or payments toother parties that would have an adverse effect on our business, results of operations, or financial condition. Even if we are successful in prosecuting claimsand lawsuits, we may not recover damages sufficient to cover our expenses incurred to manage, investigate and pursue the litigation. In addition, subject tocertain limitations, we may be obligated to indemnify our current and former directors, officers and employees in certain lawsuits. We do not maintaininsurance coverage which will cover all of our litigation costs and liabilities.If We Fail To Protect Our Intellectual Property, Our Business Could Suffer.We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.However, we cannot ensure that the actions we have taken will adequately protect our intellectual property rights or that other parties will not independentlydevelop similar or competing products that do not infringe on our patents. We generally enter into confidentiality or license agreements with our employees,consultants and corporate partners, and control access to and distribution of our intellectual property and other proprietary information. Despite our efforts toprotect our proprietary rights, unauthorized parties may attempt to copy or otherwise misappropriate or use our products or technology, which wouldadversely affect our business.We Expect the Average Selling Prices of Our Products to Decrease, Which May Reduce Gross Margin and/or Revenue.The network equipment industry has traditionally experienced an erosion of average selling prices due to a number of factors, including competitivepricing pressures, promotional pricing and technological progress. We anticipate that the average selling prices of our products will decrease in the future inresponse to competitive pricing pressures, excess inventories, increased sales discounts and new product introductions by us or our competitors. We mayexperience substantial decreases in future operating results due to the erosion of our average selling prices. To maintain our gross margin, we must developand introduce on a timely basis new products and product enhancements and continually reduce our product costs. Our failure to do so would likely causeour revenue and gross margins to decline.When Our Products Contain Undetected Errors, We May Incur Significant Unexpected Expenses and Could Lose Sales.Network products frequently contain undetected errors when new products or new versions or updates of existing products are released to themarketplace. In the past, we have experienced such errors in connection with new products and product updates. We have experienced component problemsin prior years that caused us to incur higher than expected warranty, service costs and expenses, and other related operating expenses. In the future, we expectthat, from time to time, such errors or component failures will be found in new or existing products after the commencement of commercial shipments. Theseproblems may have a material adverse effect on our business by causing us to incur significant warranty, repair and replacement costs, diverting the attentionof our engineering personnel from new product development efforts, delaying the recognition of revenue and causing significant customer relationsproblems. Further, if products are not accepted by customers due to such defects, and such returns exceed the amount we accrued for defective returns basedon our historical experience, our operating results would be adversely affected.Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult toidentify the sources of these problems. The occurrence of system errors, whether or not caused by our products, could result in the delay or loss of marketacceptance of our products and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems would likely have amaterial adverse effect on our business, operating results and financial condition. 18Table of ContentsWe Purchase Several Key Components for Products From Single or Limited Sources and Could Lose Sales if These Suppliers Fail to Meet Our Needs.We currently purchase several key components used in the manufacture of our products from single or limited sources and are dependent upon supplyfrom these sources to meet our needs. Certain components such as tantalum capacitors, SRAM, DRAM, and printed circuit boards, have been in the past, andmay in the future be, in short supply. We have encountered, and are likely in the future to encounter, shortages and delays in obtaining these or othercomponents, and this could have a material adverse effect on our ability to meet customer orders. Our principal sole-source components include: • ASICs; • Merchant silicon; • microprocessors; • programmable integrated circuits; • selected other integrated circuits; • custom power supplies; and • custom-tooled sheet metal.Our principal limited-source components include: • flash memory; • DRAMs and SRAMs; • printed circuit boards; and • CAMs.We use our forecast of expected demand to determine our material requirements. Lead times for materials and components we order vary significantly,and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If forecasts exceed orders, we may haveexcess and/or obsolete inventory, which could have a material adverse effect on our operating results and financial condition. If orders exceed forecasts, wemay have inadequate supplies of certain materials and components, which could have a material adverse effect on our ability to meet customer deliveryrequirements and to recognize revenue.Generally, we do not have agreements fixing long-term prices or minimum volume requirements from suppliers. From time to time we have experiencedshortages and allocations of certain components, resulting in delays in filling orders. Qualifying new suppliers to compensate for such shortages may be time-consuming and costly, and may increase the likelihood of errors in design or production. In addition, during the development of our products, we haveexperienced delays in the prototyping of our chipsets, which in turn has led to delays in product introductions. Similar delays may occur in the future.Furthermore, the performance of the components as incorporated in our products may not meet the quality requirements of our customers.Our Dependence on Three Manufacturers for All of Our Manufacturing Requirements Could Harm Our Operating Results.We primarily rely on three manufacturing partners to manufacture our products. In addition, each of our products is manufactured by only one of thesecompanies. We have experienced delays in product shipments from our manufacturing partners in the past, which in turn delayed product shipments to ourcustomers. These or similar problems may arise in the future, such as delivery of products of inferior quality, delivery of insufficient quantity of products, orthe interruption or discontinuance of operations of a manufacturer, any of which could have a material adverse effect on our business and operating results.While we maintain strong relationships with 19Table of Contentsour manufacturing partners, our agreements with these manufacturers are generally of limited duration and pricing, quality and volume commitments arenegotiated on a recurring basis. The failure to maintain continuing agreements with our manufacturing partners could adversely affect our business. Weintend to introduce new products and product enhancements, which will require that we rapidly achieve volume production by coordinating our efforts withthose of our suppliers and contract manufacturers.As part of our cost-reduction efforts, we will need to realize lower per unit product costs from our manufacturing partners by means of volumeefficiencies and the utilization of manufacturing sites in lower-cost geographies. However, we cannot be certain when or if such price reductions will occur.The failure to obtain such price reductions would adversely affect our gross margins and operating results.Our Dependence on an OEM for All of Our Wireless Products Could Harm Our Operating Results.We rely on Motorola to provide our wireless products. If we experience delays in product shipments from our OEM or if they experience delays fromtheir suppliers, which in turn delays product shipments to our customers, our financial results could be negatively impacted. Problems such as delivery ofproducts of inferior quality, delivery of insufficient quantity of products, or the interruption or discontinuance of operations of our OEM, may arise in thefuture, any of which could have a material adverse effect on our business and operating results.We Depend Upon International Sales for a Significant Portion of Our Revenue Which Imposes a Number of Risks on Our Business.International sales constitute a significant portion of our net revenue. Our ability to grow will depend in part on the expansion of international sales.Our international sales primarily depend on the success of our resellers and distributors. The failure of these resellers and distributors to sell our productsinternationally would limit our ability to sustain and grow our revenue. There are a number of risks arising from our international business, including: • longer accounts receivable collection cycles; • difficulties in managing operations across disparate geographic areas; • difficulties associated with enforcing agreements through foreign legal systems; • the payment of operating expenses in local currencies, which exposes us to risks of currency fluctuations; • higher credit risks requiring cash in advance or letters of credit; • difficulties in safeguarding intellectual property; • political and economic turbulence; • terrorism, war or other armed conflict; • natural disasters and epidemics; • potential adverse tax consequences; • compliance with regulatory requirements of foreign countries, including compliance with rapidly evolving environmental regulations; and • compliance with U.S. laws and regulations pertaining to the sale and distribution of products to customers in foreign countries, including exportcontrols and the Foreign Corrupt Practices Act.Substantially all of our international sales are U.S. dollar-denominated. Future increases in the value of the U.S. dollar relative to foreign currenciescould make our products less competitive in international markets. In 20Table of Contentsthe future, we may elect to invoice some of our international customers in local currency, which would expose us to fluctuations in exchange rates betweenthe U.S. dollar and the particular local currency. If we do so, we may decide to engage in hedging transactions to minimize the risk of such fluctuations.We have entered into foreign exchange forward contracts to offset the impact of payment of operating expenses in local currencies to some of ouroperating foreign subsidiaries. However, if we are not successful in managing these foreign currency transactions, we could incur losses from these activities.We Must Continue to Develop and Increase the Productivity of Our Indirect Distribution Channels to Increase Net Revenue and Improve OurOperating Results.Our distribution strategy focuses primarily on developing and increasing the productivity of our indirect distribution channels. If we fail to developand cultivate relationships with significant channel partners, or if these channel partners are not successful in their sales efforts, sales of our products maydecrease and our operating results could suffer. Many of our channel partners also sell products from other vendors that compete with our products. Ourchannel partners may not continue to market or sell our products effectively or to devote the resources necessary to provide us with effective sales, marketingand technical support. We may not be able to successfully manage our sales channels or enter into additional reseller and/or distribution agreements. Ourfailure to do any of these could limit our ability to grow or sustain revenue.Our operating results for any given period have and will continue to depend to a significant extent on large orders from a relatively small number ofchannel partners and other customers. However, we do not have binding purchase commitments from any of them. A substantial reduction or delay in sales ofour products to a significant reseller, distributor or other customer could harm our business, operating results and financial condition because our expenselevels are based on our expectations as to future revenue and to a large extent are fixed in the short term. Under specified conditions, some third-partydistributors are allowed to return products to us and unexpected returns could adversely affect our results.The Sales Cycle for Our Products is Long and We May Incur Substantial Non-Recoverable Expenses or Devote Significant Resources to Sales that DoNot Occur When Anticipated.Our products represent a significant strategic decision by a customer regarding its communications infrastructure. The decision by customers topurchase our products is often based on the results of a variety of internal procedures associated with the evaluation, testing, implementation and acceptanceof new technologies. Accordingly, the product evaluation process frequently results in a lengthy sales cycle, typically ranging from three months to longerthan a year, and as a result, our ability to sell products is subject to a number of significant risks, including risks that: • budgetary constraints and internal acceptance reviews by customers will result in the loss of potential sales; • there may be substantial variation in the length of the sales cycle from customer to customer, making decisions on the expenditure of resourcesdifficult to assess; • we may incur substantial sales and marketing expenses and expend significant management time in an attempt to initiate or increase the sale ofproducts to customers, but not succeed; • if a sales forecast from a specific customer for a particular quarter is not achieved in that quarter, we may be unable to compensate for theshortfall, which could harm our operating results; and • downward pricing pressures could occur during the lengthy sales cycle for our products. 21Table of ContentsIf We Lose Key Personnel or are Unable to Hire Additional Qualified Personnel as Necessary, We May Not Be Able to Successfully Manage OurBusiness or Achieve Our Goals.Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, service andoperations personnel, many of whom would be difficult to replace. We do not have employment contracts with these individuals who mandate that theyrender services for any specific term, nor do we carry life insurance on any of our key personnel. We have experienced and may in the future experiencesignificant turn over in our executive personnel. In addition, retention has generally become more difficult for us, in part because the exercise price of most ofthe stock options granted to many of our employees is below the market price. As a result, we experienced high levels of attrition. We believe our futuresuccess will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, service, finance andoperations personnel. The market for these personnel is competitive, especially in the San Francisco Bay Area, and we have had difficulty in hiringemployees, particularly engineers, in the timeframe we desire.Companies in the networking industry whose employees accept positions with competitors frequently claim that competitors have engaged in unfairhiring practices. We have from time to time been involved in claims like this with other companies and, although to date they have not resulted in materiallitigation, we do not know whether we will be involved in additional claims in the future. We could incur substantial costs in litigating any such claims,regardless of the merits.Failure of Our Products to Comply With Evolving Industry Standards and Complex Government Regulations May Adversely Impact Our Business.If we do not comply with existing or evolving industry standards and government regulations, we may not be able to sell our products where thesestandards or regulations apply. The network equipment industry in which we compete is characterized by rapid changes in technology and customersrequirements and evolving industry standards. As a result, our success depends on: • the timely adoption and market acceptance of industry standards, and timely resolution of conflicting U.S. and international industry standards;and • our ability to influence the development of emerging industry standards and to introduce new and enhanced products that are compatible withsuch standards.In the past, we have introduced new products that were not compatible with certain technological standards, and in the future, we may not be able toeffectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards.Our products must also comply with various U.S. federal government regulations and standards defined by agencies such as the FederalCommunications Commission, standards established by governmental authorities in various foreign countries and recommendations of the InternationalTelecommunication Union. In some circumstances, we must obtain regulatory approvals or certificates of compliance before we can offer or distribute ourproducts in certain jurisdictions or to certain customers. Complying with new regulations or obtaining certifications can be costly and disruptive to ourbusiness. For example, we expended significant resources and expenses in order to comply with the European Union’s Directive 2002/96/EC Waste Electricaland Electronic Equipment and Directive 2002/95/EC on Restriction on the Certain Hazardous Substances in Electrical and Electronic Equipment.If we do not comply with existing or evolving industry standards or government regulations, we will not be able to sell our products where thesestandards or regulations apply, which may prevent us from sustaining our net revenue or achieving profitability. 22Table of ContentsChanges in Effective Tax Rates Including From the Release of the Valuation Allowance Recorded Against Our Net U.S. Deferred Tax Assets, or AdverseOutcomes Resulting From Examination of Our Income or Other Tax Returns or Change in Ownership, Could Adversely Affect Our Results.Our future effective tax rates may be volatile or adversely affected by changes in our business or U.S. or foreign tax laws, including: the partial or fullrelease of the valuation allowance recorded against our net U.S. deferred tax assets; expiration of or lapses in the research and development tax credit laws;transfer pricing adjustments; tax effects of stock-based compensation; or costs related to restructurings. In addition, we are subject to the examination of ourincome tax returns by the Internal Revenue Service and other tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting fromthese examinations to determine the adequacy of our provision for income taxes, there is no assurance that such determinations by us are in fact adequate.Changes in our effective tax rates or amounts assessed upon examination of our tax returns may have a material, adverse impact on our cash flows and ourfinancial condition.Our future effective tax rate in particular could be adversely affected by a change in ownership pursuant to U.S. Internal Revenue Code Section 382. Ifa change in ownership occurs, it may limit our ability to utilize our net operating losses to offset our U.S. taxable income. If U.S. taxable income is greaterthan the change in ownership limitation, we will pay a higher rate of tax with respect to the amount of taxable income that exceeds the limitation. This wouldhave a material adverse impact on our results of operations. On June 30, 2010, we amended our Rights Agreement to mitigate against the possibility of aSection 382 change in ownership with the objective of preserving our tax attributes.If We Do Not Adequately Manage and Evolve Our Financial Reporting and Managerial Systems and Processes, Our Ability to Manage and Grow OurBusiness May Be Harmed.Our ability to successfully implement our business plan and comply with regulations requires an effective planning and management process. We needto continue improving our existing, and implement new, operational and financial systems, procedures and controls. Any delay in the implementation of, ordisruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to record and report financial and managementinformation on a timely and accurate basis, or to forecast future results.Failure to Maintain Effective Internal Control Over Financial Reporting May Cause Us to Delay Filing Our Periodic Reports with the SEC, Affect OurNasdaq Listing, and Adversely Affect Our Stock Price.The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies toinclude a report of management on internal control over financial reporting in their annual reports on Form 10-K. In addition, our independent registeredpublic accounting firm must attest to and report on our internal control over financial reporting. Although we review our internal control over financialreporting in order to ensure compliance with the Section 404 requirements, if our independent registered public accounting firm is not satisfied with ourinternal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent registeredpublic accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may decline to attest tomanagement’s assessment or may issue an adverse opinion on the effectiveness of internal control over financial reporting because of the existence of one ormore material weaknesses. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of ourfinancial statements, which ultimately could negatively impact our stock price.Compliance with Laws, Rules and Regulations Relating to Corporate Governance and Public Disclosure May Result in Additional Expenses.Federal securities laws, rules and regulations, as well as Nasdaq rules and regulations, require companies to maintain extensive corporate governancemeasures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and othercommittee members 23Table of Contentsand impose civil and criminal penalties for companies and their Chief Executive Officers, Chief Financial Officers and directors for securities law violations.These laws, rules and regulations and the interpretation of these requirements are evolving, and we are making investments to evaluate current practices andto continue to achieve compliance. As a result, our compliance programs have increased and will continue to increase general and administrative expensesand have diverted and will continue to divert management time and attention from revenue-generating activities.Our Headquarters and Some Significant Supporting Businesses Are Located in Northern California and Other Areas Subject to Natural Disasters ThatCould Disrupt Our Operations and Harm Our Business.Our corporate headquarters are located in Silicon Valley in Northern California. Historically, this region has been vulnerable to natural disasters andother risks, such as earthquakes, fires and floods, which at times have disrupted the local economy and posed physical risks to our property. We have contractmanufacturers located in Mexico and Taiwan where similar natural disasters and other risks may disrupt the local economy and pose physical risks to ourproperty and the property of our contract manufacturer.In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, maycause further disruptions to the economies of the U.S. and other countries. If such disruptions result in delays or cancellations of customer orders for ourproducts, our business and operating results will suffer.We currently do not have redundant, multiple site capacity in the event of a natural disaster, terrorist act or other catastrophic event. In the event ofsuch an occurrence, our business would suffer.Failure to Successfully Expand Our Sales and Support Teams or Educate Them In Regard to Technologies and Our Product Families May Harm OurOperating Results.The sale of our products and services requires a concerted effort that is frequently targeted at several levels within a prospective customer’sorganization. We may not be able to increase net revenue unless we expand our sales and support teams in order to address all of the customer requirementsnecessary to sell our products.We cannot assure you that we will be able to successfully integrate employees into our company or to educate current and future employees in regardto rapidly evolving technologies and our product families. A failure to do so may hurt our revenue growth and operating results.We May Engage in Future Acquisitions that Dilute the Ownership Interests of Our Stockholders, Cause Us to Incur Debt and Assume ContingentLiabilities.As part of our business strategy, we review acquisition and strategic investment prospects that we believe would complement our current productofferings, augment our market coverage or enhance our technical capabilities, or otherwise offer growth opportunities. In the event of any future acquisitions,we could: • issue equity securities which would dilute current stockholders’ percentage ownership; • incur substantial debt; • assume contingent liabilities; or • expend significant cash.These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if we do obtain benefitsin the form of increased sales and earnings, these benefits may be recognized much later than the time when the expenses associated with an acquisition areincurred. This is particularly relevant in cases where it is necessary to integrate new types of technology into our existing portfolio 24Table of Contentsand new types of products may be targeted for potential customers with which we do not have pre-existing relationships. Acquisitions and investmentactivities also entail numerous risks, including: • difficulties in the assimilation of acquired operations, technologies and/or products; • unanticipated costs associated with the acquisition or investment transaction; • the diversion of management’s attention from other business concerns; • adverse effects on existing business relationships with suppliers and customers; • risks associated with entering markets in which we have no or limited prior experience; • the potential loss of key employees of acquired organizations; and • substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.We may not be able to successfully integrate any businesses, products, technologies, or personnel that we might acquire in the future, and our failure todo so could have a material adverse effect on our business, operating results and financial condition.We May Need Additional Capital to Fund Our Future Operations and, If It Is Not Available When Needed, Our Business Will Be Adversely Impacted.We believe that our existing working capital and cash available from credit facilities and future operations will enable us to meet our working capitalrequirements for at least the next twelve months. However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currentlyunanticipated uses, we may need additional capital. The development and marketing of new products and the expansion of reseller and distribution channelsand associated support personnel requires a significant commitment of resources. In addition, if the markets for our products develop more slowly thananticipated, or if we fail to establish significant market share and achieve sufficient net revenue, we may continue to consume significant amounts of capital.As a result, we could be required to raise additional capital. To the extent that we raise additional capital through the sale of equity or convertible debtsecurities, the issuance of such securities could result in dilution of the shares held by existing stockholders. If additional funds are raised through theissuance of debt securities, such securities may provide the holders certain rights, preferences, and privileges senior to those of common stockholders, and theterms of such debt could impose restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptableterms, or at all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned productdevelopment and marketing efforts, which could harm our business, financial condition and operating results.We Have Entered into Long-Term Lease Agreements for Several Facilities that are Currently Vacant and May be Difficult to Sublease due to CurrentReal Estate Market Conditions.We have certain long-term real estate lease commitments carrying future obligations for non-cancelable lease payments. Reductions in our workforceand the restructuring of operations since fiscal 2002 have resulted in the need to consolidate certain of these leased facilities, located primarily in NorthernCalifornia, for which we recorded a reversal of excess facilities charges, net of approximately $0.3 million in fiscal 2010, $0.5 million expense reversal, net infiscal 2009, $0.9 million expense in fiscal 2008, $4.0 million expense in fiscal 2007, and $3.3 million expense in fiscal 2006. We may incur additionalcharges for excess facilities as a result of additional reductions in our workforce or future restructuring of operations. We will continue to be responsible forall carrying costs of these facilities until such time as we can sublease these facilities or terminate the applicable leases based on the contractual terms of thelease agreements, and these costs may have an adverse effect on our business, operating results and financial condition. 25Table of ContentsOur Stock Price Has Been Volatile In the Past and Our Stock Price May Significantly Fluctuate in the Future.In the past, our common stock price has fluctuated significantly. This could continue as we or our competitors announce new products, our results orthose of our customers or competition fluctuate, conditions in the networking or semiconductor industry change, or when investors, change their sentimenttoward stocks in the networking technology sector.In addition, fluctuations in our stock price and our price-to-earnings multiple may make our stock attractive to momentum, hedge or day-tradinginvestors who often shift funds into and out of stock rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterlybasis.Provisions in Our Charter Documents and Delaware Law and Our Adoption of a Stockholder Rights Plan May Delay or Prevent an Acquisition ofExtreme, Which Could Decrease the Value of Our Common Stock.Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us withoutthe consent of our Board of Directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, whichcould be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions of our certificate of incorporation andbylaws and Delaware law and our stockholder rights plan, which is described below, will provide for an opportunity to receive a higher bid by requiringpotential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some of ourstockholders.Our Board of Directors adopted a stockholder rights plan, under which we declared and paid a dividend of one right for each share of common stockheld by stockholders of record as of May 14, 2001. Under the plan, each right will entitle stockholders to purchase a fractional share of our preferred stock for$150.00. Each such fractional share of the new preferred stock has terms designed to make it substantially the economic equivalent of one share of commonstock. Initially the rights will not be exercisable and will trade with our common stock. Generally, the rights may become exercisable if a person or groupacquires beneficial ownership of 4.95% or more of our common stock or commences a tender or exchange offer upon consummation of which such person orgroup would beneficially own 4.95% or more of our common stock. When the rights become exercisable, our Board of Directors has the right to authorize theissuance of one share of our common stock in exchange for each right that is then exercisable.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur principal administrative, sales, marketing and research and development facilities are located in Santa Clara, California. We also lease office spaceand executive suites in various other geographic locations domestically and internationally for sales and service personnel and engineering operations. Ouraggregate lease expense for fiscal 2010 was approximately $4.2 million. We believe our current facilities will adequately meet our growth needs for theforeseeable future. In addition, we are actively engaged in efforts to sell excess property we acquired in prior years.Item 3. Legal ProceedingsWe may from time to time be party to litigation arising in the course of our business, including, without limitation, allegations relating to commercialtransactions, business relationships or intellectual property rights. 26Table of ContentsSuch claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Litigation in general, and intellectualproperty and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings aredifficult to predict.Shareholder Litigation Relating to Historical Stock Option PracticesOn April 25, 2007, an individual identifying herself as one of our shareholders filed a derivative action in the United States District Court for theNorthern District of California purporting to assert claims on behalf of and in our name against various of our current and former directors and officers relatingto historical stock option granting from 1999 to 2002 and related accounting practices. Two similar derivative actions were filed thereafter in the same courtby other individuals and the three cases were consolidated by order of the Court. After two amended complaints were filed by the lead plaintiff, we filed amotion to dismiss the second amended complaint, which was granted without prejudice on August 12, 2008.On August 22, 2008, Kathleen Wheatley, an individual identifying herself as one of our shareholders, filed a motion for the Court to reconsider itsruling on August 12, 2008 granting our motion to dismiss. In response, we asked the Court to reject Ms. Wheatley’s motion on various grounds, includingthat Ms. Wheatley is not a party to this derivative action. The Court has not yet ruled on Ms. Wheatley’s motion. On September 4, 2008, Ms. Wheatley filedboth a motion to intervene in the derivative action and a third amended complaint, which differs little from the first amended complaint. The third amendedcomplaint continues to allege that various of our current and former directors and officers breached their fiduciary duties and other obligations to us andviolated state and federal securities laws in connection with the our historical grants of stock options. We are named as a nominal defendant in the action, butwe have customary indemnification agreements with the named defendants. On our behalf, Ms. Wheatley seeks unspecified monetary and other relief againstthe named defendants. The Court has granted Ms. Wheatley’s motion to intervene. On October 16, 2008, we, as nominal defendant, moved to dismiss thethird amended complaint. On November 17, 2009, the Court denied our motion to dismiss the third amended complaint, and on December 3, 3009, we filed amotion for reconsideration or in the alternative, a motion to certify the Order denying the Motion to Dismiss for immediate appeal. On December 30, 2009,the Court issued an Order granting us leave to file the motion for reconsideration and will rule on our alternative motion to certify the Order for appeal if itdenies the motion for reconsideration. On April 2, 2010, the Court denied our Motion for Reconsideration and for Stay of Action and Certification andAppeal. No dates have been set for our response to the Third Amended Complaint. We intend to continue to defend the derivative action vigorously, but dueto the uncertainty of litigation, we cannot predict the ultimate outcome of this matter at this time.Intellectual Property LitigationOn April 20, 2007, we filed suit against Enterasys Networks in the United States District Court for the Western District of Wisconsin, Civil ActionNo. 07-C-0229-C. The complaint alleged willful infringement of U.S. Patents Nos. 6,104,700, 6,678,248, and 6,859,438, and sought injunctive relief againstEnterasys’ continuing sale of infringing goods and monetary damages. Enterasys responded to the complaint on May 30, 2007, and also filed counterclaimsalleging infringement of three U.S. patents owned by Enterasys. On April 9, 2008, the Court dismissed Enterasys’ counterclaims on one of its patents withprejudice. On May 5, 2008, the Court granted our motion for summary judgment, finding that we do not infringe Enterasys’ two remaining patents anddismissing all of Enterasys’ remaining counterclaims with prejudice. On May 30, 2008, a jury found that Enterasys infringed all three of our patents andawarded us damages in the amount of $0.2 million. The Court also ruled in our favor on Enterasys’ challenge to the validity of our patents. On October 29,2008, the Court denied Enterasys’ post-trial motion for judgment as a matter of law, and granted Extreme Network’s motion for a permanent injunctionagainst Enterasys. The injunction order permanently enjoins Enterasys from manufacturing, using, offering to sell, selling in the U.S. and importing into theU.S. the Enterasys products accused of infringing Extreme Network’s three patents. The injunction will run until the expiration of our patents the last ofwhich is not set to expire until March of 2020. On March 16, 2009, the Court also denied Enterasys’ motion for a new trial, but granted Enterasys’ motion fora stay of the injunction pending appeal. On April 17, 2009, Enterasys filed its 27Table of Contentsnotice of appeal and on May 1, 2009, we filed our cross appeal. The appeal is pending at the U.S. Court of Appeals for the Federal Circuit and we aredefending the appeal. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of the matter at this time.On June 21, 2005, Enterasys filed suit against Extreme and Foundry Networks, Inc. (“Foundry”) in the United States District Court for the District ofMassachusetts, Civil Action No. 05-11298 DPW. The complaint alleges willful infringement of U.S. Patent Nos. 5,251,205; 5,390,173; 6,128,665; 6,147,995;6,539,022; and 6,560,236, and seeks: a) a judgment that we willfully infringe each of the patents; (b) a permanent injunction from infringement, inducementof infringement and contributory infringement of each of the six patents; (c) damages and a “reasonable royalty” to be determined at trial; (d) treble damages;(e) attorneys’ fees, costs and interest; and (f) equitable relief at the Court’s discretion. Foundry brought a claim for reexamination of five of the patents at issueto the U.S. Patent and Trademark Office (“PTO”). The stay of Massachusetts action was lifted on May 21, 2010, and set a claims construction hearing forSeptember 15, 2010. No trial date has been set. We intend to defend the lawsuit vigorously, but, due to the inherent uncertainties of litigation, we cannotpredict the ultimate outcome of the matter at this time.On February 7, 2008, Network-1 Security Solutions, Inc. sued us along with Cisco, Cisco-Linksys, Inc., Adtran, Inc., Enterasys Networks, Inc., Netgear,Inc. and 3Com Corporation in the United States District Court for the Eastern District of Texas (Case No. 6:08cv030). On July 16, 2010, we entered into aMemorandum of Understanding with Nework-1 setting forth the terms for settlement of the lawsuit and license agreement, in which Extreme was grantedlicenses to certain patents in exchange for a payment of $2.4 million. On August 3, 2010, the Court dismissed the case with prejudice.On February 26, 2008, Fenner Investments, Ltd. filed suit against us along with D-Link Systems, Zyxel Communications, SMC Networks, Enterasys,Foundry, Netgear, Inc. and 3Com Corporation in the United States District Court for the Eastern District of Texas, Civil Action No. 08-CV-00061. The suitalleges infringement of US Patent No. 7,145,906 and 5,842,224, and seeks damages for the alleged infringement, injunctions against infringement andpayment of attorneys’ fees, costs and interest. On September 24, 2009, we entered into a settlement and license agreement with Fenner Investments, in whichExtreme was granted licenses to certain patents in exchange for amounts paid. On October 5, 2009, the Court dismissed the case with prejudice.Other Legal MattersBeginning on July 6, 2001, purported securities fraud class action complaints were filed in the United States District Court for the Southern District ofNew York. The cases were consolidated and the litigation is now captioned as In re Extreme Networks, Inc. Initial Public Offering Securities Litigation, Civ.No. 01-6143 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The operative amended complaintnames us as defendants; six of our present and former officers and/or directors, including our former CEO and current Chairman of the Board (the “ExtremeNetworks Defendants”); and several investment banking firms that served as underwriters of our initial public offering and October 1999 secondary offering.The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchaseshares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchaseadditional shares in the aftermarket at predetermined prices. Similar allegations were made in other lawsuits challenging over 300 other initial publicofferings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes.The parties to the lawsuits have reached a settlement, which was approved by the Court on October 6, 2009. Extreme Networks Defendants is notrequired to make any cash payments in the settlement. The Court subsequently entered a final judgment of dismissal. Certain objectors have appealed thejudgment. If the appeal is successful, we intend to defend the lawsuit vigorously, but, due to the inherent uncertainties of litigation, we cannot predict theultimate outcome of the matter at this time. 28Table of ContentsIndemnification ObligationsSubject to certain limitations, we may be obligated to indemnify our current and former directors, officers and employees. These obligations arise underthe terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify, whereapplicable, generally means that we are required to pay or reimburse, and in certain circumstances we have paid or reimbursed, the individuals’ reasonablelegal expenses and possibly damages and other liabilities incurred in connection with these matters. It is not possible to estimate the maximum potentialamount under these indemnification agreements due to the limited history of these claims. The cost to defend us and the named individuals could have amaterial adverse effect on our consolidated financial position, results of operations and cash flows in the future. Recovery of such costs under our directorsand officers insurance coverage is uncertain.Item 4. Removed and Reserved 29Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesCommon Stock Market Prices and DividendsOur common stock commenced trading on The Nasdaq Global Market on April 9, 1999 under the symbol “EXTR.” The following table sets forth thehigh and low sales prices as reported by Nasdaq. Such prices represent prices between dealers, do not include retail mark-ups, mark-downs or commissionsand may not represent actual transactions. Stock Prices High LowFiscal year ended June 27, 2010: First quarter $3.06 $1.92Second quarter $2.98 $1.99Third quarter $3.39 $2.47Fourth quarter $3.68 $2.57Fiscal year ended June 28, 2009: First quarter $3.50 $2.70Second quarter $3.37 $1.51Third quarter $2.36 $1.06Fourth quarter $2.03 $1.52As of August 13, 2010, there were 302 stockholders of record of our common stock and 17,754 beneficial shareholders. We have never declared or paidcash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earningsfor the development of our business.Certain information regarding our equity compensation plan(s) as required by Part II is incorporated by reference from our definitive Proxy Statementto be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2010 Annual Meeting of Stockholders (the“Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this report. 30Table of ContentsSTOCK PRICE PERFORMANCE GRAPHSet forth below is a stock price performance graph comparing the annual percentage change in the cumulative total return on our common stock withthe cumulative total returns of the CRSP Total Return Index for The Nasdaq Stock Market (U.S. companies) and the Nasdaq Computer ManufacturersSecurities for the period commencing July 3, 2005 and ending on June 27, 2010. The comparisons in the graph below are based on historical data and are notintended to forecast the possible future performance of our common stock.Comparison of Five-Year Cumulative Total ReturnsPerformance Graph for Extreme Networks, Inc.Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices, Booth School of Business, The University of Chicago. Used with permission. All rights reserved. 31Table of ContentsItem 6. Selected Financial DataThe following table sets forth selected consolidated financial data for each of the fiscal years ended June 27, 2010, June 28, 2009, June 29,2008, July 1, 2007 and July 2, 2006 derived from audited financial statements. These tables should be reviewed in conjunction with the ConsolidatedFinancial Statements in Item 8 and related Notes, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” Historical results may not be indicative of future results. Year Ended June 27,2010(1) June 28,2009(2) June 29,2008(3) July 1,2007(4) July 2,2006(5) (In thousands, except per share amounts) Consolidated Statements of Operations Data: Net revenues $309,354 $335,559 $361,835 $342,834 $358,601 Net income (loss) $227 $2,815 $8,381 $(14,197) $8,509 Net income (loss) per share – basic $0.00 $0.03 $0.07 $(0.12) $0.07 Net income (loss) per share – diluted $0.00 $0.03 $0.07 $(0.12) $0.07 Shares used in per share calculation – basic 89,281 94,225 115,002 114,122 121,286 Shares used in per share calculation – diluted 89,477 94,284 115,784 114,122 123,049 As of June 27,2010 June 28,2009 June 29,2008 July 1,2007 July 2,2006 (In thousands) Consolidated Balance Sheets Data: Cash and cash equivalents, short-term investments and marketablesecurities $132,419 $127,402 $225,672 $215,855 $433,105 Deferred tax asset $392 $244 $254 $1,118 $500 Total assets $259,945 $239,975 $358,672 $346,727 $564,310 Convertible subordinated notes $— $— $— $— $200,000 Other long-term liabilities $11,298 $12,100 $17,244 $21,391 $23,056 Common stock and capital in excess of par value $956,922 $949,241 $943,283 $934,540 $927,835 Accumulated deficit $(659,161) $(659,388) $(662,203) $(670,584) $(656,387) (1)Fiscal 2010 net income includes share-based compensation expense of $6.2 million, restructuring charge of $4.2 million and litigation settlement of$1.0 million.(2)Fiscal 2009 net income includes share-based compensation expense of $3.9 million and restructuring charge of $2.2 million.(3)Fiscal 2008 net income includes share-based compensation expense of $5.1 million and restructuring charge of $0.9 million.(4)Fiscal 2007 net loss includes share-based compensation expense of $6.2 million and restructuring charge of $4.0 million.(5)Fiscal 2006 net income includes share-based compensation expense of $7.0 million and restructuring charge of $3.3 million. 32Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsBusiness OverviewWe develop and sell network infrastructure equipment and offer related services contracts for extended warranty and maintenance to our enterprise,data center and metropolitan telecommunications service provider customers. Substantially all of our revenue is derived from the sale of our networkingequipment and related service contracts. In fiscal 2010, our revenue decreased $26.2 million, gross profit decreased $14.2 million, operating profit decreased$3.5 million and net income decreased $2.6 million as compared to fiscal 2009.We believe that understanding the following key developments is helpful to an understanding of our operating results for fiscal 2010.Supply Chain ConstraintsWe use our forecast of expected demand to determine our material requirements. Lead times for materials and components we order vary significantly,and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. In the fourth quarter of fiscal 2009, customerorders exceeded our forecast, especially with respect to certain products. In addition, our contract manufacturers and their component suppliers hadsignificantly reduced their capacity due to the world-wide economic slowdown, and therefore lead times significantly increased during the first fiscal quarteracross our supply chain as our contract manufacturers and their component suppliers struggled to meet increasing demands. As a result, we were unable todeliver products based on customer requests. This adversely affected our revenue and sales for the first quarter of fiscal 2010 since we were unable to deliverproducts in that quarter in a timely manner and certain customers cancelled orders or chose other vendors based on product availability. We have madesubstantial progress with our suppliers to improve timely delivery of our products to meet customers’ demands in the second quarter through the fourthquarter of fiscal 2010. We continue to work to manage our forecast and supply chain in light of our customers’ demands as accurately as possible.Impact of the Global Economic DevelopmentsIn addition to issues with our supply chain, we believe that the credit market crisis, global recession and other challenges affecting global economicconditions were the significant drivers of our financial performance during fiscal 2010. Sales in the United States and some European countries were mostimpacted as a result of the weak global economy and the global credit crisis in the financial market, while sales in Asia were only minimally impacted byglobal economic developments and grew during the period. We believe that limited access to credit, conservative purchasing patterns and delays orcancellation of IT infrastructure plans in the face of continued uncertainty regarding the global economy, may continue to negatively impact overall demandfor networking solutions, including Ethernet equipment.We have taken and plan to continue to take other steps to manage our business in the current economic environment. For example, we have managedfrom time to time our contingent work force, scheduled shutdown weeks, reduced travel and other discretionary spending, and controlled all hiring activities.Increasing Demand for BandwidthWe believe that the continued increase in demand for bandwidth will over time drive future demand for high performance Ethernet solutions. Wide-spread adoption of electronic communications in all aspects of our lives, proliferation of next generation converged mobile devices and deployment of triple-play services to residences and businesses alike, continues to generate demand for greater network performance across broader geographic locations. Inparallel to these transformational forces within society and the community at large, the accelerating adoption of internet and intranet “cloud” solutionswithin business enterprises is enabling organizations to offer greater business scalability to improve efficiency and through more effective operations,improve profitability. In 33Table of Contentsorder to realize the benefits of these developments, customers require additional bandwidth and high performance from their network infrastructure ataffordable prices. As the economy continues its paced recovery, we are already seeing the initial indications that the Ethernet segment of the networkingequipment market will return to growth as enterprise, data center and carrier customers continue to recognize the performance and operating cost benefits ofEthernet technology.Expanding Product PortfolioWe believe that continued success in our marketplace is dependent upon a variety of factors that includes, but is not limited to, our ability to design,develop and distribute new and enhanced products employing leading-edge technology. During fiscal 2010, we further extended our Ethernet productportfolio through the addition of the Summit X480 family of products targeted at Data Center customers, a further set of modules for the BlackDiamond 8900family and the next release of the ExtremeXOS modular operating system, release 12.4.1.Industry DevelopmentsThe market for network infrastructure equipment is highly competitive and dominated by a few large companies. The difficult economic climate hasfurther driven consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wirelessand voice applications. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, independent Ethernet switchvendors are being acquired or merged with larger, adjacent market vendors to enable them to deliver complete and broad solutions. As a result, we believethat, as an independent Ethernet switch vendor, we must provide products that, when combined with the products of our large strategic partners, createcompelling solutions for end user customers.RestructuringOn October 22, 2009, we restructured the organization, including restructuring from a business unit organization to a functional organization. Inconnection with the restructuring, we had a reduction in force (“RIF”), terminated 8% of our workforce and eliminated certain redundant engineeringprojects. Total restructuring charges related to the RIF and engineering projects recognized in fiscal 2010 was $4.6 million.As a result of the RIF, operating expenses significantly decreased in fiscal 2010 as compared to fiscal 2009, as discussed further below.Results of OperationsOur operations and financial performance have been affected by the economic factors described above, and during fiscal 2010, we achieved thefollowing results: • Net revenue of $309.4 million, a decrease of 8% over fiscal 2009 net revenue of $335.6 million. • Product revenue of $249.0 million, a decrease of 9% from fiscal 2009 product revenue of $273.8 million. • Service revenue of $60.3 million, a decrease of 2% from fiscal 2009 service revenue of $61.8 million • Total gross margin was 57.1% of net revenue in fiscal 2010 (including share-based compensation expense of $1.0 million), compared to 56.8%in fiscal 2009 (including share-based compensation expense of $0.5 million). • Net income was $0.2 million in fiscal 2010 (including share-based compensation expense of $6.2 million, restructuring charge of $4.2 millionand litigation settlement of $1.0 million), a decrease from net income of $2.8 million in fiscal 2009 (including share-based compensationexpense of $3.9 million and restructuring charge of $2.2 million). 34Table of Contents • Cash flow provided by operating activities was $9.3 million, compared to cash flow provided by operating activities of $4.7 million in fiscal2009, an increase of $4.6 million. Cash and cash equivalents, short-term investments and marketable securities were $132.4 million as ofJune 27, 2010, an increase of $5.0 million, primarily due to cash provided by operating activities.Net RevenueThe following table presents net product and service revenue for the fiscal years 2010, 2009 and 2008 (dollars in thousands): Year Ended Year Ended June 27,2010 June 28,2009 $Change %Change June 28,2009 June 29,2008 $Change %Change Net Revenue: Product $249,035 $273,772 $(24,737) (9)% $273,772 $302,313 $(28,541) (9)% Percentage of net revenue 80.50% 81.59% 81.59% 83.55% Service 60,319 61,787 (1,468) (2)% 61,787 59,522 2,265 (4)% Percentage of net revenue 19.50% 18.41% 18.41% 16.45% Total net revenue $309,354 $335,559 $(26,205) (8)% $335,559 $361,835 $(26,276) (7)% Product revenue decreased in fiscal 2010 as compared to fiscal 2009 primarily due to the global economic downturn and competitive pricing. Inaddition, in the first quarter of fiscal 2010, the Company experienced supply constraint issues which resulted in the loss of business.Product revenue decreased in fiscal 2009 as compared to fiscal 2008 primarily due to lower sales volumes mainly as a result of the weakness in the U.S.economy.Service revenue decreased in fiscal 2010 as compared to fiscal 2009 primarily due to a reduction in renewals of service maintenance agreements forproducts which are entering end of support life.Service revenue increased in fiscal 2009 as compared to fiscal 2008 primarily due to improved execution in the EMEA maintenance renewal business,resulting in higher maintenance renewal rates.We operate in three regions: North America, which includes the United States, Canada and Central America; EMEA, which includes Europe, MiddleEast, Africa and South America; and APAC which includes Asia Pacific and Japan. The following table presents the total net revenue geographically for thefiscal years 2010, 2009 and 2008 (dollars in thousands): Year Ended Year Ended June 27,2010 June 28,2009 $Change %Change June 28,2009 June 29,2008 $Change %Change Net Revenues: North America $123,236 $130,995 $(7,759) (6)% $130,995 $158,215 $(27,220) (17)% Percentage of net revenue 39.84% 39.04% 39.04% 43.72% EMEA 133,736 153,764 (20,028) (13)% 153,764 143,535 10,229 7% Percentage of net revenue 43.23% 45.82% 45.82% 39.67% APAC 52,382 50,800 1,582 3% 50,800 60,085 (9,285) (15)% Percentage of net revenue 16.93% 15.14% 15.14% 16.61% Total net revenues $309,354 $335,559 $(26,205) (8)% $335,559 $361,835 $(26,276) (7)% Revenue in North America decreased in fiscal 2010 as compared to fiscal 2009 primarily due to supply chain issues in the first quarter of fiscal 2010and a weaker economy in the United States. Revenue in EMEA decreased in fiscal 2010 as compared to fiscal 2009 primarily due to weaker service providersales in Europe and a weaker economy in Western Europe. Revenue in APAC increased in fiscal 2010 as compared to fiscal 2009 primarily due to strongersales in China to a large service provider end user. 35Table of ContentsRevenue in North America decreased in fiscal 2009 as compared to fiscal 2008 primarily due to the economic downturn in the United States. Revenuein EMEA increased in fiscal 2009 as compared to fiscal 2008 primarily due to increased sales to service providers in Europe. Revenue in APAC decreased infiscal 2009 as compared to fiscal 2008 primarily due to weakness in Japan and China due to sales execution issues.We rely upon multiple channels of distribution, including a two-tiered distribution channel. One of these distribution channels, tier 1 distributors,consists of large distributors who purchase our products and make them available to resellers. Revenue through our tier 1 distributor channel was 59% of totalproduct revenue in fiscal 2010, 53% in fiscal 2009 and 47% in fiscal 2008. The increase in distributor channel revenue over the past three years was due to ashift in business from direct sales to the channel as business through our strategic partners decreased coupled with strong sales from a new distributor in theU.S.The level of sales to any one customer, including a distributor, may vary from period to period.Cost of Revenue and Gross ProfitThe following table presents the gross profit on product and service revenue and the gross profit percentage of net revenue for the fiscal years 2010,2009 and 2008 (dollars in thousands): Year Ended Year Ended June 27,2010 June 28,2009 $Change %Change June 28,2009 June 29,2008 $Change %Change Gross profit: Product $141,037 $157,041 $(16,004) (10)% $157,041 $178,980 $(21,939) (12)% Percentage of product revenue 56.63% 57.36% 57.36% 59.20% Service 35,456 33,487 1,969 6% 33,487 26,328 7,159 27% Percentage of service revenue 58.78% 54.20% 54.20% 44.20% Total gross profit $176,493 $190,528 $(14,035) (7)% $190,528 $205,308 $(14,780) (7)% Percentage of net revenue 57.05% 56.78% 56.78% 56.70% Cost of product revenue includes costs of raw materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations,charges for excess and obsolete inventory, royalties under technology license agreements, and internal costs associated with manufacturing overhead,including management, manufacturing engineering, quality assurance, development of test plans, and document control. We outsource substantially all ofour manufacturing and supply chain management operations, and we conduct quality assurance, manufacturing engineering, document control anddistribution at our facility in Santa Clara, California. Accordingly, a significant portion of our cost of product revenue consists of payments to our primarycontract manufacturers, Flextronics International, Ltd. located in Guadalajara, Mexico, Alpha Networks, located in Hsinchu, Taiwan and BenchmarkElectronic, Inc, located in Huntsville, Alabama, U.S.A. In addition, we OEM our wireless product line from Motorola.Product gross profit in fiscal 2010 decreased as compared to fiscal 2009 primarily due to a $17.7 million decrease in sales volume driven by supplychain constraints in the first quarter of fiscal 2010 offset by a $1.1 million recovery of warranty expense incurred in the third quarter of fiscal 2010 from ouroutside design manufacturer and lower operating costs of $0.7 million due to cost controls.Product gross profit in fiscal 2009 decreased as compared to fiscal 2008 primarily due to lower volume of $21.7 million and increased material cost of$6.1 million, offset by changes in product mix of $2.6 million, lower distribution cost of $1.9 million, lower royalties of $1.0 million due to the completionof amortization expense related to certain technology agreements and lower operating costs of $0.7 million due to cost controls.Our cost of service revenue consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support undercustomer service contracts. Service gross profit in fiscal 2010 increased as compared to fiscal 2009 primarily due to lower return material authorization costsof $1.6 million and cost savings in professional services. 36Table of ContentsService gross profit in fiscal 2009 increased as compared to fiscal 2008 primarily due to the result of an increase of $2.3 million in maintenancerevenue primarily in EMEA, the use of written down inventory of $1.2 million, a reduction of customer specific warranty programs of $0.9 million and lowerrepair costs of $2.2 million due to improved quality.Operating ExpensesThe following table presents operating expenses and operating income (in thousands, except percentages): Year Ended Year Ended June 27,2010 June 28,2009 $Change %Change June 28,2009 June 29,2008 $Change %Change Sales and marketing $96,621 $98,235 $(1,614) (2)% $98,235 $103,490 $(5,255) (5)% Research and development 49,390 58,176 (8,786) (15)% 58,176 65,335 (7,159) (11)% General and administrative 26,839 29,945 (3,106) (10)% 29,945 34,668 (4,723) (14)% Restructuring charge, net of reversal 4,238 2,245 1,993 89% 2,245 893 1,352 151% Litigation settlement 829 — 829 100% — — — 0% Total operating expenses $177,917 $188,601 $(10,684) (6)% $188,601 $204,386 $(15,785) (8)% Operating (loss) income $(1,424) $2,061 $(3,485) (169)% $2,061 $895 $1,166 130% The following table highlights our operating expenses and operating income as a percentage of net revenues: Year Ended June 27,2010 June 28,2009 June 29,2008 Sales and marketing 31.23% 29.28% 28.60% Research and development 15.97% 17.34% 18.06% General and administrative 8.68% 8.92% 9.58% Restructuring charge, net of reversal 1.37% 0.67% 0.25% Litigation settlement 0.27% 0.00% 0.00% Total operating expenses 57.51% 56.20% 56.49% Operating (loss) income (.46)% 0.61% 0.25% Sales and Marketing ExpensesSales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well astrade shows and promotional expenses. Sales and marketing expenses decreased in fiscal 2010 as compared to fiscal 2009 primarily due to lower salaries andbenefits expenses of $1.1 million due to lower headcount and lower rent expense of $1.2 million due to the consolidation of sales offices worldwide, offset by$0.4 million increase in commissions due to mix of commissions based on large deals and $0.3 million in travel expenses due to year-end sales meetings.Sales and marketing expenses decreased in fiscal 2009 as compared to fiscal 2008 primarily due to lower salaries and benefits of $1.3 million, lowercommission expenses of $2.5 million resulting from lower revenue, lower travel of $1.1 million due to cost cutting measures and lower share-basedcompensation expense of $0.3 million. These decreases were offset by increases in general expenses of $1.1 million.Research and Development ExpensesResearch and development expenses consist primarily of salaries and related personnel expenses, consultant fees and prototype expenses related to thedesign, development, and testing of our products. Research and 37Table of Contentsdevelopment decreased in fiscal 2010 as compared to fiscal 2009 primarily due lower salaries and benefits expenses of $6.7 million due to lower headcountand lower engineering project expenses of $2.7 million due to discontinuation of several engineering projects, offset by a $0.5 million increase in stock-based compensation expense. We expense all research and development expenses as incurred.Research and development expenses decreased in fiscal 2009 as compared to fiscal 2008 primarily due to lower project spending of $2.6 million onmodular and stackable products, lower salaries and benefits of $2.2 million driven mainly by lower variable compensation expense, a decrease in the Avayawarrant amortization expense of $1.0 million, lower supplies and small equipment expense of $0.8 million and lower depreciation expense of $0.6 million.General and Administrative ExpensesGeneral and administrative expenses decreased in fiscal 2010 as compared to fiscal 2009 primarily due to lower professional fees of $2.9 million andlower salaries and benefits expense of $1.4 million due to lower headcount, offset by an increase in share-based compensation expense of $0.9 million.General and administrative expenses decreased in fiscal 2009 as compared to fiscal 2008 primarily due to lower litigation fees of $4.0 million, lowershare-based compensation of $0.4 million, and lower insurance costs of $0.4 million.Restructuring Charge, Net of ReversalDuring fiscal 2010, 2009 and 2008, we recorded restructuring charges of $4.2 million, $2.2 million, and $0.9 million, respectively.Charges in fiscal 2010 were: • $4.6 million related to a restructuring of the organization from a business unit organization to a functional organization. In connection with therestructuring, we had a RIF and terminated 8% of our workforce. Total termination benefits were $4.1 million. The RIF was executed andcompleted in the second quarter of fiscal 2010. In addition, we eliminated certain redundant engineering projects in conjunction with thereorganization. We incurred $0.5 million related to the discontinued engineering projects. • $0.2 million increase in operating expenses related to one of our restructured facilities. • $0.5 million reversal of restructuring expense due to higher projected sublease receipt from a sublease renewal arrangement. • $0.1 million reversal of restructuring expense related to the settlement of employment termination benefits incurred in the third fiscal quarter of2009.Charges in fiscal 2009 were: • $0.8 million related to our termination of 1% of our workforce, exiting a leased facility where the terminated employees worked and the write-offof impaired assets as part of our strategic plan. This restructuring was completed by the end of the third quarter of fiscal 2009. • $1.9 million related to a RIF of a further 5% of our workforce to reduce operating costs and realign our organization in the current competitiveoperating environment. The RIF was executed in the third quarter of fiscal 2009 and was completed by the end of the fourth quarter of fiscal2009.These charges were offset by a reversal of $0.5 million of restructuring expense due to higher than projected sublease receipt from a sublease renewalarrangement. 38Table of ContentsLitigation SettlementOn July 16, 2010, we entered into a Memorandum of Understanding (“Network-1 MOU”) with Network-1 Security Solutions, Inc. The Network-1 MOUprovides for a nonexclusive and worldwide license to certain patents of each party, and a release of claims based on any prior infringement of such patents.The license term is nine years and eight months and expires in March 2020. The release covers any potential claims arising out of the past use or practice ofany of the patents. Total fees for the grant of the license under the Network-1 MOU were $2.4 million. We charged the estimated value of the release of priorclaims of $0.2 million to Cost of Product Revenues for claims incurred in fiscal 2010 and $0.8 million to Litigation Settlement for claims incurred prior tofiscal 2010 in its fiscal 2010 financial statements. The remaining $1.4 million was recorded as other assets and is being recognized ratably over the licenseperiod in Cost of Product Revenue.Interest IncomeInterest income was $1.5 million in fiscal 2010, $3.4 million in fiscal 2009 and $10.2 million in fiscal 2008, representing a decrease of $1.9 million infiscal 2010 from fiscal 2009, and a decrease of $6.8 million in fiscal 2009 from fiscal 2008. The decrease in interest income in fiscal 2010 from fiscal 2009was due to a decrease in average funds available for investment and a decline in average interest yield from 2.4% in fiscal 2009 to 1.6% in fiscal 2010. Thedecrease in interest income in fiscal 2009 from fiscal 2008 was due to a decrease in funds available for investment as a result of cash expenditure of $101.4million in connection with the repurchase of 28,571,428 shares of common stock in the first quarter of fiscal 2009 and a decline in average interest yield from4.7% in fiscal 2008 to 2.4% in fiscal 2009.Interest ExpenseInterest expense was $0.1 million for each fiscal year 2010, 2009 and 2008. Interest expense in fiscal 2010 and fiscal 2009 were primarily related tointerest amortization of technology agreements.Other Income (Expense), netOther income (expense) net, was expense of $0.1 million in fiscal 2010, income of $13,000 in fiscal 2009 and expense of $0.5 million in fiscal 2008.Other expense in fiscal 2010 was primarily comprised of foreign currency losses of $0.4 million, offset by realized gain on investments of $0.1 million.Other income in fiscal 2009 was primarily comprised of foreign currency gains due to the strengthening of the U.S. dollar in fiscal 2009.Other income (expense), net for the fiscal year 2010 also includes an unrealized loss of $2.1 million on our Auction Rate Securities offset by $2.1million gain in fair value of the Put Option related to our acceptance of the UBS Rights offer to repurchase our ARS in the third quarter of fiscal 2009.Provision (Benefit) for Income TaxesWe recorded an income tax benefit of $0.4 million for fiscal 2010. The effective tax rate in fiscal 2010 was 223.6% which differs from the federalstatutory tax rate of 35% due primarily to the tax impact of income from foreign operations, the release of previously established tax reserves and therecording of a valuation allowance against the majority of our deferred tax assets. As of June 27, 2010, we had net operating loss carryforwards for federal andstate tax purposes of $262.8 million and $90.0 million, respectively, of which $53.7 million and $32.0 million, respectively, represent deductions from share-based compensation for which a benefit would be recorded in additional paid-in capital when realized. We also had federal and state tax credit carryforwardsof 39Table of Contents$8.4 million and $18.5 million, respectively, as of June 27, 2010. Federal net operating loss carryforwards of $262.8 million will expire between 2013through 2030 and state net operating losses of $90.0 million will expire between 2011 through 2020, if not utilized. Federal tax credits of $8.4 million willexpire beginning in 2020, if not utilized and state tax credits of $1.7 million will expire beginning in 2011, if not utilized. The additional state tax credits of$16.8 million will carry forward indefinitely.The provisions for income taxes of $2.5 million and $2.2 million for fiscal 2009 and 2008, respectively, were recorded for taxes due on incomegenerated in U.S federal, certain states and foreign tax jurisdictions. The effective tax rate was 46.8% and 20.6% for fiscal 2009 and 2008, respectively, whichdiffers from the federal statutory tax rate of 35% due primarily to the benefit of U.S. net operating losses carryforwards and the tax impact of income fromforeign operations.Adjustments to Share Based Compensation Expense During Fiscal 2010We were notified by our third party software provider that it had made certain changes to how its software program calculates stock-basedcompensation expense. Specifically, the prior version of this software that we had been using calculated stock-based compensation expense by incorrectlyapplying a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than calculating stock-basedcompensation expense based upon the actual vested portion of the grant date fair value, resulting in an understatement of stock-based compensation expensein certain periods prior to the grant’s final vest date. Consequently, we identified errors in the calculation of stock-based compensation expense for fiscalyears ended June 29, 2008, July 1, 2007 and July 2, 2006. The errors identified relate only to the timing of stock-based compensation expense recognition.We determined that the cumulative error from the understatement of stock-based compensation expense related to the periods discussed above totaled$0.9 million through June 29, 2008. The impact of the errors on the fiscal years ended June 29, 2008, July 1, 2007 and July 2, 2006, is to decrease net incomeby $0.3 million for each year.Management has determined that the impact of this error is not material to the previously issued annual and interim financial statements. Accordingly,the annual consolidated financial statements for the fiscal year ending June 27, 2010 include the cumulative adjustment to increase stock-basedcompensation expense by $0.9 million (or $0.01 per share) to correct these errors. We do not believe the correction of these errors is material to the annualconsolidated financial statements for the fiscal year ending June 27, 2010.Critical Accounting Policies and EstimatesOur significant accounting policies are more fully described in Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this AnnualReport on Form 10-K. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requiresmanagement to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assetsand liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By theirnature, these estimates, assumptions and judgments are subject to an inherent degree of uncertainty. We base our estimates, assumptions and judgments onhistorical experience, market trends and other factors that are believed to be reasonable under the circumstances. Estimates, assumptions and judgments arereviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to benecessary. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies have been discussedwith the Audit Committee of the Board of Directors. We believe the critical accounting policies stated below, among others, affect our more significantjudgments and estimates used in the preparation of our consolidated financial statements. 40Table of ContentsShare-based PaymentsWe use the Black-Scholes option-pricing model to determine the fair value of option award and Employee Stock Purchase Plan (“ESPP”) on the dateof grant with the weighted average assumptions. The expected term of options granted is derived from historical data on employee exercise and post-vestingemployment termination behavior. The expected term of ESPP represents the contractual life of the ESPP purchase period. The risk-free rate based upon theestimated life of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on both the impliedvolatilities from traded options on our stock and historical volatility on our stock. We do not currently pay cash dividends on our common stock and do notanticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero. We are required to estimate forfeitures at the time of grant andrevise those estimates in subsequent periods if actual forfeitures differ from those estimates. Our estimated forfeiture rate in fiscal 2010 based on our historicalforfeiture experience is approximately 12%. We modified our estimated forfeiture rate in the fourth quarter of fiscal 2010 and recognized the cumulativeeffect of the change, as a decrease in compensation expense, in that quarter of approximately $0.1 million. We use the straight-line method for expenseattribution, and we estimate forfeitures and only recognize expense for those shares expected to vest.Revenue RecognitionWe allocate revenue to each element of multiple element arrangements that include products containing software that is more-than-incidental using theresidual method based on vendor specific objective evidence of fair value of the undelivered elements. We determine vendor specific objective evidence offair value based on the price charged when the item is sold separately. Under the residual method, we first allocate the revenue for a multiple elementarrangement to the undelivered elements based on their VSOE of fair value, and the remainder of the arrangement fee to the delivered elements.We derive the majority of our revenue from sales of our networking equipment, with the remaining revenue generated from service fees relating to theservice contracts, professional services, and training on our products. We generally recognize product revenue from our value-added resellers, non-stockingdistributors and end-user customers at the time of shipment, provided that persuasive evidence of an arrangement exists, delivery has occurred, the price ofthe product is fixed or determinable and collection of the sales proceeds is reasonably assured. In instances where the criteria for revenue recognition are notmet, revenue is deferred until all criteria have been met. Revenue from service obligations under service contracts is deferred and recognized on a straight-line basis over the contractual service period. Service contracts typically range from one to two years. Our total deferred product revenue was $1.4 millionand $1.3 million as of June 27, 2010 and June 28, 2009, respectively. Our total deferred revenue for services, primarily from service contracts, was $36.4million as of June 27, 2010 and $36.7 million as of June 28, 2009. Service contracts typically range from one to two years. Shipping costs are included incost of product revenues.We make certain sales to partners in two distribution channels, or tiers. The first tier consists of a limited number of independent distributors that sellprimarily to resellers and, on occasion, to end-user customers. We defer recognition of revenue on all sales until the distributors sell the product, as evidencedby monthly “sales-out” reports that the distributors provide to us. We grant these distributors the right to return a portion of unsold inventory for the purposeof stock rotation. We also grant these distributors certain price protection rights. The distributor-related deferred revenue and receivables are adjusted at thetime of the stock rotation return or price reduction. We also provide distributors with credits for changes in selling prices, and allow distributors to participatein cooperative marketing programs. We maintain estimated accruals and allowances for these exposures based upon our contractual obligations. Inconnection with cooperative advertising programs, we do not meet the criteria in our accounting policy for recognizing the expenses as marketing expensesand accordingly, the costs are recorded as a reduction to revenue in the same period that the related revenue is recorded. 41Table of ContentsThe second tier of the distribution channel consists of a large number of third-party value-added resellers that sell directly to end-users. For productsales to value-added resellers, we do not grant return privileges, except for defective products during the warranty period, nor do we grant pricing credits.Accordingly, we recognize revenue upon transfer of title and risk of loss to the value-added reseller, which is generally upon shipment. We reduce productrevenue for cooperative marketing activities that may occur under contractual arrangements that we have with our resellers.We provide an allowance for sales returns based on our historical returns, analysis of credit memo data and our return policies. The allowance for salesreturns was $0.9 million as of June 27, 2010 and June 28, 2009 for estimated future returns that were recorded as a reduction of our accounts receivable. Theprovision for returns is charged to net revenue in the accompanying consolidated statements of operations, and was $7,000, $0.9 million and $1.0 million infiscal 2010, fiscal 2009 and fiscal 2008, respectively. If the historical data that we use to calculate the estimated sales returns and allowances does notproperly reflect future levels of product returns, these estimates will be revised, thus resulting in an impact on future net revenue. We estimate and adjust thisallowance at each balance sheet date.Inventory ValuationOur inventory balance was $21.8 million as of June 27, 2010, compared with $12.4 million as of June 28, 2009. We value our inventory at lower ofcost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We provide inventory allowances based onexcess and obsolete inventories determined primarily by future demand forecasts. The allowance is measured as the difference between the cost of theinventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At thepoint 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 therestoration or increase in that newly established cost basis. Any written down or obsolete inventory subsequently sold has not had a material impact on grossmargin for any of the periods disclosed. Inventory write-downs charged to cost of product revenue were $1.8 million in fiscal 2010, $2.3 million in fiscal2009 and $2.2 million in fiscal 2008.Accrued WarrantyNetworking products may contain undetected hardware or software errors when new products or new versions or updates of existing products arereleased to the marketplace. In the past, we had experienced such errors in connection with products and product updates. Our standard hardware warrantyperiod is typically 12 months from the date of shipment to end-users and 90 days for software. For certain access products, we offer a limited lifetime hardwarewarranty commencing on the date of shipment from us and ending five (5) years following the our announcement of the end of sale of such product. Uponshipment of products to our customers, including both end-users and channel partners, we estimate expenses for the cost to repair or replace products that maybe returned under warranty and accrue a liability through charges to cost of product revenue for this amount.Our accrued warranty balance was $3.2 million as of June 27, 2010 and June 28, 2009. The determination of our warranty requirements is based on ouractual historical experience with the product or product family, estimates of repair and replacement costs and any product warranty problems that areidentified after shipment. We estimate and adjust this accrual at each balance sheet date in accordance with changes in these factors. In fiscal 2010, werecorded $0.6 million for a change in estimate resulting from losses identified related to a failure in one of our products, and recovered in a settlement allestimated costs related to this issue from our outside design manufacturer.The cost of new warranties issued that was charged to cost of product revenue was $6.3 million in fiscal 2010, $7.1 million in fiscal 2009 and $5.7million in fiscal 2008. 42Table of ContentsAccounts Receivable and Allowance for Doubtful AccountsOur accounts receivable balance, net of allowance for doubtful accounts, was $42.1 million and $37.6 million as of June 27, 2010 and June 28, 2009,respectively. The allowance for doubtful accounts for trade accounts receivable as of June 27, 2010 was $0.8 million, compared to $1.0 million as of June 28,2009. We continually monitor and evaluate the collectability of our trade receivables based on a combination of factors. We record specific allowances forbad debts in general and administrative expense when we become aware of a specific customer’s inability to meet its financial obligation to us, such as in thecase of bankruptcy filings or deterioration of financial position. Estimates are used in determining our allowances for all other customers based on factorssuch as current trends in the length of time the receivables are past due and historical collection experience. We mitigate some collection risk by requiringmost of our customers in the Asia-Pacific region, excluding Japan and Australia, to pay cash in advance or secure letters of credit when placing an order withus. Our provision for doubtful accounts was an expense of $26,000 in fiscal 2010, expense of $0.2 million in fiscal 2009 and expense of $0.4 million in fiscal2008.Deferred Tax Asset Valuation AllowanceWe recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assetsand liabilities. Significant management judgment is required in determining our valuation allowance recorded against our net deferred tax assets. We makean assessment of the likelihood that our net deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not believed tobe likely, a valuation allowance is established. We provided a full valuation allowance against all of our U.S. federal and state net deferred tax assets in fiscal2003 in the amount of $194.8 million in accordance with our policy. In fiscal 2010, the valuation allowance increased by $11.5 million to $155.1 million,and in fiscal 2009, the valuation allowance decreased by $14.1 million to $143.6 million. We have not provided a valuation allowance against any of ournon-U.S. deferred tax assets.The valuation allowance requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Evidence,such as operating results during the most recent three-year period was given more weight than our expectations of future profitability, which are inherentlyuncertain. Our U.S. losses during those periods represented sufficient negative evidence to require a full valuation allowance against our U.S. federal and statenet deferred tax assets. This valuation allowance will be evaluated periodically and can be reversed partially or totally if business results have sufficientlyimproved to support realization of our deferred tax assets.Accounting for Uncertainty in Income TaxesWe had unrecognized tax benefits of $23.9 million as of June 27, 2010. If fully recognized in the future, $1.0 million would impact our effective taxrate, and $22.9 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. We do not anticipateany material changes to our uncertain tax positions during the next twelve months.Legal ContingenciesWe are currently involved in various claims and legal proceedings, including negotiations regarding potential licenses from third parties who havenotified us that they believe our products may infringe certain patents. Periodically, we review the status of each significant matter, whether litigation orlicensing negotiation, and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and theamount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals, if any, are based only on themost current and dependable information available at any given time. As additional information becomes available, we may reassess the potential liabilityfrom pending claims and litigation and the probability of claims being successfully asserted against us. As a result, we 43Table of Contentsmay revise our estimates related to these pending claims and litigation. Such revisions in the estimates of the potential liabilities could have a materialimpact on our consolidated results of operations, financial position and cash flows in the future. For further detail, see Note 3 of Notes to ConsolidatedFinancial Statements for a description of legal proceedings.Liquidity and Capital ResourcesThe following summarizes information regarding our cash, investments, and working capital (in thousands): June 27,2010 June 28,2009Cash and cash equivalent $49,004 $46,195Short-term investments 64,854 8,976Marketable securities 18,561 72,231Total cash and investments $132,419 $127,402Working capital $82,629 $23,414Cash and cash equivalents increased by $2.8 million primarily due to cash provided by operating activities of $9.3 million and cash from financingactivities of $1.1 million, offset by cash used in investing activities of $7.6 million. Refer to further discussions below under Key Components of Cash Flowsand Liquidity.Short-term investments increased by $55.9 million primarily due to the transfer of securities maturing within one year from marketable securities andthe reclassification of $40.7 million of ARS balance from marketable securities in the first quarter of fiscal 2010. Refer to further discussions below underItem 7A. Quantitative and Qualitative Disclosures About Market Risk.Marketable securities decreased by $53.7 million primarily due to the reclassification of $40.7 million of ARS balance to short-term investments andthe transfer of securities maturing within one year to short-term investments.The increase in working capital of $59.2 million was primarily due to the reclassification of ARS from marketable securities to short-term investments.Key Components of Cash Flows and LiquidityA summary of the sources and uses of cash and cash equivalents is as follows (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008 Net cash provided by operating activities $9,306 $4,702 $16,166 Net cash (used in) provided by investing activities $(7,582) $70,379 $(21,053) Net cash provided by (used in) financing activities $1,085 $(99,256) $3,684 Net increase (decrease) in cash and cash equivalents $2,809 $(24,175) $(1,203) Cash and cash equivalents, short-term investments and marketable securities were $132.4 million and $127.4 million at June 27, 2010 and June 28,2009, respectively, representing an increase of $5.0 million. This increase was primarily due to cash provided by operations of $9.3 million and cashprovided by financing activities of $1.1 million, offset by capital expenditures of $5.1 million.Cash provided by operating activities was $9.3 million, an increase of $4.6 million compared to cash provided by operating activities of $4.7 millionin fiscal 2009. Net income was $0.2 million and included significant non-cash charges including depreciation of $5.6 million, $6.2 million in share-basedcompensation 44Table of Contentsexpense and $1.8 million in the provision for excess and obsolete inventory. Accounts receivable, net, decreased to $42.1 million at June 27, 2010 from$37.6 million at June 28, 2009. Days sales outstanding in receivables increased to 45 days at June 27, 2010 from 42 days at June 28, 2009. The increase inaccounts receivable and days sales outstanding were primarily due to increased billings in the fourth quarter of fiscal 2010. Inventories increased to $21.8million at June 27, 2010 from $12.4 million at June 28, 2009. Inventory balance of $12.4 million at June 28, 2009 was lower than the normal inventorybalance between $16.0 million to $18.0 million due to decreased inventory forecast demand. We increased our inventory balance to $21.8 million as ofJune 27, 2010 in anticipation of increased sales demand for the upcoming first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010. Deferredrevenue, net decreased to $37.2 million at June 27, 2010 from $37.5 million at June 28, 2009. This decrease was due primarily to a reduction in renewals ofservice maintenance agreements for products which are entering end of support life.Cash flow used in investing activities was $7.6 million. Capital expenditures were $5.1 million and purchases of investments were $51.6 million, offsetby proceeds from maturities of investments and marketable securities of $34.5 million and sales of investments and marketable securities of $14.6 million.Cash provided by financing activities was $1.1 million from the issuance of common stock.As of June 27, 2010, we had letters of credit totaling $0.2 million secured by cash. These letters of credit are primarily issued in lieu of making cashdeposits with third parties.In October 2008, we entered into a secured line of credit with UBS, collateralized by our ARS held by UBS. The maximum amount of credit availableunder this line of credit is $28.8 million. On November 7, 2008 we accepted the UBS Rights offer and hence the terms of the “no net cost” loan programapply to this line of credit. Under this program, the interest rate on this secured credit facility will be equivalent to the interest rate earned by us on the ARS atUBS, resulting in no net interest cost to us. There are currently no outstanding borrowings under this line of credit. On June 30, 2010, we exercised our UBSRights to redeem the remaining ARS at par. Upon exercising the UBS Rights, this line of credit was terminated.Employee Stock Option Exchange ProgramOn December 23, 2009, our stockholders approved a voluntary program (“Exchange Program”) that permitted eligible employees to exchange certainoutstanding stock options that were “underwater” for a lesser number of shares of restricted stock units to be granted under the Extreme Networks, Inc. 2005Equity Incentive Plan (the “2005 Plan”) and to exchange certain other stock options that are more substantially underwater for a cash payment. TheExchange Program was open to all of our United States employees, except for members of our Board of Directors and our executive officers. The ExchangeProgram commenced on February 4, 2010 and ended March 4, 2010. On March 5, 2010, we cancelled a total of 3,058,761 tendered stock options, issued atotal of 569,189 replacement restricted stock units under the 2005 Plan, and incurred a cash outlay of $8,769 which was paid out at the end of March 2010.Contractual ObligationsThe following summarizes our contractual obligations at June 27, 2010, and the effect such obligations are expected to have on our liquidity and cashflow in future periods (in thousands): Total Less Than1 Year 1 – 3 Years 3 – 5 Years More ThanFive YearsContractual Obligations: Non-cancelable inventory purchase commitments $39,123 $39,123 $— $— $— Non-cancelable operating lease obligations 11,235 6,706 2,761 1,034 734Other non-cancelable purchase commitments 2,484 1,734 750 — — Total contractual cash obligations $52,842 $47,563 $3,511 $1,034 $734 45Table of ContentsNon-cancelable inventory purchase commitments represent the purchase of long lead-time component inventory that our contract manufacturersprocure in accordance with our forecast. Inventory purchase commitments were $39.1 million as of June 27, 2010, an increase of $19.2 million from $19.9million as of June 28, 2009. The increase was due to higher projected sales in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010. Wedid not have any material commitments for capital expenditures as of June 27, 2010. Other non-cancelable purchase commitments represent OEM andtechnology agreements.Off-Balance Sheet ArrangementsWe did not have any off-balance sheet arrangements as of June 27, 2010.Capital Resources and Financial ConditionAs of June 27, 2010, in addition to $49.0 million in cash and cash equivalents, we had $64.9 million invested in short-term investments and $18.6million invested in long-term marketable investments for a total cash and cash equivalents, short-term investments and marketable securities of $132.4million.At June 27, 2010, we held approximately $25.3 million (par value) of illiquid non-current Auction Rate Securities (ARS). The decline in value of thesesecurities reflects market related liquidity conditions resulting from the general collapse of the credit markets and not the issuer’s creditworthiness. The ARSare collateralized by student loan portfolios that are approximately 93% guaranteed by the US Department of Education and maintain a credit rating of AAAand AA. Historically, these securities provided liquidity to investors through their interest rate reset feature – i.e., interest rates on these securities are resetthrough a bidding process (or auction) at frequent, pre-determined intervals (typically every 7 to 28 days). At each reset, investors could either rollover andmaintain their holdings or liquidate them at par value. Since February 2008, auctions related to our ARS have failed as a result of the deterioration of thecredit markets, rendering these securities illiquid.On November 7, 2008, we accepted an offer (the “UBS Rights Offer”) from UBS AG (“UBS”), providing us with certain rights related to our ARS (the“Rights”). The Rights permit us to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARSplus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in itsdiscretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. As of June 27,2010, UBS exercised its rights to call back the ARS at par for $9.8 million and issuers redeemed $5.7 million of ARS at par. On June 30, 2010, we sold theremaining ARS balance of $25.3 million at par under the Rights. On July 1, 2010, we received $25.3 million plus accrued interest in cash from UBS for theARS settlement.In October 2008, we entered into a secured line of credit with UBS, collateralized by our ARS held by UBS. The maximum amount of credit availableunder this line of credit is $28.8 million. When we accepted the UBS Rights Offer in November 2008, the terms of the UBS “no net cost” loan program wereapplied to this line of credit. Under this program, the interest rate on this secured credit facility will be equivalent to the interest rate earned by us on the ARS,resulting in no net interest cost to us. As of June 27, 2010, there was no outstanding borrowing under this line of credit. On June 30, 2010, we exercised ourUBS Rights to redeem the remaining ARS at par. Upon exercising the UBS Rights, this line of credit was terminated.We believe that our current cash and cash equivalents, short-term investments, marketable securities and cash available from credit facilities and futureoperations will enable us to meet our working capital requirements for at least the next 12 months.New Accounting PronouncementsIn January 2010, the FASB issued a new accounting standards update for fair value measurements and disclosures. A reporting entity should discloseseparately the amounts of significant transfers in and out of 46Table of ContentsLevel 1 and Level 2 and describe the reasons for the transfers. A reporting entity should separately disclose information about purchases, sales, issuances andsettlements for Level 3 reconciliation disclosures. The new disclosures and clarifications of existing disclosures are effective for financial statements issuedinterim or annual financial periods ending after December 15, 2009, with the exception for the reconciliation disclosures for Level 3, which are effective forfinancial statements issued interim or annual financial periods ending after December 15, 2010. The adoption of the new accounting standards update did nothave a material impact on our consolidated results of operations, financial condition or financial disclosures.In October 2009, the FASB issued a new accounting standard which excludes from the scope of software revenue guidance the revenue arrangementsthat include tangible products containing software components and non-software components that function together to deliver the tangible product’sessential functionality. At the same time, the FASB also issued a new accounting standard which updates existing guidance pertaining to the separation andallocation of consideration in a multiple element arrangement. This new guidance will be applicable to our multiple element arrangements that include suchtangible products. The new standards are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on orafter June 15, 2010. The adoption of this accounting standard is not expected to have a material effect on the amount of revenue reported. 47Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate SensitivityThe primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investmentswithout significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailinginterest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at thethen-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, wemaintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, other non-government debtsecurities and money market funds.As of June 27, 2010, we held a variety of interest bearing ARS that represent investments in pools of student loans. These ARS investments areintended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to eitherroll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of ourholdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. On November 7,2008, we accepted the UBS Rights Offer from UBS, providing us with rights related to our ARS. The Rights permit us to require UBS to purchase our ARS atpar value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during theperiod of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, solong as we receive payment at par value upon any sale or disposition. During the first quarter of fiscal 2010, we reclassified our entire balance of ARS frommarketable securities to short-term securities in our consolidated balance sheet. The reclassification is a result of the Put Option being due within less thanone year from the balance sheet date. Beginning in 2010, we began to sell our ARS under the Rights. As of June 27, 2010, UBS exercised its rights to callback the ARS at par for $9.8 million and issuers redeemed $5.7 million of ARS at par. On June 30, 2010, we sold the remaining ARS balance of $25.3 millionat par under the Rights. On July 1, 2010, we received $25.3 million plus accrued interest in cash from UBS for the ARS settlement.The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changesto credit ratings of the securities, discount rates and ongoing strength and quality of market credit and liquidity.If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to recordimpairment charges in future quarters.The following table presents the amounts of our cash equivalents, short-term investments and marketable securities that are subject to market risk byrange of expected maturity and weighted-average interest rates as of June 27, 2010 and June 28, 2009. This table does not include money market fundsbecause those funds are generally not subject to market risk. Included within short-term investments as of June 27, 2010 within this table is our ARS portfolioheld at UBS. Maturing in Threemonthsor less Threemonths toone year Greaterthan oneyear Total FairValue (In thousands)June 27, 2010: Included in short-term investments $31,255 $33,599 $64,854 $64,854Weighted average interest rate 1.62% 1.84% Included in marketable securities $18,561 $18,561 $18,561Weighted average interest rate 1.58% 48Table of Contents Maturing in Threemonthsor less Threemonths toone year Greaterthan oneyear Total FairValue (In thousands)June 28, 2009: Included in cash and cash equivalents $11,368 $11,368 $11,368Weighted average interest rate 0.11% Included in short-term investments $0 $8,976 $8,976 $8,976Weighted average interest rate 0.00% 2.03% Included in marketable securities $72,231 $72,231 $72,231Weighted average interest rate 1.52% We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income in thestockholders’ equity section of its balance sheets. Such an unrealized gain or loss does not reduce net income for the applicable accounting period. If the fairvalue of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where(1) we intend to sell the instrument, (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or(3) we do not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If we intend to sell or it is more likely than notthat we will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, we recognize an other-than-temporaryimpairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debtinstruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if we do not intend to sell and it is not more likely thannot that we will be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period creditloss), we separate the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component isrecognized in earnings and is the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. Theremaining difference between the debt instrument’s fair value and the present value of future expected cash flows is due to factors that are not credit relatedand is recognized in other comprehensive income (loss).Exchange Rate SensitivityCurrently, substantially all of our sales and the majority of our expenses are denominated in United States dollars and, as a result, we have experiencedno significant foreign exchange gains and losses to date. While we conduct some sales transactions and incur certain operating expenses in foreign currenciesand expect to continue to do so, we do not anticipate that foreign exchange gains or losses will be significant, in part because of our foreign exchange riskmanagement process discussed below.Foreign Exchange Forward ContractsWe record all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives are recognized in earnings as Other Income(Expense). We enter into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the foreign currency forecastedtransactions related to certain operating expenses and remeasurement of certain assets and liabilities denominated in Japanese Yen, the Euro, the SwedishKrona, the Indian Rupee and the British Pound. These derivatives do not qualify as hedges. At June 27, 2010, these forward foreign currency contracts had anotional principal amount of $19.1 million and fair value was $0.1 million. These contracts have maturities of less than 60 days. Changes in the fair value ofthese foreign exchange forward contracts are offset largely by remeasurement of the underlying assets and liabilities.Foreign currency transaction gains and losses from operations were a loss of $0.4 million in fiscal 2010, a loss of $0.1 million in fiscal 2009 and a lossof $0.7 million in fiscal 2008. 49Table of ContentsItem 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF EXTREME NETWORKS, INC. Page(s)Report of Independent Registered Public Accounting Firm 51Consolidated Balance Sheets 52Consolidated Statements of Operations 53Consolidated Statements of Stockholders’ Equity 54Consolidated Statements of Cash Flows 55Notes to Consolidated Financial Statements 56 50Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersExtreme Networks, Inc.We have audited the accompanying consolidated balance sheets of Extreme Networks, Inc. as of June 27, 2010 and June 28, 2009, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 27, 2010. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ExtremeNetworks, Inc. at June 27, 2010 and June 28, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the periodended June 27, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.As discussed in Note 6 to the consolidated financial statements, in fiscal year 2008, Extreme Networks, Inc. changed its method of accounting foruncertain tax positions in accordance with the guidance provided in Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109 (codified in FASB ASC Topic 740, Income Taxes).We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Extreme Networks, Inc.’sinternal control over financial reporting as of June 27, 2010, based on criteria established in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated August 20, 2010 expressed an unqualified opinion thereon./s/ Ernst & Young LLPSan Francisco, CaliforniaAugust 20, 2010 51Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) June 27,2010 June 28,2009 ASSETS Current assets: Cash and cash equivalents $49,004 $46,195 Short-term investments 64,854 8,976 Accounts receivable, net of allowances of $1,969 at June 27, 2010 ($2,135 at June 28, 2009) 42,057 37,616 Inventories, net 21,842 12,380 Deferred income taxes 392 244 Prepaid expenses and other current assets, net 3,932 4,368 Total current assets 182,081 109,779 Property and equipment, net 43,572 44,229 Marketable securities 18,561 72,231 Other assets, net 15,731 13,736 Total assets $259,945 $239,975 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $18,543 $12,771 Accrued compensation and benefits 13,365 12,320 Restructuring liabilities 3,097 3,559 Accrued warranty 3,169 3,170 Deferred revenue, net 29,552 30,058 Deferred revenue, net of cost of sales to distributors 18,345 9,821 Other accrued liabilities 13,381 14,666 Total current liabilities 99,452 86,365 Restructuring liabilities, less current portion 273 3,519 Deferred revenue, less current portion 7,633 7,425 Deferred income taxes 731 564 Other long-term liabilities 2,661 592 Commitments and contingencies (Note 3) — — Stockholders’ equity: Convertible preferred stock, $.001 par value, issuable in series, 2,000,000 shares authorized; none issued — — Common stock, $.001 par value, 750,000,000 shares authorized; 129,827,715 issued at June 27, 2010 and128,425,140 issued at June 28, 2009 130 128 Treasury stock, 39,625,305 shares at June 27, 2010 and June 28, 2009 (149,666) (149,666) Additional paid-in-capital 956,792 949,113 Accumulated other comprehensive income 1,100 1,323 Accumulated deficit (659,161) (659,388) Total stockholders’ equity 149,195 141,510 Total liabilities and stockholders’ equity $259,945 $239,975 See accompanying notes to consolidated financial statements. 52Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended June 27, June 28, June 29, 2010 2009 2008 Net revenues: Product $249,035 $273,772 $302,313 Service 60,319 61,787 59,522 Total net revenues 309,354 335,559 361,835 Cost of revenues: Product 107,998 116,731 123,333 Service 24,863 28,166 33,221 Total cost of revenues 132,861 144,897 156,554 Gross profit: Product 141,037 157,041 178,980 Service 35,456 33,621 26,301 Total gross profit 176,493 190,662 205,281 Operating expenses: Sales and marketing 96,621 98,235 103,490 Research and development 49,390 58,176 65,335 General and administrative 26,839 29,945 34,668 Restructuring charge, net of reversal 4,238 2,245 893 Litigation Settlement 829 — — Total operating expenses 177,917 188,601 204,386 Operating (loss) income (1,424) 2,061 895 Interest income 1,481 3,360 10,229 Interest expense (141) (147) (89) Other (expense) / income, net (99) 13 (476) (Loss) income before income taxes (183) 5,287 10,559 Provision for income taxes (410) 2,472 2,178 Net income $227 $2,815 $8,381 Basic and diluted net income per share: Net income per share – basic $0.00 $0.03 $0.07 Net income per share – diluted $0.00 $0.03 $0.07 Shares used in per share calculation – basic 89,281 94,225 115,002 Shares used in per share calculation – diluted 89,477 94,284 115,784 See accompanying notes to consolidated financial statements. 53Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands) Common Stock Treasury Stock AdditionalPaid-in-Capital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit TotalStockholders’Equity Shares Amount Shares Amount Balances at July 1, 2007 125,105 $125 (11,054) $(48,303) $934,415 $572 $(670,584) $216,225 Components of comprehensive income: Net income — — — — — — 8,381 8,381 Change in unrealized gain on investments, net of tax expense of$0 — — — — — (2,346) — (2,346) Foreign currency translation adjustment — — — — — 1,051 — 1,051 Total comprehensive income 7,086 Exercise of options to purchase common stock 840 1 — — 2,444 — — 2,445 Issuance of common stock under employee stock purchase plan 480 — — — 1,425 — — 1,425 Issuance of restricted stock, net of repurchases 74 — — (195) — — (195) Exercise of warrant by Avaya 859 1 — — 8 — — 9 Share-based payments, net of repurchases — — — — 5,059 — — 5,059 Balances at June 29, 2008 127,358 $127 (11,054) $(48,303) $943,156 $(723) $(662,203) $232,054 Components of comprehensive income: Net income — — — — — — 2,815 2,815 Change in unrealized gain on investments, net of tax expense of$0 — — — — — 3,159 — 3,159 Foreign currency translation adjustment — — — — — (1,113) — (1,113) Total comprehensive income 4,861 Exercise of options to purchase common stock 399 — — — 1,124 — — 1,124 Issuance of common stock under employee stock purchase plan 666 1 — — 1,166 — — 1,167 Issuance of restricted stock, net of repurchases 2 — — (184) — — (184) Share-based payments, net of repurchases — — — — 3,851 — — 3,851 Repurchase of common stock — — (28,571) (101,363) — — (101,363) Balances at June 28, 2009 128,425 $128 (39,625) $(149,666) $949,112 $1,323 $(659,388) $141,510 Components of comprehensive income: Net income — — — — — 227 227 Change in unrealized gain on investments, net of tax expense of$0 — — — — (265) — (265) Foreign currency translation adjustment — — — — 42 — 42 Total comprehensive income 4 Exercise of options to purchase common stock 337 — — — 739 — — 739 Issuance of common stock under employee stock purchase plan 620 1 — — 1,101 — — 1,102 Issuance of restricted stock, net of repurchases 446 1 — — (750) — — (749) Share-based payments — — — — 6,243 — — 6,243 Repurchase of employee stock options — — — — (7) — — (7) Acceleration of employee stock option 353 353 Balances at June 27, 2010 129,828 $130 (39,625) $(149,666) $956,792 $1,100 $(659,161) $149,195 See accompanying notes to consolidated financial statements. 54Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended June 27,2010 June 28,2009 June 29,2008 Cash flows from operating activities: Net income $227 $2,815 $8,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,588 5,902 7,193 Change in value / loss (gain) on value of UBS option to put securities 2,091 (4,520) — Auction rate securities mark to market, trading (gain) loss (2,091) 4,520 — (Recovery of) provision for doubtful accounts (26) 232 416 Provision for excess and obsolete inventory 1,782 2,265 2,172 Deferred income taxes 21 170 578 Amortization of warrant — — 1,349 Loss on retirement of assets 178 94 300 Stock-based compensation 6,235 3,854 5,059 Restructuring charge, net of reversal 4,238 2,244 893 Changes in operating assets and liabilities, net Accounts receivable (4,414) 19,730 (18,119) Inventories (11,236) (706) 5,567 Prepaid expenses and other assets (1,560) 26 5,813 Accounts payable 5,773 (4,150) (4,382) Accrued compensation and benefits 1,045 (6,636) 4,115 Restructuring liabilities (7,593) (4,553) (5,492) Accrued warranty (0) (1,654) (2,359) Deferred revenue, net (299) (2,807) (1,791) Deferred revenue, net of cost of sales to distributors 8,524 (4,317) 2,151 Other accrued liabilities (1,245) (7,341) 5,226 Other long-term liabilities 2,068 (466) (904) Net cash provided by operating activities 9,306 4,702 16,166 Cash flows (used in) provided by investing activities: Capital expenditures (5,109) (6,877) (7,683) Purchases of investments (51,552) (44,479) (307,442) Proceeds from maturities of investments and marketable securities 34,452 28,164 122,063 Proceeds from sales of investments and marketable securities 14,627 93,571 172,009 Net cash (used in) provided by investing activities (7,582) 70,379 (21,053) Cash flows provided by (used in) financing activities: Proceeds from issuance of common stock 1,085 2,107 3,684 Repurchase of common stock, including expenses — (101,363) — Net cash provided by (used in) financing activities 1,085 (99,256) 3,684 Net increase (decrease) in cash and cash equivalents 2,809 (24,175) (1,203) Cash and cash equivalents at beginning of period 46,195 70,370 71,573 Cash and cash equivalents at end of period $49,004 $46,195 $70,370 Supplemental disclosure of cash flow information: Interest paid $141 $146 $88 Cash paid for income taxes, net $1,197 $2,825 $996 See accompanying notes to the consolidated financial statements. 55Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Description of BusinessExtreme Networks, Inc. (“Extreme Networks” or “the Company”) is a leading provider of network infrastructure equipment and markets its productsprimarily to business, governmental, health care, service provider, and educational customers with a focus on large corporate enterprises and metropolitanservice providers on a global basis. The Company conducts its sales and marketing activities on a worldwide basis through distributors, resellers and theCompany’s field sales organization. Extreme Networks was incorporated in California in 1996 and reincorporated in Delaware in 1999.2. Basis of Presentation and Summary of Significant Accounting PoliciesFiscal YearThe Company’s fiscal year is a 52/53-week fiscal accounting year that closes on the Sunday closest to June 30th every year. Fiscal 2010, 2009 andfiscal 2008 were 52-week fiscal years. All references herein to “fiscal 2010” or “2010” represent the fiscal year ended June 27, 2010. The Company hasevaluated all subsequent events through the date the financial statements were filed with the SEC.Principles of ConsolidationThe consolidated financial statements include the accounts of Extreme Networks and its wholly-owned subsidiaries. All inter-company accounts andtransactions have been eliminated.The Company uses the U.S. dollar predominately as its functional currency. The functional currency for certain of its foreign subsidiaries is the localcurrency. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated to United States dollars atcurrent rates of exchange; and revenue and expenses are translated using average rates. Foreign currency transaction gains and losses from operations were aloss of $0.4 million in fiscal 2010, a loss of $0.1 million in fiscal 2009 and a loss of $0.7 million in fiscal 2008.ReclassificationCertain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications impacted the Consolidated BalanceSheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity. Specifically,the Company reclassified back-end rebate for distributors from Other Accrued Liabilities to contra Accounts Receivable and gains and losses from foreigncurrency transactions from Cost of Revenues and Operating Expenses to Other Income (Expense) beginning in the second and fourth quarter of fiscal 2010,respectively, with the prior periods updated to conform to this presentation.AdjustmentsThe audited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and out of period share basedcompensation adjustments totaling $0.9 million that, in the opinion of management, are necessary for a fair presentation of the results of operations and cashflows for the annual period presented and the financial condition of Extreme Networks at June 27, 2010.Accounting EstimatesThe preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the 56Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) amounts reported in the financial statements and accompanying notes. Estimates are used for, but are not limited to, the accounting for the allowances fordoubtful accounts and sales returns, inventory valuation, depreciation and amortization, valuation of ARS, valuation of UBS Put Option, impairment of long-lived assets, warranty accruals, restructuring liabilities, measurement of share-based compensation costs and income taxes. Actual results could differmaterially from these estimates.Revenue RecognitionThe Company allocates revenue to each element of multiple element arrangements that include products containing software that is more-than-incidental using the residual method based on vendor specific objective evidence of fair value of the undelivered elements. The Company determines vendorspecific objective evidence of fair value based on the price charged when the item is sold separately. Under the residual method, the Company first allocatesthe revenue for a multiple element arrangement to the undelivered elements based on their VSOE of fair value, and the remainder of the arrangement fee tothe delivered elements.The Company derives the majority of its revenue from sales of its networking equipment, with the remaining revenue generated from service feesrelating to the service contracts, professional services, and training for its products. The Company generally recognizes product revenue from its value-addedresellers and end-user customers at the time of shipment, provided that persuasive evidence of an arrangement exists, delivery has occurred, the price of theproduct is fixed or determinable, and collection of the sales proceeds is reasonably assured. In instances where the criteria for revenue recognition are not met,revenue is deferred until all criteria have been met. Revenue from service obligations under service contracts is deferred and recognized on a straight-linebasis over the contractual service period. Service contracts typically range from one to two years. The Company’s total deferred product revenue was $1.4million and $1.3 million as of June 27, 2010 and June 28, 2009, respectively. The Company’s total deferred revenue for services, primarily from servicecontracts, was $36.4 million as of June 27, 2010 and $36.7 million as of June 28, 2009. Service contracts typically range from one to two years. Shippingcosts are included in cost of product revenues.The Company makes certain sales to partners in two distribution channels, or tiers. The first tier consists of a limited number of independentdistributors that sell primarily to resellers and, on occasion, to end-user customers. The Company defers recognition of revenue on all sales to thesedistributors until the distributors sell the product, as evidenced by monthly “sales-out” reports that the distributors provide. The Company grants thesedistributors the right to return a portion of unsold inventory for the purpose of stock rotation. The Company also grants these distributors certain priceprotection rights. The distributor-related deferred revenue and receivables are adjusted at the time of the stock rotation return or price reduction. TheCompany also provides distributors with credits for changes in selling prices, and allows distributors to participate in cooperative marketing programs. TheCompany maintains estimated accruals and allowances for these exposures based upon the Company’s historical experience. In connection with cooperativeadvertising programs, the Company does not meet the criteria in its accounting policy for recognizing the expenses as marketing expenses and accordingly,the costs are recorded as a reduction to revenue in the same period that the related revenue is recorded.The second tier of the distribution channel consists of a large number of third-party value-added resellers that sell directly to end-users. For productsales to value-added resellers, the Company does not grant return privileges, except for defective products during the warranty period, nor does the Companygrant pricing credits. Accordingly, the Company recognizes revenue upon transfer of title and risk of loss to the value-added reseller, which is generally uponshipment. The Company reduces product revenue for cooperative marketing activities and certain price protection rights that may occur under contractualarrangements with its resellers. 57Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company provides an allowance for sales returns based on its historical returns, analysis of credit memo data and its return policies. The allowancefor sales returns was $0.9 million as of June 27, 2010 and June 28, 2009 for estimated future returns that were recorded as a reduction of our accountsreceivable. The provision for returns is charged to net revenue in the accompanying consolidated statements of operations, and was $7,000, $0.9 million and$1.0 million in fiscal 2010, fiscal 2009 and fiscal 2008, respectively. If the historical data that the Company uses to calculate the estimated sales returns andallowances does not properly reflect future levels of product returns, these estimates will be revised, thus resulting in an impact on future net revenue. TheCompany estimates and adjusts this allowance at each balance sheet date.Cash Equivalents, Short-Term Investments and Marketable SecuritiesSummary of Available-for-Sale Securities and Trading Securities June 27, 2010 June 28, 2009Cash equivalent $42,544 $43,367Short-term investments 64,855 8,976Marketable securities 18,561 72,231Total available-for-sale and trading securities $125,960 $124,574Available-for-Sale SecuritiesThe following is a summary of available-for-sale securities (in thousands): AmortizedCost Fair Value UnrealizedHoldingGains UnrealizedHoldingLosses June 27, 2010: Money market funds $42,544 $42,544 $— $— U.S. corporate debt securities 53,525 53,570 159 (114) U.S. government agency securities 4,413 4,514 101 — $100,482 $100,628 $260 $(114) Classified as: Cash equivalents $42,544 $42,544 $— $— Short-term investments 39,381 39,523 202 (60) Marketable securities 18,557 18,561 58 (54) $100,482 $100,628 $260 $(114) June 28, 2009: Money market funds $35,367 $35,367 $— $— U.S. corporate debt securities 37,184 37,437 253 — U.S. government agency securities 10,829 10,987 158 — $83,380 $83,791 $411 $— Classified as: Cash equivalents $43,367 $43,367 $— $— Short-term investments 8,965 8,976 11 — Marketable securities 31,048 31,448 400 — $83,380 $83,791 $411 $— 58Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The amortized cost and estimated fair value of available-for-sale investments in debt securities at June 27, 2010, by contractual maturity, were asfollows (in thousands): AmortizedCost FairValueDue in 1 year or less $39,381 $39,523Due in 1-2 years 11,659 11,665Due in 2-5 years 6,898 6,896Due in more than 5 years — — Total investments in available for sale debt securities $57,938 $58,084The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investmentswith maturities of greater than three months at the date of purchase are classified as non-cash equivalents. Of these, investments with maturities of less thanone year at balance sheet date are classified as Short Term Investments. Investments with maturities of greater than one year at balance sheet date areclassified as Marketable Securities. Except for direct obligations of the United States government, securities issued by agencies of the United Statesgovernment, and money market funds, the Company diversifies its investments by limiting its holdings with any individual issuer.Investments include available-for-sale investment-grade debt securities and trading securities that the Company carries at fair value. The Companyaccumulates unrealized gains and losses on the Company’s available-for-sale debt securities, net of tax, in accumulated other comprehensive income in thestockholders’ equity section of its balance sheets. Such an unrealized gain or loss does not reduce net income for the applicable accounting period. If the fairvalue of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where(1) the Company intends to sell the instrument, (2) it is more likely than not that the Company will be required to sell the instrument before recovery of itsamortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If theCompany intends to sell or it is more likely than not that the Company will be required to sell the available-for-sale debt instrument before recovery of itsamortized cost basis, the Company recognizes an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of acredit loss, if the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the instrument before recoveryof its remaining amortized cost basis (amortized cost basis less any current-period credit loss), the Company separates the amount of the impairment into theamount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between thedebt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fairvalue and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income (loss).The Company records unrealized and realized gains and losses on the Company’s trading securities, net of tax, in other income (expense), net, in itsstatements of operations. The ARS are held with UBS AG (“UBS”) and the Company accepted a Rights offer on November 7, 2008 (see discussions below).The ARS and Put Option (as defined below) represent a fair value of $25.3 million and are reflected in short-term investments trading as of June 27, 2010. Thereclassification to short-term investment is made based on the Company’s intention to exercise the Put Option which first comes due in less than one yearfrom the balance sheet date. 59Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table presents the Company’s investments’ gross unrealized losses and fair values, aggregated by investment category and length oftime that individual securities have been in a continuous unrealized loss position. Less than 12 months 12 months or more Total Fair Value UnrealizedLosses Fair Value UnrealizedLosses Fair Value UnrealizedLosses June 27, 2010: U.S. corporate debt securities $26,809 $(114) $— $— $26,809 $(114) Realized gains or losses recognized on the sale of investments were not significant for fiscal 2010, fiscal 2009 and fiscal 2008. The unrealized gains /(losses) on the Company’s investments were caused by interest rate fluctuations. Substantially all of the Company’s available-for-sale investments areinvestment grade government and corporate debt securities that have maturities of less than 3 years. The Company does not intend to sell the investmentsand it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized costs.Fair Value of Financial InstrumentsThe Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale securities,trading securities and foreign currency derivatives. Fair value is measured based on a fair value hierarchy following three levels of inputs, of which the firsttwo are considered observable and the last unobservable: • Level 1 - Quoted prices in active markets for identical assets or liabilities;• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market datafor substantially the full term of the assets or liabilities; and• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets orliabilities.The following table presents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis: June 27, 2010 Level 1 Level 2 Level 3 Total (In thousands)Assets Investments: Federal agency notes $— $4,514 $— $4,514Money market funds 42,544 42,544Corporate notes/bonds 53,570 53,570Auction rate securities 22,902 22,902Put Option 2,429 2,429Derivative instruments: Foreign currency forward contracts 109 109Total $42,544 $58,193 $25,331 $126,068 60Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 28, 2009 Level 1 Level 2 Level 3 Total (In thousands) Assets Investments: Commercial paper $— $8,000 $— $8,000 Federal agency notes 10,987 10,987 Money market funds 35,367 35,367 Corporate notes/bonds 29,437 29,437 Auction rate securities 36,263 36,263 Put Option 4,520 4,520 Derivative instruments: Foreign currency forward contracts (58) (58) Total $35,367 $48,366 $40,783 $124,516 The following table provides a summary of changes in the fair value of the Company’s Level 3 financial assets for fiscal 2010 (in thousands): Auction RateSecurities Balance as of June 28, 2009 $36,263 Change in interest accrued (2) Change in unrealized loss 2,091 Redemptions at par by issuers (5,675) Redemptions at par by UBS (9,775) Balance as of June 27, 2010 $22,902 Put Option Balance as of June 28, 2009 $4,520 Change in value in Put Option (2,091) Balance as of June 27, 2010 $2,429 Level 3 assets consist of ARS whose underlying assets are student loans which are substantially backed by the federal government. Since the auctionsfor these securities have continued to fail since February 2008, these investments are not currently trading and therefore do not have a readily determinablemarket value. Accordingly, the estimated fair value of the ARS no longer approximates par value. These ARS are held by UBS, the Company’s investmentprovider. In November 2008, the Company accepted an offer (the “Right”) from UBS entitling the Company to sell at par value ARS originally purchasedfrom UBS (approximately $40.8 million, par value) at anytime during a two-year period from June 30, 2010 through July 2, 2012. Although the Companyexpects to sell its ARS under the Right, if the Right is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation tobuy the Company’s ARS. The enforceability of the Right results in the creation of an asset akin to a Put Option (the Company has the right to “put” the ARSback to UBS at some specified date for a payment equal to the par value of the ARS). The Put Option is a free standing asset separate from the ARS. TheCompany has valued the ARS and Put Option using a discounted cash flow model based on Level 3 assumptions. The assumptions used in valuing the ARSand the Put Option include estimates of, based on data available as of June 27, 2010, interest rates, timing and amount of cash flows, credit and liquiditypremiums, expected holding periods of the ARS and bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010.During the first quarter of fiscal 2010, the Company reclassified its 61Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) entire balance of ARS from marketable securities to short-term securities in its consolidated balance sheet. The reclassification is a result of the Put Optionbeing due within less than one year from the balance sheet date and the Company’s intention to exercise the Put Option. As of June 27, 2010, UBS exercisedits rights to call back the ARS at par for $9.8 million and issuers redeemed $5.7 million of ARS at par. On June 30, 2010, the Company sold the remainingARS balance of $25.3 million at par under the Rights. On July 1, 2010, the Company received $25.3 million plus accrued interest in cash from UBS for theARS settlement.ConcentrationsThe Company may be subject to concentration of credit risk as a result of certain financial instruments consisting principally of marketableinvestments and accounts receivable. The Company has placed its investments with high-credit quality issuers. The Company does not invest an amountexceeding 10% of its combined cash, cash equivalents, short-term investments and marketable securities in the securities of any one obligor or maker, exceptfor obligations of the United States government, obligations of United States government agencies and money market accounts.The Company performs ongoing credit evaluations of its customers and generally does not require collateral in exchange for credit. The Companymitigates some collection risk by requiring most of its customers in the Asia-Pacific region, excluding Japan, to pay cash in advance or secure letters of creditwhen placing an order with it. Tech Data and Westcon accounted for 12% and 12%, respectively, of the Company’s net revenue in fiscal 2010. Tech DataCorporation and Ericsson AB accounted for 11% and 10%, respectively, of the Company’s net revenue in fiscal 2009. Tech Data Corporation accounted for11% of the Company’s net revenue in fiscal 2008. Scansource Inc. and Westcon Group Inc. accounted for 14% and 13%, respectively, of the Company’saccounts receivable balance at June 27, 2010. Westcon Group Inc. and Ericsson Enterprise AB accounted for 15% and 14%, respectively, of the Company’saccounts receivable balance at June 28, 2009.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are recorded at the invoiced amount and do not bear interest. Substantially all receivables were trade receivables as of June 27,2010 and June 28, 2009.The Company continually monitors and evaluates the collectability of its trade receivables based on a combination of factors. The Company recordsspecific allowances for bad debts in general and administrative expense when the Company becomes aware of a specific customer’s inability to meet itsfinancial obligation to it, such as in the case of bankruptcy filings or deterioration of financial position. The Company writes-off receivables to the allowanceafter all collection efforts are exhausted. Estimates are used in determining the Company’s allowances for all other customers based on factors such as currenttrends in the length of time the receivables are past due and historical collection experience. The Company mitigates some collection risk by requiring mostof its customers in the Asia-Pacific region, excluding Japan, to pay cash in advance or secure letters of credit when placing an order with it. 62Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) InventoriesInventories consist of raw materials and finished goods and are stated at the lower of cost, determined on a first-in, first-out basis, or replacement cost.Inventories, net of write-downs for excess and obsolete inventory (which the Company determines primarily based on future demand forecasts) of $5.2million and $4.7 million at June 27, 2010 and June 28, 2009, respectively, consist of (in thousands): June 27, 2010 June 28, 2009Raw materials $1,346 $42Finished goods 20,496 12,338Total $21,842 $12,380Property and Equipment, NetProperty and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using thestraight-line method over the estimated useful lives of the assets, with the exception of land, which is not depreciated. Estimated useful lives of 25 years areused for buildings. Estimated useful lives of one to four years are used for computer equipment and software. Estimated useful lives of three years are used foroffice equipment, furniture and fixtures. Depreciation and amortization of leasehold improvements is computed using the lesser of the remaining lease termsor three years. Property and equipment consist of the following (in thousands): June 27, 2010 June 28, 2009 Computer equipment $65,210 $65,866 Land 20,600 20,600 Buildings and improvements 19,164 18,629 Purchased software 18,549 19,088 Office equipment, furniture and fixtures 3,808 3,962 Leasehold improvements 5,795 5,933 133,126 134,078 Less accumulated depreciation and amortization (89,554) (89,849) Property and equipment, net $43,572 $44,229 Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may notbe recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventualdisposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.Other assets include technology agreements that are amortized over their contractual periods using the straight-line method of amortization. Therelated liability for the technology agreement is recorded in other accrued liabilities and other long-term liabilities. 63Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred Revenue, NetDeferred revenue, net represents amounts for (i) deferred services revenue (support arrangements, professional services and training), and (ii) deferredproduct revenue net of the related cost of revenue where the revenue recognition criteria have not been met related to sales by the Company to its resellers ordirectly to its end-customers. Product revenue includes shipments to end-users and value-add resellers. The following table summarizes deferred revenue, netat the end of fiscal 2010 and 2009, respectively (in thousands): June 27, 2010 June 28, 2009 Deferred services $36,360 $36,690 Deferred product Deferred revenue 1,415 1,315 Deferred cost of sales (590) (522) Deferred product revenue, net 825 793 Balance at end of period 37,185 37,483 Less: current portion 29,552 30,058 Non-current deferred revenue, net $7,633 $7,425 The Company offers renewable support arrangements, including extended warranty contracts, to its customers that range generally from one to fiveyears. Deferred support revenue is included within deferred revenue, net within the Services category above. The change in the Company’s deferred supportrevenue balance in relation to these arrangements was as follows (in thousands): Year Ended June 27, 2010 June 28, 2009 Balance beginning of period $36,194 $38,778 New support arrangements 57,098 54,818 Recognition of support revenue (57,099) (57,402) Balance end of period 36,193 36,194 Less current portion 28,560 28,769 Non-current deferred revenue $7,633 $7,425 Deferred Revenue, Net of Cost of Sales to DistributorsAt the time of shipment to distributors, the Company records a trade receivable at the contractual discount to list selling price since there is a legallyenforceable obligation from the distributor to pay it currently for product delivered, the Company relieves inventory for the carrying value of goods shippedsince legal title has passed to the distributor, and the Company records deferred revenue and deferred cost of sales in “Deferred revenue, net of cost of sales todistributors” in the liability section of its consolidated balance sheets. Deferred revenue, net of cost of sales to distributors effectively represents the grossmargin on the sale to the distributor; however, the amount of gross margin the Company recognizes in future periods will frequently be less than theoriginally recorded deferred revenue, net of cost of sales to distributors as a result of price concessions negotiated at time of sell-through to end customers.The Company sells each item in its product catalog to all of its distributors worldwide at contractually discounted prices. However, distributors resell theCompany’s products to end customers at a very broad range of individually negotiated price points based on customer, product, quantity, geography,competitive pricing, and other factors. The majority of the Company’s distributors’ resales are priced at a discount from list price. Often, under thesecircumstances, the Company remits back to the distributor a 64Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) portion of their original purchase price after the resale transaction is completed. Thus, a portion of the deferred revenue balance represents a portion ofdistributors’ original purchase price that will be remitted back to the distributor in the future. The wide range and variability of negotiated price creditsgranted to distributors does not allow the Company to accurately estimate the portion of the balance in the deferred revenue that will be remitted to thedistributors. Therefore, the Company does not reduce deferred revenue by anticipated future price credits; instead, price credits are typically recorded againstdeferred revenue, net of cost of sales to distributors when incurred, which is generally at the time the distributor sells the product.The following table summarizes deferred revenue, net of cost of sales to distributors at the end of fiscal 2010 and 2009, respectively (in thousands): June 27, 2010 June 28, 2009 Deferred revenue $24,252 $13,644 Deferred cost of Sales (5,907) (3,823) Total deferred revenue, net of cost of sales to distributors $18,345 $9,821 Guarantees and Product WarrantiesUpon issuance of a standard product warranty, the Company discloses and recognizes a liability for the fair value of the obligation it assumes under thewarranty. The following table summarizes the activity related to the Company’s product warranty liability during fiscal 2010, fiscal 2009 and fiscal 2008: Year ended June 27, 2010 June 28, 2009 June 29, 2008 Balance beginning of period $3,170 $4,824 $7,182 New warranties issued 6,318 7,115 5,707 Warranty expenditures (6,882) (6,679) (6,650) Change in estimates 563 (2,090) (1,415) Balance end of period $3,169 $3,170 $4,824 The Company’s standard hardware warranty period is typically 12 months from the date of shipment to end-users and 90 days for software. For certainaccess products, the Company offers a limited lifetime hardware warranty commencing on the date of shipment from the Company and ending five (5) yearsfollowing the Company’s announcement of the end of sale of such product. Upon shipment of products to its customers, the Company estimates expenses forthe cost to repair or replace products that may be returned under warranty and accrue a liability in cost of product revenue for this amount. The determinationof the Company’s warranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costsand any product warranty problems that are identified after shipment. The Company estimates and adjusts these accruals at each balance sheet date inaccordance with changes in these factors. In fiscal 2010, the Company recorded $0.6 million for a change in estimate resulting from losses identified relatedto a failure in one of its products and recovered in a settlement all estimated costs related to this issue from its outside design manufacturer.In the normal course of business to facilitate sales of its products, the Company indemnifies its resellers and end-user customers with respect to certainmatters. The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other claimsmade against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount 65Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of the claim. It is not possible to estimate the maximum potential amount under these indemnification agreements due to the limited history of priorindemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company underthese agreements have not had a material impact on its operating results or financial position.Other Accrued LiabilitiesThe following are the components of other accrued liabilities (in thousands): June 27, 2010 June 28, 2009Accrued income taxes $598 $2,467Accrued general and administrative costs 2,674 3,306Accrued research and development costs 1,326 1,445Accrued overhead costs 3,457 4,663Accrued marketing development funds 1,976 1,332Other accrued liabilities 3,350 1,453Total $13,381 $14,666AdvertisingCooperative advertising obligations with customers are accrued and the costs expensed at the time the related revenue is recognized. All otheradvertising costs are expensed as incurred. Cooperative advertising expenses are recorded as marketing expenses to the extent that an advertising benefitseparate from the revenue transaction can be identified and the cash paid does not exceed the fair value of that advertising benefit received. Otherwise, suchcooperative advertising obligations with customers are recorded as a reduction of revenue. Advertising expenses were $0.1 million in fiscal 2010 and $0.2million for each of fiscal 2009 and fiscal 2008.Recently Issued Accounting StandardsIn January 2010, the FASB issued a new accounting standards update for fair value measurements and disclosures. A reporting entity should discloseseparately the amounts of significant transfers in and out of Level 1 and Level 2 and describe the reasons for the transfers. A reporting entity shouldseparately disclose information about purchases, sales, issuances and settlements for Level 3 reconciliation disclosures. The new disclosures andclarifications of existing disclosures are effective for financial statements issued interim or annual financial periods ending after December 15, 2009, with theexception for the reconciliation disclosures for Level 3, which are effective for financial statements issued interim or annual financial periods ending afterDecember 15, 2010. The adoption of the new accounting standards update did not have a material impact on the Company’s consolidated results ofoperations, financial condition or financial disclosures.In October 2009, the FASB issued a new accounting standard which excludes from the scope of software revenue guidance the revenue arrangementsthat include tangible products containing software components and non-software components that function together to deliver the tangible product’sessential functionality. At the same time, the FASB also issued a new accounting standard which updates existing guidance pertaining to the separation andallocation of consideration in a multiple element arrangement. This new guidance will be applicable to the Company’s multiple element arrangements thatinclude such tangible products. The new standards are effective prospectively for revenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010. The adoption of this accounting standard is not expected to have a material effect on the amount of revenue reported. 66Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 3. Commitments, Contingencies and LeasesLine of CreditIn October 2008, UBS and the Company entered into a secured line of credit collateralized by the Company’s ARS held by UBS. The maximumamount of credit available under this line of credit is $28.8 million. On November 7, 2008 the Company accepted the UBS Rights offer from UBS and hencethe terms of the “no net cost” loan program apply to this line of credit. Under this program, the interest rate on this secured credit facility will be equivalent tothe interest rate earned by the Company on the ARS at UBS, resulting in no net interest cost to the Company. There are currently no outstanding borrowingsunder this line of credit. On June 30, 2010, the Company exercised its UBS Rights to redeem the remaining ARS at par. Upon exercising the UBS Rights, thisline of credit was terminated.LeasesThe Company leases office space for its various United States and international sales offices. Certain leases contain rent escalation clauses and renewaloptions. The Company subleases certain of its leased facilities to third party tenants. Future annual minimum lease payments under all noncancelableoperating leases and future rental income under all noncancelable subleases (including facilities included in the Company’s restructuring accruals) havinginitial or remaining lease terms in excess of one year at June 27, 2010 were as follows (in thousands): Future LeasePayments Future RentalIncomeFiscal 2011 $6,706 $399Fiscal 2012 1,883 — Fiscal 2013 878 — Fiscal 2014 837 Thereafter 931 — Total minimum payments $11,235 $399Rent expense, excluding restructuring rent expense, was approximately $4.2 million in fiscal 2010, $4.7 million in fiscal 2009, and $4.8 million infiscal 2008, net of sublease income of zero, $0.1 million and $0.2 million in the respective periods.Purchase CommitmentsThe Company currently has arrangements with contract manufacturers and suppliers for the manufacture of its products. The arrangements allow themto procure long lead-time component inventory on the Company’s behalf based upon a rolling production forecast provided by it. The Company is obligatedto the purchase of long lead-time component inventory that its contract manufacturer procures in accordance with the forecast, unless the Company givesnotice of order cancellation outside of applicable component lead-times. As of June 27, 2010, the Company had non-cancelable commitments to purchaseapproximately $39.1 million of such inventory during the first quarter of fiscal 2011.Legal ProceedingsShareholder Litigation Relating to Historical Stock Option PracticesOn April 25, 2007, an individual identifying herself as one of the Company’s shareholders filed a derivative action in the United States District Courtfor the Northern District of California purporting to assert claims on 67Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) behalf of and in the Company’s name against various of the Company’s current and former directors and officers relating to historical stock option grantingfrom 1999 to 2002 and related accounting practices. Two similar derivative actions were filed thereafter in the same court by other individuals and the threecases were consolidated by order of the Court. After two amended complaints were filed by the lead plaintiff, the Company filed a motion to dismiss thesecond amended complaint, which was granted without prejudice on August 12, 2008.On August 22, 2008, Kathleen Wheatley, an individual identifying herself as one of the Company’s shareholders, filed a motion for the Court toreconsider its ruling on August 12, 2008 granting the Company’s motion to dismiss. In response, the Company asked the Court to reject Ms. Wheatley’smotion on various grounds, including that Ms. Wheatley is not a party to this derivative action. The Court has not yet ruled on Ms. Wheatley’s motion. OnSeptember 4, 2008, Ms. Wheatley filed both a motion to intervene in the derivative action and a third amended complaint, which differs little from the firstamended complaint. The third amended complaint continues to allege that various of the Company’s current and former directors and officers breached theirfiduciary duties and other obligations to the Company and violated state and federal securities laws in connection with its historical grants of stock options.The Company is named as a nominal defendant in the action, but it has customary indemnification agreements with the named defendants. On theCompany’s behalf, Ms. Wheatley seeks unspecified monetary and other relief against the named defendants. The Court has granted Ms. Wheatley’s motion tointervene. On October 16, 2008, the Company, as nominal defendant, moved to dismiss the third amended complaint. On November 17, 2009, the Courtdenied the Company’s motion to dismiss the third amended complaint, and on December 3, 3009, the Company filed a motion for reconsideration or in thealternative, a motion to certify the Order denying the Motion to Dismiss for immediate appeal. On December 30, 2009, the Court issued an Order granting usleave to file the motion for reconsideration and will rule on the Company’s alternative motion to certify the Order for appeal if it denies the motion forreconsideration. On April 2, 2010, the Court denied the Company’s Motion for Reconsideration and for Stay of Action and Certification and Appeal. Nodates have been set for the Company’s response to the Third Amended Complaint. The Company intends to continue to defend the derivative actionvigorously, but due to the uncertainty of litigation, the Company cannot predict the ultimate outcome of this matter at this time.Intellectual Property LitigationOn April 20, 2007, the Company filed suit against Enterasys Networks in the United States District Court for the Western District of Wisconsin, CivilAction No. 07-C-0229-C. The complaint alleged willful infringement of U.S. Patents Nos. 6,104,700, 6,678,248, and 6,859,438, and sought injunctive reliefagainst Enterasys’ continuing sale of infringing goods and monetary damages. Enterasys responded to the complaint on May 30, 2007, and alsofiled counterclaims alleging infringement of three U.S. patents owned by Enterasys. On April 9, 2008, the Court dismissed Enterasys’ counterclaims on oneof its patents with prejudice. On May 5, 2008, the Court granted the Company’s motion for summary judgment, finding that it does not infringe Enterasys’two remaining patents and dismissing all of Enterasys’ remaining counterclaims with prejudice. On May 30, 2008, a jury found that Enterasys infringed allthree of the Company’s patents and awarded it damages in the amount of $0.2 million. The Court also ruled in the Company’s favor on Enterasys’ challengeto the validity of the Company’s patents. On October 29, 2008, the Court denied Enterasys’ post-trial motion for judgment as a matter of law, and grantedExtreme Network’s motion for a permanent injunction against Enterasys. The injunction order permanently enjoins Enterasys from manufacturing, using,offering to sell, selling in the U.S. and importing into the U.S. the Enterasys products accused of infringing Extreme Network’s three patents. The injunctionwill run until the expiration of the Company’s patents the last of which is not set to expire until March of 2020. On March 16, 2009, the Court also deniedEnterasys’ motion for a new trial, but granted Enterasys’ motion for a stay of the injunction pending appeal. On April 17, 2009, Enterasys filed its 68Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) notice of appeal and on May 1, 2009, the Company filed its cross appeal. The appeal is pending at the U.S. Court of Appeals for the Federal Circuit and theCompany is defending the appeal. Due to the inherent uncertainties of litigation, the Company cannot predict the ultimate outcome of the matter at this time.On June 21, 2005, Enterasys filed suit against Extreme and Foundry Networks, Inc. (“Foundry”) in the United States District Court for the District ofMassachusetts, Civil Action No. 05-11298 DPW. The complaint alleges willful infringement of U.S. Patent Nos. 5,251,205; 5,390,173; 6,128,665; 6,147,995;6,539,022; and 6,560,236, and seeks: a) a judgment that the Company willfully infringe each of the patents; (b) a permanent injunction from infringement,inducement of infringement and contributory infringement of each of the six patents; (c) damages and a “reasonable royalty” to be determined at trial;(d) treble damages; (e) attorneys’ fees, costs and interest; and (f) equitable relief at the Court’s discretion. Foundry brought a claim for reexamination of fiveof the patents at issue to the U.S. Patent and Trademark Office (“PTO”). The stay of the Massachusetts action was lifted on May 21, 2010, and set a claimsconstruction hearing for September 15, 2010. No trial date has been set. The Company intends to defend the lawsuit vigorously, but, due to the inherentuncertainties of litigation, it cannot predict the ultimate outcome of the matter at this time.On February 7, 2008, Network-1 Security Solutions, Inc. sued Extreme Networks along with Cisco, Cisco-Linksys, Inc., Adtran, Inc., EnterasysNetworks, Inc., Netgear, Inc. and 3Com Corporation in the United States District Court for the Eastern District of Texas (Case No. 6:08cv030). On July 16,2010, the Company entered into a Memorandum of Understanding with Nework-1 setting forth the terms for settlement of the lawsuit and license agreement,in which Extreme was granted licenses to certain patents in exchange for a payment of $2.4 million. On August 3, 2010, the Court dismissed the case withprejudice.On February 26, 2008, Fenner Investments, Ltd. filed suit against Extreme Networks along with D-Link Systems, Zyxel Communications, SMCNetworks, Enterasys, Foundry, Netgear, Inc. and 3Com Corporation in the United States District Court for the Eastern District of Texas, Civil Action No. 08-CV-00061. The suit alleges infringement of US Patent No. 7,145,906 and 5,842,224, and seeks damages for the alleged infringement, injunctions againstinfringement and payment of attorneys’ fees, costs and interest. On September 24, 2009, the Company entered into a settlement and license agreement withFenner Investments, in which Extreme was granted licenses to certain patents in exchange for amounts paid. On October 5, 2009, the Court dismissed the casewith prejudice.Other Legal MattersBeginning on July 6, 2001, purported securities fraud class action complaints were filed in the United States District Court for the Southern District ofNew York. The cases were consolidated and the litigation is now captioned as In re Extreme Networks, Inc. Initial Public Offering Securities Litigation, Civ.No. 01-6143 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The operative amended complaintnames us as defendants; six of the Company’s present and former officers and/or directors, including its former CEO and current Chairman of the Board (the“Extreme Networks Defendants”); and several investment banking firms that served as underwriters of its initial public offering and October 1999 secondaryoffering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Actof 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers topurchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers topurchase additional shares in the aftermarket at predetermined prices. Similar allegations were made in other lawsuits challenging over 300 other initialpublic offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. 69Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The parties to the lawsuits have reached a settlement, which was approved by the Court on October 6, 2009. Extreme Networks is not required to makeany cash payments in the settlement. The Court subsequently entered a final judgment of dismissal. Certain objectors have appealed the judgment. If theappeal is successful, the Company intends to defend the lawsuit vigorously, but, due to the inherent uncertainties of litigation, it cannot predict the ultimateoutcome of the matter at this time.Indemnification ObligationsSubject to certain limitations, the Company may be obligated to indemnify its current and former directors, officers and employees. These obligationsarise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify, whereapplicable, generally means that the Company is required to pay or reimburse, and in certain circumstances the Company has paid or reimbursed, theindividuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. It is not possible to estimate themaximum potential amount under these indemnification agreements due to the limited history of these claims. The cost to defend the Company and thenamed individuals could have a material adverse effect on its consolidated financial position, results of operations and cash flows in the future. Recovery ofsuch costs under its directors and officers insurance coverage is uncertain.4. Stockholders’ EquityPreferred StockIn April 2001, in connection with the Company’s Stockholders’ Rights Agreement, the Company authorized the issuance of preferred stock. Thepreferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to provide for the rights, preferences and privilegesof the shares of each series and any qualifications, limitations or restrictions on these shares. As of June 27, 2010, no shares of preferred stock wereoutstanding.Stockholders’ Rights AgreementIn April 2001, the Board of Directors approved a Stockholders’ Rights Agreement (“Rights Agreement”), declaring a dividend of one preferred sharepurchase right for each outstanding share of common stock, par value $0.001 per share, of Extreme Networks common stock. The Rights Agreement isintended to protect stockholders’ rights in the event of an unsolicited takeover attempt. It is not intended to prevent a takeover of Extreme Networks on termsthat are favorable and fair to all stockholders and will not interfere with a merger approved by the Board of Directors. In the event the rights becomeexercisable, each right entitles stockholders to buy, at an exercise price of $150 per right owned, a unit equal to a portion of a new share of Extreme NetworksSeries A preferred stock. The rights will be exercisable only if a person or a group acquires or announces a tender or exchange offer to acquire 4.95% or moreof the Company’s common stock. The rights, which expire in April 2011, are redeemable for $0.001 per right at the approval of the Board of Directors.Stock RepurchaseOn August 11, 2008, the Company commenced a “modified Dutch auction” tender offer to purchase up to $100 million worth of its shares ofoutstanding common stock, including the associated preferred stock purchase rights, at a price per share not less than $3.30 and not greater than $3.70,subject to certain conditions. Following the expiration of the tender offer on September 12, 2008, the Company repurchased 28,571,428 shares of commonstock on September 19, 2008 at $3.50 per share, the lowest purchase price specified by tendering 70Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) stockholders that enabled the Company to purchase $100 million worth of shares of common stock. The Company’s common stock closing stock price onSeptember 19, 2008 was $3.05. The Company funded this purchase entirely from cash on hand. Total cash expenditures were $101.4 million for the sharesrepurchased, including direct costs associated with the repurchase.Comprehensive IncomeThe following are the components of comprehensive income, net of tax (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008 Net income $227 $2,815 $8,381 Change in unrealized (loss) gain on investments: Net unrealized gain on ARS recorded to other income $— $2,517 $— Net unrealized (loss) gain on other investments (265) 642 (2,346) Net unrealized (loss) gain on investments (265) 3,159 (2,346) Foreign currency translation adjustments: Beginning balance 912 2,025 974 Ending balance 954 912 2,025 Foreign currency translation adjustments change 42 (1,113) 1,051 Comprehensive income $4 $4,861 $7,086 Shares Reserved for IssuanceThe following are shares reserved for issuance (in thousands): June 27,2010Employee stock purchase plan 3,818Employee stock options 25,813Total shares reserved for issuance 29,6315. Employee Benefit Plans (including Share-based Compensation)As of June 27, 2010, the Company has the following share-based compensation plans:2005 Equity Incentive PlanThe 2005 Equity Incentive Plan (the “2005 Plan”) was adopted by the Company’s Board of Directors on October 20, 2005, and approved bystockholders on December 2, 2005. The 2005 Plan replaces the 1996 Stock Option Plan (the “1996 Plan”), 2000 Nonstatutory Stock Option Plan (the “2000Plan”) and 2001 Nonstatutory Stock Option Plan (the “2001 Plan”).Under the 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares,performance units, and other share-based or cash-based awards to employees and consultants. The 2005 Plan also authorizes the grant of awards of stockoptions, stock 71Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) appreciation rights, restricted stock and restricted stock units to non-employee members of the Board of Directors and deferred compensation awards toofficers, directors and certain management or highly compensated employees. The 2005 Plan authorizes the issuance of up to 12,000,000 shares of theCompany’s common stock and on December 23, 2009, the Company’s shareholders approved to increase the number of shares authorized by another4,000,000 shares. In addition, up to 11,000,000 shares subject to awards outstanding under the 1996 Plan, the 2000 Plan, and the 2001 Plan that expired havebeen added to the number of shares available for future grant under the 2005 Plan. As of June 27, 2010, total options and awards to acquire 9,863,656 shareswere outstanding under the 2005 Plan and 13,412,704 shares are available for grant under the 2005 Plan.Amended 1996 Stock Option PlanThe 1996 Plan was originally adopted in September 1996, and provided for the grant of options for common stock to eligible participants. A total of56,382,867 shares were reserved under the 1996 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the1996 Plan was terminated, and, as of June 27, 2010, options to acquire 2,269,862 shares were outstanding under the 1996 Plan.2000 PlanIn March 2000, the Board of Directors adopted the 2000 Plan which provided for the grant of options for common stock to eligible participants. A totalof 4,000,000 shares were reserved under the 2000 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the2000 Plan was terminated, and, as of June 27, 2010, options to acquire 136,402 shares were outstanding under the 2000 Plan.2001 PlanIn May 2001, the Board of Directors adopted the 2001 Plan which provided for the grant of options for common stock to eligible participants. A totalof 4,000,000 shares were reserved under the 2001 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the2001 Plan was terminated, and, as of June 27, 2010, options to acquire 130,520 shares were outstanding under the 2001 Plan.The following table summarizes stock option activity under all plans: Number ofShares(000’s) Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractualTerm AggregateIntrinsic Value($ 000’s)Options outstanding at July 1, 2007 21,441 $5.97 Granted 8,085 $4.07 Exercised (840) $2.82 Canceled (9,717) $6.46 Options outstanding at June 29, 2008 18,969 $5.05 Granted 2,759 $2.01 Exercised (398) $2.82 Canceled (3,691) $4.96 Options outstanding at June 28, 2009 17,639 $4.65 Granted 936 $2.31 Exercised (337) $2.20 Canceled (8,652) $4.94 Options outstanding at June 27, 2010 9,586 $4.24 6.34 1,723Exercisable at June 27, 2010 6,656 $4.79 5.68 628Vested and expected to vest at June 27, 2010 9,329 $4.28 6.29 1,617 72Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes significant ranges of outstanding and exercisable options at June 27, 2010: Options Outstanding Options ExercisableRange of Exercise Prices NumberOutstanding (000’s) Weighted-AverageRemaining Contractual Life Weighted-AverageExercise Price NumberExercisable (000’s) Weighted-AverageExercise Price (In years) $0.93 – $2.05 1,650 8.3 $2.02 777 $2.01$2.09 – $3.53 1,817 7.02 $2.94 915 $3.43$3.58 – $4.09 1,601 6.42 $3.81 1,409 $3.82$4.11 – $4.24 132 6.58 $4.18 127 $4.18$4.25 – $4.25 1,915 7.24 $4.25 962 $4.25$4.26 – $30.30 2,471 3.76 $6.95 2,466 $6.96$0.93 – $30.30 9,586 6.34 $4.24 6,656 $4.79The total intrinsic value of options exercised in fiscal 2010, fiscal 2009 and fiscal 2008 were $0.2 million, $0.2 million and $0.7 million, respectively.The fair value of options vested in fiscal 2010, fiscal 2009 and fiscal 2008 were $1.4 million, $3.3 million and $3.8 million, respectively.Stock AwardsStock awards may be granted under the 2005 Plan on terms approved by the Board of Directors. Stock awards generally provide for the issuance ofrestricted stock which vests over a fixed period. A summary of the status of the Company’s non-vested stock awards as of June 27, 2010 and changes duringfiscal 2010 is presented below: Number ofShares(000’s) Weighted-Average Grant-Date Fair ValueNon-vested stock outstanding at June 28, 2009 796 $3.37Granted 2,965 $2.77Vested (702) $2.91Cancelled (179) $2.40Non-vested stock outstanding at June 27, 2010 2,880 $2.92During fiscal 2010, fiscal 2009 and fiscal 2008, the Company granted non-vested stock awards under the 2005 Plan for 2,965,000, 742,000 and155,000 shares of common stock with a weighted average grant date fair value per share of $2.77, $2.04 and $4.06, respectively. The shares were placed in anescrow account and will be released to the recipients as the shares vest over periods of up to twenty-four months. If a participant terminates employment priorto the vesting dates, the unvested shares will be canceled and returned to the 2005 Plan. The Company recognizes compensation expense on the awards overthe vesting period based on an intrinsic value calculation as of the date of grant. As of June 27, 2010, there were approximately $4.1 million in unrecognizedcompensation costs related to non-vested stock awards. This cost is expected to be recognized over a weighted-average period of approximately 1.7 year.1999 Employee Stock Purchase PlanIn January 1999, the Board of Directors approved the adoption of Extreme Network’s 1999 Employee Stock Purchase Plan (the “Purchase Plan”). OnDecember 2, 2005, the stockholders approved an amendment to the 73Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Purchase Plan to increase the maximum number of shares of common stock that may be issued under the plan by 5,000,000 to a total of 12,000,000 shares.The Purchase Plan permits eligible employees to acquire shares of the Company’s common stock through periodic payroll deductions of up to 15% of totalcompensation. No more than 625 shares may be purchased on any purchase date per employee. Each offering period has a maximum duration of 3 months.The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common stock on the first day of theapplicable offering period or on the last day of the respective purchase period. On January 26, 2010, the Board of Directors approved an amendment to thePurchase Plan to increase the maximum number of shares that may be purchased on any purchase date per employee from 625 shares to 1,000 shares. ThroughJune 27, 2010, 8,182,336 shares had been purchased under the Purchase Plan.Share Based CompensationShare-based compensation expense recognized in the financial statements by line item caption is as follows (dollars in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008 Cost of product revenue $489 $205 $479 Cost of service revenue 523 253 251 Sales and marketing 1,853 1,349 1,656 Research and development 1,695 1,240 1,554 General and administrative 1,675 807 1,119 Total share-based compensation expense 6,235 3,854 5,059 Share-based compensation cost capitalized in inventory 8 (3) (7) Total share-based compensation cost $6,243 $3,851 $5,052 As of June 27, 2010, there was $4.6 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to berecognized over a weighted-average period of approximately 2.3 years.The weighted-average grant-date per share fair value of options granted in fiscal 2010 and 2009 were $0.94 and $0.54, respectively. The weighted-average estimated per share fair value of shares purchased under the Company’s 1999 Employee Stock Purchase Plan (“ESPP”) in fiscal 2010 and 2009 were$0.66 and $0.65, respectively.The Company uses the straight-line method for expense attribution, and the Company estimates forfeitures and only recognizes expense for thoseshares expected to vest. The Company’s estimated forfeiture rate in fiscal 2010 based on the Company’s historical forfeiture experience is approximately12%. The Company modified its estimated forfeiture rate in the fourth quarter of fiscal 2010 and recognized the cumulative effect of the change, as a decreasein compensation expense, in that quarter of approximately $0.1 million.The fair value of each option award and ESPP is estimated on the date of grant using the Black-Scholes-Merton option valuation model with theweighted average assumptions noted in the following table. The expected term of options granted is derived from historical data on employee exercise andpost-vesting employment termination behavior. The expected term of ESPP represents the contractual life of the ESPP purchase period. The risk-free ratebased upon the estimated life of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based onboth the implied volatilities from traded options on the Company’s stock and historical volatility on the Company’s stock. 74Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The fair value of stock options granted and employee stock purchase plan awards granted in fiscal 2010, 2009 and 2008 was estimated at the date ofgrant using a Black-Scholes option pricing model with the following weighted average assumptions: Stock Option Plan Employee Stock Purchase Plan Year Ended Year Ended June 27,2010 June 28,2009 June 29,2008 June 27,2010 June 28,2009 June 29,2008 Expected life 3.03 yrs 2.51 yrs 2.5 yrs 0.25 yrs 0.25 yrs 0.25 yrs Risk-free interest rate 1.36% 1.36% 3.5% 0.20% 0.72% 2.96% Volatility 59% 41% 40% 73% 78% 45% Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Adjustments to Share-Based Compensation Expense During Fiscal 2010The Company was notified by its third party software provider that it had made certain changes to how its software program calculates stock-basedcompensation expense. Specifically, the prior version of this software that the Company had been using calculated stock-based compensation expense byincorrectly applying a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than calculatingstock-based compensation expense based upon the actual vested portion of the grant date fair value, resulting in an understatement of stock-basedcompensation expense in certain periods prior to the grant’s final vest date. Consequently, the Company identified errors in the calculation of stock-basedcompensation expense for fiscal years ended June 29, 2008, July 1, 2007 and July 2, 2006. The errors identified relate only to the timing of stock-basedcompensation expense recognition.The Company determined that the cumulative error from the understatement of stock-based compensation expense related to the periods discussedabove totaled $0.9 million through June 29, 2008. The impact of the errors on the fiscal years ended June 29, 2008, July 1, 2007 and July 2, 2006, is todecrease net income by $0.3 million for each year.Management has determined that the impact of this error is not material to the previously issued annual and interim financial statements. Accordingly,the annual consolidated financial statements for the fiscal year ended June 27, 2010 include the cumulative adjustment to increase stock-based compensationexpense by $0.9 million (or $0.01 per share) to correct these errors. The Company does not believe the correction of these errors is material to the annualconsolidated financial statements for the fiscal year ending June 27, 2010.Employee Stock Option Exchange ProgramOn December 23, 2009, the Company’s stockholders approved a voluntary program (“Exchange Program”) that permitted eligible employees toexchange certain outstanding stock options that were “underwater” for a lesser number of shares of restricted stock units to be granted under the ExtremeNetworks, Inc. 2005 Equity Incentive Plan (the “2005 Plan”) and to exchange certain other stock options that are more substantially underwater for a cashpayment. The Exchange Program was open to all of the Company’s United States employees, except for members of its Board of Directors and its executiveofficers. The Exchange Program commenced on February 4, 2010 and ended March 4, 2010. On March 5, 2010, the Company cancelled a total of 3,058,761tendered stock options, issued a total of 569,189 replacement restricted stock units under the 2005 Plan, and incurred a cash outlay of $8,769 which was paidout at the end of March 2010. 75Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 401(k) PlanThe Company provides a tax-qualified employee savings and retirement plan, commonly known as a 401(k) plan (the “Plan”), which covers theCompany’s eligible employees. Pursuant to the Plan, employees may elect to reduce their current compensation up to the lesser of 80% or the statutorilyprescribed limit of $16,500 for calendar year 2010. Effective January 1, 2005, employees age 50 or over may elect to contribute an additional $5,500. Theamount contributed to the Plan is on a pre-tax basis.The Company provides for discretionary matching contributions as determined by the Board of Directors for each calendar year. Prior to January 1,2008, the Board of Directors set the match at $0.25 for every dollar contributed by the employee up to the first 4% of pay. The same level of match wasapproved during the 2007 and 2006 calendar years. On January 1, 2008, the Board of Directors increased the match at $0.50 for every dollar contributed bythe employee up to the first 4% of pay. All matching contributions vest immediately. In addition, the Plan provides for discretionary contributions asdetermined by the Board of Directors each year. Effective April 1, 2009, the Company suspended the 401(k) matching program. The Company’s matchingcontributions to the Plan totaled zero, $1,058,850 and $906,027 for fiscal 2010, fiscal 2009 and fiscal 2008, respectively. No discretionary contributionswere made in fiscal 2010, fiscal 2009 and fiscal 2008.6. Income TaxesIncome before income taxes is as follows (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008Domestic $(10,024) $(10,566) $4,960Foreign 9,841 15,853 5,599Total $(183) $5,287 $10,559The provision for (benefit from) income taxes for fiscal 2010, 2009 and fiscal 2008 consisted of the following (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008Current: Federal $(1,062) $(218) $296State 106 210 103Foreign 596 2,396 1,729Total current (360) 2,388 2,128Deferred: Federal — — — State — — — Foreign (50) 84 50Total deferred (50) 84 50Provision for income taxes $(410) $2,472 $2,178 76Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Pretax income from foreign operations was $9.8 million, $15.8 million and $5.6 million in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate (35 percent) toincome (loss) before taxes is explained below (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008 Tax at federal statutory rate (benefit) $(64) $1,800 $3,745 Federal alternative minimum tax — 391 296 State income tax, net of federal benefit 66 137 67 Unbenefited foreign taxes — 350 (562) Valuation allowance 607 (9,349) (3,966) Foreign earnings taxed at other than U.S. rates (3,348) 5,135 381 Deferred compensation 2,196 307 388 Dividends from foreign subsidiary — 4,175 1,661 Other 133 (474) 168 Provision for income taxes $(410) $2,472 $2,178 Significant components of the Company’s deferred tax assets are as follows (in thousands): June 27,2010 June 28,2009 Deferred tax assets: Net operating loss carryforwards $76,216 $65,476 Tax credit carryforwards 20,408 20,614 Depreciation 17,036 17,495 Deferred revenue (net) 9,957 6,611 Warrant amortization 8,250 9,410 Inventory write-downs 3,902 3,839 Other allowances and accruals 4,673 5,659 Other 15,170 14,862 Total deferred tax assets 155,612 143,966 Valuation allowance (155,067) (143,640) Total net deferred tax assets 545 326 Deferred tax liabilities: Deferred tax liability on foreign withholdings (731) (564) Total deferred tax liabilities (731) (564) Net deferred tax assets (liabilities) $(186) $(238) Recorded as: Net current deferred tax assets $392 $244 Net non-current deferred tax assets 153 — Net non-current deferred tax liabilities (731) (482) Net deferred tax assets (liabilities) $(186) $(238) 77Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s valuation allowance increased by $11.5 million in fiscal 2010, decreased by $14.1 million in fiscal 2009, and decreased by $9.0million in fiscal 2008. The Company has provided a full valuation allowance against all of its U.S. federal and state deferred tax assets, and no valuationallowance against any of its non-U.S. deferred tax assets. The valuation allowance is determined by assessing both negative and positive evidence todetermine whether it is more likely than not that the deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis.The Company’s U.S. losses in recent periods represent sufficient negative evidence to require a full valuation allowance against its U.S. federal and state netdeferred tax assets. This valuation allowance will be evaluated periodically and can be reversed partially or totally if business results and the economicenvironment have sufficiently improved to support realization of the Company’s deferred tax assets.As of June 27, 2010, the Company had net operating loss carryforwards for federal and state tax purposes of $262.8 million and $90.0 million,respectively, of which $53.7 million and $32.0 million, respectively represent deductions from share-based compensation for which a benefit would berecorded in additional paid-in capital when realized. The Company also had federal and state tax credit carryforwards of $8.4 million and $18.5 million,respectively, as of June 27, 2010. Federal net operating loss carryforwards of $262.8 million will expire between 2013 through 2030 and state net operatinglosses of $90.0 million will expire between 2011 through 2020, if not utilized. Federal tax credits of $8.4 million will expire beginning in 2020, if notutilized, and state tax credits of $1.7 million will expire beginning in 2011, if not utilized. The additional state tax credits of $16.8 million will carry forwardindefinitely.As of June 27, 2010, the Company conducted an Internal Revenue Code Section 382 (“Sec. 382”) analysis with respect to its net operating loss andcredit carryforwards and determined that there was no limitation. It is possible that subsequent ownership changes may limit the utilization of these taxattributes.As of June 27, 2010, the Company intends to indefinitely reinvest the earnings of certain foreign corporations. The determination of the unrecognizeddeferred tax liability on a future repatriation of these earnings is not practicable.In its first fiscal quarter 2008, the Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretationof FASB Statement No. 109 (codified in FASB ASC Topic 740, Income Taxes) which did not result in a material impact on the Company’s consolidatedfinancial statements. As of June 27, 2010, the Company has $23.9 million of unrecognized tax benefits. If fully recognized in the future, $1.0 million wouldimpact the effective tax rate, and $22.9 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance.The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months.As of June 28, 2009, we had $22.6 million of unrecognized tax benefits. If fully recognized in the future, $2.0 million would impact our effective taxrate, and $20.6 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. 78Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands): Balance at July 2, 2007 (at adoption) $16,131 Increases related to prior year tax positions 154 Decreases related to current year tax positions (720) Balance at June 29, 2008 $15,565 Increase related to prior year tax positions 6,029 Increase related to current year tax positions 984 Balance at June 28, 2009 $22,578 Decrease related to prior year tax positions (98) Increase related to prior year tax positions 1,094 Increase related to current year tax positions 1,414 Lapse of statute of limitations (1,078) Balance at June 27, 2010 $23,910 Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the ConsolidatedStatement of Operations and totaled approximately $72,000, $126,000 and $182,000 for the year end June 27, 2010, June 28, 2009 and June 29, 2008,respectively. Accrued interest and penalties were approximately $193,000 and $548,000 as of June 27, 2010 and June 28, 2009, respectively.In general, the Company’s U.S. federal income tax returns are subject to examination by tax authorities for fiscal years 1998 forward due to netoperating losses and the Company’s state income tax returns are subject to examination for fiscal years 2001 forward due to net operating losses. TheCompany’s Netherlands income tax return is subject to examination by tax authorities for fiscal year 2005.7. Disclosure about Segments of an Enterprise and Geographic AreasOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly bythe chief operating decision makers with respect to the allocation of resources and performance.The Company operates in one segment, the development and marketing of network infrastructure equipment. The Company conducts businessglobally and is managed geographically. Revenue is attributed to a geographical area based on the location of the customers. The Company operates in threegeographical areas: North America, which includes the United States, Canada and Central America; EMEA, which includes Europe, Middle East, Africa andSouth America; and APAC which includes Asia Pacific and Japan.Information regarding geographic areas is as follows (in thousands): Year Ended June 28,2010 June 28,2009 June 29,2008Net Revenues: North America $123,236 $130,995 $158,215EMEA $133,736 153,764 143,535APAC $52,382 50,800 60,085Total net revenues $309,354 $335,559 $361,835 79Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Substantially all of the Company’s assets were attributable to North America operations at June 27, 2010 and June 28, 2009.8. Net Income (Loss) Per ShareBasic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period, lessshares subject to repurchase, and excludes any dilutive effects of options, warrants and unvested restricted stock. Dilutive earnings per share is calculated bydividing net income by the weighted average number of common shares used in the basic earnings per share calculation plus the dilutive effect of sharessubject to repurchase, options, warrants and unvested restricted stock. The following table presents the calculation of basic and diluted net income per share(in thousands, except per share data): Year Ended June 27,2010 June 28,2009 June 29,2008Net income $227 $2,815 $8,381Weighted-average shares used in per share calculation – basic 89,281 94,224 115,002Incremental shares using the treasury stock method: Stock options 171 14 186Unvested restricted awards 25 46 123Warrants issuable to Avaya 0 0 473Weighted -average share used in per share calculation – diluted 89,477 94,284 115,784Net income per share – basic $0.00 $0.03 $0.07Net income per share – diluted $0.00 $0.03 $0.07The following table sets forth potential shares of common stock that are not included in the diluted net income (loss) per share calculation abovebecause they would be anti-dilutive for the periods presented (in thousands): Year Ended June 27,2010 June 28,2009 June 29,2008Weighted stock options outstanding: Out-of-the-money options 12,217 18,093 19,422Total potential shares of common stock excluded from the computation of earnings per share 12,217 18,093 19,422Weighted stock options outstanding with an exercise price higher than the Company’s average stock price for the periods presented (“Out-of-the-money options”) are excluded from the calculation of diluted net income per share since the effect would have been anti-dilutive under the treasury stockmethod.9. Foreign Exchange Forward ContractsThe Company uses derivative financial instruments to manage exposures to foreign currency. The Company’s objective for holding derivatives is touse the most effective methods to minimize the impact of these exposures. The Company does not enter into derivatives for speculative or trading purposes.The Company records all derivatives on the balance sheet as Other Assets, Net at fair value. Changes in the fair value of 80Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) derivatives are recognized in earnings as Other Income (Expense). The Company enters into foreign exchange forward contracts to mitigate the effect of gainsand losses generated by the foreign currency forecasted transactions related to certain operating expenses and remeasurement of certain assets and liabilitiesdenominated in Japanese Yen, the Euro, the Swedish Krona, the Indian Rupee and the British Pound. These derivatives do not qualify as hedges. At June 27,2010, these forward foreign currency contracts had a notional principal amount of $19.1 million and fair value was $0.1 million. These contracts havematurities of less than 60 days. Changes in the fair value of these foreign exchange forward contracts are offset largely by remeasurement of the underlyingassets and liabilities.Foreign currency transaction gains and losses from operations were a loss of $0.4 million in fiscal 2010, a loss of $0.1 million in fiscal 2009 and a lossof $0.7 million in fiscal 2008.10. Restructuring Charges and Technology AgreementRestructuring ChargesAs of June 27, 2010, restructuring liabilities were $3.4 million and consisted of obligations under excess facility operating leases, net of projectedfuture sublease receipts and termination benefits. During fiscal 2010, 2009 and 2008, the Company recorded restructuring charges of $4.2 million, $2.2million, and $0.9 million, respectively.Charges in fiscal 2010 were: • $4.6 million related to a restructuring of the organization from a business unit organization to a functional organization. In connection with therestructuring, the Company had a reduction in force (“RIF”) and terminated 8% of its workforce. Total termination benefits were $4.1 million.The RIF was executed and completed in the second quarter of fiscal 2010. In addition, the Company eliminated certain redundant engineeringprojects in conjunction with the reorganization. The Company incurred $0.5 million related to the discontinued engineering projects. • $0.2 million increase in operating expenses related to one of the Company’s restructured facilities. • $0.5 million reversal of restructuring expense due to higher projected sublease receipt from a sublease renewal arrangement. • $0.1 million reversal of restructuring expense related to the settlement of employment termination benefits incurred in the third fiscal quarter of2009.The charges in fiscal 2009 were: • $0.8 million related to the Company’s termination of 1% of its workforce, exiting a leased facility where the terminated employees worked andthe write-off of impaired assets as part of its strategic plan. This restructuring was completed by the end of the third quarter of fiscal 2009. • $1.9 million related to a reduction-in-force of a further 5% of the Company’s workforce to reduce operating costs and realign our organization inthe current competitive operating environment. The reduction-in-force was executed in the third quarter of fiscal 2009 and was completed by theend of the fourth quarter of fiscal 2009.These charges were offset by a reversal of $0.5 million of restructuring expense due to higher than projected sublease receipt from a sublease renewalarrangement. 81Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The charges in fiscal 2008 were for excess facilities charges and represented increases to the charges initially recognized during the fourth and thirdquarter of fiscal 2002, respectively. The commercial real estate market deteriorated in fiscal 2006 through fiscal 2008 and the Company was not able to findsuitable tenants to sublease these facilities necessitating additional charges due to lower projected sublease receipts. The lower than projected subleaseincome necessitated an increase in the liability to take into consideration the unfavorable difference between lease obligation payments and projectedsublease receipts. The actual costs could differ from the Company’s estimates, and additional adjustments to the restructuring liability could be recorded ifthe Company is able to negotiate reasonable termination fees on certain facilities, if facility sub-lease rental rates change, or if other estimates andassumptions change.Restructuring liabilities consist of (in thousands): ExcessFacilities AssetImpairment ContractTermination TerminationBenefits Accelerationof StockAwards Total Balance at July 1, 2007 $11,395 $83 $1,098 $1,412 $— $13,988 Period charges 946 — — — — 946 Period reversals — — — (53) — (53) Period impairments — (83) — — — (83) Period payments (2,952) — (1,098) (1,359) — (5,409) Balance at June 29, 2008 9,389 — — — — 9,389 Period charges 96 415 — 2,220 — 2,731 Period reversals (487) — — — — (487) Period impairments — (415) — — — (415) Period payments (2,661) — — (1,479) — (4,140) Balance at June 28, 2009 6,337 — — 741 — 7,078 Period charges 260 449 86 3,763 353 4,911 Period reversals (529) — — (139) — (668) Period write-offs — (65) — — (353) (418) Period payments (2,928) (384) (77) (4,144) — (7,533) Restructuring Liabilities at June 27, 2010 3,140 — 9 221 — 3,370 Less current portion 2,867 — 9 221 — 3,097 Restructuring liabilities at June 27, 2010, less currentportion $273 $— $— $— $— $273 Technology AgreementsOn March 31, 2005, the Company entered into a Patent and Cross License Agreement (“Technology Agreement”) with IBM. The agreement providesfor a release of prior claims and a cross license of patents extending into the future from the effective date of the agreement. On December 22, 2008, theCompany amended the Technology Agreement to extend the term of the agreement over the remaining life of the patents. The Company capitalized the costof the amendment in other assets and continued to amortize the remaining cost of the Technology Agreement and its amendment over the remaining life ofthe patents.On July 16, 2010, the Company entered into a Memorandum of Understanding (“Network-1 MOU”) with Network-1 Security Solutions, Inc. TheNetwork-1 MOU provides for a nonexclusive and worldwide license to certain patents of each party, and a release of claims based on any prior infringementof such patents. The license term is nine years and eight months and expires in March 2020. The release covers any potential claims arising 82Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) out of the past use or practice of any of the patents. Total fees for the grant of the license under the Network-1 MOU were $2.4 million. The Company chargedthe estimated value of the release of prior claims of $0.2 million to Cost of Product Revenues for claims incurred in fiscal 2010 and $0.8 million to LitigationSettlement for claims incurred prior to fiscal 2010 in its fiscal 2010 financial statements. The remaining $1.4 million was recorded as other assets and is beingrecognized ratably over the license period in Cost of Product Revenue.11. Subsequent EventsRedemption of ARS from UBSOn June 30, 2010, the Company exercised the Rights from UBS entitling the Company to sell the remaining ARS balance of $25.3 million par valueoriginally purchased from UBS. On July 1, 2010, the Company received $25.3 million plus accrued interest in cash from UBS for the ARS settlement.Amendment to Rights AgreementJune 30, 2010, the Board of Directors (the “Board”) of the Company adopted an amendment (the “Amendment”) to the Rights Agreement, dated as ofApril 27, 2001 (the “Rights Plan”), between the Company and Mellon Investor Services LLC as the rights agent. The Rights Plan governs the terms of eachright (a “Right”) that has been issued with each share of common stock of the Company (the “common stock”). Each Right initially represents the right topurchase one one-thousandth of a share of Series A Preferred Stock of the Company.The Company adopted the Amendment to preserve the value of its deferred tax assets, including its net operating loss carry forwards, because its abilityto fully use its tax benefits to offset future income may be limited if it experiences an “ownership change” for purposes of Section 382 of the InternalRevenue Code of 1986 as a result of ordinary buying and selling of its common stock.Generally, the Company would experience a Section 382 ownership change if stockholders who beneficially own (or who are deemed underSection 382 to beneficially own) 5% or more of the Company’ outstanding common stock increase their aggregate beneficial ownership of the outstandingcommon stock by more than 50 percent over a rolling three-year period.There is no guarantee, however, that the Rights Plan will prevent the Company from experiencing an ownership change.Under the Amendment, a person would become an Acquiring Person if such person (when combined with such person’s affiliates and associates)acquires 4.95% of the then outstanding common stock. Any holder who currently owns greater than 4.95% of outstanding common stock is grand-fathered,but such holder may become an Acquiring Person if such holder acquires an additional 0.5% of the Company’ common stock.The Board may, at its option, at any time after any person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisableRights (other than those held by the Acquiring Person and its affiliates and associates) for common stock at an exchange ratio of one share of common stockper Right (subject to adjustment from time to time). If a person becomes an Acquiring Person, such person may experience substantial dilution to its holdingsthrough the exercise of Rights by the holders of Rights or the exchange, if determined by the Board, of Rights for common stock.The Amendment allows the Board to grant exceptions to the Plan, and requires the Board to review the necessity of this new provision of the RightsPlan annually. The Rights Plan expires on April 27, 2011, and there is no guarantee, however, that the Rights Plan will prevent the Company fromexperiencing an ownership change. 83Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Network-1 Memorandum of UnderstandingOn July 16, 2010, the Company entered into a Memorandum of Understanding (“Network-1 MOU”) with Network-1 Security Solutions, Inc. TheNetwork-1 MOU provides for a nonexclusive and worldwide license to certain patents of each party, and a release of claims based on any prior infringementof such patents. The license term is nine years and eight months and expires in March 2020. The release covers any potential claims arising out of the past useor practice of any of the patents. Total fees for the grant of the license under the Network-1 MOU were $2.4 million. The Company charged the estimatedvalue of the release of prior claims of $0.2 million to Cost of Product Revenues for claims incurred in fiscal 2010 and $0.8 million to Litigation Settlementfor claims incurred prior to fiscal 2010 in its fiscal 2010 financial statements. The remaining $1.4 million was recorded as other assets and is being recognizedratably over the license period in Cost of Product Revenue.12. Quarterly Financial Data (Unaudited)Quarterly results for the years ended June 27, 2010 and June 28, 2009 follow: June 27,2010(1) March 28,2010(2) Dec 27,2009(3) Sept 27,2009(4) (In thousands, except per share amounts) Net revenues $85,452 $78,197 $79,397 $66,309 Gross profit $48,617 $45,339 $45,772 $36,770 Net income (loss) $3,412 $3,676 $(1,379) $(5,482) Net income (loss) per share – basic $0.04 $0.04 $(0.02) $(0.06) Net income (loss) per share – diluted $0.04 $0.04 $(0.02) $(0.06) June 28,2009(5) March 29,2009(6) Dec 28,2008(7) Sept 28,2008(8) (In thousands, except per share amounts) Net revenues $81,282 $77,202 $87,548 $89,526 Gross profit $45,986 $44,418 $48,691 $51,432 Net income (loss) $883 $(2,173) $2,466 $1,639 Net income (loss) per share – basic $0.01 $(0.02) $0.03 $0.01 Net income (loss) per share – diluted $0.01 $(0.02) $0.03 $0.01 (1)Net loss and net loss per share include the effect of stock-based compensation expense of $1.7 million, a restructuring charge of $0.2 million andlitigation settlement of $1.0 million.(2)Net loss and net loss per share include the effect of stock-based compensation expense of $1.4 million and a restructuring charge of $0.4 million.(3)Net loss and net loss per share include the effect of stock-based compensation expense of $2.0 million and a restructuring charge of $4.1 million.(4)Net loss and net loss per share include the effect of stock-based compensation expense of $1.1 million and a restructuring reversal of $0.5 million.(5)Net loss and net loss per share include the effect of stock-based compensation expense of $1.2 million and a restructuring charge of $0.2 million.(6)Net loss and net loss per share include the effect of stock-based compensation expense of $1.2 million and a restructuring charge of $2.1 million.(7)Net loss and net loss per share include the effect of stock-based compensation expense of $1.0 million.(8)Net loss and net loss per share include the effect of stock-based compensation expense of $0.4 million.Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters maynot agree with per share amounts for the year. 84Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in theCompany’s reports filed under the Securities Exchange Act of 1934 as amended, (the “Exchange Act”), such as this Report, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules and forms and to reasonably assure that such information is accumulated andcommunicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluatedthe effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 27, 2010.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over our financial reporting. There are inherent limitationsin the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly,even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further because of changes inconditions, the effectiveness of internal control may vary over time.We assessed the effectiveness of our internal control over financial reporting as of June 27, 2010. In making this assessment, we used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.Based on our assessment using those criteria, we concluded that, as of June 27, 2010 our internal control over financial reporting is effective.Our independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in this Annual Report on Form10-K and has issued its report on our internal control over financial reporting as of June 27, 2010.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting during the quarter ended June 27, 2010 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsOur management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will preventor detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will bemet and our CEO and CFO have concluded that our disclosure controls and procedures 85Table of Contentsare effective at the reasonable assurance level. The design of a control system must reflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Extreme Networkshave been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur becauseof simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Projections of anyevaluation of the effectiveness of controls in future periods are subject to risks. Over time, controls may become inadequate because of changes in conditionsor deterioration in the degree of compliance with policies or procedures. Notwithstanding these limitations, our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their objectives. Our CEO and CFO have concluded that our disclosure controls and procedures are, infact, effective at the “reasonable assurance” level.Item 9B. Other InformationNone. 86Table of ContentsReport of Independent Registered Public Accounting Firm on Internal Control Over Financial ReportingThe Board of Directors and ShareholdersExtreme Networks, Inc.We have audited Extreme Networks, Inc.’s internal control over financial reporting as of June 27, 2010, based on criteria established in InternalControl – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Extreme Networks,Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, Extreme Networks, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 27, 2010, basedon the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Extreme Networks, Inc. as of June 27, 2010 and June 28, 2009 and the related consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended June 27, 2010, and the related financial statement schedule listed in the Index at Item 15(a), and ourreport dated August 20, 2010 expressed an unqualified opinion thereon./s/ Ernst & Young LLPSan Francisco, CaliforniaAugust 20, 2010 87Table of ContentsPART IIICertain information required by Part III is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and ExchangeCommission in connection with the solicitation of proxies for our 2009 Annual Meeting of Stockholders (the “Proxy Statement”) not later than 120 daysafter the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this section is incorporated by reference from the information in the section entitled “Proposal 1 – Election of Directors”in the Proxy Statement. The required information concerning our executive officers is contained in the section entitled “Executive Officers of the Registrant”in Part I, Item 1 of this Form 10-K.Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the ExchangeAct. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and isincorporated herein by reference.Information with respect to Item 406 of Regulation S-K is incorporated by reference to the information contained in the section captioned “Code ofEthics and Corporate Governance Materials” in the Proxy Statement.Item 11. Executive CompensationThe information required by this section is incorporated by reference from the information in the sections entitled “Directors’ Compensation”,“Executive Compensation and Other Matters” and “Report of the Compensation Committee” in the Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of CertainBeneficial Owners and Management” in the Proxy Statement.The information required by this section regarding securities authorized for issuance under equity compensation plans is incorporated by referencefrom the information in the section entitled “Equity Compensation Plan Information” in the Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this section is incorporated by reference from the information in the section titled “Certain Relationships and RelatedTransactions” in the Proxy Statement.Item 14. Principal Accounting Fees and ServicesThe information required by this section is incorporated by reference from the information in the section titled “Principal Accountant Fees andServices” in the Proxy Statement. 88Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as a part of this Form 10-K: (1)Financial Statements:Reference is made to the Index to Consolidated Financial Statements of Extreme Networks, Inc. under Item 8 in Part II of this Form 10-K. (2)Financial Statement Schedules:The following financial statement schedule of Extreme Networks, Inc. for the fiscal years ended June 27, 2010, June 28, 2009 and June 29, 2008 is filedas part of this Report and should be read in conjunction with the Consolidated Financial Statements of Extreme Networks, Inc. PageSchedule II – Valuation and Qualifying Accounts 91All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3)Exhibits:The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to befiled as an exhibit to this Form 10-K has been identified. ExhibitNumber Incorporated by Reference FiledHerewith Description of Document Form FilingDate Number 3.4 Amended and Restated Bylaws of Extreme Networks, Inc. 8-K 12/27/07 3.1 3.5 Restated Certificate of Incorporation of Extreme Networks, Inc. 10-K 09/26/01 3.5 3.6 Certificate of Amendment of Restated Certificate of Incorporation of ExtremeNetworks, Inc. 10-K 09/26/01 3.6 3.7 Certificate of Designation, Preferences and Rights of the Terms of the Series APreferred Stock. 10-K 09/26/01 3.7 4.2 Rights Agreement dated April 27, 2001 between Extreme Networks, Inc. andMellon Investor Services LLC. 8-K/A 06/07/01 4.2 10.1 Form of Indemnification Agreement for directors and officers. S-1 02/05/99 10.1 10.2* Amended 1996 Stock Option Plan and forms of agreements thereunder. S-1 02/05/99 10.2 10.3* 1999 Employee Stock Purchase Plan. S-1 02/05/99 10.3 10.4* 2000 Nonstatutory Stock Option Plan. 10-K 09/24/00 10.7 10.7* 2001 Nonstatutory Stock Option Plan. Schedule TO 10/31/01 (d)(9) 10.9* Offer of Employment Letter dated August 18, 2006 from Extreme Networks, Inc.to Mark A. Canepa 8-K 09/05/06 99.1 10.10* Revised compensation policies for non-employee service on the Board ofDirectors and its committees. 8-K 10/31/06 Item 1.01 10.13* Offer Letter for Employment between Extreme Networks, Inc. and Karen Roggedated as of March 13, 2007. 8-K 03/29/07 99.2 89Table of ContentsExhibitNumber Incorporated by Reference FiledHerewith Description of Document Form FilingDate Number 10.15* Extreme Networks, Inc. Fiscal 2009 Executive Incentive Bonus Plan. 8-K 08/04/08 99.1 10.16* Extreme Networks, Inc. Executive Change in Control Severance Plan 10-Q 05/09/06 10.11 10.17* Extreme Networks, Inc. Amended and Restated Executive Change in Control SeverancePlan 8-K 08/11/08 Item 5.02(e) 10.18* Extreme Networks, Inc. 2005 Equity Incentive Plan 8-K 12/08/05 99.1 10.19* Offer of Employment Letter dated May 5, 2008 from Extreme Networks, Inc. to Robert S.Schlossman 10-K 09/09/08 10.19 10.20* Offer of Employment Letter dated February 22, 2007 from Extreme Networks, Inc. toHelmut Wilke 10-K 09/09/08 10.20 10.21* Fiscal Year 2009 Sales Compensation Plan For Senior Vice President, Sales. 10-K 09/09/08 10.21 10.22* Form of Restricted Stock Units Agreement Under the 2005 Equity Incentive Plan 10-Q 11/07/08 10.22 10.23* Offer of Employment Letter Dated July 3, 2009 from Extreme Networks, Inc. to GordonStitt 8-K 07/08/09 10.22 10.24* Offer of Employment Letter Dated July 15, 2009 from Extreme Networks, Inc. to Bob L.Corey 8-K 07/20/09 10.23 10.25* Extreme Networks, Inc. Fiscal 2010 Executive Incentive Bonus Plan. 8-K 07/31/09 10.24 10.26* Fiscal Year 2009 Sales Compensation Plan For Senior Vice President, Sales. 8-K 07/31/09 10.25 10.27* Resignation and Consulting Agreement and General Release of Claims, dated July 31,2009, between Extreme Networks, Inc. and Karen Rogge 8-K 08/04/09 10.26 10.28 Resignation Agreement and General Release of Claims, dated October 20, 2009, betweenExtreme Networks, Inc. and Mark A. Canepa. 8-K 10/23/2009 10.28 10.29 Supplement to Offer of Employment Letter, dated October 21, 2009, from ExtremeNetworks, Inc. to Bob L. Corey. 8-K 10/23/2009 10.29 10.30 Letter regarding modification of employment terms dated March 18, 2010, from ExtremeNetworks, Inc. to Bob L. Corey 8-K 3/19/2010 99.1 10.31* Extreme Networks, Inc. Fiscal 2011 Executive Incentive Bonus Plan 8-K 7/30/2010 10.1 10.32 Offer of Employment Letter Dated July 29, 2010 from Extreme Networks, Inc to OscarRodriguez 21.1 Subsidiaries of Registrant. X23.1 Consent of Independent Registered Public Accounting Firm. X24.1 Power of Attorney (see page 92 of this Form 10-K). X31.1 Section 302 Certification of Chief Financial Officer and Acting Chief Executive Officer. X32.1 Section 906 Certification of Chief Financial Officer and Acting Chief Executive Officer. X *Indicates management or board of directors contract or compensatory plan or arrangement. 90Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTSYEARS ENDED JUNE 27, 2010, JUNE 28, 2009 and JUNE 29, 2008 Description Balance atbeginningof period Charges tocosts andexpenses (Deductions)(1) Balance atend ofperiodYear Ended June 29, 2008: Allowance for doubtful accounts $959 $416 $(88) $1,287Allowance for sales returns $2,129 $1,036 $(1,990) $1,175Year Ended June 28, 2009: Allowance for doubtful accounts $1,287 $232 $(314) $1,205Allowance for sales returns $1,175 $863 $(1,108) $930Year Ended June 27, 2010: Allowance for doubtful accounts $1,205 $26 $(199) $1,032Allowance for sales returns $930 $1,229 $(1,222) $937 (1)Uncollectible accounts written off, net of recoveries 91Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, on August 20, 2010. EXTREME NETWORKS, INC.(Registrant)By: /s/ BOB L. COREY Bob L. Corey Senior Vice President & Chief Financial Officer August 20, 2010POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bob L. Corey, his true andlawful attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file thesame, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming allthat each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated: /s/ GORDON L. STITT /s/ BOB L. COREY Gordon L. Stitt Bob L. CoreyChairman of the Board Acting President, Chief Executive Officer, DirectorAugust 20, 2010 (Principal Executive Officer) August 20, 2010/s/ BOB L. COREY /s/ JUSTIN DIMACCHIA Bob L. Corey Justin DiMacchiaSenior Vice President & Chief Financial Officer Vice President, Corporate Controller(Principal Financial Officer)August 20, 2010 (Principal Accounting Officer)August 20, 2010/s/ JOHN KISPERT /s/ CHARLES CARINALLI John Kispert Charles CarinalliDirector DirectorAugust 20, 2010 August 20, 2010/s/ HARRY SILVERGLIDE /s/ KENNETH LEVY Harry Silverglide Kenneth LevyDirector DirectorAugust 20, 2010 August 20, 2010/s/ JOHN C. SHOEMAKER John C. Shoemaker Director August 20, 2010 92Table of ContentsEXHIBIT INDEX ExhibitNumber Incorporated by Reference FiledHerewith Description of Document Form FilingDate Number 3.4 Amended and Restated Bylaws of Extreme Networks, Inc. 8-K 12/27/07 3.1 3.5 Restated Certificate of Incorporation of Extreme Networks, Inc. 10-K 09/26/01 3.5 3.6 Certificate of Amendment of Restated Certificate of Incorporation ofExtreme Networks, Inc. 10-K 09/26/01 3.6 3.7 Certificate of Designation, Preferences and Rights of the Terms of the SeriesA Preferred Stock. 10-K 09/26/01 3.7 4.2 Rights Agreement dated April 27, 2001 between Extreme Networks, Inc. andMellon Investor Services LLC. 8-K/A 06/07/01 4.2 10.1 Form of Indemnification Agreement for directors and officers. S-1 02/05/99 10.1 10.2* Amended 1996 Stock Option Plan and forms of agreements thereunder. S-1 02/05/99 10.2 10.3* 1999 Employee Stock Purchase Plan. S-1 02/05/99 10.3 10.4* 2000 Nonstatutory Stock Option Plan. 10-K 09/24/00 10.7 10.7* 2001 Nonstatutory Stock Option Plan. Schedule TO 10/31/01 (d)(9) 10.9* Offer of Employment Letter dated August 18, 2006 from Extreme Networks,Inc. to Mark A. Canepa 8-K 09/05/06 99.1 10.10* Revised compensation policies for non-employee service on the Board ofDirectors and its committees. 8-K 10/31/06 Item 1.01 10.13* Offer Letter for Employment between Extreme Networks, Inc. and KarenRogge dated as of March 13, 2007. 8-K 03/29/07 99.2 10.15* Extreme Networks, Inc. Fiscal 2009 Executive Incentive Bonus Plan. 8-K 08/04/08 99.1 10.16* Extreme Networks, Inc. Executive Change in Control Severance Plan 10-Q 05/09/06 10.11 10.17* Extreme Networks, Inc. Amended and Restated Executive Change in ControlSeverance Plan 8-K 08/11/08 Item 5.02(e) 10.18* Extreme Networks, Inc. 2005 Equity Incentive Plan 8-K 12/08/05 99.1 10.19* Offer of Employment Letter dated May 5, 2008 from Extreme Networks, Inc.to Robert S. Schlossman 10-K 09/09/08 10.19 10.20* Offer of Employment Letter dated February 22, 2007 from ExtremeNetworks, Inc. to Helmut Wilke 10-K 09/09/08 10.20 10.21* Fiscal Year 2009 Sales Compensation Plan For Senior Vice President, Sales. 10-K 09/09/08 10.21 10.22* Form of Restricted Stock Units Agreement Under the 2005 Equity IncentivePlan 10-Q 11/07/08 10.22 10.23* Offer of Employment Letter Dated July 3, 2009 from Extreme Networks, Inc.to Gordon Stitt 8-K 07/08/09 10.22 93Table of ContentsExhibitNumber Incorporated by Reference FiledHerewith Description of Document Form FilingDate Number 10.24* Offer of Employment Letter Dated July 15, 2009 from Extreme Networks, Inc. to Bob L.Corey 8-K 07/20/09 10.23 10.25* Extreme Networks, Inc. Fiscal 2010 Executive Incentive Bonus Plan. 8-K 07/31/09 10.24 10.26* Fiscal Year 2009 Sales Compensation Plan For Senior Vice President, Sales. 8-K 07/31/09 10.25 10.27* Resignation and Consulting Agreement and General Release of Claims, dated July 31, 2009,between Extreme Networks, Inc. and Karen Rogge 8-K 08/04/09 10.26 10.28 Resignation Agreement and General Release of Claims, dated October 20, 2009, betweenExtreme Networks, Inc. and Mark A. Canepa. 8-K 10/23/2009 10.28 10.29 Supplement to Offer of Employment Letter, dated October 21, 2009, from Extreme Networks,Inc. to Bob L. Corey. 8-K 10/23/2009 10.29 10.30 Letter regarding modification of employment terms dated March 18, 2010, from ExtremeNetworks, Inc. to Bob L. Corey 8-K 3/19/2010 99.1 10.31* Extreme Networks, Inc. Fiscal 2011 Executive Incentive Bonus Plan 8-K 7/30/2010 10.1 10.32 Offer of Employment Letter Dated July 29, 2010 from Extreme Networks, Inc to OscarRodriguez 21.1 Subsidiaries of Registrant. X23.1 Consent of Independent Registered Public Accounting Firm. X24.1 Power of Attorney (see page 92 of this Form 10-K). X31.1 Section 302 Certification of Chief Financial Officer and Acting Chief Executive Officer. X32.1 Section 906 Certification of Chief Financial Officer and Acting Chief Executive Officer. X *Indicates management or board of directors contract or compensatory plan or arrangement. 94EXHIBIT 21.1SUBSIDIARIES OF REGISTRANT NAME LOCATIONExtreme Networks International Cayman IslandsExtreme Networks K.K. JapanExtreme Networks Hong Kong Limited Hong KongExtreme Networks IHC, Inc. DelawareExtreme Networks UK Limited United KingdomExtreme Networks B.V. The NetherlandsExtreme Networks GmbH GermanyExtreme Networks Sarl FranceExtreme Networks Srl ItalyExtreme Networks Canada, Inc. CanadaExtreme Networks Korea, Ltd. KoreaIHC Networks AB SwedenExtreme Networks Australia PTY, Ltd. AustraliaExtreme Networks EMEA Cayman IslandsExtreme Networks Argentina, SRL ArgentinaExtreme Networks Brasil, Ltda. BrazilExtreme Networks Mexico, Ltda. MexicoExtreme Networks Chile, Ltda. ChileExtreme Networks Singapore PTE, Ltd. SingaporeExtreme Networks China Ltd. ChinaExtreme Networks Spain, SL SpainExtreme Networks Switzerland GmbH SwitzerlandExtreme Networks India Private Limited IndiaExtreme Networks Mauritius MauritiusExtreme Networks Rus, LLC. RussiaEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements: Form Number Registration Statement Number DescriptionForm S-8 333-112831 Extreme Networks, Inc. Amended 1996 Stock Option Plan and 1999 EmployeeStock Purchase PlanForm S-8 333-105767 Extreme Networks, Inc. Amended 1996 Stock Option PlanForm S-8 333-76798 Extreme Networks, Inc. Amended 1996 Stock Option PlanForm S-8 333-65636 Extreme Networks, Inc. 2001 Nonstatutory Stock Option PlanForm S-8 333-58634 Extreme Networks, Inc. Individual Option Agreements Granted Under theWebstacks, Inc. 2000 Stock Option Plan and Assumed by Extreme Networks, Inc.Form S-8 333-55644 Extreme Networks, Inc. Individual Option Agreements Granted Under theOptranet, Inc. 2000 Option Plan and Assumed by Extreme Networks, Inc.Form S-8 333-54278 Extreme Networks, Inc. Amended 1996 Stock Option Plan, 1999 Employee StockPurchase Plan and 2000 Nonstatutory Stock Option PlanForm S-8 333-131705 Extreme Networks, Inc. 2005 Equity Incentive Plan and 1999 Employee StockPurchase PlanForm S-8 333-83729 Extreme Networks, Inc. Amended 1996 Stock Option Plan and 1999 EmployeeStock Purchase Planof our reports dated August 20, 2010, with respect to the consolidated financial statements and schedule of Extreme Networks, Inc. and the effectiveness ofinternal control over financial reporting included in this Annual Report (Form 10-K) of Extreme Networks Inc. for the year ended June 27, 2010./s/ Ernst & Young LLPSan Francisco, CaliforniaAugust 20, 2010EXHIBIT 31.1I, Bob L. Corey, certify that: 1.I have reviewed this annual report on Form 10-K of Extreme Networks, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: August 20, 2010 /s/ BOB L. COREY Bob L. CoreyActing President and Chief Executive OfficerSenior Vice President and Chief Financial OfficerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Extreme Networks, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 27, 2010, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ BOB COREYBob CoreyActing President and Chief Executive OfficerSenior Vice President and Chief Financial OfficerAugust 20, 2010A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signaturethat appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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