As filed with the Securities and Exchange Commission on August 12, 2010

Registration No. 333-165142

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Pre-effective

Amendment No. 5

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

Force10 Networks, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

3576

94-3340753

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

Force10 Networks, Inc.

350 Holger Way

San Jose, California 95134

(408) 571-3500

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Henry Wasik

President and Chief Executive Officer

Force10 Networks, Inc.

350 Holger Way

San Jose, California 95134

(408) 571-3500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Mark A. Leahy, Esq.	Leah Maher, Esq.	Katharine A. Martin, Esq.
Jeffrey R. Vetter, Esq.	Vice President and	Wilson Sonsini Goodrich &
Fenwick & West LLP	General Counsel	Rosati, Professional
Silicon Valley Center	Force10 Networks, Inc.	Corporation
801 California Street	350 Holger Way	650 Page Mill Road
Mountain View, California 94041	San Jose, California 95134	Palo Alto, California 94304
(650) 988-8500	(408) 571-3500	(650) 493-9300

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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


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

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee
Common Stock, par value $0.0001 per share	$143,750,000	$10,250(2)

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated August 12, 2010

Preliminary Prospectus

shares

Force10 Networks, Inc.

LOGO

Common stock

This is an initial public offering of shares of common stock by Force10 Networks, Inc. We are selling shares of common stock. The selling stockholders identified in this prospectus are selling an additional shares of common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. The estimated initial public offering price is between $ and $ per share.

We are applying to list our common stock for trading on the New York Stock Exchange under the symbol “FCTN.”



	Per share	Total

Initial public offering price	$	$

Underwriting discounts and commissions	$	$

Proceeds to us, before expenses	$	$

Proceeds to selling stockholders, before expenses	$	$

We have granted the underwriters an option for a period of 30 days to purchase from us up to additional shares of common stock at the initial public offering price, less the underwriting discounts and commissions.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on .


J.P. Morgan	Deutsche Bank Securities	Barclays Capital

Baird	Cowen and Company	RBC Capital Markets

	Pacific Crest Securities

, 2010

LOGO

Table of contents


		Page

Prospectus summary		1

Risk factors		13

Special note regarding forward-looking statements and industry data		33

Use of proceeds		34

Dividend policy		34

Capitalization		35

Dilution		37

Selected consolidated financial data		39

Management’s discussion and analysis of financial condition and results of operations		42

Business		87

Management		103

Executive compensation		110

Certain relationships and related party transactions		131

Principal and selling stockholders		135

Description of capital stock		143

Shares eligible for future sale		148

Material United States federal income tax consequences to non-U.S. holders		151

Underwriting		156

Legal matters		162

Experts		162

Where you can find more information		163

Index to consolidated financial statements		F-1

You should rely only on the information contained in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

Prospectus summary

The following summary highlights information contained elsewhere in this prospectus. Before deciding whether to purchase shares of our common stock, you should read this summary and the more detailed information in this prospectus, including our consolidated financial statements and related notes and the discussion of the risks of investing in our common stock in the section entitled “Risk factors.”

Overview

We provide high performance networking solutions for data center and other network deployments. Our solutions include switches and routers that deliver the high density, performance, resiliency and reliability that our customers demand in a cost-effective manner.

We are organized in two operating segments—Ethernet, which consists of our E-Series, C-Series and S-Series products, and Transport, which includes our multi-service transport and access products. Our broad portfolio of Ethernet products helps our customers deploy a seamless, high-capacity, scalable network fabric extending from the server and storage edge to the network core and into the cloud. Our Ethernet products are deployed in data center, high performance enterprise and service provider networks utilizing 1 Gigabit Ethernet, or GbE, and 10 GbE technologies. Our E-Series and C-Series products are also designed to support future customer deployments of 40 and 100 GbE technologies. Our products combine the features of our modular Force10 Operating System, or FTOS, software and our scalable system architecture to forward or route network traffic at the maximum throughput capacity of each port. This maximum throughput port capacity is referred to as “non-blocking line-rate” throughput. This enables maximum network capacity utilization, by minimizing performance bottlenecks, even under heavy traffic conditions, and reduces the number of network systems required to handle the same aggregate network traffic. Our solutions also use less power, generate less heat and therefore require less cooling power than competing systems. As a result, our solutions allow customers to reduce capital expenditures and operating costs and support “green” initiatives in data centers.

We complement our family of Ethernet products with multi-service transport and access products targeted at service providers. Multi-service transport products are used within telecommunications network infrastructure to transport voice, video and data traffic between different carrier facilities. Access products are networking devices that provide end users access to a wide area network. These products support the delivery of a wide range of legacy telecommunications services to metro networks, which span metropolitan areas or large campuses, and to access networks, which are located between end users and service provider central offices. These products also support Ethernet services to enable the transition from legacy telecommunications networks, which are the technologies and infrastructure originally designed to carry phone-based traffic and services, but are not optimized for Internet-based traffic and services such as data and video, to packet-optimized Ethernet-based networks, which are the technologies and infrastructure optimized for carrying Internet-based traffic and services, including voice. Our family of multi-service transport and access products includes the Traverse and TraverseEdge products, the MASTERseries and Axxius products and the Adit product.

In fiscal 2009, our products were shipped to more than 1,100 end customers in 63 countries worldwide that have some of the most demanding performance environments, including Fortune 100 companies, Internet portals, global carriers, leading research laboratories and government organizations. We sell our products through our direct sales force, resellers, distributors and

system integrators. For the three months ended June 30, 2010, we generated revenue of $48.0 million and had net income of $7.2 million, and for the 12 months ended June 30, 2010, we generated revenue of $173.6 million and had a net loss of $13.3 million.

Industry overview

The proliferation of rich media content, network-connected devices and on-demand software applications is driving disruptive change throughout the networking industry, resulting in tremendous growth in Internet Protocol, or IP, network traffic and the need for more resilient and scalable networks in organizations. These trends have also caused network traffic to become increasingly volatile and unpredictable in nature, requiring higher capacity and bandwidth management in the network.

Due to its cost-effectiveness, scalability and increasing reliability, Ethernet has emerged as the leading technology for building IP-based networks to address the increasing bandwidth demands for a wide variety of network traffic both internal and external to organizations. As the fastest available standard for Ethernet technology, 10 GbE is emerging as the Ethernet technology of choice to satisfy increasing bandwidth demands. The Dell’Oro Group, an independent market research firm, estimates that the worldwide 10 GbE network equipment market will grow from $2.8 billion in 2009 to $8.5 billion in 2014, representing a 25% compounded annual growth rate, or CAGR.⁽¹⁾

The pervasiveness and increasing complexity of computing, combined with the growth in IP traffic, driven by the demand for anytime and anywhere access to applications and network content, has made high performance IP-based networks essential for organizations. High performance networking equipment is especially important for data centers, which are increasingly being used to centralize computing and storage resources. Organizations that utilize data centers as a core part of their operations require cost-effective networking solutions that provide high density, performance, resiliency and reliability, as network downtime often results in lost revenue and increased costs. As organizations initially build-out or continue to upgrade their networks to high performance IP-based networks, several trends have developed that further exacerbate the challenge to cost-effectively deploy these high performance networking solutions:

•

data center consolidation;

•

increasing adoption of virtualization and cloud computing technologies; and

•

increasing focus on managing operating costs.

These trends are driving customers to evaluate new data center architectures for initial deployments and are accelerating upgrade and replacement cycles within existing data center deployments. According to IDC, an independent market research firm, worldwide data center Ethernet switching revenue is expected to grow from $3.1 billion in 2009 to $4.3 billion in 2013, representing a 9% CAGR.⁽²⁾

Next-generation data center networking architectures must continue to address the following challenges:

•

Density. Solutions need to provide high port density in order to reduce the cost of networking and the physical space required to support current and future bandwidth needs.

(1)

Source: The Dell’Oro Group, Ethernet Forecast Tables, February 2010.

(2)

Source: IDC, Worldwide Datacenter Network 2009-2013 Forecast, Doc #220397, October 2009.

•

High performance. Solutions need to be architected to efficiently accommodate high-throughput and volatile traffic patterns that, if blocked, can create congestion, resulting in degraded network and application performance.

•

Resiliency and reliability. Solutions need to be resilient and reliable as networks have become essential for most organizations. Without failure isolation and reliable recovery mechanisms, a large number of users can experience interruptions and delays, which can have significant adverse financial and business impacts.

•

Ease of use. Solutions need to be easily deployed and managed in heterogeneous network environments. Products that support standards-based technologies can help to reduce the challenges associated with managing and provisioning equipment from multiple vendors.

•

Cost-effectiveness. Solutions need to address the challenges described above while minimizing both capital expenditures and operating costs.

Our solutions

Our solutions offer the following key benefits to our customers:

•

High density architecture. We believe our solutions offer among the highest port densities per rack unit in the industry based on 10 GbE technology, which enables our products to handle the same aggregate traffic using fewer ports. With high port density, our products can process more traffic per card, leaving more chassis space available to accommodate future capacity expansion. This enables our customers to cost-effectively deploy more compact, high performance and scalable networks. Additionally, our 40 GbE- and 100 GbE-ready solutions are designed to help our customers make seamless transitions to emerging Ethernet standards.

•

High performance architecture. Our solutions are able to perform at non-blocking line-rate throughput in order to minimize network congestion and meet latency requirements for real-time data and application delivery. Our solutions can also maintain performance even under heavy load or abnormal network conditions by rapidly processing network changes and determining the best way to forward or route traffic.

•

Resiliency and reliability. Our solutions can meet the requirements of the most complex and demanding network environments. The combination of both modular software and no “single point of failure” hardware design helps to reduce the impact of component or process failures by isolating errors, which in turn minimizes network disruptions.

•

Ease of use. Our standards-based solutions can be easily deployed and managed in heterogeneous network environments. Our FTOS software uses industry-standard commands and management interfaces to enable seamless interoperability and deployment with minimal staff retraining.

•

Low total cost of ownership. Our high-density solutions help our customers reduce the physical footprint required to handle the same aggregate network traffic. Our solutions are also designed to use less power, generate less heat and therefore require less cooling power than competing systems. As a result, our systems enable customers to reduce capital expenditures and operating costs and support “green” initiatives in data centers.

Our strategy

Our goal is to become the industry’s leading supplier of high performance networking solutions. Key elements of our strategy include:

•

Maintain and extend our technological advantages. We intend to continue to invest in high-capacity, compact, power-efficient and resilient system architectures as well as standards-based convergence, virtualization, automation and provisioning technologies.

•

Extend our position as a leading data center networking provider. We intend to enhance our position as a leader and innovator in the data center market. Through our direct sales organization, channel partners, professional services offerings and increased marketing activities, we intend to aggressively pursue data center opportunities.

•

Leverage our position as a leading data center networking provider in adjacent markets. We intend to focus on adjacent markets where our technology can be leveraged for other applications, and to continue to sell new solutions into our installed base.

•

Leverage and grow our channel partners and global presence. We intend to further augment our sales efforts in the United States and internationally with additional resellers, distributors and system integrators.

•

Pursue opportunistic acquisitions. We intend to opportunistically pursue acquisition opportunities that have complementary technologies and services and that can accelerate the growth of our business.

Risk factors

We are subject to a number of risks which you should be aware of before you invest in our common stock, including:

•

our markets are extremely competitive and one competitor in particular has a dominant share of the market;

•

it is difficult to evaluate our current business and prospects as a result of our prior acquisitions;

•

our future financial performance depends on growth in the market for standards-based GbE and 10 GbE technologies;

•

we have a history of losses and we may not be able to become profitable;

•

the success of our business depends on increased sales of our Ethernet products; and

•

our operating results have fluctuated in the past and are difficult to predict.

These risks are discussed more fully in the section entitled “Risk factors” following this prospectus summary.

Corporate information

We incorporated in the State of Delaware in 1999 as Turin Networks, Inc., with headquarters in Petaluma, California. In February 2008, we acquired Carrier Access Corporation, which we refer to as Carrier Access. In March 2009, we acquired Force10 Networks, Inc., which we refer to as “Legacy Force10.” We then moved our corporate headquarters to San Jose, California and changed our name to Force10 Networks, Inc. Our executive offices are located at 350 Holger Way, San Jose, California 95134, and our telephone number is (408) 571-3500. Our website address is www.force10networks.com. The information on, or that can be accessed through, our website is not part of this prospectus.

In this prospectus, unless otherwise noted, “Force10 Networks,” “we,” “us” and “our” refer to Force10 Networks, Inc. and its subsidiaries.

The Force10 logo and the names Force10 Networks, E-Series, Traverse, TraverseEdge, TransAccess, Axxius and Adit are registered trademarks and ExaScale, C-Series, S-Series, TeraScale, FTOS, and MASTERseries are trademarks of Force10 Networks, Inc. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.

The offering

Common stock offered by Force10 Networks, Inc.

Common stock offered by the selling stockholders

Over-allotment option

Common stock to be outstanding after this offering

Use of proceeds

We intend to use our net proceeds from this offering for working capital and general corporate purposes. Accordingly, our management will have broad discretion in the application of our net proceeds from this offering, and investors will be relying on management’s judgment regarding the application of these net proceeds. We also may use a portion of our net proceeds from this offering to acquire complementary businesses, products, services or technologies, but we currently have no agreements, commitments or understandings relating to any material acquisitions. We will not receive any proceeds from the sale of shares by the selling stockholders.

Risk factors

You should carefully consider the information set forth under “Risk factors” together with all of the other information set forth in this prospectus before deciding to invest in shares of our common stock.

Proposed NYSE symbol

FCTN

The shares of our common stock to be outstanding after this offering are based on 56,076,208 shares of our common stock outstanding on a pro forma basis as of June 30, 2010 and exclude:

•

9,747,530 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010, with a weighted average exercise price of $1.15 per share;

•

373,135 shares of common stock issuable upon the exercise of options granted between July 1, 2010 and July 31, 2010, with an exercise price of $2.89 per share;

•

shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, which will become effective in connection with this offering; and

•

5,924,152 shares of common stock issuable upon exercise of warrants outstanding as of June 30, 2010, with a weighted average exercise price of $8.96 per share.

Unless otherwise noted, all information in this prospectus gives effect to a 1-for-175 reverse stock split effected in March 2009 and a 40-for-1 forward stock split effected in October 2009 and assumes:

•

no exercise of the underwriters’ over-allotment option;

•

the conversion of all shares of our outstanding convertible preferred stock into an aggregate of 52,733,480 shares of our common stock upon completion of this offering;

•

a -for- reverse split of our outstanding capital stock to be effective upon the completion of this offering; and

•

no exercise of options, warrants or rights outstanding as of the date of this prospectus.

Summary consolidated financial information

The following summary consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The actual consolidated statements of operations data for the fiscal years ended September 30, 2007, 2008 and 2009 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The actual consolidated statements of operations data for the nine months ended June 30, 2009 and 2010 and the actual consolidated balance sheet data as of June 30, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results to be expected in any future period.

As a result of our acquisition of Legacy Force10 in March 2009, management believes that a pro forma combined presentation, which includes a comparison of the combined results of operations with the results of operations of us and Legacy Force10 for fiscal 2009, provides a meaningful basis of presentation for investors in evaluating our historical financial performance. The pro forma condensed combined statement of operations data assumes that our acquisition of Legacy Force10 occurred on October 1, 2008 and combines our results of operations for the year ended September 30, 2009, which includes the results of Legacy Force10 since March 31, 2009, with the results of operations of Legacy Force10 for the six months ended January 31, 2009. The pro forma combined data may not, however, be indicative of our consolidated results of operations that actually would have occurred had the transaction reflected in the pro forma combined results of operations occurred on that date, or of the consolidated results of operations that we may achieve in the future. You should read this pro forma combined information together with the unaudited pro forma condensed combined financial statements included elsewhere in this prospectus.

The other operational data presented are used in addition to the financial measures reflected in the consolidated statements of operations data to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.


	Actual									Pro forma combined			Actual
	Fiscal year ended September 30,												Nine months ended June 30,
(in thousands, except percentages and per share data)	2007			2008⁽³⁾			2009⁽⁴⁾			2009			2009			2010


Consolidated statements of operations data:
Revenue
Product	$	—		$	48,225		$	86,120		$	113,005		$	59,494		$	102,330
Service		—			5,370			16,290			22,398			11,036			20,531
Ratable product and service		31,562			102,303			16,660			63,820			12,541			14,717

Total revenue		31,562			155,898			119,070			199,223			83,071			137,578


Cost of goods sold⁽¹⁾
Product		—			28,072			66,012			84,861			48,227			54,488
Service		—			2,440			8,213			13,155			5,421			11,188
Ratable product and service		19,507			56,977			8,079			28,787			6,423			5,737

Total cost of goods sold		19,507			87,489			82,304			126,803			60,071			71,413


Gross profit
Product		—			20,153			20,108			28,144			11,267			47,842
Service		—			2,930			8,077			9,243			5,615			9,343
Ratable product and service		12,055			45,326			8,581			35,033			6,118			8,980

Total gross profit		12,055			68,409			36,766			72,420			23,000			66,165


Operating expenses
Research and development⁽¹⁾		13,443			23,611			34,137			52,249			23,091			30,764
Sales and marketing⁽¹⁾		19,650			27,265			36,010			61,785			24,060			35,328
General and administrative⁽¹⁾		6,027			9,427			12,871			22,917			9,320			11,663
Restructuring		—			—			—			3,119			—			1,881
In-process research and development and amortization of intangible assets		—			3,119			7,459			7,584			7,189			612

Total operating expenses		39,120			63,422			90,477			147,654			63,660			80,248

Operating income (loss)		(27,065	)		4,987			(53,711	)		(75,234	)		(40,660	)		(14,083	)
Interest and other income (expense), net		(2,368	)		544			(920	)		(848	)		(854	)		14,104

Income (loss) before income taxes		(29,433	)		5,531			(54,631	)		(76,082	)		(41,514	)		21
Benefit from (provision for) income taxes		(22	)		(87	)		41			(209	)		101			(180	)

Net income (loss)	$	(29,455	)	$	5,444		$	(54,590	)	$	(76,291	)	$	(41,413	)	$	(159	)

Net income (loss) per share⁽²⁾
Basic	$	121.06		$	(12.88	)	$	52.15		$	13.70		$	91.50		$	(0.14	)

Diluted	$	(46.70	)	$	(12.88	)	$	(20.79	)	$	(24.41	)	$	(13.04	)	$	(0.14	)


Weighted average shares outstanding⁽²⁾
Basic		344			386			640			852			575			1,120

Diluted		1,030			386			4,563			4,775			5,797			1,120


Pro forma net loss per share (unaudited)⁽²⁾
Basic and diluted							$	(2.40	)							$	(0.00	)


Pro forma weighted average shares outstanding (unaudited)⁽²⁾
Basic and diluted								22,763									53,853


	Actual									Pro forma combined			Actual
	Fiscal year ended September 30,												Nine months ended June 30,
(in thousands, except percentages and per share data)	2007			2008⁽³⁾			2009⁽⁴⁾			2009			2009			2010


Other operational data:
Ethernet segment revenue	$	—		$	—		$	34,367		$	114,520		$	17,207		$	78,529
Transport segment revenue		31,562			155,898			84,703			84,703			65,864			59,049
Change in total deferred revenue⁽⁵⁾		16,672			(60,137	)		5,234						(6,203	)		(10,712	)
Non-GAAP operating income (loss)		(26,431	)		10,013			(35,188	)					(25,691	)		(6,883	)
Non-GAAP net income (loss)		(28,598	)		10,470			(36,067	)					(26,444	)		(7,580	)
Ethernet segment gross margin		—	%		—	%		27.8	%		39.7	%		18.2	%		52.7	%
Transport segment gross margin		38.2			43.9			32.1			32.1			30.2			41.9

(1)

Includes stock-based compensation expense as follows:


	Actual						Pro forma combined		Actual
	Fiscal year ended September 30,								Nine months ended June 30,
(in thousands)	2007		2008⁽³⁾		2009⁽⁴⁾		2009		2009		2010

Cost of goods sold	$	44	$	95	$	38	$	38	$	31	$	42
Research and development		150		322		212		212		163		310
Sales and marketing		215		335		177		177		138		215
General and administrative		225		637		195		195		151		407

Total stock-based compensation	$	634	$	1,389	$	622	$	622	$	483	$	974

(2)

See note 7 to the notes to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) and pro forma basic and diluted net income (loss) per share.

(3)

Includes the results of operations of Carrier Access from February 8, 2008.

(4)

Includes the results of operations of Legacy Force10 from March 31, 2009.

(5)

Excludes deferred revenue assumed in the acquisition of Legacy Force10.

The following table presents consolidated balance sheet data as of June 30, 2010 (1) on an actual basis, (2) on a pro forma basis to reflect the conversion of all shares of our outstanding convertible preferred stock into an aggregate of 52,733,480 shares of our common stock and the reclassification of the preferred stock warrant liability to additional paid-in capital upon completion of this offering and (3) on a pro forma as adjusted basis to further reflect the sale of shares of common stock in this offering by us at an assumed initial public offering, or IPO, price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.


June 30, 2010 (unaudited) (in thousands)	Actual		Pro forma		Pro forma as adjusted⁽¹⁾

Consolidated summary balance sheet data:
Cash and cash equivalents and short-term investments	$	48,834	$	48,834	$
Working capital		27,944		35,111
Total assets		190,851		190,851
Preferred stock warrant liability		7,167		—
Convertible preferred stock		204,539		—
Common stock and additional paid-in capital		20,516		232,222
Total stockholders’ equity		70,821		77,988

(1)

Each $1.00 increase or decrease in the assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted cash, cash equivalents and short-term investments, working capital, total assets, common stock and additional paid-in capital and total stockholders’ equity by approximately $ million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

Non-GAAP financial results

We believe that non-GAAP operating income (loss) and non-GAAP net income (loss) are helpful financial measures for an investor determining whether to invest in our common stock. In computing these measures, we exclude certain items outside ongoing operating results, such as inventory purchase accounting adjustments, in-process research and development expenses and restructuring charges. We believe excluding these items helps investors compare our operating performance with our results in prior periods, as well as with the performance of other companies, as they are not indicative of ongoing operating results and therefore limit comparability of our historical and current financial statements. In addition, we exclude stock-based compensation expense because we believe it allows for more accurate comparisons of our operating results to our peer companies because of the varying available valuation methodologies, subjective assumptions and the variety of award types. While amortization of intangible assets is a recurring item, we believe that excluding these charges provides for more accurate comparisons of our historical and our current operating results and those of similar companies due to the varying nature and significance of acquisitions that we and similar companies may complete, and the varying valuation methodologies and amortization periods related to intangible assets. See “Management’s discussion and analysis of financial condition and results of operations” for a discussion of the adjustments in computing these non-GAAP financial measures.

items. Our non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to operating income (loss) or net income (loss) or as indications of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial measures.

The following table reflects the reconciliation of non-GAAP operating income (loss) and non-GAAP net income (loss) to GAAP operating income (loss) and GAAP net income (loss).


	Fiscal year ended September 30,								Nine months ended June 30,
(in thousands)	2007			2008		2009			2009			2010

GAAP operating income (loss)	$	(27,065	)	$	4,987	$	(53,711	)	$	(40,660	)	$	(14,083	)

Non-GAAP adjustments
Add: Amortization of intangible assets included in cost of goods sold		—			518		2,126			1,319			951
Add: Inventory purchase accounting adjustment		—			—		8,316			5,978			2,782
Add: Restructuring		—			—		—			—			1,881
Add: In-process research and development and amortization of intangible assets included in operating expenses		—			3,119		7,459			7,189			612
Add: Employee stock-based compensation		634			1,389		622			483			974

Non-GAAP operating income (loss)	$	(26,431	)	$	10,013	$	(35,188	)	$	(25,691	)	$	(6,883	)


GAAP net income (loss)	$	(29,455	)	$	5,444	$	(54,590	)	$	(41,413	)	$	(159	)

Non-GAAP adjustments
Add: Amortization of intangible assets included in cost of goods sold		—			518		2,126			1,319			951
Add: Inventory purchase accounting adjustment		—			—		8,316			5,978			2,782
Add: Restructuring		—			—		—			—			1,881
Add: In-process research and development and amortization of intangible assets included in operating expenses		—			3,119		7,459			7,189			612
Add: Employee stock-based compensation		634			1,389		622			483			974
Add (subtract): Change in fair value of preferred stock warrant liability		2,025			—		—			—			(14,621	)
Subtract: Gain on extinguishment of preferred stock warrants		(1,802	)		—		—			—

Non-GAAP net income (loss)	$	(28,598	)	$	10,470	$	(36,067	)	$	(26,444	)	$	(7,580	)

See “Management’s discussion and analysis of financial condition and results of operations” for a discussion of these non-GAAP financial measures. The income tax effect of the above non-GAAP adjustments was insignificant for all periods presented.

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks related to our business and industry

We have a history of losses and we may not be able to become profitable.

We have a history of losses and have not yet achieved profitability. We incurred net losses of $54.6 million for the fiscal year ended September 30, 2009 and $0.2 million for the nine months ended June 30, 2010. In addition, prior to our acquisition of Legacy Force10, both we and Legacy Force10 had incurred substantial losses. As of June 30, 2010, we had an accumulated deficit of $154.2 million. This accumulated deficit was due to our history of losses. We expect our operating expenses to increase in the future due to our expected development activities, sales and marketing expenses, operations costs and general and administrative costs, including additional finance, legal and accounting costs as a result of being a public company. Accordingly, we expect to continue to incur losses for the foreseeable future and we cannot assure you that we will achieve profitability in the future or, if we do become profitable, that we will sustain profitability.

Because we have a limited history operating as a combined company, it is difficult to evaluate our current business and prospects.

We acquired Legacy Force10 in March 2009 and we acquired Carrier Access in February 2008. Prior to these acquisitions, we developed, marketed and sold our Traverse and TraverseEdge products targeted at service providers. Carrier Access developed, marketed and sold wireless aggregation and converged business access products targeted at service providers and enterprises. As a combined company, we have limited experience offering all of the products of each company. In addition, we restructured our operations after the acquisition of Legacy Force10. Accordingly, we only have a limited operating history operating our current combined business, which makes it difficult to evaluate our current business and prospects.

Our operating results have fluctuated in the past and are difficult to predict, which could cause our stock price to fluctuate.

Our quarterly results of operations have fluctuated in the past and may continue to fluctuate as a result of a variety of factors, some of which may be outside of our control. If our quarterly results of operations fall below our expectations or the expectations of securities analysts or investors, the price of our common stock could decline substantially. Fluctuations in our quarterly results of operations may be due to a number of factors, including, but not limited to:

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the mix of products sold during the period;

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the timing and volume of shipments of our products during a particular quarter;

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potential seasonal variations in the demand for our products;

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the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;

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our ability to control costs, including third-party manufacturing costs and costs of components;

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our ability to forecast our manufacturing requirements and manage our inventory;

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changes in our or our competitors’ pricing policies or sales and service terms;

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changes in costs of components, manufacturing costs or lead times;

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our ability to obtain sufficient supplies of components;

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our ability to maintain sufficient production volumes for our products;

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the timing and success of new product introductions by us or our competitors;

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volatility in our stock price, which may lead to higher stock compensation expenses;

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the timing of costs related to the development of new products or the acquisition of technologies or businesses;

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general economic, industry and market conditions and those conditions specific to the networking industry;

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the length and unpredictability of the purchasing and budgeting cycles of our customers;

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our lack of long-term, committed volume purchase agreements with our customers; and

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geopolitical events such as war, threat of war or terrorist actions.

In addition, our revenue in a given quarter is largely dependent upon sales closed in that quarter. Because our operating expenses are largely fixed in the short-term and difficult to adjust quickly, any shortfalls in revenue in a given quarter would have a direct and material adverse effect on our operating results in that quarter. Historically, we have received a substantial portion of a quarter’s sales orders during the last month and often, the last two weeks of the quarter. If expected sales at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, or our inability to ship products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our results for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price. Our quarterly revenue and results of operations may vary significantly from period to period and period-to-period comparisons of our operating results may not be meaningful. In addition, because of our prior acquisitions, our past financial results are not indicative of our future performance.

Our markets are extremely competitive and if we are unable to compete effectively, we may experience decreased sales or pricing pressure, which would negatively impact our future operating results.

Our market is intensely competitive. For example, Cisco Systems, Inc. currently maintains a dominant position in our markets, offers products and services that compete directly with our products and services, and is able to adopt aggressive pricing policies and leverage its customer base and extensive portfolio to gain market share. Other principal competitors for our Ethernet products include Brocade Communications Systems, Inc., Extreme Networks, Inc., Hewlett-Packard

Company (which recently completed the acquisition of 3Com Corporation, another competitor), Huawei Technologies Co., Ltd. and Juniper Networks, Inc. Other principal competitors for our transport and access products include ADTRAN, Inc., Alcatel-Lucent SA, Fujitsu Limited, Huawei Technologies Co., Ltd. and Tellabs, Inc. Many of these other competitors are substantially larger and have greater financial, technical, research and development, sales and marketing, manufacturing, distribution, services capabilities and other resources. We could also face competition from new market entrants, whether from new ventures or from established companies moving into these markets.

Because many of our competitors have greater financial strength than we do and are able to offer a more diversified and comprehensive bundle of products and services, they may have the ability to significantly undercut our prices, which could make us uncompetitive or force us to reduce our selling prices, negatively impacting our margins. In addition to price, we also compete with other companies on the basis of product features, service offerings, performance, reliability and scalability. Our competitors may also be able to develop products and services that are superior to ours in these respects, or may be able to offer products and services that provide significant price advantages over those we offer. In addition, if our competitors’ products and services become more accepted than ours, our competitive position will be impaired and we may not be able to increase our revenue.

Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. In addition, current or potential competitors may be acquired by third parties with greater available resources, such as Hewlett Packard’s acquisition of 3Com Corporation and Brocade Communications’ acquisition of Foundry Networks. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily or develop and expand their product and service offerings more quickly than we do.

As the industry evolves and as we introduce additional products and services, we expect to encounter additional competitors and other emerging companies that may announce network product and services offerings. Moreover, our current and potential competitors, including companies with whom we currently have strategic alliances, may establish cooperative relationships among themselves or with other third parties. If this occurs, new competitors or alliances may emerge that could negatively affect our competitive position and negatively impact our future operating results.

Our future financial performance depends on growth in the market for standards-based Gigabit Ethernet technology. If this market does not continue to grow at the rate that we forecast, our operating results would be materially and adversely impacted.

Historically, we offered our products and services to telecommunications service providers. After our acquisition of Legacy Force10 in March 2009, we also began to offer 10 GbE products, targeting data center customers. We have been experiencing rapid growth in the sales of these Ethernet-based products and services, as compared to our traditional transport and access products and services, and we expect that our future revenue growth will be largely dependent upon the continued increase in demand for our current 10 GbE products and services and future

standards-based Gigabit Ethernet products we may introduce, including 40 GbE and 100 GbE products. This is a new and emerging market. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to the emerging demands in this market. In addition, service providers have historically relied on technologies, such as synchronous optical networking, synchronous digital hierarchy, or SONET/SDH, which were developed specifically to satisfy service provider requirements in their networks and have been slow to adopt emerging technologies. If service providers do not adopt Ethernet to replace SONET/SDH technology, demand for our Ethernet products from these customers may not develop. A reduction in demand for our Ethernet-based products caused by lack of customer acceptance, weakening economic conditions, competing technologies and products, decreases in corporate spending or otherwise would result in decreased revenue or a lower revenue growth rate.

The success of our business depends on increased sales of our E-Series, C-Series and S-Series products, some of which have been introduced recently. If market acceptance of these products does not continue, our future operating results could be harmed.

Prior to our acquisition, Legacy Force10 derived substantially all of its revenue from its E-Series, C-Series and S-Series products. We intend to continue to aggressively market these products and intend to devote significant portions of our development resources to these and other Ethernet products. Therefore, we expect that in the future we will depend on these products for a substantial majority of our revenue. If these products are unable to remain competitive, or if we experience pricing pressure or reduced demand for these products, our future revenue and business would be harmed.

We introduced the first release of our newest E-Series product, ExaScale, in March 2009 and intend to continue to release additional boards and features for this product. We first recognized revenue from sales of ExaScale during the second quarter of 2009. We cannot assure you that this product will become widely accepted in the marketplace or that we will be able to derive substantial revenue from the sale of this product.

We have derived a substantial majority of our historic revenue from telecommunications service providers. If we fail to generate continued revenue from this market or from additional markets, our revenue could decline.

Historically, we have derived a substantial majority of our revenue from telecommunications service providers. Our future success depends upon the continued demand for our products from customers in this industry. This industry is cyclical and reactive to geopolitical and general economic conditions. In the past, this industry has experienced restructurings, consolidations and reorganizations. These can cause delays and reductions in capital expenditures and operating costs, which could reduce demand for the type of equipment we sell. In addition, if this industry were to widely adopt products of our competitors or if this industry is otherwise more reluctant to adopt and move to Ethernet products, our future revenue and operating results could be harmed.

We use third party distributors, resellers and system integrators to sell our products, and disruptions to, or our failure to effectively develop and manage, our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenue from the sale of our products.

We depend on distributors, resellers and system integrators, which we refer to collectively as channel partners, to sell our products, particularly in international markets, and our success

depends on our ability to establish and maintain relationships with these channel partners. Our channel partners may not promote or market our products effectively, or they may experience financial difficulties or cease operations. These entities are generally not contractually obligated to sell or promote our products, and may also sell or promote our competitors’ products. If our competitors offer more favorable terms or more attractive sales incentives to these entities for sales of their products, sales of our products through these entities could be adversely affected. If our channel partners do not promote our products effectively, or if we lose the services of certain partners, we would have to develop additional relationships with other third parties or devote more resources to directly marketing our products, either of which could harm our operating results.

Our sales cycle can be lengthy and unpredictable, which may cause our sales and operating results to vary.

The sales cycle for our products can be lengthy, in some cases over 12 months. We expend substantial time, effort and money educating our current and prospective customers as to the value of our products, but we may ultimately fail to produce a sale. The success of our product sales process is subject to many factors, some of which we have little or no control over, including:

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the timing of our end customers’ budget cycles and approval processes;

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customers’ or system integrators’ willingness to use our products as part of a larger system implementation;

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the length and timing of design and testing cycles for end customers;

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our ability to introduce new products, features or functionality in a timely manner;

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the announcement or introduction of competing products; and

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established relationships between our competitors and our potential customers.

If we are unsuccessful in closing sales after expending significant resources, our revenue and operating results will be adversely affected. Because of the lengthy sales cycle, the timing of the actual sale is unpredictable and may lead to variances in our operating results from quarter to quarter. In addition, because our products are incorporated into larger network systems, if our products are not designed into a new system after a long sales cycle, we may also find it more difficult to sell future products for that network, which could also harm our revenue and other operating results.

We are dependent on third party contract manufacturers and our business may be harmed if our contract manufacturers are not able to provide us with adequate supplies of our products in a timely manner.

We outsource the manufacturing of our products to third party contract manufacturers, including Flextronics International USA, Inc., or Flextronics, and AsteelFlash U.S., Inc., or AsteelFlash, each of which manufacture products for other enterprises. Our reliance on outside manufacturers involves a number of potential risks, including the absence of adequate capacity, the unavailability of or interruptions in access to necessary manufacturing processes and reduced control over delivery schedules. Even if our manufacturers fulfill our orders, it is possible that the products may not meet our specifications. Due to the inherent statistical variation and life of

electronic components, and due to our inability to inspect the physical quality of our products, our products have in the past and may in the future contain defects or otherwise not meet our quality standards, which could result in warranty claims, product returns or harm to our reputation, any of which could adversely affect our operating results and future sales.

If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, if they fail to meet our quality specifications, or if they significantly increase their prices, we will have to transition to one or more alternative manufacturers. The process of identifying and qualifying a new manufacturer can be time consuming and expensive. Additionally, transitioning to new manufacturers may cause delays in supply if the new manufacturers have difficulty manufacturing products to our specifications or quality standards or meeting our transition timing requirements. Also, the addition of manufacturing locations or contract manufacturers would increase the complexity of our supply chain management. Each of these factors could adversely affect our business, financial condition, and results of operations.

If we fail to accurately forecast demand or manage our inventory, we could experience increased inventory levels and write-offs or we could experience manufacturing or shipment delays, shortages, additional costs and lose revenue.

Under our agreements with our contract manufacturers, we generally provide rolling forecasts to our manufacturers every four weeks. Based on these forecasts, the manufacturers plan to produce a certain quantity of products and order certain components required for the products on our behalf. While we can adjust our forecasts, due to complexity and demand, certain of our components must be ordered several months to up to one year in advance and it is difficult to adjust quantities on a timely basis. We are currently purchasing additional inventory to ensure that we can fulfill future orders.

If we overestimate production requirements, our manufacturers may purchase excess components that are unique to our products or build excess products. If the inventory is held on a long-term basis, we could experience write-downs, particularly if this inventory becomes obsolete. Any such fees or write-downs could have an adverse effect on our gross margin and other results of operations.

If we underestimate production requirements, and experience unanticipated demand for our products, we could experience difficulty in obtaining additional components, increased costs of components or shipping delays. Our contract manufacturers also may not be able to manufacture additional products from those set forth in our forecasts. As a result, we could experience cancellations or delays of orders or lost customers, which could harm our reputation and operating results.

We depend on sole source and limited source suppliers for several components. If we are unable to source these components on a timely or cost-effective basis, we will not be able to deliver products for our customers.

We depend on sole source and limited source suppliers for several components of our products. For example, certain of our ASIC processors and network chipsets are purchased from sole source suppliers. Any of the sole source and limited source suppliers or manufacturers upon whom we rely could stop producing our components or products, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors. Because we sometimes offer long-term warranties on some of our products, we may be forced to buy more components than we need to

service our products over time if providers of our components cease operations or stop producing certain components used in our products. We generally do not have long term supply agreements with our suppliers and our purchase volumes are currently too low for us to be considered a priority customer by most of our suppliers. As a result, most of these suppliers could stop selling to us at commercially reasonable terms, or at all. In addition, if any of these limited or single source component suppliers experience capacity constraints, work stoppages, financial difficulties or other reductions or disruptions in output, they may not be able to meet, or may choose not to meet, our delivery schedules. Any interruptions or delays may force us to seek similar components from alternative sources, which may not be available in time to meet demand or on commercially reasonable terms, if at all. If our suppliers are no longer able to provide certain components we may be required to find an alternative supplier which will require us to retest components and requalify products with our customers, which would be costly and time-consuming. In certain cases, we may be required to redesign our products if a component becomes unavailable. In addition, we must successfully manage the supply of components to our contract manufacturers. Any failure by us to effectively manage our supply chain could adversely affect our supply of finished goods and our ability to fulfill customer demand, which could adversely affect our revenue and our reputation.

Any price increases, shortages or interruptions of supply would adversely affect our revenue and gross profits.

We may be vulnerable to price increases for components. In addition, in the past we have occasionally experienced shortages or interruptions in supply for certain components, which caused us to purchase components at a higher cost or delayed production for a longer period of time than we had initially forecasted. We are currently experiencing a period of constrained supply for some components. To help address these issues, we may decide to purchase “safety stock” in quantities that are above our foreseeable requirements. As a result, we could be forced to increase our excess and obsolete inventory reserves to account for excess quantities. If we experience any shortage of components or receive components of unacceptable quality or if we are not able to procure components from alternate sources at acceptable prices and within a reasonable period of time, our revenue and gross profit could decrease.

Our gross margin may fluctuate from quarter to quarter and may be adversely affected by a number of factors.

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

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the products and services mix in any particular period;

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our willingness to negotiate price discounts with our customers;

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competitive pressure to reduce sales prices;

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charges for excess or obsolete inventory or purchase commitments;

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changes in the price or availability of components;

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variations in production volumes, which may result in higher relative costs at lower volumes due to fixed costs;

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warranty or repair costs that exceed our expectations; and

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the timing of revenue recognition and related cost of goods sold.

The networking equipment industry has experienced price erosion due to a number of factors, including competitive pricing pressures, increased negotiated sales discounts, rapid technological change and new product introductions. We expect these trends to continue. As a result, our gross margin will decline if we cannot maintain our selling prices by offering new products and product enhancements or offset declines in average selling prices with a reduction in the cost of products and services through manufacturing efficiencies, design improvements and other cost reductions. Our failure to do so would cause our sales, revenue and gross margin to decline, which could materially and adversely affect our operating results.

If we fail to develop and introduce new products in a timely manner, or if we fail to effectively manage product transitions, we could experience decreased revenue.

Our future growth depends on our ability to develop and introduce new products successfully. For example, we introduced the first release of our ExaScale product in March 2009 and intend to continue to release additional boards and features for this product. Due to the complexity of our products, there are significant technical risks that may affect our ability to introduce new products successfully. If we are unable to develop and introduce new products in a timely manner or in response to changing market conditions or customer requirements, or if these products do not achieve market acceptance, our growth could be negatively impacted and our operating results could be materially and adversely affected.

In addition, components used in our products are periodically discontinued by our suppliers which results in our having to change our product designs. We also periodically redesign some of our products in order to remain competitive because of increased functionality or higher performance afforded by new components. If these redesigns are not timely, of if they result in unexpected issues related to quality or performance, sales of our products could be adversely affected.

Product introductions by us in future periods may also reduce demand for our existing products. As new or enhanced products are introduced, we must successfully manage the transition from older products, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure to do so could adversely affect our operating results.

If we fail to respond to technological changes, evolving industry standards or customer demand for new features, our products could become obsolete or less competitive in the future.

Our products must respond to technological changes and evolving industry standards. If we are unable to develop enhancements to, and new features for, our existing products or acceptable new products that keep pace with technological developments, industry standards or customer demand for new features, our products may become obsolete, less marketable and less competitive and our business will be harmed.

Our products are highly complex and may contain undetected software or hardware errors, which could harm our reputation and future product sales.

Our products are deployed in large and complex networks and must be compatible with other system components. Our products can only be fully tested for reliability when deployed in these networks for long periods of time and accordingly, errors, defects or incompatibilities may not be discovered until after they have been installed and used by customers. In addition, our products are often used in applications that place heavy use and strain on networking equipment. Our

customers may discover errors, defects or incompatibilities in our products only after they have been fully deployed and operated under peak stress conditions. For example, in the second quarter of fiscal 2010 we detected a defect in the power supply subsystem included in the line cards for our ExaScale product. The defect, which was only detectable under peak stress conditions, caused delays in sales for the quarter and caused us to incur additional costs and expenses of approximately $1.4 million to remediate the error. We do not expect to incur significant additional costs or expenses for any further remediation.

In addition, our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. Errors, defects, incompatibilities or other problems with our products or other products within a larger system could result in a number of negative effects on our business, including:

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loss of customers;

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loss of or delay in revenue;

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loss of market share;

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damage to our brand and reputation;

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inability to attract new customers or achieve market acceptance;

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diversion of development resources;

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increased service and warranty costs;

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legal actions by our customers; and

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increased insurance costs.

If any of these occurs, our operating results could be harmed.

If our products do not interoperate with other systems, installations could be delayed or cancelled.

Our products may be required to interoperate with existing customer equipment or systems, each of which may have different specifications. A lack of interoperability between our products and our customers’ existing systems may result in significant support and repair costs and harm relations with our customers. If our products do not interoperate with those of our customers’ networks, installations could be delayed or orders for our products could be cancelled, which would result in losses of revenue and customers that could have an adverse effect on our business and operating results.

Our business is subject to the risk of warranty claims.

We could face claims for product liability, tort or breach of warranty. Our agreements with customers typically contain warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, our business liability insurance coverage may not be adequate to cover the full amount of any future claims.

Our success depends on our ability to attract and retain key personnel, and our failure to do so could harm our ability to grow our business.

Our success depends on our ability to attract and retain our key personnel, namely our management team and experienced sales and engineering personnel. We must also attract,

assimilate and retain other highly qualified employees, including our chief executive officer and our technology, marketing, sales and support personnel. Despite current economic conditions, there is substantial competition for highly-skilled employees particularly in the Silicon Valley where our headquarters is located. The members of our management and key employees are at-will employees and do not have employment agreements. If we fail to attract and retain key employees, our ability to grow our business could be harmed.

Our company has grown significantly during the last two years as a result of two large acquisitions and if we fail to manage our growth and integration effectively, our business could be harmed.

We recently acquired two companies, Legacy Force10 in March 2009 and Carrier Access in February 2008, and are currently refocusing our strategy, which has required us to restructure our business. These changes have placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. For example, we are still in the process of integrating our accounting and financial reporting systems with those acquired as part of our acquisition of Legacy Force10. Our success will depend in part upon the ability of our senior management to manage these changes effectively. To manage these changes, we will need to continue to improve and expand our operational, financial and management controls and our reporting systems and procedures. Further, we need to establish an internal audit function. If we fail to successfully manage our growth, we will be unable to execute our business plan and our business could be harmed.

Adverse economic conditions or reduced network technology product spending may adversely impact our business.

Our business depends on the overall demand for network technology products and on the economic health of our current and prospective customers. We are particularly susceptible to weakness in capital and IT spending because purchases of our products are often discretionary and involve a significant commitment of capital and other resources. Continued weakness in the global economy, or a further reduction in network technology spending even if economic conditions improve, could adversely impact our business, financial condition and results of operations in a number of ways, including longer sales cycles, lower prices for our products and services, reduced unit sales and lower or no growth.

We have operations worldwide and intend to expand our international operations, which exposes us to significant risks.

We have research and development employees in Canada, India and the United States. We have sales support employees in Australia, Canada, China, France, Germany, Hong Kong, India, Japan, South Korea, Malaysia, Mexico, Singapore, Spain, Taiwan and the United Kingdom, in addition to the United States. We intend to grow our large India operations and expand into other geographic areas. The success of our business depends, in large part, on our ability to continue to operate successfully worldwide and to further expand our international operations and sales. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. We cannot be sure that further international expansion will be successful. In addition, we face risks in doing business internationally that could expose us to reduced demand for our products, lower prices for our products or other adverse effects on our operating results. Among the risks we believe are most likely to affect us are:

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difficulties and costs associated with staffing and managing foreign operations;

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longer and more difficult customer qualification and credit checks;

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greater difficulty collecting accounts receivable and longer payment cycles;

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the need for various local approvals in order to sell products in some countries;

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difficulties in entering some foreign markets, such as China, without larger-scale local operations;

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compliance with local laws and regulations on a timely basis;

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lack of adequate physical infrastructure, including power and cooling;

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unexpected changes in regulatory requirements, including the extension of tax holidays;

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reduced protection for intellectual property rights in some countries;

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adverse tax consequences, including as a result of repatriating cash generated from foreign operations to the United States, if we were deemed to have permanent establishments outside of the United States, or if our compliance with applicable transfer pricing laws and regulations were challenged, including under our existing and future intercompany agreements and transfer pricing methodologies and practices;

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the effectiveness of our policies and procedures designed to ensure compliance with the Foreign Corrupt Practices Act and similar regulations;

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fluctuations in currency exchange rates, which could increase the price of our products to customers outside of the United States, increase the expenses of our international operations by reducing the purchasing power of the U.S. dollar and expose us to foreign currency exchange rate risk if, in the future, we denominate our international sales in currencies other than the U.S. dollar;

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our dependence on third-parties to provide international back-office support;

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new and different sources of competition; and

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political and economic instability and terrorism.

Our failure to manage any of these risks successfully could harm our international operations and reduce our international revenue.

We intend to grow our research and development operations and our ability to introduce new products cost-effectively depends on our ability to manage remote development sites and third party developers successfully.

Our success depends on our ability to develop new products and enhance our existing products rapidly and cost-effectively. We have a research and development center in India, and on June 30, 2010, we had 148 personnel at this location. We intend to expand our headcount and product development activities in this location. As we do not have substantial experience managing core product development operations that are remote from our U.S. headquarters, we may not be able to manage these remote operations successfully. We are in the process of transitioning software development to a third party service provider for certain of our lower density products in order to accelerate the introduction of new products and features. We could incur unexpected costs or delays in product development, including transition difficulties in outsourcing certain of our software development efforts to a third party service provider, that could impair our ability to meet market windows or cause us to forego certain new product opportunities.

Our use of open source software and other third-party technology and intellectual property could impose limitations on our ability to market our products.

We incorporate open source software into our products. Although we monitor our use of open source closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to market or sell our products or to develop new products. In such event, we could be required to seek licenses from third-parties in order to continue offering our products, to disclose and offer royalty-free licenses in connection with our own source code, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business.

We also incorporate certain third-party technologies, including software programs and patented standards into our products and may need to utilize additional third-party technologies in the future. However, licenses to relevant third-party technology may not continue to be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our products. These delays, if they occur, could materially adversely affect our business.

Failure to protect our intellectual property could substantially harm our business.

Our success and ability to compete are substantially dependent upon our intellectual property. We rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, channel partners and others to protect our intellectual property rights. We cannot assure you that any patents will be issued from the patent applications we have filed and we cannot assure you that the steps we take to protect our intellectual property rights will be adequate, particularly in foreign jurisdictions. Patents may not adequately protect our intellectual property rights or our products against competitors, and third-parties may challenge the scope, validity and/or enforceability of our issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.

We intend to enforce our intellectual property rights vigorously, and from time to time we may initiate claims against third-parties that we believe are infringing our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could materially harm our business.

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, which could harm our business.

Third parties have in the past sent us correspondence regarding intellectual property infringement and in the future we may receive claims that our products infringe or violate their intellectual property rights. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require us to pay substantial damages and prevent us from selling our products. We may also be obligated to indemnify our customers or business partners in connection with any such litigation, which could further exhaust our resources.

Furthermore, as a result of an intellectual property challenge, we may be required to enter into royalty, license or other agreements, but such agreements may not be available to us on commercially reasonable terms, or at all. Litigation over patent rights and other intellectual property rights is not uncommon with respect to networking technologies, and sometimes involves patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

We are subject to governmental export controls that could subject us to liability or adversely affect our ability to sell our products in international markets.

Some of our products are subject to U.S. export controls and may be exported outside the United States only with the required export license or through an export license exception. Various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to deploy our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets or prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business.

We are subject to environmental and other health and safety regulations that may increase our costs of operations or limit our activities.

We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the European Union, or EU, Restriction of Hazardous Substances, or RoHS, and the EU Waste Electrical and Electronic Equipment, or WEEE, Directive as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. We have incurred costs to comply with these laws, including research and development costs, costs associated with assuring the supply of compliant components and costs associated with writing off noncompliant inventory. We expect to incur more of these costs in the future. With respect to the EU RoHS, we and our competitors rely on an exemption for lead in network infrastructure equipment. It is possible this exemption will be revoked in the near future. If revoked, if there are other changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components that are compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The EU WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Although currently our EU international channel partners are responsible for compliance with this directive as the importer of record in most of the European countries in which we sell our products, changes in interpretation of the regulations may cause us to incur costs or have to meet additional regulatory requirements in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

We may not be able to comply in all cases with applicable environmental and other regulations or compliance may be prohibitively expensive, and if we do not comply, we may incur remediation costs or inventory write-offs, reputational damage, penalties or we may not be able to offer our products for sale in certain countries.

We have engaged in acquisitions in the past and plan to continue to expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, result in additional dilution to stockholders or use resources that are necessary to operate other parts of our business.

In the past, we have grown our business through acquisitions, and we plan in the future to acquire or invest in businesses, products or technologies that we believe could complement or expand our products, enhance our technical capabilities or otherwise offer growth opportunities. Such acquisitions or investments could create risks for us, including:

•

difficulties in assimilating acquired personnel, operations and technologies or realizing synergies expected in connection with an acquisition, particularly with acquisitions of companies with large and widespread operations or complex products;

•

unanticipated costs or liabilities, including possible litigation, associated with the acquisition;

•

incurrence of acquisition-related costs;

•

diversion of management’s attention from other business concerns;

•

use of resources that are needed in other parts of our business; and

•

use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our results of operations.

We may be unable to complete acquisitions at all or on commercially reasonable terms, which could limit our future growth. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results and result in a decline in our stock price. In addition, if an acquired business fails to meet our expectations, our operating results may suffer.

Our ability to use net operating losses to offset future taxable income may be subject to significant limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses to offset future taxable income. We believe it is probable that we have had one or more ownership changes, as a result of which our existing net operating loss carryforwards may be subject to substantial limitations. The existing net operating loss carryforwards of corporations we have acquired also may be subject to substantial limitations arising from ownership changes prior to, or in connection with, their acquisition by us. In addition, if we undergo an ownership change in connection with or after this public offering, our ability to utilize net operating loss carryforwards could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. For these reasons, it is likely that we may not be able to utilize a significant portion of our net operating loss carryforwards if we attain profitability.

The issuance of new accounting standards or future interpretations of existing accounting standards could adversely affect our operating results.

We prepare our financial statements to conform to GAAP. A change in those principles could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. Generally accepted accounting principles in the United States are issued by and are subject to interpretation by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the Securities and Exchange Commission, or SEC, and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. The AICPA continues to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales practices and business arrangements. The issuance of new accounting standards or future interpretations of existing accounting standards, or changes in our business practices could result in future changes in our revenue recognition or other accounting policies that could have a material adverse effect on our results of operations.

Our principal offices and facilities and some of those of our contract manufacturers are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities or the facilities of our contract manufacturers, which could cause us to curtail our operations.

Our principal offices and some of our facilities and some of those of our contract manufacturers are located in California near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. In addition, we may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

Risks related to this offering, the securities market and investment in our common stock

As a result of becoming a public company, we will be obligated to develop and maintain effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Beginning with our 2011 fiscal year, our auditors will also have to issue an opinion on the effectiveness of our internal control over financial reporting.

We are in the very early stages of the costly and challenging process of enhancing our internal controls and compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We currently estimate that our costs to enhance our controls in order to comply with the requirements of Section 404 will be in the range of $0.8 to $1.2 million. We may also incur significant additional unforeseen expenses as part of this process. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal control over financial reporting is effective, or if our auditors were to express an adverse opinion on the effectiveness of our internal controls because we had one or more material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline.

During our fiscal 2009 audit and fiscal 2010 interim reviews, we identified a material weakness in our internal control over financial reporting related to the accounting for infrequent and complex stockholders’ equity transactions, involving (a) the issuance of our Series B preferred stock in June through August 2009 at a fair value substantially higher than the amount paid by investors and (b) the presentation in the consolidated statement of cash flows of payments of costs related to our initial public offering. We have also identified during our fiscal 2009 audit significant deficiencies in our internal control over financial reporting related to insufficient independent review of accounting analyses, revenue recognition related to certain Transport customer arrangements, balance sheet classification, valuation of certain property and equipment and deferred tax liabilities in the purchase price allocation related to our acquisition of Legacy Force10 and a lack of documented policies and procedures related to information systems. While the attestation as to our internal control over financial reporting will not occur until the end of our 2011 fiscal year, we cannot assure you that this material weakness or these significant deficiencies will be remediated until the completion of the testing and attestation process, or that other material weaknesses or significant deficiencies will not arise.

During fiscal 2010, we hired additional accounting and finance personnel, who will, among other things, assist with our remediation efforts, and we will continue to enhance our procedures regarding the preparation and review of accounting analyses. Although we believe these actions will remediate this material weakness and these significant deficiencies during our fiscal year

ending September 30, 2010, we could experience unforeseen difficulties and we may need to operate for an extended period of time with the new or revised controls in place before the material weakness and these significant deficiencies will be determined to be remediated.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act and the recently-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules implemented by the SEC and the New York Stock Exchange on which we expect our common stock will be traded. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We expect that complying with these rules and regulations will increase our legal and financial compliance costs substantially and make some activities more time consuming and costly. We are unable currently to estimate these costs with any degree of certainty. We also expect that, as a public company, it will be more expensive for us to obtain director and officer liability insurance.

We might require additional capital to support business operations, and this capital might not be available on acceptable terms, or at all.

If our cash and cash equivalents balances and any cash generated from operations and from this offering are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our operations. We cannot assure you that we will be able to raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the IPO price. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of common stock. In addition, if we were to raise cash through a debt financing, such debt may impose conditions or restrictions on our operations, which could adversely affect our business. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our operating plans to the extent of available funding, which would harm our ability to grow our business.

If securities analysts do not publish research or reports about our business and our stock or if they publish negative evaluations, the price of our stock could decline.

We expect that the trading price for our common stock will be affected by research or reports that industry or financial analysts publish about us or our business. There are many large, well-established publicly-traded companies active in our industry and market, which may mean that we receive less widespread analyst coverage than our competitors. If one or more of the analysts who covers us downgrade their evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause our stock price to decline.

Our common stock has no prior public market and could trade at prices below the IPO price.

There has not been a public trading market for shares of our common stock prior to this offering. An active trading market may not develop or be sustained after this offering. The IPO price for

our common stock sold in this offering will be determined by negotiations among us, the selling stockholders and representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering, and our common stock could trade below the IPO price.

The concentration of ownership of our capital stock with insiders upon the completion of this offering will limit your ability to influence corporate matters.

We anticipate that our executive officers, directors, current 5% or greater stockholders and entities affiliated with them together will beneficially own approximately % of our common stock outstanding after this offering. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, these stockholders, acting together, will be able to exert significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate.

Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of options, warrants or rights outstanding as of the date of this prospectus. Of the outstanding shares, all of the shares sold in this offering, plus any additional shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933, or the Securities Act) may only be sold in compliance with the limitations described in the section entitled “Shares eligible for future sale—Rule 144.” Taking into consideration the effect of the lock-up agreements described below and the provisions of Rule 144 and Rule 701 under the Securities Act, based on an assumed IPO date of August 31, 2010, the remaining shares of our common stock will be available for sale in the public market as follows:

•

no shares will be eligible for sale on the date of this prospectus;

•

shares will be eligible for sale upon the expiration of the lock-up agreements described below; and

•

the remaining shares will be eligible for sale in the public market from time to time thereafter upon the lapse of our right of repurchase with respect to any unvested shares.

The lock-up agreements expire 180 days after the date of this prospectus, subject to extension upon the occurrence of specified events. The representatives of the underwriters may, in their

sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. After this offering, we intend to register on a Form S-8 up to 9,747,530 shares of common stock that may be issued upon exercise of outstanding stock options granted under our stock plans and shares of common stock that are authorized for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, which we expect to adopt in connection with this offering.

Because our estimated IPO price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

The assumed IPO price of $ , which is the midpoint of the price range set forth on the cover page of this prospectus, is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution of approximately $ per share, based on an assumed IPO price of $ , which is the midpoint of the price range set forth on the cover page of this prospectus, the difference between the price you pay for our common stock and its pro forma as adjusted net tangible book value after completion of the offering. To the extent outstanding options and warrants to purchase our capital stock are exercised, there will be further dilution.

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

Our management will have broad discretion in the application of the net proceeds of this offering. We cannot specify with certainty the uses to which we will apply these net proceeds. The failure by our management to apply these funds effectively could adversely affect our ability to maintain and expand our business.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our bylaws, in effect upon the closing of this offering, will contain provisions that could delay or prevent a change in control of us. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

•

providing for a classified board of directors with staggered, three year terms;

•

authorizing the board of directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;

•

vacancies on our board of directors are filled by appointment of the board of directors;

•

prohibiting stockholder action by written consent;

•

limiting the persons who may call special meetings of stockholders; and

•

requiring advance notification of stockholder nominations and proposals.

In addition, we are subject to the Section 203 of the Delaware General Corporate Law, or DGCL, which may prohibit large stockholders, in particular those owning 15% or more of our

outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

These and other provisions in our amended and restated certificate of incorporation and our bylaws, as in effect upon completion of this offering, and under the DGCL could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. See the section entitled “Description of capital stock.”

We do not anticipate paying any dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Further, our loan and security agreement with Silicon Valley Bank limits our ability to pay dividends. If we do not pay cash dividends, you would receive a return on your investment in our common stock only if the market price of our common stock is greater than the IPO price at the time you sell your shares.

Our stock price may be volatile, and you may be unable to sell your shares at or above the IPO price.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this “Risk factors” section or otherwise, and other factors beyond our control, such as fluctuations in the valuations of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

Special note regarding forward-looking statements

and industry data

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” “Business” and “Executive compensation—Compensation discussion and analysis.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, product development and releases, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates based on industry publications, surveys and forecasts, including those generated by IDC and The Dell’Oro Group. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable. Although we believe the publications to be reliable, we have not independently verified their data. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section entitled “Risk factors.”

Use of proceeds

We estimate that the net proceeds from our sale of shares of common stock in this offering at an assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $ million, or $ million if the underwriters’ option to purchase additional shares is exercised in full. A $1.00 increase or decrease in the assumed IPO price of $ per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Pending their use, we plan to invest our net proceeds from this offering in short term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

Dividend policy

We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to pay dividends on our common stock would be subject to the discretion of our board of directors and would depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law and our contracts and other factors deemed relevant by our board of directors. In addition, our loan and security agreement with Silicon Valley Bank limits our ability to pay dividends.

Capitalization

The following table sets forth our consolidated cash, cash equivalents and short-term investments and total capitalization as of June 30, 2010 on:

•

an actual basis;

•

a pro forma basis to reflect (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 52,733,480 shares of our common stock, (2) the reclassification of the preferred stock warrant liability to additional paid-in capital effective upon the closing of this offering, and (3) the amendment and restatement of our certificate of incorporation upon the closing of this offering; and

•

a pro forma as adjusted basis to further reflect the sale by us of shares of common stock in this offering at an assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual IPO price and other terms of this offering determined at pricing. You should read this table together with the section entitled “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.


	As of June 30, 2010
(in thousands, except share and per share data)	Actual			Pro forma			Pro forma as adjusted⁽¹⁾

	(unaudited)
Cash, cash equivalents and short-term investments	$	48,834		$	48,834		$

Total debt and capital lease obligations	$	34,790		$	34,790		$
Preferred stock warrant liability		7,167			—


Stockholders’ equity:
Preferred stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted
Convertible preferred stock, $0.0001 par value: 31,702,920 shares authorized, 24,981,240 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		204,539			—
Common stock, $0.0001 par value; 86,000,000 shares authorized, 3,342,728 shares issued and outstanding, actual; 86,000,000 shares authorized, 56,076,208 shares issued and outstanding, pro forma; and shares authorized, shares issued and outstanding, pro forma as adjusted		3			56
Additional paid-in capital		20,516			232,169
Other comprehensive loss		(4	)		(4	)
Accumulated deficit		(154,233	)		(154,233	)

Total stockholders’ equity		70,821			77,988

Total capitalization	$	112,778		$	112,778		$

(1)

Each $1.00 increase or decrease in the assumed IPO price of $ per share would increase or decrease, as applicable, the amount of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

The information on the preceding page excludes:

•

9,747,530 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010, with a weighted average exercise price of $1.15 per share;

•

373,135 shares of common stock issuable upon the exercise of options granted between July 1, 2010 and July 31, 2010, with an exercise price of $2.89 per share;

•

shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, which will become effective in connection with this offering; and

•

5,924,152 shares of common stock issuable upon exercise of warrants outstanding as of June 30, 2010, with a weighted average exercise price of $8.96 per share.

Dilution

As of June 30, 2010, our pro forma net tangible book value was approximately $40.8 million, or $0.73 per share of common stock. Our pro forma net tangible book value per share represents our tangible assets less our liabilities, reflecting the reclassification of the preferred stock warrant liability to additional paid-in capital effective upon the closing of this offering, divided by our shares of common stock outstanding as of June 30, 2010 after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 52,733,480 shares of common stock in this offering.

After giving effect to our sale of shares of common stock in this offering at the assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2010 would have been $ , or $ per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors.

The following table illustrates this dilution:


Assumed IPO price per share			$
Pro forma net tangible book value per share as of June 30, 2010	$	1.05
Increase per share attributable to this offering

Pro forma as adjusted net tangible book value per share after this offering

Net tangible book value dilution per share to new investors in this offering			$

If all our outstanding options had been exercised, the pro forma net tangible book value as of June 30, 2010 would have been $52.0 million, or $0.79 per share, and the pro forma net tangible book value after this offering would have been $ million, or $ per share, causing dilution to new investors of $ per share.

A $1.00 increase or decrease in the assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share by approximately $ , assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, our pro forma as adjusted net tangible book value per share after this offering would be $ per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $ per share and the dilution to new investors purchasing shares in this offering would be $ per share.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2010, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at the assumed IPO price of $ , the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:


	Shares purchased		Total consideration			Average price per share
	Number	Percent	Amount		Percent	Average price per share

Existing stockholders		%	$	⁽¹⁾	%	$
New investors

Total		100%	$		100%	$

(1)

Includes approximately $ million of consideration from the issuance of shares of capital stock in connection with our acquisition of Legacy Force10.

A $1.00 increase or decrease in the assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, total consideration paid to us by new investors and total consideration paid to us by all stockholders by approximately $ million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and without deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.

The foregoing calculations exclude:

•

9,747,530 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010, with a weighted average exercise price of $1.15 per share;

•

373,135 shares of common stock issuable upon the exercise of options granted between July 1, 2010 and July 31, 2010, with an exercise price of $2.89 per share;

•

shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, which will become effective in connection with this offering; and

•

5,924,152 shares of common stock issuable upon exercise of warrants outstanding as of June 30, 2010, with a weighted average exercise price of $8.96 per share.

Selected consolidated financial data

The following selected consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The actual consolidated statements of operations data for the fiscal years ended September 30, 2007, 2008 and 2009 and the consolidated balance sheet data as of September 30, 2008 and 2009, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended September 30, 2005 and 2006, and consolidated balance sheet data as of September 30, 2005, 2006 and 2007, are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the nine months ended June 30, 2009 and 2010 and the consolidated balance sheet data as of June 30, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results to be expected in any future period. See “Management’s discussion and analysis of financial condition and results from operations—Significant issues affecting comparability from period-to-period” for a discussion of factors you should consider in reviewing our historical financial results.

The pro forma condensed combined statement of operations data assumes that our acquisition of Legacy Force10 occurred on October 1, 2008 and combines our results of operations for the year ended September 30, 2009, which includes the results of Legacy Force10 since March 31, 2009, with the results of operations of Legacy Force10 for the six months ended January 31, 2009. The pro forma combined data may not, however, be indicative of our consolidated results of operations that actually would have occurred had the transaction reflected in the pro forma combined results of operations occurred on that date, or of the consolidated results of operations that we may achieve in the future. You should read this pro forma combined information together with the unaudited pro forma condensed combined financial statements included elsewhere in this prospectus.


	Actual															Pro forma combined			Actual
	Fiscal year ended September 30,																		Nine months ended June 30,
(in thousands, except per share data)	2005⁽³⁾			2006⁽³⁾			2007			2008			2009			2009			2009			2010


Consolidated statements of operations data:

Revenue
Product	$	—		$	—		$	—		$	48,225		$	86,120		$	113,005		$	59,494		$	102,330
Service		—			—			—			5,370			16,290			22,398			11,036			20,531
Ratable product and service		9,183			19,243			31,562			102,303			16,660			63,820			12,541			14,717

Total revenue		9,183			19,243			31,562			155,898			119,070			199,223			83,071			137,578


Cost of goods sold⁽¹⁾
Product		—			—			—			28,072			66,012			84,861			48,227			54,488
Service		—			—			—			2,440			8,213			13,155			5,421			11,188
Ratable product and service		7,525			14,440			19,507			56,977			8,079			28,787			6,423			5,737

Total cost of goods sold		7,525			14,440			19,507			87,489			82,304			126,803			60,071			71,413


Gross profit
Product		—			—			—			20,153			20,108			28,144			11,267			47,842
Service		—			—			—			2,930			8,077			9,243			5,615			9,343
Ratable product and service		1,658			4,803			12,055			45,326			8,581			35,033			6,118			8,980

Total gross profit		1,658			4,803			12,055			68,409			36,766			72,420			23,000			66,165


Operating expenses
Research and development⁽¹⁾		12,287			10,635			13,443			23,611			34,137			52,249			23,091			30,764
Sales and marketing⁽¹⁾		10,497			12,857			19,650			27,265			36,010			61,785			24,060			35,328
General and administrative⁽¹⁾		3,986			4,241			6,027			9,427			12,871			22,917			9,320			11,663
Restructuring		—			—			—			—			—			3,119			—			1,881
In-process research and development and amortization of intangible assets		—			—			—			3,119			7,459			7,584			7,189			612

Total operating expenses		26,770			27,733			39,120			63,422			90,477			147,654			63,660			80,248

Operating income (loss)		(25,112	)		(22,930	)		(27,065	)		4,987			(53,711	)		(75,234	)		(40,660	)		(14,083	)
Interest and other income (expense), net		457			(5,176	)		(2,368	)		544			(920	)		(848	)		(854	)		14,104

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle		(24,655	)		(28,106	)		(29,433	)		5,531			(54,631	)		(76,082	)		(41,514	)		21
Benefit from (provision for) income taxes		(29	)		(33	)		(22	)		(87	)		41			(209	)		101			(180	)

Income (loss) before cumulative effect of change in accounting principle		(24,684	)		(28,139	)		(29,455	)		5,444			(54,590	)		(76,291	)		(41,413	)		(159	)
Cumulative effect of change in accounting principle		—			206			—			—			—			—			—			—

Net income (loss)	$	(24,684	)	$	(27,933	)	$	(29,455	)	$	5,444		$	(54,590	)	$	(76,291	)	$	(41,413	)	$	(159	)


	Actual															Pro forma combined			Actual
	Fiscal year ended September 30,																		Nine months ended June 30,
(in thousands, except per share data)	2005⁽³⁾			2006⁽³⁾			2007			2008			2009			2009			2009			2010


Net income (loss) per share⁽²⁾
Basic	$	(88.71	)	$	(82.16	)	$	121.06		$	(12.88	)	$	52.15		$	13.70		$	91.50		$	(0.14	)

Diluted	$	(88.71	)	$	(82.16	)	$	(46.70	)	$	(12.88	)	$	(20.79	)	$	(24.41	)	$	(13.04	)	$	(0.14	)


Weighted average shares used in computing net income (loss) per share⁽²⁾
Basic		280			340			344			386			640			852			575			1,120

Diluted		280			340			1,030			386			4,563			4,775			5,797			1,120

(1)

Includes stock-based compensation expense as follows:


	Actual										Pro forma combined		Actual
	Fiscal year ended September 30,												Nine months ended June 30,
(in thousands)	2005⁽⁴⁾		2006⁽⁴⁾		2007		2008		2009		2009		2009		2010

Cost of goods sold	$	—	$	—	$	44	$	95	$	38	$	38	$	31	$	42
Research and development		—		—		150		322		212		212		163		310
Sales and marketing		—		—		215		335		177		177		138		215
General and administrative		—		—		225		637		195		195		151		407

Total stock-based compensation	$	—	$	—	$	634	$	1,389	$	622	$	622	$	483	$	974

(2)

See note 7 to the notes to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per share.

(3)

Certain reclassifications have been made to the 2005 and 2006 consolidated statements of operations data to conform to the current year presentation. These reclassifications did not have any impact on the previously-reported net loss.

(4)

In fiscal years 2005 and 2006, we recognized an expense in the consolidated statement of operations only for options with intrinsic value at the date of grant. As all options granted to employees prior to October 1, 2006 were granted with an exercise price equal to the fair value of the underlying stock, no compensation cost was recorded in these fiscal years.


	As of September 30,													As of June 30,
(in thousands)	2005			2006			2007			2008		2009		2010


Consolidated balance sheet data:
Cash, cash equivalents and short-term investments	$	12,814		$	9,027		$	40,067		$	50,572	$	67,165	$	48,834
Working capital		4,457			(35,565	)		(199	)		39,589		47,910		27,944
Total assets		64,267			73,761			117,577			126,078		209,383		190,851
Total debt and capital lease obligations		4,709			8,214			11,292			18,288		28,145		34,790
Other long-term liabilities		356			312			491			467		6,015		5,322
Preferred stock warrant liability		—			12,696			—			—		—		7,167
Redeemable convertible preferred stock		32,089			32,089			—			—		—		—
Convertible preferred stock		139,475			139,475			152,024			197,216		204,539		204,539
Common stock and additional paid-in capital		23,448			15,645			32,500			36,284		39,018		20,519
Total stockholders’ equity (deficit)⁽¹⁾		(36,485	)		(72,221	)		(1,160	)		48,282		91,707		70,821

(1)

2005 and 2006 figures have been updated to reflect the correction of stockholders’ equity (deficit) as described in note 15 to the consolidated financial statements included elsewhere in this prospectus.

Management’s discussion and analysis of

financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk factors.” References to fiscal 2007, 2008 and 2009 refer to our fiscal years ended September 30, 2007, 2008 and 2009, respectively.

Business overview

We are organized in two operating segments—Ethernet, which consists of our E-Series, C-Series and S-Series products, and Transport, which includes our multi-service transport and access products. Our Ethernet segment consists of 1 GbE and 10 GbE switches and routers. These products are targeted at data center, high performance enterprise and service provider networks. Our Transport segment, which includes the Traverse and TraverseEdge products for metro networks, the MASTERseries and Axxius products for wireless aggregation networks, and the Adit product for converged business access networks.

Historically, we developed, sold and marketed products to telecommunications service providers. Beginning in the fourth quarter of our fiscal 2009, we increased our focus on the data center market, which we believe has significant growth opportunities, with the goal of leveraging this investment into high performance enterprise and service provider markets.

We sell our products and associated services in the United States, primarily through our direct sales force. We also rely on channel partners, such as resellers, distributors and system integrators, particularly in international markets. We believe our channel strategy allows us to reach a larger number of prospective customers more effectively than if we were to sell directly. Our channel partners generally perform installation and implementation services. In most cases, our channel partners provide post-contractual support, or PCS, by providing first-level support services and purchasing additional services from us under a PCS contract.

Revenue from international sales comprised 21.2% and 21.5% of our total revenue for our fiscal year 2009 and the first nine months of fiscal 2010, respectively. Although we intend to focus on increasing international sales, we expect that sales to customers in the United States will continue to comprise the majority of our sales for the foreseeable future.

We outsource the manufacturing of our products to contract manufacturers. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain a manufacturing operation. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement and final testing and assembly of our products. We work

closely with our contract manufacturers and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecasted product sales and unanticipated shifts in sales volume and product mix.

We believe several emerging trends and developments will be integral to the future growth of our business. The pervasiveness and increasing complexity of computing, combined with the growth in IP traffic, driven by the demand for anytime and anywhere access to applications and network content, has made high performance IP-based networks more essential for organizations. We also believe several additional trends, such as data center consolidation, increased adoption of virtualization and cloud computing technologies and increased focus on managing operating costs are exacerbating the need for high performance networking equipment. As a result, our plan is to capitalize on these trends by focusing our business on selling products targeted at this growing market. While we currently expect this market to grow, we cannot offer a specific timetable as to when or if we will be able to capitalize on these trends and achieve profitability on a GAAP basis.

Our ability to capitalize on emerging trends and developments will depend, in part, on our ability to execute our growth strategy of extending our market position, maintaining and extending our technological advantages, and expanding our relationships with our channel partners. We also intend to focus efforts on improving our supply chain management and to outsource functions that we have historically performed internally to help reduce our costs and expenses. Our ability to achieve and maintain profitability in the future will be affected by, among other things, the continued acceptance of our products, the timing and size of orders, the average selling prices for our products and services, the costs of our products, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources. However, we can offer no assurance that we will succeed in these efforts. We intend for our operating expenses to increase in absolute dollars but decline as a percentage of total revenue on an annual basis.

Significant issues affecting comparability from period-to-period

Certain significant items or events should be considered to better understand differences in our results of operations from period-to-period. We believe that the following items or events have significantly affected our financial results for prior periods and the results we may achieve in the future:

Recent acquisitions

In March 2009, we acquired Legacy Force10, which developed, marketed and sold Ethernet switch and router products. With this acquisition, we established our Ethernet business segment and began to market our products for use in data centers and high performance enterprise networks. The aggregate purchase consideration consisted of 7,826,800 shares of our Series A preferred stock, 424,200 shares of our common stock, and warrants to purchase 1,036,948 shares of our convertible preferred stock, which was valued at $69.1 million in the aggregate. We also incurred $3.1 million in direct acquisition costs, resulting in total purchase consideration of $72.2 million. As a result of the acquisition of Legacy Force10, we immediately expensed $6.5 million of in-process research and development, and we recognized $16.0 million of acquired intangible assets and $15.3 million of goodwill. Our historical results of operations include the results from our Ethernet segment, which was established following the acquisition of Legacy Force10, beginning with the quarter ended June 30, 2009.

In February 2008, we acquired Carrier Access, which provided wireless aggregation and converged business access equipment to wireless and wireline communications carriers. With this acquisition,

we began to sell our MASTERseries and Axxius wireless aggregation platforms and Adit converged business access product to wireless and wireline carriers. The aggregate purchase price for Carrier Access was approximately $95.4 million, including approximately $69.0 million of Carrier Access’ cash on hand. As a result of the acquisition of Carrier Access, we immediately expensed $2.6 million of in-process research and development, and we recognized $5.8 million of acquired intangible assets and $5.8 million of goodwill. The results of operations of Carrier Access are reflected in our consolidated results of operations beginning with the quarter ended March 31, 2008.

Revenue recognition

Our revenue as reported under GAAP, increased from fiscal 2007 to fiscal 2008, but decreased in fiscal 2009. We believe this trend in revenue is not indicative of our expected revenue in future periods due to the following:

•

Prior to fiscal 2007, the substantial majority of our sales had an implied customer support element due to the fact that we provided PCS free of charge to substantially all of our customers, sometimes in excess of their contractual rights. As a result, in fiscal 2007 and prior years, substantially all revenue was deferred and recognized as ratable product and service revenue over periods of up to 48 months, the estimated useful life of the product. On December 1, 2007, we terminated the implied customer support element in the majority of our sales arrangements by no longer providing customer support to customers who were not entitled to receive such services. For customers where we terminated these services on that date, we then recognized any previously deferred revenue and direct costs immediately. For other customers where we entered into a new PCS contractual arrangement, we adjusted the amortization period in accordance with the terms of the new arrangement and accelerated our revenue recognition to ratable product and service revenue over the shortened contract period. This change in revenue recognition resulted in the acceleration of the recognition of a significant amount of ratable product and service revenue in fiscal 2008.

•

Prior to April 1, 2008, we did not have vendor-specific objective evidence, or VSOE, for PCS, which meant all product and PCS revenue were deferred and recognized as ratable product and service revenue over the contractual support period, or 48 months, for shipments prior to December 1, 2007. As of April 1, 2008, we established VSOE for PCS and certain other bundled elements, which allowed us to recognize product revenue upon shipment or delivery of the product, and to recognize PCS revenue over the contractual support period.

•

As a result of our acquisitions of Carrier Access and Legacy Force10, we recognized incremental revenue since the respective acquisition dates as compared to the prior periods. For example, in fiscal 2009 and the first nine months of fiscal 2010, we recognized revenue from sales of Legacy Force10 products and services of $34.4 million and $78.5 million, respectively.

Gross margin

Our gross margin decreased from fiscal 2008 to fiscal 2009. We believe this decrease in gross margin is not indicative of our expected gross margin in future periods due to the following:

•

In connection with our acquisition of Legacy Force10, we recorded a purchase accounting adjustment to increase the inventory acquired to its current fair market value, less normal selling costs and a normal profit margin on such costs, which resulted in an $11.4 million increase in inventory as of April 1, 2009. Upon the sale of this inventory in fiscal 2009 and the first nine months of fiscal 2010, we incurred $8.3 million and $2.8 million, respectively, of incremental product cost of goods sold due to the stepped-up fair value of this inventory.

•

In connection with our acquisitions of Legacy Force10 and Carrier Access, amortization associated with acquired developed technology and backlog was amortized to product cost of goods sold in the amount of $2.1 million and $1.0 million in fiscal 2009 and the first nine months of fiscal 2010, respectively.

•

In connection with our acquisition of Legacy Force10, we recorded a purchase accounting adjustment to reduce deferred service revenue to its fair value, representing our estimated future costs to fulfill acquired contractual service obligations plus a normal profit margin. As a result, upon our acquisition of Legacy Force10 on March 31, 2009, we recorded the deferred service revenue at a value that was $8.4 million less than its carrying value on Legacy Force10’s financial statements. The impact of this purchase accounting adjustment during fiscal 2009 and the first nine months of fiscal 2010 was a reduction in service revenue of $4.2 million and $2.6 million, respectively, compared to the amounts that would have been recognized had we not made this adjustment.

Other purchase accounting expenses

In connection with our acquisitions of Carrier Access and Legacy Force10, we incurred other purchase accounting expenses of $3.1 million, $7.5 million and $0.6 million in fiscal 2008, fiscal 2009 and the first nine months of fiscal 2010, respectively. These expenses related to the write- off of purchased in-process research and development related to development projects that had not yet reached technological feasibility and had no alternative future use, and the amortization of acquired intangible assets with defined useful lives.

Restructuring, severance and other expenses

•

Subsequent to our acquisition of Legacy Force10, we embarked on a plan to realign our operations by eliminating redundant positions in the combined company. We incurred severance and other expenses related to this realignment plan of $0.8 million in fiscal year 2009 and $2.8 million in the first nine months of fiscal 2010. As a result of these efforts, we have significantly reduced our operating expenses. For the nine months ended June 30, 2010, we incurred a total of $77.8 million of research and development, sales and marketing and general and administrative expenses, as compared to a total of $110.4 million for the nine months ended June 30, 2009 on a pro forma as combined basis. See our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus.

•

In October 2009, we announced that we were shutting down our research and development center in Shanghai, China. In March 2010, we exited our office facility in Boulder, Colorado. As a result of these actions, we incurred total restructuring expenses of $1.9 million for our Transport segment during the first nine months of fiscal 2010, consisting of severance payments related to a headcount reduction of 58 employees in Shanghai, and asset impairment charges, other termination benefits and facility exit costs for both locations.

New accounting standards

With the adoption of FASB Accounting Standards Codification, or ASC, 605-25 (formerly referred to as Emerging Issues Task Force, or EITF, Issue No. 08-1) and ASC 985-605 (formerly referred to as EITF Issue 09-3), effective for our fiscal year beginning October 1, 2010, our revenue recognition could change significantly in future periods. While we expect the adoption of these standards to result in the accelerated recognition of product revenue for certain bundled arrangements entered into

after the adoption, we have not completed our evaluation of the impact of these standards. See note 1 to the notes to our consolidated financial statements included elsewhere in this prospectus.

Key metrics

We monitor the key financial metrics set forth below to help us evaluate future growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.


	Actual									Pro forma⁽¹⁾ combined			Actual
	Fiscal year ended September 30,												Nine months ended June 30,
(dollars in thousands)	2007			2008			2009			2009			2009			2010

Revenue
Product	$	—		$	48,225		$	86,120		$	113,005		$	59,494		$	102,330
Service		—			5,370			16,290			22,398			11,036			20,531
Ratable product and service		31,562			102,303			16,660			63,820			12,541			14,717

Total revenue	$	31,562		$	155,898		$	119,070		$	199,223		$	83,071		$	137,578


Revenue by segment
Ethernet	$	—		$	—		$	34,367		$	114,520		$	17,207		$	78,529
Transport		31,562			155,898			84,703			84,703			65,864			59,049

Change in total deferred revenue		16,672			(60,137	)		5,234						(6,203	)		(10,712	)

GAAP operating income (loss)		(27,065	)		4,987			(53,711	)					(40,660	)		(14,083	)
Non-GAAP operating income (loss)		(26,431	)		10,013			(35,188	)					(25,691	)		(6,883	)

GAAP net income (loss)		(29,455	)		5,444			(54,590	)					(41,413	)		(159	)
Non-GAAP net income (loss)		(28,598	)		10,470			(36,067	)					(26,444	)		(7,580	)

Gross margin by segment
Ethernet		—	%		—	%		27.8	%		39.7	%		18.2	%		52.7	%
Transport		38.2			43.9			32.1			32.1			30.2			41.9

(1)

The unaudited pro forma condensed combined information is based on our separate historical financial information and that of Legacy Force10, presented as if the acquisition had occurred on October 1, 2008 with recurring acquisition-related adjustments reflected in this information. The unaudited pro forma condensed combined information is provided for informational purposes only and is not necessarily and should not be assumed to be an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. See our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus.

Total revenue. Total revenue is comprised of product revenue generated from sales of our Ethernet and transport and access products, service revenue generated primarily from PCS, and ratable product and service revenue generated from sales of our products and services in cases where the fair value of the services being provided cannot be segregated from the value of the entire sale. Historically, we developed, sold and marketed products to telecommunications service providers. Subsequent to the acquisition of Legacy Force10 in 2009, management determined that the revenue growth and gross margin potential for the Ethernet segment was higher than the Transport segment. Therefore, management decided to make a shift in strategic focus in the fourth quarter of fiscal 2009 by increasing our efforts in growing our market share in our Ethernet segment by initially focusing on the data center market, which we believe has significant growth opportunities, with the goal of leveraging this investment into high performance enterprise and service provider markets. Total revenue increased 65.6% in the first nine months of fiscal 2010 compared to the first nine months of 2009, but decreased by 23.6% in fiscal 2009 compared to fiscal 2008. For a more complete description of the reasons for changes in total revenue, please see the section “Results of operations” below.

Revenue by segment. We are organized in two operating segments – Ethernet, which consists of our E-Series, C-Series and S-Series products, and Transport, which includes our multi-service

transport and access products. On March 31, 2009, with the acquisition of Legacy Force10, we established our Ethernet business segment. Prior to the acquisition, all revenue was generated by our Transport business segment. Our management monitors revenue by segment on a regular basis in deciding how to allocate resources and in assessing our performance as a whole, and of each business segment in particular. Since the acquisition of Legacy Force10 we have focused on investing resources in key technology initiatives aimed at growing our Ethernet segment revenue, and intend to continue to do so for the foreseeable future as we believe there is potential for greater revenue growth and higher margins in the Ethernet segment. In connection with this strategy, we anticipate increasing our engineering, sales and marketing headcount focused on the Ethernet segment. For a more complete description of the reasons for changes in revenue by segment, please see the section “Results of operations” below.

Change in total deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our total deferred revenue balance as of June 30, 2010 consisted of the unamortized portion of service revenue from PCS and revenue deferred due to non delivery of certain elements under the sales arrangement. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We also assess the change in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity in that period. We also believe that it is an important metric for investors evaluating our operating results in a given period. The increase in deferred revenue in fiscal 2007 and the decrease in deferred revenue in fiscal 2008 were primarily due to changes in revenue recognition described above under “—Significant issues affecting comparability from period-to-period.” The increase in deferred revenue in fiscal 2009 was due to increased sales of PCS, commensurate with our increase in product sales during the same period. The decrease in deferred revenue in the first nine months of fiscal 2010 was primarily due to the recognition of $7.2 million of previously deferred product and service revenue as we satisfied the remaining deliverables under two existing customer contracts for transport products and services, offset by deferred revenue related to current period shipments.

Gross margin by segment. Gross margin, defined as gross profit as a percentage of total revenue, has been and will continue to be affected by a variety of factors, including the mix of products sold, manufacturing costs and any write-offs of excess or obsolete inventory, and the mix of revenue between products and services. Our management monitors gross margin by segment on a regular basis in assessing the performance of the respective business segments. In comparing gross margin by segment over the last four quarters, management determined that our Ethernet segment products generate higher unit gross margin than our Transport segment products, and therefore our overall gross margin is affected by the level of sales of these products. This was a factor management considered in making its strategic decision to focus more of our efforts and resources in growing our Ethernet segment revenue. For a more complete description of the reasons for changes in gross margin by segment, please see the section “Results of operations” below.

Non-GAAP financial results. We believe that the use of non-GAAP operating income (loss) and non-GAAP net income (loss) are helpful financial measures for an investor determining whether to invest in our common stock. In computing these measures, we exclude certain items that are considered by us to be outside ongoing operating results, such as inventory purchase accounting adjustments, in-process research and development expenses and restructuring charges. Management believes excluding these items helps investors compare our operating performance

with our results in prior periods, as well as with the performance of other companies, as they are not indicative of ongoing operating results and therefore limit comparability between periods.

•

Restructuring charges. These charges related to severance, lease termination, asset impairment, and other costs for the Transport segment associated with the closures of our development center in Shanghai and office facility in Boulder, Colorado.

•

Inventory purchase accounting adjustment. In the acquisition of Legacy Force10, we were required to record acquired inventory at its fair market value, less normal selling costs and a normal profit margin on such costs, which resulted in an $11.4 million increase in inventory, as of April 1, 2009. As we have sold this inventory, our cost of goods sold has been significantly impacted by this purchase accounting adjustment.

•

Change in fair value of warrant liability. This represents a non-cash charge representing the difference in the fair value of our preferred stock warrant liability between the beginning and end of the period.

•

Gain on extinguishment of preferred stock warrants. This represents a non-cash gain upon the exchange of certain preferred stock warrants in 2007 for warrants to purchase a different series of preferred stock.

•

In-process research and development and amortization of intangible assets. These charges relate to our acquisitions of Carrier Access and Legacy Force10. Under GAAP, we were required to immediately charge to expense the fair value of acquired in-process research and development, and to record intangible assets and amortize them over their useful lives. While amortization is a recurring item, we believe that excluding these charges provides for more accurate comparisons of our historical and our current operating results and those of similar companies due to the varying nature and significance of acquisitions that we and similar companies may complete, and the varying valuation methodologies and amortization periods related to intangible assets.

•

Employee stock-based compensation. This represents non-cash charges for the fair value of stock options and other awards granted to employees. While this is a recurring item, we believe that excluding these charges provides for more accurate comparisons of our historical and our current operating results and those of similar companies due to the varying available valuation methodologies, subjective assumptions and the variety of stock-based award types issued.

These non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate such financial measures differently, particularly as it relates to nonrecurring, unusual items. Our non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to net income (loss) or as indications of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial measures.

The following table reflects the reconciliation of non-GAAP operating income (loss) and non-GAAP net income (loss) to GAAP operating income (loss) and GAAP net income (loss).


	Fiscal year ended September 30,								Nine months ended June 30,
(in thousands)	2007			2008		2009			2009			2010

GAAP operating income (loss)	$	(27,065	)	$	4,987	$	(53,711	)	$	(40,660	)	$	(14,083	)

Non-GAAP adjustments
Add: Amortization of intangible assets included in cost of goods sold		—			518		2,126			1,319			951
Add: Inventory purchase accounting adjustment		—			—		8,316			5,978			2,782
Add: Restructuring		—			—		—			—			1,881
Add: In-process research and development and amortization of intangible assets included in operating expenses		—			3,119		7,459			7,189			612
Add: Employee stock-based compensation		634			1,389		622			483			974

Non-GAAP operating income (loss)	$	(26,431	)	$	10,013	$	(35,188	)	$	(25,691	)	$	(6,883	)


GAAP net income (loss)	$	(29,455	)	$	5,444	$	(54,590	)	$	(41,413	)	$	(159	)

Non-GAAP adjustments
Add: Amortization of intangible assets included in cost of goods sold		—			518		2,126			1,319			951
Add: Inventory purchase accounting adjustment		—			—		8,316			5,978			2,782
Add: Restructuring		—			—		—			—			1,881
Add: In-process research and development and amortization of intangible assets included in operating expenses		—			3,119		7,459			7,189			612
Add: Employee stock-based compensation		634			1,389		622			483			974
Add: Change in fair value of preferred stock warrant liability		2,025			—		—			—			(14,621	)
Subtract: Gain on extinguishment of preferred stock warrants		(1,802	)		—		—			—

Non-GAAP net income (loss)	$	(28,598	)	$	10,470	$	(36,067	)	$	(26,444	)	$	(7,580	)

The income tax effect of the above non-GAAP adjustments was insignificant for all periods presented.

Components of operating results

Revenue

Our total revenue is comprised of the following:

•

Product revenue. Product revenue is generated from sales of our Ethernet and transport and access products. Prior to our acquisition of Legacy Force10 on March 31, 2009, substantially all of our product revenue was generated from sales of products in our Transport segment. We began selling our Ethernet products in April 2009.

•

Service revenue. Service revenue is generated primarily from PCS, which typically includes technical support services for software updates, maintenance releases and patches, telephone

and Internet access to technical support personnel and hardware warranty. We recognize revenue from support services ratably over the service performance period. Our typical PCS term is one year from the date of product shipment, and generally does not exceed 36 months. We also generate a small portion of our revenue from professional services and training services, which are recognized when such services are delivered.

•

Ratable product and service revenue. Ratable product and service revenue is generated from sales of our products and services in cases where the fair value of the services being provided cannot be segregated from the value of the entire sale. In these cases, the value of the entire sale is deferred and recognized ratably over the life of the service performance period. See “—Critical accounting policies and estimates—Revenue recognition.” In fiscal 2009 and the first nine months of fiscal 2010, ratable product and service revenue represented approximately 14.0% and 10.7% of total revenue, respectively, and we expect the percentage of ratable product and service revenue to decline in the future as a result of the impact of our adoption of ASC 605-25 and ASC 985-605 effective October 1, 2010 as discussed under note 1 to the notes to our consolidated financial statements.

The variability of our revenue directly impacts our operating results in any particular period because a significant portion of our operating costs, such as personnel costs, facilities expense, depreciation expense and sales commissions are either fixed in the short term or may not vary proportionately with recorded revenue.

Cost of goods sold

Our cost of goods sold is comprised of the following:

•

Cost of product revenue. The substantial majority of the cost of product revenue consists of third-party manufacturing costs. Our cost of product revenue also includes write-offs of excess and obsolete inventory, royalty payments, amortization and any impairment of certain acquired intangible assets, warranty costs, shipping and allocated facilities costs, and personnel costs associated with our operations team.

•

Cost of service revenue. Cost of service revenue is primarily comprised of personnel costs associated with our technical assistance center, professional services and training teams, as well as depreciation, supplies, data center, data communications, and facility-related costs. We expect our cost of service revenue will increase in absolute dollars as we continue to invest in support services to meet the needs of our customer base.

•

Cost of ratable product and service revenue. Cost of ratable product and service revenue is comprised primarily of the amortization of deferred product and services costs associated with sales that we classify as ratable product and service revenue. We expect that cost of ratable product and service revenue as a percentage of cost of goods sold will decline commensurate with ratable product and service revenue in the future.

Gross margin

Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including the mix of products sold, manufacturing costs and any write-offs of excess and obsolete inventories, and the mix of revenue between products and services. Because our Ethernet segment products generate higher unit gross margin than our Transport segment products, we expect that our overall gross margin will be affected by the level of sales of, and gross margin on, these products.

Service revenue has increased over time as a percentage of total revenue and this trend has had a positive effect on our total gross margin given the higher service gross margin compared to product gross margin. We expect service gross margin to remain relatively constant in the future as we continue to invest in our support infrastructure.

Operating expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative, restructuring expenses, and amortization of purchased intangibles and other purchase accounting charges. Personnel costs are the most significant component of operating expenses and consist of costs such as salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, sales commissions.

•

Research and development. Research and development expense consists of personnel costs, as well as system prototype and certification-related expenses, depreciation of capital equipment and facility-related expenses. We record all research and development expenses as incurred. We expect our spending for research and development to increase in absolute dollars but intend for research and development expenses to decline as a percentage of total revenue on an annual basis as we grow our revenue base.

•

Sales and marketing. Sales and marketing expense primarily consists of personnel costs, as well as promotional and other marketing expenses, travel, depreciation of capital equipment and facility-related expenses. We intend to hire additional personnel focused on sales and marketing and expand our sales and marketing efforts worldwide in order to add new customers and increase penetration within our existing customer base. We also plan to continue to invest in our worldwide marketing activities to help build brand awareness and generate sales leads. Accordingly, we expect sales and marketing expenses to increase in absolute dollars and to continue to be our largest operating expense, but intend for sales and marketing expenses to decline as a percentage of total revenue on an annual basis as we grow our revenue base.

•

General and administrative. General and administrative expense consists of personnel costs as well as professional fees, depreciation of capital equipment and software, and facility-related expenses. General and administrative personnel include our executive, finance, human resources, information technology and legal organizations. We expect that general and administrative expense will increase in absolute dollars as we hire additional personnel, make improvements to our information technology infrastructure and incur significant additional costs to comply with the requirements of operating as a public company, including the costs associated with SEC reporting, Sarbanes-Oxley Act compliance and insurance. However, we intend for general and administrative expenses to decline as a percentage of total revenue on an annual basis.

•

Restructuring. Restructuring expense, primarily related to our Transport segment, consists of severance payments, other termination benefits, asset impairment charges and facility exit costs related to the shutdown of our research and development center in Shanghai, China announced in October 2009 as well as the closing of our office facility in Boulder, Colorado in March 2010.

•

In-process research and development and amortization of intangible assets. These expenses consist of the write-off of purchased in-process research and development related to projects that had not yet reached technological feasibility and have no alternative use, and amortization of acquired intangible assets with defined useful lives.

Interest and other income (expense), net

Interest income consists of income earned on our cash, cash equivalents and short-term investments. Interest expense consists of amounts paid for interest on our short-term and long-term debt borrowings and capital lease obligations.

Other income (expense), net consists primarily of costs incurred with the extinguishment of debt and foreign exchange gains and losses. Foreign exchange gains and losses relate to transactions denominated in currencies other than the functional currency of the associated entity.

Increase in fair value of preferred stock warrant liability

Effective October 1, 2009, we adopted ASC 815, formerly referred to as EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock. Under the provisions of ASC 815, we determined that the warrants to purchase our preferred stock should be classified as liabilities and marked to market at each reporting date. The fair value of these warrants was $21.8 million and $7.2 million as of October 1, 2009 and June 30, 2010, respectively. Accordingly, the $14.6 million decrease in value during the nine months ended June 30, 2010 was recorded in the consolidated statement of operations as a component of other income (expense).

Provision for income taxes

Our provision for income taxes relates to taxes paid on the income of our foreign subsidiaries. Due to our history of net losses, we have a full valuation allowance against our gross deferred tax assets, other than with respect to $0.1 million at September 30, 2009. As a result, we have recorded no provision or benefit related to federal or state income taxes for any period presented. We expect our provision for income taxes to remain relatively consistent, as we do not expect to reverse any significant portion of our valuation allowance for the foreseeable future.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flows and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe that of our significant accounting policies, which are described in note 1 to the notes to our consolidated financial statements included elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

Revenue recognition

We derive revenue primarily from the sales of products, including hardware and software, and services, including PCS, installation and training. PCS typically includes unspecified software

updates and upgrades on an if-and-when available basis and telephone and internet access to technical support personnel.

The majority of our products are integrated with software that is essential to the functionality of the hardware. Further, we provide unspecified software upgrades and PCS to our customers for these products. As a result, we account for revenue from these products in accordance with ASC 985-605 (formerly referred to as Statement of Position No. 97-2, Software Revenue Recognition) and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price or fee is fixed or determinable and collection is probable.

Certain of our access products are integrated with software that management does not consider to be essential to the functionality of the equipment. Accordingly, we account for revenue from sales of these products in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, and ASC 605-25-30 (formerly referred to as EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables). We recognize revenue on sales of these products and services when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price or fee is fixed or determinable, and collection is reasonably assured.

See note 1 to the notes to our consolidated financial statements for a discussion of new revenue recognition standards that we will be required to adopt effective October 1, 2010. We are still assessing the impact of the new standards and have not reflected in this prospectus any impact such standards may have on our consolidated financial statements.

Evidence of an arrangement. Contracts and customer purchase orders are used to determine the existence of an arrangement.

Delivery. Delivery is considered to occur when title to our products and risk of loss has transferred to the customer, which typically occurs when products are delivered to a common carrier. Delivery of services occurs when performed. Some customer agreements commit us to provide future-specified software or hardware deliverables. Delivery is considered to have occurred only when all such deliverables have been provided to the customer.

Fixed or determinable fee. We assess whether the sales price is fixed or determinable at the time of sale based on payment terms and whether the sales price is subject to refund or adjustment. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Some of our customer agreements contain acceptance clauses that grant the customer the right to return or exchange products that do not conform to specifications. If there is insufficient historical evidence of customer acceptance, delivery is considered to have occurred when the conditions of acceptance have been met or the acceptance provisions lapse.

Collectibility. Collectibility is assessed based on the creditworthiness of the customer as determined by credit checks and the customer’s payment history to us. If collectibility is not considered probable, revenue is not recognized until the fee is collected.

Bundled arrangements and establishment of VSOE. Typically, our sales involve multiple elements, such as sales of products bundled with PCS. When a sale involves multiple elements, ASC 985-605 requires that we allocate the entire fee from the arrangement to each respective element based on its VSOE of fair value and recognize revenue when each element’s revenue recognition criteria is met. Prior to April 1, 2008, we had not established VSOE of fair value for any of the elements in sales of our multiple-element arrangements with respect to transport

products, thus we accounted for each of these sales arrangements as a single element. As of April 1, 2008, we determined that we had sufficient standalone sales of PCS and certain other elements at consistent prices in order to establish VSOE for these elements. Accordingly, for new multiple-element arrangements after that time that include PCS or other undelivered elements for which VSOE has been established, we allocate and defer revenue related to the undelivered elements using VSOE, with the residual fees allocated to the product. We recognize product revenue upon delivery, assuming that all other criteria for revenue recognition have been met and that VSOE exists for all undelivered elements, and recognize PCS revenue over the contractual support period. Revenue from all bundled transactions with respect to transport products entered into prior to the establishment of VSOE on April 1, 2008, and those entered into subsequently but for which VSOE of services has not been established, is included in ratable product and service revenue in the accompanying consolidated statements of operations.

For sales arrangements occurring in certain regions and with certain specific customers, we have not established VSOE of fair value for PCS and certain other elements. Accordingly, we account for each of these sales arrangements as a single element. The entire fee from each arrangement is deferred until all elements except for the PCS are delivered and all other criteria of ASC 985-605 are met, and then amortized ratably over the contractual service period, generally ranging between 12 and 36 months from the date of initial shipment. This revenue is included in ratable product and service revenue in the accompanying consolidated statements of operations.

The establishment of VSOE for PCS and other elements on April 1, 2008 did not have any impact on the accounting for sales made prior to that date. Any revenue and costs deferred for prior sales continue to be amortized over the contractual service period.

Implied PCS. Historically, we had provided software upgrades and technical support services to substantially all of our Transport customers, sometimes in excess of the customers’ contractual entitlements. This practice created an implied PCS arrangement, for which we did not have VSOE. Therefore, the length of the PCS period was considered to be the longer of (a) the contractual term, or (b) the period over which the implied PCS was expected to be provided, which, in the absence of specific historical experience, was considered to be the life of the product itself. Based upon management’s review of technical innovations, competitive obsolescence, and the relationship between software and hardware development cycles, among other factors, we determined that the life cycle of the products is approximately four years. Accordingly, the entire fee from each arrangement was deferred until all elements except for PCS were delivered and all other criteria of ASC 985-605 were met, and then amortized ratably over the longer of the remaining contractual service period or 48 months, from the date of initial shipment.

On December 1, 2007, we terminated the implied customer support element in the majority of our sales arrangements for transport products by no longer providing customer support to customers who are not entitled to receive such services. For some customers, such services were terminated immediately, in which case any previously deferred revenue and direct costs were recognized immediately. For other customers, the implied PCS arrangement was replaced with a contractual arrangement, upon the expiration of which the customer would be required to pay for PCS. In these instances, we did not immediately recognize any previously deferred revenue or direct costs, but rather adjusted the amortization thereof on a prospective basis to match the new contractual period.

Channel partner arrangements. We complement our direct sales and marketing efforts by using reseller, distributor and system integrator channels to extend our market reach. Resellers and system

integrators generally place orders with us after first receiving firm orders from an end customer. Sales to certain resellers and system integrators are on business terms that are similar to sales arrangements with our direct customers, and revenue recognition begins upon sell-in of product to the reseller or system integrator. With respect to sales to distributors or resellers with rights of return, when adequate sales and returns history does not exist to allow management to make a reasonable estimate of future returns, revenue is recognized upon sale by the distributor or reseller to the end customer. Otherwise, revenue is recognized upon shipment and reserves for possible returns are recorded.

Shipping charges. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of goods sold.

Deferred product costs. When our products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria in ASC 985-605 or SAB 104, we also defer the direct and incremental costs, primarily product costs, associated with the sale, and amortize those costs over the same period as the associated revenue is amortized. Deferred costs related to sales for which revenue will be recognized within one year are classified as current assets, while all deferred costs related to sales for which revenue will be recognized over a period longer than one year are classified as noncurrent assets, with no portion classified as current assets.

Stock-based compensation

Our stock-based compensation expense is as follows:


	Fiscal year ended September 30,						Nine months ended June 30,
(in thousands)	2007		2008		2009		2009		2010

Cost of goods sold	$	44	$	95	$	38	$	31	$	42
Research and development		150		322		212		163		310
Sales and marketing		215		335		177		138		215
General and administrative		225		637		195		151		407

Total stock-based compensation	$	634	$	1,389	$	622	$	483	$	974

Effective October 1, 2006, we adopted the fair value recognition provisions of ASC 718-10 (formerly referred to as FASB Statement No. 123 (revised 2004), Share-Based Payment) using the prospective transition method. Under the prospective transition method, employee stock-based compensation expense for the years ended September 30, 2007, 2008 and 2009 includes compensation expense only for stock-based awards granted or modified by us after September 30, 2006, based on the grant date fair value. The fair value of each employee stock option is estimated on the date of grant using the Black-Scholes valuation model. Prior to the adoption of ASC 718-10 on October 1, 2006 we recognized an expense in the statement of operations only for options with intrinsic value at the date of grant. As all options granted to employees prior to October 1, 2006 were granted with an exercise price equal to the fair value of the underlying stock, no compensation cost was recorded. Accordingly, employee stock-based compensation expense in all periods presented relates solely to options granted or modified subsequent to September 30, 2006. For all employee stock options, we recognize expense over the requisite service period using the straight-line method. Option grants to nonemployees have not been significant for any period presented.

The Black-Scholes pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable; characteristics not present in our option grants. Existing valuation models, including the Black-Scholes model, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon exercise. Stock options may expire or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements.

As of September 30, 2009, there was approximately $2.1 million of unrecognized stock-based compensation expense related to non-vested stock option awards, net of estimated forfeitures that we expect to be recognized over a weighted-average period of 2.3 years.

We calculated the fair value of options granted to employees using the Black-Scholes pricing model using the following weighted average assumptions:


	Fiscal year ended September 30,			Nine months ended June 30,
	2007	2008	2009	2010

Expected volatility	61%	52%	51%	51%
Expected term, in years	6.0	6.0	6.1	6.4
Dividend yield	—	—	—	—
Risk-free interest rate	4.6%	3.2%	2.9%	2.8%

Because our stock is not publicly traded, we estimate expected volatility based on historical volatilities of comparable publicly traded companies. The expected term was determined utilizing the “simplified” method as prescribed by authoritative guidance, which uses the average between the weighted average vesting period and the contractual term. For those options for which the simplified method is not appropriate, the expected term is based on our best estimate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. Because we have never declared or paid cash dividends and do not expect to pay cash dividends in the foreseeable future, the expected dividend yield was assumed to be zero. If we determine that another method to estimate expected volatility or expected term is more reasonable than our current methods, or if another method for calculating these assumptions is prescribed by authoritative guidance, the fair value calculated for future stock-based awards could change significantly from past awards, even if the principal terms of the awards are similar. Higher volatility and longer expected terms result in an increase to stock-based compensation determined at the date of grant. The expected dividend rate and expected risk-free interest rate are not as significant to the calculation of fair value. A hypothetical 10% increase or decrease to any of the above assumptions would not have had a material impact on the amount of stock-based compensation expense we recognized in any of the periods presented.

In addition, in determining stock-based compensation expense, we develop an estimate of the number of stock-based awards that we expect to vest. Changes in our estimates of award forfeiture rates and further adjustments when the awards actually vest can have a significant effect on reported stock-based compensation. Increases to the estimated forfeiture rate will result in a decrease to the expense recognized in our financial statements during the period of

the change and future periods. Decreases in the estimated forfeiture rate will result in an increase to the expense recognized in the financial statements during the period of the change and future periods. These adjustments affect our cost of goods sold, research and development expense, sales and marketing expense and general and administrative expense. The expense we recognize in future periods could differ significantly from the current period and our forecasts due to adjustments in the estimated number of stock-based awards that we expect to vest and further adjustments when the awards actually vest.

The table below summarizes all stock option grants from March 31, 2009 through the date of this prospectus:


Grant date	Shares subject to options granted	Common stock fair value per share at grant for financial reporting purposes			Exercise price

August 14, 2009	8,281,080	$	0.06		$	0.06
September 16, 2009	98,600		0.06			0.06
October 18, 2009	1,038,600		0.57	⁽¹⁾		0.06
December 24, 2009	1,218,520		2.15	⁽¹⁾		1.11
January 15, 2010	53,200		3.23	⁽¹⁾		2.36
February 9, 2010	9,400		3.51			3.51
March 26, 2010	208,950		3.81			3.81
June 3, 2010	3,116,241		2.89			2.89
July 21, 2010	373,135		2.84			2.89

(1)

At the time of these grants, our board of directors determined that the fair value of our common stock was $0.06 per share as of October 18, 2009, $1.11 per share as of December 24, 2009 and $2.36 per share as of January 15, 2010 (as further discussed below). Subsequent to these grants, we obtained valuations of our common and preferred stock as of October 1, 2009 and December 31, 2009 for the purposes of adopting new accounting guidance impacting the accounting for warrants to purchase our preferred stock. These valuations indicated a fair value of our common stock of $0.57 as of October 1, 2009, $2.15 as of December 31, 2009 and $3.23 as of January 15, 2010 which, for financial reporting purposes, we have determined to be more precise estimates of the fair value of our common stock at these grant dates. As such, we have recorded additional expense in our statement of operations related to these options due to the difference between the exercise price and the reassessed grant date fair value. See below for further discussion regarding the change in fair value of our common stock between each valuation date.

Based upon the assumed IPO price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of options outstanding as of June 30, 2010 was $ million, of which $ million related to vested options and $ million to unvested options.

We believe it is appropriate to only present stock option grant activity since March 31, 2009, due to our recapitalization in March 2009 and the acquisition of Legacy Force10 on March 31, 2009. These events significantly altered our capitalization structure, business prospects and valuation. Further, from the start of fiscal 2009 until March 31, 2009, we granted options to purchase only a total of 6,137 shares, all of which were cancelled in the stock option exchange program discussed below. As such, we do not believe that a description of grants prior to April 1, 2009 would provide meaningful information.

In July 2009, our board of directors approved a voluntary stock option exchange program, or the stock option exchange, for certain holders of our stock options. The stock option exchange offered to replace outstanding options granted to holders of stock options under the 2007 equity incentive plan and 1999 stock plan. The stock option exchange commenced on July 15, 2009 and

expired on August 12, 2009. Under the terms of this stock option exchange, previously granted options were exchanged for new replacement options with revised vesting terms to purchase shares of our common stock at an exercise price per share equal to the fair value of our common stock on the date of grant. On August 14, 2009, our board of directors approved and ratified the grant of the replacement options, and, in accordance with the terms of the stock option exchange, we cancelled outstanding options to purchase 1,053,640 shares of common stock and issued new options to purchase 4,468,120 shares of common stock at an exercise price of $0.06 per share, which are included in the table above.

Determining the fair value of our common stock

The fair value of our common stock at the date of each option grant is determined by our board of directors. For all of the options listed above, the board of directors’ intent was to grant the options with exercise prices at least equal to the fair value of our common stock at the date of grant. Given the absence of an active market for our common stock prior to this offering, our board of directors engaged a third party appraisal firm to assist in performing contemporaneous valuations of our common stock as of August 7, 2009, November 29, 2009, February 3, 2010, March 16, 2010, May 25, 2010 and July 15, 2010.

The August 7, 2009 valuation was used as a basis for the options granted on August 14, 2009, September 16, 2009 and October 18, 2009; the November 29, 2009 valuation was used as a basis for setting the exercise price of the options granted on December 24, 2009 and January 15, 2010; the February 3, 2010 valuation was used as a basis for setting the exercise price of the options granted on February 9, 2010; the March 16, 2010 valuation was used as a basis for setting the exercise price of the options granted on March 26, 2010; the May 25, 2010 valuation was used as a basis for setting the exercise price of the options granted on June 3, 2010; and the July 15, 2010 valuation was used as a basis for setting the exercise price of the options granted on July 21, 2010.

Our management and board of directors reviewed each valuation, including the valuation methodologies employed, the assumptions made, and the resulting value of common stock, and concluded that the valuations represented the board of directors’ and managements’ best estimate of the fair value of our common stock as of each valuation date. In addition, our board of directors considered numerous objective and subjective factors in valuing our common stock in accordance with the guidance in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, which we refer to as the AICPA Practice Aid. These objective and subjective factors included:

•

the significant liquidation preferences, which were $612.3 million in the aggregate at September 30, 2009, as well as other rights and privileges, of our convertible preferred stock relative to those of our common stock;

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our ability to successfully integrate our recent acquisition of Legacy Force10 into our company;

•

changes to our business plan;

•

the low likelihood we assigned to achieving an IPO as a liquidity event in the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010, as compared to a sale of our company, given the prevailing market conditions and the nature and history of our business;

•

our operating and financial performance;

•

our stage of development and revenue growth;

•

the lack of an active public market for our common and preferred stock;

•

industry information such as market growth and volume;

•

the execution of sales agreements; and

•

the risks inherent in the development and expansion of our products.

In determining the fair value of our common stock at each valuation date, we used a combination of income approaches and market approaches, as further described below. The significant input assumptions used in the valuation models are based on subjective future expectations combined with management judgment, as follows:

Assumptions utilized in the income approach are:

•

our expected revenue, operating performance, cash flow and EBITDA for the current and future years, determined as of the valuation date based on our estimates;

•

a discount rate, which is applied to discretely forecasted future cash flows in order to calculate the present value of those cash flows; and

•

a terminal value multiple, which is applied to our last year of discretely forecasted EBITDA to calculate the residual value of our future cash flows.

Assumptions utilized in the market approach are:

•

our expected revenue, operating performance, cash flow and EBITDA for the current and future years, determined as of the valuation date based on our estimates;

•

multiples of market value to trailing 12 months revenue, determined as of the valuation date, based on a group of comparable public companies we identified; and

•

multiples of market value to expected future revenue, determined as of the valuation date, based on the same group of comparable public companies.

In determining the most appropriate comparable companies, we considered several factors, including the other companies’ industry, size and their specific products and services.

August 7, 2009 valuation

This valuation was prepared contemporaneously by management, with the assistance of a third-party appraisal firm, for the purpose of granting stock options on August 14, 2009. It was also used by the board of directors as a basis for granting stock options on September 16, 2009 and October 18, 2009.

In determining our enterprise value at August 7, 2009, we used both a market approach (using the guideline public company method) and an income approach. We weighted each of the two approaches equally in determining our estimate of the value of our company. In order to allocate that value between the various classes of stock, we utilized the Option Pricing Method. We utilized both the Black-Scholes Option Pricing Method and the Binomial Lattice Option Pricing Method in our analysis. The analysis was performed for each equity class (preferred and common) considering the rights and preferences of each class, resulting in a per share value for each class.

This valuation included an assumption that a sale of us was significantly more likely than the completion of a successful IPO. The board of directors (of whom the members controlled approximately 45.3% of our outstanding preferred stock at August 7, 2009) believed that an IPO

would only be agreed to by a majority of preferred stockholders if our valuation in an IPO was at least equal to 90% of the aggregate liquidation preferences, and further that even at such a valuation, there would only be a 10% likelihood of the preferred stockholders accepting an IPO as the form of liquidation. In arriving at its conclusions regarding the likelihood of a successful IPO, the board of directors also considered the low number of venture-backed technology IPOs in 2008 and 2009, as well as the significant merger and acquisition activity in the telecommunications networking industry. These factors, combined with the significant liquidation preferences, led the board of directors to conclude that a successful IPO was very unlikely as of the valuation date.

Significant assumptions used in the income approach included the following: an annual revenue growth rate of 10%, gross margins of 51.4% to 55.0% over the forecast period, a terminal growth rate of 4%, and a discount rate of 15%.

Significant assumptions used in the market approach included the following: a multiple of 0.72 times trailing twelve months’ revenue, a multiple of 0.77 times next twelve months’ revenue, and equal weighting between the outcomes of these multiples.

Other significant assumptions used in applying the Option Pricing Model and Binomial Lattice Option Pricing Model included the following: estimated time to a liquidity event of 1.5 years, estimated volatility of 50.4%, risk-free interest rate of 0.9%, and no expected dividends.

We also applied a discount for lack of marketability of 25% in arriving at the value of common stock, which reflected the assessment in August 2009 that an IPO was very unlikely.

October 1, 2009 valuation

This valuation was completed in February 2010 by management, with the assistance of a third-party appraisal firm, for purposes of adopting new accounting guidance related to warrants to purchase our convertible preferred stock. Due to the proximity of the valuation date to the October 18, 2009 option grants, this valuation has been used for financial reporting purposes as a basis to record stock-based compensation expense, as management believes it provides a more precise estimate of fair value on October 18, 2009.

In determining our enterprise value at October 1, 2009, we used the Probability-Weighted Expected Return, or PWER, method as described in the AICPA Practice Aid. We determined the probability of a successful IPO to be 10%, based on management’s and the board of directors’ best estimate of the probability at that time. This probability reflects the fact that we had not begun any substantive discussions with underwriters regarding a potential IPO and we had not yet begun to execute on our revised business plan.

For each of the scenarios used in the PWER model as of October 1, 2009, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Unfavorable Sale	30%	0.50	2.00x – 2.25x
Strategic Sale	60%	0.75	2.75x – 3.00x
IPO—low	5%	1.00	2.50x – 2.75x
IPO—high	5%	1.25	2.75x – 3.25x

(1)

The first number in this column represents the multiple applied to the next twelve months’ forecasted revenue, and the second number represents the multiple applied to the twelve months’ trailing revenue. For all scenarios except “unfavorable sale” the outcomes of these two multiples were weighted equally. For the “unfavorable sale” scenario the forecasted revenue multiple was weighted 25% and the historical revenue multiple was weighted 75%.

The fair value of common stock as of October 1, 2009 was calculated by discounting the future values under each scenario at an annual discount rate of 27.5%.

We also applied a discount for lack of marketability of 20% in arriving at the fair value of common stock. The discount decreased from the 25% used in the August 7, 2009 valuation due primarily to the slight increase in the probability of a successful IPO.

November 29, 2009 valuation

This valuation was prepared contemporaneously by management, with the assistance of a third-party appraisal firm, for the purpose of granting stock options on December 24, 2009. It was also used by the board of directors as a basis for granting stock options on January 15, 2010.

In determining our enterprise value at November 29, 2009, we used the PWER method. The recent growth of our business, initial execution of our revised business plan and the general improvement of the capital markets allowed us to better forecast the occurrence of a liquidity event within the next year.

In applying the PWER method, our board of directors reviewed our enterprise value determined by the guideline public company method. Our board of directors, based on its discussions with our management, reviewed and determined the probability of the occurrence of each of the four scenarios over the following one-year period. We used the same comparable companies and other assumptions as we did for the October 1, 2009 valuation described above. Our board of directors then considered an appropriate marketability discount, reflecting the lack of marketability of our common stock, to determine the estimated fair value of our common stock at such valuation date.

The probability of an IPO was estimated to be 10% in the one-year period following the valuation date in each of the two scenarios, and the probability of the two strategic sale scenarios were estimated to be 25% and 55%. This reflected the board of directors’ view that while we had initiated the process to file our initial registration statement related to our planned IPO prior to November 29, 2009, there was still a strong likelihood that we would be acquired prior to successfully completing the IPO.

For each of the scenarios used in the PWER model as of November 29, 2009, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Unfavorable Sale	25%	0.33	2.00x – 2.25x
Strategic Sale	55%	0.58	2.50x – 2.75x
IPO—low	10%	0.84	2.25x – 2.50x
IPO—high	10%	1.09	2.50x – 3.00x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the October 1, 2009 valuation.

The fair value of common stock as of November 29, 2009 was calculated by discounting the future values under each scenario at an annual discount rate of 27.5%.

We also applied a discount for lack of marketability of 20% in arriving at the fair value of common stock, which was consistent with that used at October 1, 2009.

December 31, 2009 valuation

This valuation was completed in February 2010 by management, with the assistance of a third-party appraisal firm, for purposes of adopting new accounting guidance related to warrants to purchase our convertible preferred stock. Due to the proximity of the valuation date to the December 24, 2009 option grants, this valuation has been used for financial reporting purposes to record stock-based compensation expense, as management believes it provides a more precise estimate of fair value on December 24, 2009.

For each of the scenarios used in the PWER model as of December 31, 2009, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Unfavorable Sale	25%	0.25	2.00x – 2.25x
Strategic Sale	55%	0.50	3.00x – 3.25x
IPO—low	10%	0.75	2.75x – 3.00x
IPO—high	10%	1.00	3.00x – 3.50x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the prior valuations for which we used the PWER model.

The fair value of common stock as of December 31, 2009 was calculated by discounting the future values under each scenario at an annual discount rate of 27.5%.

We also applied a discount for lack of marketability of 20% in arriving at the fair value of common stock, which was consistent with that used at October 1, 2009 and November 29, 2009.

February 3, 2010 valuation

This valuation was prepared contemporaneously by management with the assistance of a third-party appraisal firm, for the purpose of granting stock options on February 9, 2010.

The board of directors estimated the probability of an IPO to be 25% in the one-year period following the valuation date in each of the two scenarios and the probability of the two strategic sale scenarios were estimated to be 10% and 40%. This reflected the board of directors’ view that the likelihood of completing a successful IPO had increased significantly since December 2009, given our performance and the state of the overall public equity markets.

For each of the scenarios used in the PWER model as of February 3, 2010, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Unfavorable Sale	10%	0.15	2.25x – 2.50x
Strategic Sale	40%	0.40	2.75x – 3.00x
IPO—low	25%	0.91	2.50x – 2.75x
IPO—high	25%	0.91	2.75x – 3.00x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the prior valuations for which we used the PWER model.

The fair value of common stock as of February 3, 2010 was calculated by discounting the future values under each scenario at an annual discount rate of 20.0%.

We also applied a discount for lack of marketability of 10% in arriving at the fair value of common stock. The discount decreased from the 20% previously used due primarily to the increase in the probability of a successful IPO from 20% to 50%.

March 16, 2010 valuation

This valuation was prepared contemporaneously by management with the assistance of a third-party appraisal firm, for the purpose of granting stock options on March 26, 2010.

The board of directors estimated the probability of an IPO to be 32.5% in each of the two scenarios used in the PWER model (for a cumulative probability of a successful IPO of 65%) and the probability of the two sale scenarios were estimated to be 10% and 25%. This reflected the board of directors’ view that the likelihood of completing a successful IPO had increased since February 2010, given our performance, the state of the overall public equity markets and the filing of our initial registration statement related to our planned IPO on March 2, 2010.

For each of the scenarios used in the PWER model as of March 16, 2010, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Unfavorable Sale	10%	0.29	1.75x – 2.00x
Strategic Sale	25%	0.29	2.00x – 2.25x
IPO—low	32.5%	0.79	2.00x – 2.25x
IPO—high	32.5%	0.79	2.50x – 2.75x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the prior valuations for which we used the PWER model.

The fair value of common stock as of March 16, 2010 was calculated by discounting the future values under each scenario at an annual discount rate of 20.0%.

We also applied a discount for lack of marketability of 10% in arriving at the fair value of common stock, which was consistent with that used in our February 3, 2010 valuation.

May 25, 2010 valuation

This valuation was prepared contemporaneously by management with the assistance of a third-party appraisal firm, for the purpose of granting stock options on June 3, 2010.

The board of directors estimated the probability of an IPO to be 35% in each of the two scenarios used in the PWER model (for a cumulative probability of a successful IPO of 70%) and the probability of the strategic sale scenario was estimated to be 25%. This reflected the board of directors’ view that the likelihood of completing a successful IPO had increased slightly since March 2010, but at a significantly reduced valuation, given the decline in equity values of the comparable companies used in our valuation, the state of the overall public equity markets and investor concerns over macroeconomic conditions in Europe.

For each of the scenarios used in the PWER model as of May 25, 2010, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Strategic Sale	30.0%	0.35	1.25x – 1.50x
IPO—low	35.0%	0.85	1.50x – 1.75x
IPO—high	35.0%	1.35	1.75x – 2.00x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the prior valuations for which we used the PWER model.

The fair value of common stock as of May 25, 2010 was calculated by discounting the future values under each scenario at an annual discount rate of 15%.

We also applied a discount for lack of marketability of 10% in arriving at the fair value of common stock, which was consistent with that used in our March 16, 2010 valuation.

July 15, 2010 valuation

This valuation was prepared contemporaneously by management with the assistance of a third-party appraisal firm, for the purpose of granting stock options on July 21, 2010.

The board of directors estimated the probability of an IPO to be 35% in each of the two scenarios used in the PWER model (for a cumulative probability of a successful IPO of 70%) and the probability of the strategic sale scenario was estimated to be 30%. This reflected the board of directors’ view that the likelihood of completing a successful IPO had not changed since May 2010, given the close proximity to the previous valuation, and no significant change had occurred in equity values of the comparable companies used in our valuation or the state of the overall public equity markets.

For each of the scenarios used in the PWER model as of July 15, 2010, the significant assumptions used were as follows:


	Probability	Time to liquidity event (years)	Revenue multiples⁽¹⁾

Strategic Sale	30.0%	0.21	1.25x – 1.50x
IPO—low	35.0%	0.71	1.50x – 1.75x
IPO—high	35.0%	1.21	1.75x – 2.00x

(1)

The weighting of historical and forecasted revenue multiples in this valuation were consistent with those in the prior valuations for which we used the PWER model.

The fair value of common stock as of July 15, 2010 was calculated by discounting the future values under each scenario at an annual discount rate of 15%.

We also applied a discount for lack of marketability of 10% in arriving at the fair value of common stock, which was consistent with that used in our May 25, 2010 valuation.

Significant factors contributing to the changes in the fair value of our common stock at the date of each grant beginning in fiscal 2009 were as follows:

•

August 14, 2009 grants. Our common stock fair value as of August 7, 2009 decreased significantly from prior valuation dates. In August 2009 our board of directors assumed in excess of a 90% probability that we would be acquired in a strategic sale, and our enterprise value at August 7, 2009 was estimated at $178.4 million. The acquisition of Legacy Force10, as

well as the issuance of Series B convertible preferred stock in June, July and August 2009, resulted in an increase in the liquidation preferences of our preferred stockholders from $271.6 million at September 30, 2008 to approximately $612.7 million at August 7, 2009. Given that the liquidation preferences significantly exceeded our enterprise value, our board of directors concluded that it was extremely unlikely that we would be able to sell our company for proceeds above liquidation preferences, in which case common stockholders would receive no value for their shares. This contributed significantly to the decrease in common stock value as of August 7, 2009. In addition, at August 7, 2009, we had only been operating as a combined company with Legacy Force10 for four months, and our integration efforts were still ongoing. As such, there was a significant amount of execution risk related to combining the two companies and a significant amount of uncertainty existing related to our ability to achieve our revenue and earnings targets for the quarter ending September 30, 2009 and beyond.

•

September 16, 2009 grants. Our common stock fair value as of September 16, 2009 remained unchanged from the prior valuation date since the board of directors determined none of the factors indicated above had changed or improved as of that date.

•

October 18, 2009 grants. The increase from the August 7, 2009 value of $0.06 per share to $0.57 per share at October 18, 2009 was due primarily to the following factors:

•

During the fourth quarter of fiscal 2009 and into October 2009, our management developed, and our board of directors approved, a new strategic plan focusing on data center customers, with the goal of leveraging this investment into enterprise and service provider customers and markets. As a result, the comparable companies used in our valuation changed, resulting in a significantly higher revenue multiple in the November valuation than at prior valuation dates. As a result, our aggregate equity value increased from $178.4 million at August 7, 2009 to a range of $402 to $704 million as of October 18, 2009.

•

Our shipments and revenue for the month of September were stronger than expected, which resulted in us exceeding our financial forecasts for the quarter ended September 30, 2009, and thus somewhat reducing the execution risk associated with the combination of our company and Legacy Force10.

•

December 24, 2009 grants. The increase from the October 1, 2009 value of $0.57 per share to $2.15 per share at December 24, 2009 was due primarily to the following factors:

•

In early November, our board of directors authorized us to retain investment bankers to prepare for an IPO. Accordingly, as of November 29, 2009 our board of directors increased the probability of completing a successful IPO to 20%, and this same probability was used in the December 31, 2009 valuation. Absent any other changes in our valuation, this increase in probability would have doubled the value of our common stock from October 1, 2009 to December 24, 2009 based on the December 31, 2009 valuation.

•

The market value of our comparable companies increased, thus increasing the revenue multiples we used in our valuation, which increased our aggregate equity value and the value attributable to common stock in our December 31, 2009 valuation. Specifically, the changes from October 1, 2009 to December 31, 2009 that most significantly impacted the valuation of our common stock were as follows:

—

our valuation under the low IPO scenario increased by 9.2%, and our valuation under the high IPO scenario increased by 8.1%; and

—

at December 31, 2009, the value under the strategic sale scenario exceeded the aggregate liquidation preferences. As such, this scenario resulted in value being attributable to common stock, whereas in the October 1, 2009 valuation, all of the value under this scenario was attributable to preferred stock, as the calculated value was below the aggregate liquidation preferences.

•

January 15, 2010 grants. The increase from the December 24, 2009 value of $2.15 per share to $3.23 per share at January 15, 2010 was entirely due to an increase in the probability of a successful IPO to 40%, reflecting the board of directors’ view that the market conditions and the execution of our business plan had continued to improve, thus making a successful IPO significantly more likely.

•

February 9, 2010 grants. The increase from the January 15, 2010 value of $3.23 per share to $3.51 per share at February 3, 2010 was due to an increase in the probability of a successful IPO from 40% to 50%, reflecting the board of directors’ continued view that the market conditions and the execution of our business plan had continued to improve, thus making a successful IPO more likely. Absent any other changes in our valuation, this increase in the probability of an IPO would have increased the value of our common stock by $0.73 per share. This increase was offset by decreases in equity value of 7.7% under the favorable sale scenario, 4.6% under the low IPO scenario, and 11.0% under the high IPO scenario due to decreases in the values of our comparable companies, which reduced the revenue multiples we used. While the value under the unfavorable sale scenario increased from January 15, 2010 to February 3, 2010, this did not have any impact on the value of our common stock, as the value under that scenario was below aggregate liquidation preferences, thus no value was attributable to common stock.

•

March 26, 2010 grants. The increase from the February 3, 2010 value of $3.51 per share to $3.81 per share at March 16, 2010 was due to an increase in the probability of a successful IPO from 50% to 65%, reflecting the board of directors’ continued view that the market conditions and the execution of our business plan had continued to improve, thus making a successful IPO more likely. Absent any other changes in our valuation, this increase in the probability of an IPO would have increased the stock prices of our common stock by $1.05 per share. This increase was offset by decreases in equity value of 17.4% under the low IPO scenario and 7.2% under the high IPO scenario due to decreases in the stock prices of our comparable companies, which reduced the revenue multiples we used. While the values under the two sale scenarios also decreased from February 3, 2010 to March 16, 2010, this did not have any impact on the value of our common stock, as the values under those scenarios were below aggregate liquidation preferences at both valuation dates, thus no value was attributable to common stock.

•

June 3, 2010 grants. The decrease from the March 16, 2010 value of $3.81 per share to $2.89 per share at May 25, 2010 was due primarily to the following factors:

•

Overall market conditions resulted in a significant decline in the equity values of the comparable companies used in our valuation, which resulted in a decline in our value under the low and high IPO scenarios of 30.3% and 27.7%, respectively, which offset the 5% increase in the probability of an IPO at lower valuations. The group of comparable companies has not changed since the previous valuation date. While the value of the strategic sale scenario also decreased significantly from March 16, 2010 to May 25, 2010, this did not have any impact on the value of our common stock, as the value under this scenario was below aggregate liquidation preferences at both valuation dates, thus no value was attributable to common stock.

•

While our total revenue for the March 2010 quarter grew 8.2% sequentially from the December 2009 quarter, our Ethernet segment revenue declined 13.8% sequentially from the December 2009 quarter.

•

July 21, 2010 grants. Our board of directors decided to maintain the May 25, 2010 exercise price of $2.89 per share due to the close proximity of the grant dates and the fact that overall market conditions had not changed significantly, nor had the equity values of the comparable companies used in our valuation since the last grant date, as demonstrated by the less than 5% decline in our value under both the low and high IPO scenarios.

Notwithstanding the above, our common stock valuation continues to be low relative to the value of our preferred stock due to the significant liquidation preferences of our preferred stock.

We believe consideration of the factors described above by our board of directors was a reasonable approach to estimating the fair value of our common stock for those periods. However, the assumptions around fair value that we have made represent our board of directors’ and management’s best estimate, but they are highly subjective and inherently uncertain. If we had made different assumptions, our calculation of the fair value of common stock and the resulting stock-based compensation expense could have differed materially from the amounts recognized in our financial statements.

Valuation of inventory

Inventory is recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventory, we are required to make estimates regarding future customer demand, the timing of new product introductions, economic trends and market conditions. If the actual product demand is significantly lower than forecasted, we could be required to record additional inventory write-downs which would be charged to cost of product revenue. If the actual product demand is significantly higher than forecasted, we could realize benefits from selling previously written-down inventories. Any write-downs could have an adverse impact on our gross margin and profitability. During fiscal 2009, we wrote-off $6.8 million of excess inventory, the majority of which pertained to our wireless aggregation products in our Transport segment. During the first nine months of fiscal 2010, we wrote-off $6.3 million of excess inventory and realized a benefit of $5.3 million related to the sale of previously written-down inventories.

Valuation of goodwill and long-lived assets

As required by ASC 350-20 (formerly referred to as FASB Statement No. 142, Goodwill and Other Intangible Assets), goodwill is not amortized but is subject to impairment testing annually, or more frequently if indicators of potential impairment exist, using a fair-value-based approach. Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. We conducted our annual evaluation of goodwill on February 28, 2010, and concluded that there was no impairment.

With the acquisition of Legacy Force10 on March 31, 2009, we determined that we have two operating segments—Ethernet and Transport. Each of these operating segments is also considered a reporting unit for purposes of our evaluation of goodwill for impairment. Accordingly, in our annual goodwill impairment test as of February 28, 2010, we considered the fair value and carrying value of each of these reporting units separately. In addition to goodwill,

we also tested for impairment the trade name acquired in the acquisition of Legacy Force10, as we determined that it has an indefinite life and is not amortized. We concluded that there was no impairment to the trade name.

We periodically evaluate the carrying value of long-lived assets, including acquired intangible assets, to be held and used when indicators of impairment exist. The carrying value of a long-lived asset to be held and used is considered impaired when the estimated separately identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the estimated cash flows discounted at a rate commensurate with the risk involved. No impairment charges have been recorded in any of the periods presented.

Determining the fair value of a reporting unit or a long-lived asset is subjective in nature and requires the use of significant estimates and assumptions, including, among others, revenue growth rates and operating margins, discount rates and future market conditions. Unanticipated changes in our revenue, gross margin, projected long-term growth rates or discount rates could result in a material impact on the estimated fair values of our reporting units, and could require us to record impairment losses on our goodwill or with respect to our long-lived assets in future periods.

Warranty liabilities

We generally provide a one to two-year warranty on hardware products and up to a one-year warranty on software. A provision for estimated future costs related to warranty activities is charged to cost of product revenue based upon historical product failure rates and historical costs incurred in correcting product failures. If we experience an increase in warranty claims compared with our historical experience, or if the cost of servicing warranty claims is greater than expected, our gross margin could be adversely affected.

Deferred tax assets

At September 30, 2009, we had $327.8 million of total deferred tax assets, a $4.0 million deferred tax liability related to an intangible asset with an indefinite life, and a valuation allowance of $327.7 million. The significant majority of our deferred tax assets relate to net operating loss carryforwards which could be used to offset against future taxable income. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of the net operating loss carryforwards. Due to our history of net losses and the uncertainty surrounding our ability to realize such deferred tax assets, a significant valuation allowance has been established. If our future results support the realization of all or a portion of our deferred tax assets, our effective tax rate in future periods could increase significantly.

At September 30, 2009, we had federal and state net operating loss carryforwards available to reduce future taxable income of approximately $742.7 million and $491.7 million, respectively. Both the federal and state net operating loss carryforwards begin to expire in 2010. Section 382 of the Internal Revenue Code imposes significant restrictions on the utilization of net operating loss carryforwards and experimental tax credits in the event of a change in ownership. While we believe that it is probable that our ability to utilize our net operating loss carryforwards may be significantly limited due to past ownership changes, we have not completed an analysis to determine the amount of such limitation.

Preferred stock warrant liability

At June 30, 2010, we had a preferred stock warrant liability of $7.2 million. We are required to determine the fair value of this liability at each balance sheet date and record any increases or decreases in our consolidated statement of operations. We use the Black-Scholes option pricing model to value these warrants, and this model includes certain assumptions that are highly subjective, such as the fair value of the underlying convertible preferred stock, the expected term of the warrants and the estimated future volatility of our stock price. To the extent our judgments on any of these assumptions change from one balance sheet date to the next, we could record significant charges or credits to our consolidated statement of operations related to the change in fair value of the preferred stock warrant liability. Upon the closing of this offering, the fair value of this liability will be reclassified to stockholders’ equity, and we will not be required to record the warrants at fair value subsequent to that date.

Results of operations

First nine months of fiscal 2010 and 2009

Revenue


	Nine months ended June 30,
	2009				2010
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change			Percent change


Revenue
Product	$	59,494	71.6	%	$	102,330	74.4	%	$	42,836		72.0	%
Service		11,036	13.3			20,531	14.9			9,495		86.0
Ratable product and service		12,541	15.1			14,717	10.7			2,176		17.4

Total revenue	$	83,071	100.0	%	$	137,578	100.0	%	$	54,507		65.6	%


Revenue by segment
Ethernet	$	17,207	20.7	%	$	78,529	57.1	%	$	61,322		356.4	%
Transport		65,864	79.3			59,049	42.9			(6,815	)	(10.3	)

Total revenue	$	83,071	100.0	%	$	137,578	100.0	%	$	54,507		65.6	%

Total revenue increased $54.5 million, or 65.6%, in the first nine months of fiscal 2010 compared to the same period in fiscal 2009. Product revenue increased $42.8 million, or 72.0%, in the first nine months of fiscal 2010 compared to the same period in fiscal 2009 due to $44.6 million of incremental Ethernet product revenue following our acquisition of Legacy Force10, offset by a decrease in transport product revenue of $1.8 million in the first nine months of fiscal 2010 compared to the same period in fiscal 2009. The decrease in transport product revenue was due to a decrease in the volume of sales of our Traverse and converged access products, partially offset by the recognition of approximately $6.5 million of previously deferred product revenue as we satisfied the remaining deliverables under contracts with certain customers during the nine months ended June 30, 2010. There were no significant changes in our average selling prices between periods.

Service revenue increased $9.5 million, or 86.0%, in the first nine months of fiscal 2010 compared to the same period in fiscal 2009 due to $8.3 million of incremental Ethernet service revenue

following our acquisition of Legacy Force10 and an increase in transport service revenue of $1.2 million. This increase in transport service revenue was primarily due to the recognition of approximately $0.6 million of previously deferred service revenue as we satisfied the remaining deliverables under contracts with certain customers during the nine months ended June 30, 2010.

Ratable product and service revenue increased $2.2 million, or 17.4%, in the first nine months of fiscal 2010 compared to the same period in fiscal 2009. Our acquisition of Legacy Force10 contributed incremental Ethernet ratable product and service revenue of $8.4 million in the first nine months of fiscal 2010 as compared to the same period in fiscal 2009. This incremental revenue was offset by a decrease in transport ratable product and service revenue of $6.2 million due to the termination of the implied PCS element in the majority of our sales arrangements effective December 1, 2007.

Cost of goods sold and gross margin


	Nine months ended June 30,
(dollars in thousands)	2009			2010			Change			Percent change


Cost of goods sold
Product	$	48,227		$	54,488		$	6,261		13.0	%
Service		5,421			11,188			5,767		106.4
Ratable product and service		6,423			5,737			(686	)	(10.7	)

Total cost of goods sold	$	60,071		$	71,413		$	11,342		18.9	%


Gross margin
Product		18.9	%		46.8	%		27.9	%
Service		50.9			45.5			(5.4	)
Ratable product and service		48.8			61.0			12.2

Total gross margin		27.7	%		48.1	%		20.4	%


Cost of goods sold by segment
Ethernet	$	14,082		$	37,135		$	23,053		163.7	%
Transport		45,989			34,278			(11,711	)	(25.5	)

Total cost of goods sold	$	60,071		$	71,413		$	11,342		18.9	%


Gross margin by segment
Ethernet		18.2	%		52.7	%		34.5	%
Transport		30.2			41.9			11.7

Total gross margin		27.7	%		48.1	%		20.4	%

Total gross margin increased by 20.4 percentage points in the first nine months of fiscal 2010 compared to the same period in fiscal 2009 primarily due to the contribution of incremental Ethernet product and ratable product and service revenue in the first nine months of fiscal 2010 from the acquisition of Legacy Force10 at significantly higher gross margin compared to gross margin from Transport segment products. In addition, we wrote off $5.8 million of excess inventory related primarily to our wireless aggregation products in our Transport segment in the first nine months of fiscal 2009. This increase was offset by a decrease in service gross margin due

to a $2.6 million impact in the first nine months of fiscal 2010 of a purchase accounting adjustment related to our acquisition of Legacy Force10 that required deferred service revenue at the date of acquisition to be recorded at fair value. This resulted in a reduction of service gross margin by 6.2 percentage points in the first nine months of fiscal 2010.

Operating expenses


	Nine months ended June 30,
	2009				2010
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change			Percent change

Operating expenses
Research and development	$	23,091	27.8	%	$	30,764	22.4	%	$	7,673		33.2	%
Sales and marketing		24,060	29.0			35,328	25.7			11,268		46.8
General and administrative		9,320	11.2			11,663	8.5			2,343		25.1
Restructuring		—	—			1,881	1.4			1,881		n/a
In-process research and development and amortization of intangible assets		7,189	8.7			612	0.4			(6,577	)	(91.5	)

Total operating expenses	$	63,660	76.7	%	$	80,248	58.3	%	$	16,588		26.1	%

Research and development expense

Research and development expense increased $7.7 million, or 33.2%, in the first nine months of fiscal 2010 from the same period in fiscal 2009 primarily due to an increase of $3.3 million in cash-based personnel costs as a result of increasing headcount primarily from the acquisition of Legacy Force10, an increase of $0.9 million for rent and occupancy related expenses, an increase of $1.2 million in prototype and other materials as a result of our increased design efforts, and an increase of $1.9 million in allocated facilities and depreciation expense, both as a result of facilities and assets acquired in the acquisition of Legacy Force10.

Sales and marketing expense

Sales and marketing expense increased $11.3 million, or 46.8%, in the first nine months of fiscal 2010 from the same period in fiscal 2009 primarily due to an increase of $4.9 million in cash-based personnel costs resulting from merger-related growth in headcount, an increase of $2.9 million in sales commission expense due to an increase in commissionable sales and a change in our commission payment structure, an increase of $2.5 million in trade show, advertising, travel and other variable sales and marketing costs as we began the execution of our new business plan after the integration of Legacy Force10 with our company and an increase of $0.8 million in allocated facilities and depreciation expense, both as a result of facilities and assets acquired in the acquisition of Legacy Force10.

General and administrative expense

General and administrative expense increased $2.3 million, or 25.1%, in the first nine months of fiscal 2010 from the same period in fiscal 2009 primarily due to an increase of $1.8 million in cash-based personnel costs as a result of increased headcount primarily due to the acquisition of Legacy Force10, and an increase of $0.4 million in professional service expense due to the increased size and complexity of our business.

Restructuring expense

Restructuring expense, primarily related to our Transport segment, of $1.9 million in the first nine months of fiscal 2010 is comprised of severance, asset impairment charges and facility exit costs due to the shutdown of our research and development center in Shanghai, China in October 2009, as well as the closing of our office facility in Boulder, Colorado in March 2010.

In-process research and development and amortization of intangible assets

During the nine months ended June 30, 2009, we incurred a charge of $6.5 million in conjunction with our acquisition of Legacy Force10 for the write-off of purchased in-process research and development related to projects that had not yet reached technological feasibility and had no alternative use. The other amounts in both periods relate entirely to amortization of acquired intangible assets with defined useful lives acquired from Legacy Force10 and Carrier Access.

Interest income (expense), increase in fair value of preferred stock warrant liability and other income (expense)


	Nine months ended June 30,
(dollars in thousands)	2009			2010			Change			Percent change

Interest income	$	67		$	53		$	(14	)	(20.9	)%
Interest expense		(508	)		(365	)		143		28.1
Decrease in fair value of preferred stock warrant liability		—			14,621			14,621		n/a
Other income (expense), net		(413	)		(205	)		208		50.3

Net interest expense declined in the first nine months of fiscal 2010 compared to the same period in fiscal 2009 due to lower average borrowings at lower interest rates during the periods. Interest income for both periods was not significant. The decrease in net other expense in the first nine months of fiscal 2010 was attributable to a loss taken on the extinguishment of a debt instrument in the third quarter of fiscal 2009. The decrease in fair value of preferred stock warrant liability was due to the change in fair value of our preferred stock warrants from October 1, 2009 to June 30, 2010.

Fiscal years 2009 and 2008

Revenue


	Fiscal year ended September 30,
	2008				2009
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change			Percent change


Revenue
Product	$	48,225	30.9	%	$	86,120	72.3	%	$	37,895		78.6	%
Service		5,370	3.5			16,290	13.7			10,920		203.4
Ratable product and service		102,303	65.6			16,660	14.0			(85,643	)	(83.7	)

Total revenue	$	155,898	100.0	%	$	119,070	100.0	%	$	(36,828	)	(23.6	)%


Revenue by segment
Ethernet	$	—	—	%	$	34,367	28.9	%	$	34,367		n/a
Transport		155,898	100.0			84,703	71.1			(71,195	)	(45.7	)%

Total revenue	$	155,898	100.0	%	$	119,070	100.0	%	$	(36,828	)	(23.6	)%

Total revenue decreased $36.8 million, or 23.6%, in fiscal 2009. Product revenue increased $37.9 million, or 78.6%, in fiscal 2009 due to $26.7 million of incremental Ethernet product revenue in the last six months of fiscal 2009 from our acquisition of Legacy Force10, and an increase of $11.2 million in transport product revenue in fiscal 2009 compared to fiscal 2008. Due to our establishment of VSOE as of April 1, 2008, we recognized certain transport product revenue for only six months in fiscal 2008 compared to 12 months in fiscal 2009. Transport product revenue decreased on a quarterly basis from $21.3 million in the third quarter of fiscal 2008, to $13.8 million in the fourth quarter of fiscal 2009 due to reduced volume of orders across all product lines, but particularly our Traverse and Traverse Edge, and wireless aggregation products. There were no significant changes to our average selling prices between periods.

Service revenue increased $10.9 million, or 203.4%, due to $4.1 million of incremental Ethernet service revenue in the last six months of fiscal 2009 from our acquisition of Legacy Force10, and an increase of $6.8 million in transport service revenue due to our establishment of VSOE as of April 1, 2008 and therefore recognizing only six months of service revenue in fiscal 2008 as compared to 12 months in fiscal 2009.

Ratable product and service revenue decreased $85.6 million, or 83.7%, due to the termination of the implied PCS element in the majority of our sales arrangements effective December 1, 2007. Such services were either terminated immediately, in which case any previously deferred revenue were recognized immediately as ratable product and service revenue, or we entered into a contractual arrangement with the customer, in which we adjusted the amortization period on a prospective basis to match the new contractual period.

Cost of goods sold and gross margin


	Fiscal year ended September 30,
(dollars in thousands)	2008			2009			Change			Percent change


Cost of goods sold
Product	$	28,072		$	66,012		$	37,940		135.2	%
Service		2,440			8,213			5,773		236.6
Ratable product and service		56,977			8,079			(48,898	)	(85.8	)

Total cost of goods sold	$	87,489		$	82,304		$	(5,185	)	(5.9	)%


Gross margin
Product		41.8	%		23.3	%		(18.5	)%
Service		54.6			49.6			(5.0	)
Ratable product and service		44.3			51.5			(7.2	)

Total gross margin		43.9	%		30.9	%		(13.0	)%


Cost of goods sold by segment
Ethernet	$	—		$	24,806		$	24,806		n/a
Transport		87,489			57,498			(29,991	)	(34.3	)%

Total cost of goods sold	$	87,489		$	82,304		$	(5,185	)	(5.9	)%


Gross margin by segment
Ethernet		—	%		27.8	%		n/a
Transport		43.9			32.1			(11.8	)%

Total gross margin		43.9	%		30.9	%		(13.0	)%

Subsequent to our acquisition of Legacy Force10, sales of Ethernet products had a positive effect on gross margins, as our standard gross margins on Ethernet products are higher than on transport products. Despite this positive impact, total gross margin decreased 13.0 percentage points in fiscal 2009 compared to fiscal 2008. This decrease was primarily due to (1) $8.3 million of incremental product cost of goods sold due to a purchase accounting adjustment for the stepped-up fair value of inventory acquired in our acquisition of Legacy Force10, which reduced product gross margin by approximately 9.7 percentage points, (2) a $6.8 million excess inventory write-off primarily related to our wireless aggregation products taken in fiscal 2009 which reduced product gross margin by approximately 7.8 percentage points, and (3) a $4.2 million impact of a purchase accounting adjustment related to our acquisition of Legacy Force10 that required deferred service revenue to be recorded at fair value at the date of acquisition. This resulted in a reduction of service gross margin by approximately 10.2 percentage points as such services were delivered.

Operating expenses


	Fiscal year ended September 30,
	2008				2009
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change		Percent change


Operating expenses
Research and development	$	23,611	15.2	%	$	34,137	28.7	%	$	10,526	44.6	%
Sales and marketing		27,265	17.5			36,010	30.2			8,745	32.1
General and administrative		9,427	6.0			12,871	10.8			3,444	36.5
In-process research and development and amortization of intangible assets		3,119	2.0			7,459	6.3			4,340	139.1

Total operating expenses	$	63,422	40.7	%	$	90,477	76.0	%	$	27,055	42.7	%

Research and development expense

Research and development expense increased $10.5 million, or 44.6%, in fiscal 2009 primarily due to an increase of $8.7 million in cash-based personnel costs as a result of increased headcount primarily from the acquisition of Legacy Force10, an increase of $2.0 million in depreciation expense primarily due to assets acquired in the acquisition of Legacy Force10 and an increase of $1.2 million for rent and occupancy-related expenses. These increases were partially offset by a $1.4 million decrease in outside services, consultants and temporary employee expenses as we focused on cost containment and performing such tasks with internal resources.

Sales and marketing expense

Sales and marketing expense increased $8.7 million, or 32.1%, in fiscal 2009 primarily due to increased cash-based personnel costs of $7.3 million as a result of increased headcount primarily from the acquisition of Legacy Force10, an increase of $2.2 million in sales commission expense due to an increase in commissionable sales and a change in our commission payment structure and an increase in severance costs of $0.8 million as we realigned our domestic international sales territories and thus reduced headcount. These increases were offset by a $1.9 million decrease in occupancy and other allocated costs as we increased headcount in our service and support areas in fiscal 2009, which costs were allocated to cost of goods sold.

General and administrative expense

General and administrative expense increased $3.4 million, or 36.5%, in fiscal 2009 primarily due to an increase of $3.0 million in cash-based personnel costs as a result of increased headcount primarily from the acquisition of Legacy Force10, an increase of $1.2 million in professional services expense due to the increased size and complexity of our business, partially offset by a $0.4 million decrease in stock-based compensation expense and a $0.3 million decrease in hiring and temporary employee costs as we focused on cost containment and utilizing internal resources.

In-process research and development and amortization of intangible assets

In-process research and development and amortization of intangible assets consists of the write-off of purchased in-process research and development related to development projects that had not yet reached technological feasibility and have no alternative future use and the amortization of acquired intangible assets with defined useful lives. In fiscal 2009, this amount consisted of purchased in-process research and development of $6.5 million related to our acquisition of Legacy Force10, and amortization of intangible assets acquired from Legacy Force10 and Carrier Access of $1.0 million. In fiscal 2008, this amount consisted of purchased in-process research and development of $2.6 million and amortization of intangible assets of $0.5 million, both related to our acquisition of Carrier Access.

Interest income, interest expense and other income (expense), net


	Fiscal year ended September 30,
(dollars in thousands)	2008			2009			Change			Percent change

Interest income	$	910		$	80		$	(830	)	(91.2	)%
Interest expense		(397	)		(664	)		(267	)	67.3
Other income (expense), net		31			(336	)		(367	)	*

Not meaningful.

Interest income decreased $0.8 million in fiscal 2009 due to a decline in interest rates and a change in mix of investments. Interest expense increased $0.3 million in fiscal 2009 due to higher average borrowings at higher interest rates during the year. The increase in other expense is primarily attributable to a loss taken on the extinguishment of a debt instrument during the year.

Fiscal years 2008 and 2007

Revenue


	Fiscal year ended September 30,
	2007				2008
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change		Percent change


Revenue
Product	$	—	—	%	$	48,225	30.9	%	$	48,225	n/a
Service		—	—			5,370	3.5			5,370	n/a
Ratable product and service		31,562	100.0			102,303	65.6			70,741	224.1	%

Total revenue	$	31,562	100.0	%	$	155,898	100.0	%	$	124,336	393.9	%

All of our revenue in fiscal 2007 and fiscal 2008 was derived from transport and access products. Total revenue increased $124.3 million, or 393.9%, in fiscal 2008 driven primarily by our termination of the implied PCS element in the majority of our sales arrangements for transport products effective December 1, 2007, and our establishment of VSOE for PCS and certain other elements as of April 1, 2008. In fiscal 2007, the entire fee from all arrangements was deferred until all elements except for PCS were delivered and all other revenue recognition criteria were met, and then amortized ratably over the longer of the remaining contractual service period or 48 months, the estimated product life, from the date of initial shipment. There were no significant changes to our average selling prices between periods.

The increase in product and service revenue in fiscal 2008 was due to the establishment of VSOE for PCS as of April 1, 2008. For new multiple-element arrangements that included PCS or other undelivered elements for which VSOE had been established, we allocated and deferred revenue to the undelivered elements, primarily services, using VSOE, with the residual fees allocated to product. We recognized product revenue upon delivery, and recognized service revenue over the contractual support period.

Ratable product and service revenue increased $70.7 million, or 224.1%, in fiscal 2008. Upon termination of the implied PCS element in the majority of our sales arrangements effective December 1, 2007, such services were either terminated immediately, in which case any previously deferred revenue was recognized immediately as ratable product and service revenue, or we entered into a contractual arrangement with the customer, in which case we adjusted the amortization period on a prospective basis to match the new contractual period.

Cost of goods sold and gross margin


	Fiscal year ended September 30,
(dollars in thousands)	2007			2008			Change			Percent change


Cost of goods sold
Product	$	—		$	28,072		$	28,072		n/a
Service		—			2,440			2,440		n/a
Ratable product and service		19,507			56,977			37,470		192.1	%

Total cost of goods sold	$	19,507		$	87,489		$	67,982		348.5	%


Gross margin
Product		—	%		41.8	%		n/a
Service		—			54.6			n/a
Ratable product and service		38.2			44.3			6.1	%

Total gross margin		38.2	%		43.9	%		5.7	%

Total gross margin increased 5.7 percentage points from fiscal 2007 to fiscal 2008, primarily due to higher gross margin associated with the wireless aggregation products we began selling in February 2008 after our acquisition of Carrier Access.

Operating expenses


	Fiscal year ended September 30,
	2007				2008
(dollars in thousands)	Amount		Percent of revenue		Amount		Percent of revenue		Change		Percent change


Operating Expenses
Research and development	$	13,443	42.6	%	$	23,611	15.2	%	$	10,168	75.6	%
Sales and marketing		19,650	62.2			27,265	17.5			7,615	38.8
General and administrative		6,027	19.1			9,427	6.0			3,400	56.4
In-process research and development and amortization of intangible assets		—	—			3,119	2.0			3,119	*

Total operating expenses	$	39,120	123.9	%	$	63,422	40.7	%	$	24,302	62.1	%

Not meaningful.

Research and development expense

Research and development expense increased by $10.2 million, or 75.6%, in fiscal 2008 primarily due to $5.7 million in higher cash-based personnel costs associated with increased headcount primarily due to our acquisition of Carrier Access, increased material and third party consulting and professional services costs of $2.0 million primarily related to the development of new product releases, increased facility related costs of $1.0 million, increased depreciation and maintenance contract expenses of $0.7 million, and increased travel expenses of $0.4 million, primarily due to our acquisition of Carrier Access.

Sales and marketing expense

Sales and marketing expense increased $7.6 million, or 38.8%, in fiscal 2008 primarily due to $3.4 million in higher cash-based personnel costs associated with increased headcount primarily due to our acquisition of Carrier Access, increased sales commissions of $2.8 million due to increased sales in 2008, increased travel-related expenses of $1.0 million due to our expanded sales force and increased promotional and other marketing expenses of $0.6 million.

General and administrative expense

General and administrative expense increased $3.4 million, or 56.4%, in fiscal 2008 primarily due to $2.5 million in higher cash-based personnel costs associated with increased headcount primarily due to our acquisition of Carrier Access and the implementation of an executive bonus plan in fiscal 2008, increased depreciation expense of $0.6 million due to increases in purchases of fixed assets and increased stock-based compensation expense of $0.4 million.

In-process research and development and amortization of intangible assets

In-process research and development and amortization of intangible assets in fiscal 2008 consisted of $2.6 million of purchased in-process research and development related to projects that had not yet reached technological feasibility and had no alternative future use as of the date of acquisition, and purchased intangibles amortization expense of $0.5 million, both related to our acquisition of Carrier Access.

Interest income (expense), increase in fair value of preferred stock warrant liability, gain on extinguishment of preferred stock warrants and other income (expense)


	Fiscal year ended September 30,
(dollars in thousands)	2007			2008			Change			Percent change

Interest income	$	778		$	910		$	132		17.0	%
Interest expense		(2,928	)		(397	)		2,531		(86.4	)
Increase in fair value of preferred stock warrant liability		(2,025	)		—			2 ,025		*
Gain on extinguishment of preferred stock warrants		1,802			—			(1,802	)	*
Other income		5			31			26		*

Not meaningful.

The increase in interest income was due to interest earned on higher invested balances. The $2.5 million decrease in interest expense was primarily attributable to $1.9 million of debt discount related to the issuance of warrants and convertible notes, which were subsequently converted to preferred stock, and higher average borrowings at higher interest rates in fiscal 2007. The increase in fair value of preferred stock warrants was a result of a recapitalization of our equity structure during fiscal 2007. The warrants were subsequently extinguished and replaced with new warrants, resulting in a gain on extinguishment.

Quarterly results of operations

The following tables set forth selected unaudited quarterly statements of operations data for the last seven fiscal quarters, as well as the percentage that each line item represents of total revenue. The information below reflects the inclusion of the results of Legacy Force10 beginning with the quarter ended June 30, 2009. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.


	Quarter ended
(in thousands)	Dec 31, 2008			Mar 31, 2009			June 30, 2009			Sept 30, 2009			Dec 31, 2009			Mar 31, 2010			June 30, 2010


Consolidated statement of operations data:
Revenue
Product	$	14,985		$	14,247		$	30,262		$	26,626		$	32,128		$	34,366		$	35,836
Service		3,368			3,245			4,423			5,254			5,821			7,406			7,304
Ratable product and service		5,354			3,375			3,812			4,119			5,098			4,796			4,823

Total revenue		23,707			20,867			38,497			35,999			43,047			46,568			47,963


Cost of goods sold
Product		10,420			13,875			23,932			17,785			18,630			18,580			17,278
Service		1,230			1,306			2,885			2,792			3,358			4,842			2,988
Ratable product and service		2,944			1,767			1,712			1,656			1,812			2,110			1,815

Total cost of goods sold⁽¹⁾		14,594			16,948			28,529			22,233			23,800			25,532			22,081

Total gross profit		9,113			3,919			9,968			13,766			19,247			21,036			25,882


Operating expenses
Research and development⁽¹⁾		5,954			5,741			11,396			11,046			9,653			10,028			11,083
Sales and marketing⁽¹⁾		6,069			5,089			12,902			11,950			11,376			11,466			12,486
General and administrative⁽¹⁾		2,038			2,308			4,974			3,551			4,243			3,851			3,569
Restructuring		—			—			—			—			841			1,000			40
In-process research and development and amortization of intangible assets		209			6,709			271			270			271			192			149

Total operating expenses		14,270			19,847			29,543			26,817			26,384			26,537			27,327

Operating loss		(5,157	)		(15,928	)		(19,575	)		(13,051	)		(7,137	)		(5,501	)		(1,445	)
Interest and other income (expense), net		(325	)		(71	)		(458	)		(66	)		(385	)		5,769			8,720

Income (loss) before income taxes		(5,482	)		(15,999	)		(20,033	)		(13,117	)		(7,522	)		268			7,275
Income tax benefit (provision)		142			33			(74	)		(60	)		(98	)		(20	)		(62	)

Net income (loss)	$	(5,340	)	$	(15,966	)	$	(20,107	)	$	(13,177	)	$	(7,620	)	$	248		$	7,213


Other operational data:
Ethernet segment revenue	$	—		$	—		$	17,207		$	17,160		$	26,047		$	22,454		$	30,028
Transport segment revenue		23,707			20,867			21,290			18,839			17,000			24,114			17,935
Change in total deferred revenue		(6,566	)		(2,027	)		2,390			11,437			2,277			(5,980	)		(7,009	)
Non-GAAP operating loss		(4,530	)		(8,881	)		(12,280	)		(9,497	)		(4,147	)		(2,381	)		(355	)
Non-GAAP net loss		(4,713	)		(8,919	)		(12,812	)		(9,623	)		(4,475	)		(2,554	)		(551	)
Ethernet segment gross margin		—	%		—	%		18.2	%		37.5	%		50.2	%		47.0	%		58.5	%
Transport segment gross margin		38.4			18.8			32.1			38.9			36.3			43.5			46.3

(1)

Includes stock-based compensation expense as follows:


	Quarter ended
(in thousands)	Dec 31, 2008		Mar 31, 2009		June 30, 2009		Sept 30, 2009		Dec 31, 2009		Mar 31, 2010		June 30, 2010

Cost of goods sold	$	15	$	8	$	7	$	8	$	8	$	1	$	33
Research and development		69		50		45		49		51		122		137
Sales and marketing		85		31		22		38		31		111		73
General and administrative		53		53		45		44		99		133		175

Total stock-based compensation	$	222	$	142	$	119	$	139	$	189	$	367	$	418

Quarter ended

(as a percentage of revenue)

Dec 31,
2008

Mar 31,

2009

June 30,

2009

Sept 30,
2009

Dec 31,
2009

Mar 31,
2010

June 30,
2010

Revenue

Product

FORCE10 NETWORKS INC S-1/A