Summary of Significant Accounting Principles

Revenue Recognition

The Company derives the majority of its revenue from sales of its networking equipment and from service fees related to maintenance service contracts, professional services, and training for its products. The Company defers recognition of revenue on all sales to its stocking distributors until the distributors sell the product, as evidenced by monthly “sales-out” reports that the distributors provide. The Company generally recognizes product revenue from its value-added resellers, non-stocking distributors and end-user customers at the time of shipment, provided that persuasive evidence of an arrangement exists, delivery has occurred, the price of the product is fixed or determinable, and collection of the sales proceeds is reasonably assured. In instances where the criteria for revenue recognition are not met, revenue is deferred until all criteria have been met. Revenue from service obligations under service contracts is deferred and recognized on a straight-line basis over the contractual service period. Service contracts typically range from one to two years.

Under the accounting standards for multiple-element revenue arrangements, when the Company's sales arrangements contain multiple elements, such as products, software licenses, maintenance agreements, and/or professional services, the Company determines the standalone selling price for each element based on a selling price hierarchy. Under the selling price hierarchy, the selling price for each deliverable is based on the Company's vendor-specific objective evidence (“VSOE”), which is determined by a substantial majority of the Company's historical standalone sales transactions for a product or service falling within a narrow range. If VSOE is not available due to a lack of standalone sales transactions or lack of pricing within a narrow range, then third party evidence (“TPE”), as determined by the standalone pricing of competitive vendor products in similar markets, is used, if available. TPE typically is difficult to establish due to the proprietary differences of competitive products and difficulty in obtaining reliable competitive standalone pricing information. When neither VSOE nor TPE is available, the Company determines its best estimate of standalone selling price (“ESP”) for a product or service and does so by considering several factors including, but not limited to, the 12-month historical median sales price, sales channels, geography, gross margin objectives, competitive product pricing, and product lifecycle. In consideration of all relevant pricing factors, the Company applies management judgment to determine the Company's best estimate of selling price through consultation with and formal approval by the Company's management for all products and services for which neither VSOE nor TPE is available. Generally the standalone selling price of services is determined using VSOE and the standalone selling price of other deliverables is determined by using ESP. The Company regularly reviews VSOE, TPE and ESP for all of its products and services and maintains internal controls over the establishment and updates of these estimates.

Under software revenue recognition accounting standards, the Company continues to recognize revenue for software using the residual method for its sale of standalone software products, including software upgrades, and for the sale of software that is not essential to the functionality of the hardware with which it is sold. After allocation of the relative selling price to each element of the arrangement, the Company recognizes revenue in accordance with the Company's policies for product, software, and service revenue recognition.

Available-for-Sale Securities

The following is a summary of available-for-sale securities (in thousands):



	Amortized Cost		Fair Value		Unrealized Holding Gains		Unrealized Holding Losses
January 1, 2012
Money market funds	$	29,766	$	29,766	$	—	$	—
U.S. corporate debt securities	89,658		89,545		141		(255		)
U.S. government agency securities	7,488		7,476		1		(13		)
	$	126,912	$	126,787	$	142	$	(268	)
Classified as:
Cash equivalents	$	29,766	$	29,766	$	—	$	—
Short-term investments	34,207		34,250		51		(9		)
Marketable securities	62,939		62,771		91		(259		)
	$	126,912	$	126,787	$	142	$	(268	)



	Amortized Cost		Fair Value		Unrealized Holding Gains		Unrealized Holding Losses
July 3, 2011
Money market funds	$	30,405	$	30,405	$	—	$	—
U.S. corporate debt securities	89,004		89,249		287		(43		)
U.S. government agency securities	7,746		7,756		13		(3		)
	$	127,155	$	127,410	$	300	$	(46	)
Classified as:
Cash equivalents	$	30,405	$	30,405	$	—	$	—
Short-term investments	41,245		41,357		114		(1		)
Marketable securities	55,505		55,648		186		(45		)
	$	127,155	$	127,410	$	300	$	(46	)

The amortized cost and estimated fair value of available-for-sale investments in debt securities at January 1, 2012, by contractual maturity, were as follows (in thousands):



	Amortized Cost		Fair Value
Due in 1 year or less	$	34,207	$	34,250
Due in 1-2 years	43,643		43,585
Due in 2-5 years	19,296		19,186
Due in more than 5 years	—		—
Total investments in available for sale debt securities	$	97,146	$	97,021

The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investments with maturities of greater than three months, but less than one year at the balance sheet date are classified as Short Term Investments. Investments with maturities of greater than one year at balance sheet date are classified as Marketable Securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, the Company diversifies its investments by limiting its holdings with any individual issuer.

Investments include available-for-sale investment-grade debt securities that the Company carries at fair value. The Company accumulates unrealized gains and losses on the Company’s available-for-sale debt securities, net of tax, in accumulated other comprehensive income in the stockholders’ equity section of its balance sheets. Such an unrealized gain or loss does not reduce net income for the applicable accounting period. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) the Company intends to sell the instrument, (2) it is more likely than not that the Company will be required to sell the instrument before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If the Company intends to sell or it is more likely than not that the Company will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, the Company recognizes an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), the Company separates the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. As of January 1, 2012 and July 3, 2011, the Company did not have other-than-temporary impairment on its investment securities.

The following table presents the Company’s investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
January 1, 2012:
U.S. corporate debt securities	$	39,391	$	(249	)	$	7,184	$	(6	)	$	46,575	$	(255	)
U.S. government agency securities	$	4,972	$	(13	)	$	—	$	—		$	4,972	$	(13	)
	$	44,363	$	(262	)	$	7,184	$	(6	)	$	51,547	$	(268	)

The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings using the specific identification method. During the three and six months ended January 1, 2012, realized gains or losses recognized on the sale of investments were not significant. As of January 1, 2012, there were twenty-seven out of fifty-one investment securities that had unrealized losses. The unrealized gains / (losses) on the Company’s investments were caused by interest rate fluctuations. Substantially all of the Company’s available-for-sale investments are investment grade government and corporate debt securities that have maturities of less than 3 years.

Fair Value of Financial Instruments

The Company recognizes certain financial instruments at fair value on a recurring basis. The following table presents the Company’s fair value hierarchy for those instruments:



January 1, 2012:	Level 1		Level 2		Total
			(In thousands)
Assets
Investments:
Federal agency notes	$	—	$	7,476	$	7,476
Money market funds	29,766		—		29,766
Corporate notes/bonds	—		89,545		89,545
Total	29,766		97,021		126,787
Liabilities
Foreign currency forward contracts	—		42		42
Total	$	—	$	42	$	42

July 3, 2011:	Level 1		Level 2		Total
			(In thousands)
Assets
Investments:
Federal agency notes	$	—	$	7,756	$	7,756
Money market funds	30,405		—		30,405
Corporate notes/bonds	—		89,248		89,248
Total	30,405		97,004		127,409
Liabilities
Foreign currency forward contracts	—		37		37
Total	$	—	$	37	$	37

Level 2 investment valuations are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, and state, municipal and provincial obligations. As of January 1, 2012 and July 3, 2011, the Company had no assets or liabilities classified within Level 3.

Inventory, Net

Inventory is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company reduces the carrying value of inventory based on excess and obsolete inventories which are primarily determined by age of inventory and future demand forecasts. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Any written down or obsolete inventory subsequently sold has not had a material impact on gross profit for any of the periods disclosed. Inventories at January 1, 2012 and July 3, 2011, respectively, were (in thousands):



	January 1, 2012		July 3, 2011
Inventory, gross	$	22,503	$	26,487
Less: Write down for excess and obsolete inventory	1,111		4,904
Inventory, net	$	21,392	$	21,583

Long-lived assets

Long-lived assets include property and equipment, intangible assets, and service inventory which the Company holds to support customers who have purchased service contracts with a hardware replacement element. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of the long-lived assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. There was no impairment of long-lived assets during the three and six months ended January 1, 2012 and December 26, 2010.

On September 23, 2010, the Company entered into an Option Agreement with Trumark Companies LLC (“Trumark”), under which the Company granted Trumark an option (the “Option”) to purchase half of its corporate headquarters campus in Santa Clara, California (First Property), at a price of $24.0 million. The Option expires on December 18, 2012, provided that Trumark continues to make the required Option payments. As of January 1, 2012, the Company had received $1.0 million of Option payments from Trumark, which were classified as a deferred gain and included in other current liabilities on the condensed consolidated balance sheet. If Trumark exercises the Option, the closing on this transaction will occur within thirty days after the exercise date. As of January 1, 2012, the assets associated with the proposed transaction were classified as “assets held for sale” on the condensed consolidated balance at a net book value of $17.1 million, which was the lesser of the fair value (less cost to sell) or carrying amount of the assets. In addition, as of January 1, 2012, the Company ceased recognizing depreciation expense on the assets held for sale.

Intangible assets

The following tables summarize the components of gross and net intangible asset balances (in thousands):



	Weighted Average Remaining Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
January 1, 2012:
Patents	7.6 years	$	1,800	$	528	$	1,272
License Agreements	6.8 years	8,443		5,630		2,813
Other Intangibles	0.7 years	324		230		94
		$	10,567	$	6,388	$	4,179



	Weighted Average Remaining Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
July 3, 2011:
Patents	7.7 years	$	1,800	$	387	$	1,413
License Agreements	6.5 years	8,140		4,788		3,352
Other Intangibles	1.2 years	324		183		141
		$	10,264	$	5,358	$	4,906

Amortization expense was $0.5 million and $0.5 million for the three months ended January 1, 2012 and December 26, 2010, respectively. Amortization expense was $1.0 million and $1.0 million for the six months ended January 1, 2012 and December 26, 2010, respectively. Amortization expense expected to be recorded for each of the next five years is as follows (in thousands):



For the fiscal year ending:
Remaining in fiscal 2012	$	703
2013	1,183
2014	552
2015	255
2016	214
Thereafter	1,272
Total	$	4,179

Deferred Revenue, Net

Deferred revenue, net represents amounts for (i) deferred services revenue (support arrangements, professional services and training), and (ii) deferred product revenue net of the related cost of revenues when the revenue recognition criteria have not been met. Product revenue includes shipments to end-users and value-add resellers. The following table summarizes deferred revenue, net at January 1, 2012 and July 3, 2011, respectively (in thousands):



	January 1, 2012			July 3, 2011
Deferred services	$	37,669		$	36,025
Deferred product
Deferred revenue	1,706			1,984
Deferred cost of sales	(504		)	(1,036		)
Deferred product revenue, net	1,202			948
Balance at end of period	38,871			36,973
Less: current portion	31,308			29,613
Non-current deferred revenue, net	$	7,563		$	7,360

The Company offers renewable support arrangements, including extended warranty contracts, to its customers that range generally from one to two years. Deferred support revenue is included within deferred revenue, net within the deferred services category above. The change in the Company’s deferred support revenue balance in relation to these arrangements was as follows (in thousands):



	Three Months Ended						Six Months Ended
	January 1, 2012			December 26, 2010			January 1, 2012			December 26, 2010
Balance beginning of period	$	35,730		$	35,417		$	35,802		$	36,193
New support arrangements	15,960			18,237			30,560			31,730
Recognition of support revenue	(14,274		)	(14,782		)	(28,946		)	(29,051		)
Balance end of period	37,416			38,872			37,416			38,872
Less current portion	29,853			31,727			29,853			31,727
Non-current deferred revenue	$	7,563		$	7,145		$	7,563		$	7,145

Deferred Distributors Revenue, Net of Deferred Cost of Sales to Distributors

At the time of shipment to distributors, the Company records a trade receivable at the contractual discount to list selling price since there is a legally enforceable obligation from the distributor to pay it currently for product delivered, the Company relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and the Company records deferred revenue and deferred cost of sales in “Deferred distributors revenue, net of deferred cost of sales to distributors” in the liability section of its consolidated balance sheets. The following table summarizes deferred distributors revenue, net of deferred cost of sales to distributors at January 1, 2012 and July 3, 2011, respectively (in thousands):



	January 1, 2012			July 3, 2011
Deferred revenue	$	19,156		$	22,454
Deferred cost of sales	(4,665		)	(5,902		)
Total deferred distributors revenue, net of deferred cost of sales to distributors	$	14,491		$	16,552

Guarantees and Product Warranties

The Company's standard hardware warranty period is typically 12 months from the date of shipment to end-users. For certain access products, the Company offers a lifetime hardware warranty commencing on the date of shipment from the Company and ending five years following the Company's announcement of the end of sale of such product. The following table summarizes the activity related to the Company’s product warranty liability during the three and six months ended January 1, 2012 and December 26, 2010, respectively (in thousands):



	Three Months Ended						Six Months Ended
	January 1, 2012			December 26, 2010			January 1, 2012			December 26, 2010
Balance beginning of period	$	2,702		$	2,794		$	2,640		$	3,169
New warranties issued	1,589			1,653			3,237			2,944
Warranty expenditures	(1,640		)	(1,636		)	(3,226		)	(3,302		)
Balance end of period	$	2,651		$	2,811		$	2,651		$	2,811

In the normal course of business to facilitate sales of the Company's products, the Company indemnifies the Company's resellers and end-user customers with respect to certain matters. The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to estimate the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results or financial position.

Other Accrued Liabilities

The following are the components of other accrued liabilities (in thousands):



	January 1, 2012		July 3, 2011
Accrued income taxes	$	701	$	897
Accrued general and administrative costs	2,001		5,373
Accrued research and development costs	1,601		1,734
Accrued in-transit inventory and freight	1,250		2,777
Accrued marketing development funds	2,459		2,492
Deferred gain on assets held for sale	1,002		—
Other accrued liabilities	3,262		5,777
Total	$	12,276	$	19,050