10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2011

OR

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

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-27273

SYCAMORE NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-3410558
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

220 Mill Road

Chelmsford, Massachusetts 01824

(Address of principal executive offices)

(Zip code)

(978) 250-2900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock as of November 21, 2011 was 28,749,971.

Sycamore Networks, Inc.

Index		Page No.
Part I.	FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited)		3
	Consolidated Balance Sheets as of October 29, 2011 and July 31, 2011		3
	Consolidated Statements of Operations for the three months ended October 29, 2011 and October 30, 2010		4
	Consolidated Statements of Cash Flows for the three months ended October 29, 2011 and October 30, 2010		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25
Part II.	OTHER INFORMATION		26
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 6.	Exhibits		29
Signature			30

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Part I. Financial Information

Item 1. Financial Statements

Sycamore Networks, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)

	October 29, 2011			July 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	51,781		$	60,765
Short-term investments		351,430			335,847
Accounts receivable, net of allowance for doubtful accounts of $72 at October 29, 2011 and July 31, 2011		9,336			8,764
Inventories		9,692			11,537
Prepaid and other current assets		1,182			1,770
Total current assets		423,421			418,683
Property and equipment, net		6,133			5,978
Long-term investments		35,160			44,786
Other assets		292			290
Total assets	$	465,006		$	469,737
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	606		$	1,664
Accrued compensation		2,121			2,325
Accrued warranty		1,136			1,140
Accrued expenses		1,313			1,889
Accrued restructuring costs		4			294
Deferred revenue		7,041			9,141
Other current liabilities		913			1,013
Total current liabilities		13,134			17,466
Long term deferred revenue		1,724			1,812
Other long term liabilities		1,743			1,702
Total liabilities		16,601			20,980
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding		—			—
Common stock, $.001 par value; 250,000 shares authorized; 28,749 and 28,739 shares issued and outstanding at October 29, 2011 and July 31, 2011, respectively		29			29
Additional paid-in capital		1,584,278			1,583,124
Accumulated deficit		(1,135,572	)		(1,133,958	)
Accumulated other comprehensive income (loss)		(330	)		(438	)
Total stockholders’ equity		448,405			448,757
Total liabilities and stockholders’ equity	$	465,006		$	469,737

The accompanying notes are an integral part of the consolidated financial statements.

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Sycamore Networks, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended
	October 29, 2011			October 30, 2010
Revenue:
Product	$	9,898		$	5,724
Service		5,482			5,985
Total revenue		15,380			11,709
Cost of revenue:
Product		4,368			4,673
Service		1,894			2,212
Total cost of revenue		6,262			6,885
Gross profit		9,118			4,824
Operating expenses:
Research and development		6,485			7,311
Sales and marketing		2,670			2,600
General and administrative		1,985			2,126
Restructuring		(271	)		—
Total operating expenses		10,869			12,037
Loss from operations		(1,751	)		(7,213	)
Interest and other income, net		234			768
Loss before income taxes		(1,517	)		(6,445	)
Income tax expense		97			94
Net loss	$	(1,614	)	$	(6,539	)
Net loss per share:
Basic	$	(0.06	)	$	(0.23	)
Diluted	$	(0.06	)	$	(0.23	)
Weighted average shares outstanding:
Basic		28,741			28,451
Diluted		28,741			28,451

The accompanying notes are an integral part of the consolidated financial statements.

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Sycamore Networks, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended
	October 29, 2011			October 30, 2010
Cash flows from operating activities:
Net loss	$	(1,614	)	$	(6,539	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		716			1,088
Share-based compensation		974			544
Adjustments to provision for excess and obsolete inventory		73			859
Changes in operating assets and liabilities:
Accounts receivable		(572	)		7,694
Inventories		1,725			(310	)
Prepaids and other assets		586			356
Deferred revenue		(2,188	)		(3,238	)
Accounts payable		(1,058	)		(851	)
Accrued expenses and other current liabilities		(843	)		(651	)
Accrued restructuring costs		(290	)		271
Net cash used in operating activities		(2,491	)		(777	)
Cash flows from investing activities:
Purchases of property and equipment		(824	)		(126	)
Purchases of investments		(51,719	)		(131,305	)
Proceeds from maturities and sales of investments		45,870			234,413
Net cash provided by (used in) investing activities		(6,673	)		102,982
Cash flows from financing activities:
Proceeds from issuance of common stock		180			2,224
Net cash provided by financing activities		180			2,224
Net increase (decrease) in cash and cash equivalents		(8,984	)		104,429
Cash and cash equivalents, beginning of period		60,765			104,416
Cash and cash equivalents, end of period	$	51,781		$	208,845
Cash paid for income taxes	$	31		$	28

The accompanying notes are an integral part of the consolidated financial statements.

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Sycamore Networks, Inc.

Notes To Consolidated Financial Statements (Unaudited)

1. Description of Business

The Company operates in one industry segment serving two market areas, bandwidth management and mobile broadband optimization. We develop and market Intelligent Bandwidth Management solutions for fixed line and mobile network operators worldwide and provide services associated with such products. Our current and prospective customers include domestic and international wireline and wireless network service providers, utility companies, large enterprises, multiple systems operators and government entities (collectively referred to as “service providers”). Our existing bandwidth management portfolio of optical switches, multiservice cross-connects and multiservice access platforms serve applications that extend across the network infrastructure, from multiservice access and regional backhaul to the optical core. We also develop and market a mobile broadband optimization solution designed to help mobile operators reduce congestion in mobile access networks. We believe our products enable network operators to efficiently and cost-effectively provision and manage network capacity to support a wide range of converged services such as voice, video and data. As used in this report, “Sycamore,” “we,” “us,” or “our” refers collectively to Sycamore Networks, Inc. (the “Company”) and its subsidiaries.

2. Basis of Presentation

The accompanying financial data as of October 29, 2011 and for the three months ended October 29, 2011 and October 30, 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC for the fiscal year ended July 31, 2011.

In the opinion of management, the accompanying financial statements include all adjustments necessary to state fairly the financial position as of October 29, 2011 and results of operations and cash flows for the periods ended October 29, 2011 and October 30, 2010. The results of operations and cash flows for the period ended October 29, 2011 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and judgments relied upon in preparing these financial statements include those related to revenue recognition, allowance for doubtful accounts, warranty obligations, inventory allowance, litigation and other contingencies, and share-based compensation. Estimates, judgments, and assumptions are reviewed periodically by management and the effects of revisions are reflected in the consolidated financial statements in the period in which they are made.

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3. Share-Based Compensation

The following table presents share-based compensation expense included in the Company’s consolidated statements of operations (in thousands):

	Three Months Ended
	October 29, 2011		October 30, 2010
Cost of product revenue	$	34	$	33
Cost of service revenue		117		47
Research and development		383		147
Sales and marketing		210		169
General and administrative		230		148
Share-based compensation expense	$	974	$	544

Stock option activity under all of the Company’s stock plans since July 31, 2011 is summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding at July 31, 2011		2,993,840		$	20.33		5.59
Options granted		4,750			16.82
Options exercised		(10,620	)		16.95
Options cancelled		(66,169	)		21.50
Outstanding at October 29, 2011		2,921,801		$	20.31		5.32
Options vested and expected to vest		2,825,726		$	20.30		5.19
Options exercisable at end of period		1,805,479		$	20.23		2.98
Weighted average fair value of options granted for the three months ended October 29, 2011	$	7.58

The intrinsic value of options exercised during the three months ended October 29, 2011 was $0.01 million.

As of October 29, 2011, there was $7.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted-average period of 2.3 years.

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4. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period less unvested restricted stock. Common equivalent shares are not used in the calculation of net loss per share because the effect would be antidilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended
	October 29, 2011			October 30, 2010
Numerator:
Net loss	$	(1,614	)	$	(6,539	)
Denominator:
Weighted-average shares of common stock outstanding		28,741			28,452
Weighted-average shares subject to repurchase		—			(1	)
Shares used in per-share calculation – basic		28,741			28,451
Weighted-average shares of common stock outstanding		28,741			28,451
Weighted common stock equivalents		—			—
Shares used in per-share calculation – diluted		28,741			28,451
Net loss per share:
Basic	$	(0.06	)	$	(0.23	)
Diluted	$	(0.06	)	$	(0.23	)

Employee stock options to purchase 3.0 million shares have not been included in the computation of diluted net loss per share for the three month ended October 29, 2011 because their effect would have been antidilutive. Employee stock options to purchase 2.6 million shares have not been included in the computation of diluted net loss per share for the three ended October 30, 2010 because their effect would have been antidilutive.

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5. Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less at the date of acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. At October 29, 2011 the Company’s short and long term investments, as classified on the balance sheet, were $351.4 million and $35.2 million, respectively. These investments are marketable securities classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of short and long term investments is determined based on quoted market prices at the reporting date for those instruments. As of October 29, 2011 and July 31, 2011, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

October 29, 2011:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	51,781	$	—	$	—		$	51,781
Corporate securities		15,230		3		—			15,233
Government securities		371,374		52		(69	)		371,357
Total	$	438,385	$	55	$	(69	)	$	438,371

July 31, 2011:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	60,765	$	—	$	—		$	60,765
Corporate securities		26,819		37		—			26,856
Government securities		353,907		27		(157	)		353,777
Total	$	441,491	$	64	$	(157	)	$	441,398

6. Inventories

Inventories consisted of the following (in thousands):

	October 29, 2011		July 31, 2011
Raw materials	$	4,256	$	4,398
Work in process		1,526		2,193
Finished goods		3,910		4,946
Total	$	9,692	$	11,537

7. Comprehensive Loss

The components of comprehensive loss consisted of the following (in thousands):

	Three Months Ended
	October 29, 2011			October 30, 2010
Net loss	$	(1,614	)	$	(6,539	)
Unrealized gain (loss) on investments		108			(373	)
Comprehensive loss	$	(1,506	)	$	(6,912	)

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8. Restructuring Charges

During the first quarter of fiscal 2012, the Company reversed the balance of a reserve for the consolidation of its Chelmsford, Massachusetts facility totaling $0.2 million. The adjustment relates to a change in the previously estimated restructuring liability resulting from an amendment to extend the term of the facility lease and was recorded to operating expenses.

During the first quarter of fiscal 2011, the Company integrated and realigned its operations group with other functional areas to enhance operational efficiency and realize the benefits of identified synergies within the respective groups. The realignment resulted in the elimination of four positions. The Company recorded a restructuring charge of $0.3 million which was charged to cost of product revenue. This charge relates to employee separation packages including severance pay, benefits continuation and outplacement costs.

There can be no assurance that further restructuring actions may not be required in the future.

As of October 29, 2011, the Company has substantially completed its cash restructuring payments. A roll-forward of the restructuring accrual is summarized below (in thousands):

	Accrual Balance at July  31, 2011		Adjustments			Payments		Accrual Balance at October 29, 2011
Workforce reduction	$	67	$	—		$	63	$	4
Facility consolidations		227		(227	)		—		—
Total	$	294	$	(227	)	$	63	$	4

9. Income Taxes

As of October 29, 2011 and July 31, 2011, the Company had a liability of $1.7 million for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate.

As of October 29, 2011 and July 31, 2011, the Company had $0.5 million and $0.4 million, respectively, accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.

The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2005 through July 31, 2011. However, limited audit adjustments could be made to federal and state tax returns in earlier years resulting in a reducuction of net operating loss carryforwards.

Income tax expense was $0.1 million for the three months ended October 29, 2011 and October 30, 2010, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets will not be realized. Therefore, we maintain a full valuation allowance. If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the net operating loss carryforwards may be utilized and the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended, (the “Code”) is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income.

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In May 2006, the Company conducted a study to determine if it had undergone an ownership change within the meaning of the Code for the period from its inception through April 2006. The study indicated the occurrence of an ownership change in fiscal 1999. The losses subject to the fiscal 1999 limitation were fully utilized in fiscal 2000. The Company updated its earlier Section 382 study through July 31, 2011 and the results of the updated study showed that no subsequent ownership change within the meaning of the Code had occurred during the period from April 2006, the date of the last study, through July 31, 2011. The Company maintains a full valuation allowance against available net operating loss carryforwards and tax credits.

10. Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 will be effective for the Company beginning August 1, 2012, with early adoption permitted. The Company is currently considering the appropriate presentation upon adoption.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which provides guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 will be effective for the Company beginning the first day of our third fiscal quarter, which is January 29, 2012. The Company is currently assessing the impact, if any, on its consolidated financial statements.

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11. Commitments and Contingencies

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant was a class member with standing

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to appeal. The district court ruled that the appellant has no standing to object to the settlement. The appellant has appealed the district court’s decision. On October 25, 2011, plaintiff/appellees filed a motion to dismiss the appellant objector’s appeal and have requested that the Second Circuit consider the motion on an expedited basis.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. stockholder filed a complaint for violation of Section 16 of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s Initial Public Offering underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., in the District Court for the Western District of Washington (“District Court”) seeks recovery of short-swing profits. On April 28, 2008, the district court established a briefing schedule for motions to dismiss and ruled that all discovery be stayed pending resolution of the motions to dismiss. The District Court found the motions appropriate for oral argument which was held on January 6, 2009. On March 16, 2009, the District Court issued an order dismissing the case. On March 31, 2009, the plaintiff appealed. On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriters’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, the underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days. On April 5, 2011, Appellant filed a petition for writ of certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision. On April 15, 2011, the underwriters filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. The statute of limitations issue has been fully briefed and the Supreme Court has set oral argument for November 29, 2011.

The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. Our management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operations or financial condition.

Guarantees

As of October 29, 2011, the Company’s guarantees requiring disclosure consist of its accrued warranty obligations, indemnifications for intellectual property infringement claims and indemnifications for officers and directors.

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In the normal course of business, the Company may also agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company with respect to certain matters. The Company has agreed to hold these other parties harmless against losses arising from a breach of representations or covenants, 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 determine 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. Accordingly, the Company has not recorded a liability for these agreements at October 29, 2011 or July 31, 2011 as the Company believes the fair value is not material.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not limited; however, the Company maintains liability insurance coverage that may enable the Company to recover all or a portion of any future amounts paid. The Company did not incur any expense under these arrangements in the first quarter of fiscal year 2012 or fiscal year 2011. Due to the Company’s inability to estimate liabilities in connection with these agreements, if and when they might be incurred, the Company has not recorded any liability for these agreements at October 29, 2011 or July 31, 2011.

Warranty Liability

The following table summarizes the activity related to product warranty liability (in thousands):

	Three Months Ended
	October 29, 2011			October 30, 2010
Beginning balance	$	1,140		$	1,720
Accruals /adjustments		69			57
Settlements		(73	)		(97	)
Ending balance	$	1,136		$	1,680

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12. Fair Value Measurements

The fair value measurement rules establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities of the Company measured at fair value on a recurring basis as of October 29, 2011, are summarized as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
Description	October 29, 2011		Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash Equivalents	$	51,781	$	51,781	$	—	$	—
Corporate Obligations		15,233		15,233		—		—
Government Obligations		371,357		371,357		—		—
Total assets	$	438,371	$	438,371	$	—	$	—

Cash Equivalents

Cash equivalents of $51.8 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $15.2 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $371.4 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

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Assets and liabilities of the Company measured at fair value on a recurring basis as of July 31, 2011, are summarized as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
Description	July 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash Equivalents	$	60,765	$	60,765	$	—	$	—
Corporate Obligations		26,856		26,856		—		—
Government Obligations		353,777		353,777		—		—
Total assets	$	441,398	$	441,398	$	—	$	—

Cash Equivalents

Cash equivalents of $60.8 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $26.9 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $353.8 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, we wish to caution you that certain matters discussed in this report constitute forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including, without limitation, those risks and uncertainties discussed under the heading “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. The information discussed in this report should be read in conjunction with our Annual Report on Form 10-K and other reports we file from time to time with the SEC. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise. Forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). These reports, any amendments to these reports, proxy and information statements and certain other documents we file with the SEC are available through the SEC’s website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file the documents with the SEC. The public may also read and copy these reports and any other materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Executive Summary

The Company operates in one industry segment serving two market areas, bandwidth management and mobile broadband optimization. We develop and market Intelligent Bandwidth Management solutions for fixed line and mobile network operators worldwide and provide services associated with such products. Our current and prospective customers include domestic and international wireline and wireless network service providers, utility companies, large enterprises, multiple systems operators and government entities (collectively referred to as “service providers”). Our existing bandwidth management portfolio of optical switches, multiservice cross-connects and multiservice access platforms serve applications that extend across the network infrastructure, from multiservice access and regional backhaul to the optical core. We also develop and market a mobile broadband optimization solution designed to help mobile operators reduce congestion in mobile access networks. We believe our products enable network operators to efficiently and cost-effectively provision and manage network capacity to support a wide range of converged services such as voice, video and data.

Revenue for the three months ended October 29, 2011 was derived exclusively from our Intelligent Bandwidth Management products and services and totaled $15.4 million, an increase of 31% compared to fiscal 2011. Net loss for the three months ended October 29, 2011 was $1.6 million, compared to a net loss for the three months ended October 30, 2010 of $6.5 million.

We believe the portion of the bandwidth management market that we serve is experiencing a gradual, secular decline and continues to be challenged by high customer concentration, the project-oriented nature of purchasing patterns and uncertainty with regard to the level and timing of capital expenditures by service providers. With purchasing power concentrated in a small number of customers and with an excess of suppliers, competition remains intense. We believe that these factors will result in a limited number of new opportunities for revenue growth, and will continue to influence quarterly revenue variability in this area of our business. Accordingly, our investments in these products will remain focused on customer support and sustaining engineering efforts, including limited new feature development tied to tangible revenue opportunities. At the same time, we continue to invest in IQstream, our mobile broadband solution designed to help operators reduce congestion in mobile access networks caused by rising demand for Internet video and other rich media subscriber content.

We remain engaged in multiple trials with our IQstream prospects, which currently are in various stages. Over the past several quarters we have made meaningful progress in our trials, including validation of the product’s system reliability, interoperability with widely deployed radio system vendors, and its ability

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to provide bandwidth savings in the backhaul segment of mobile networks. Given the complexity of the environment in which IQstream operates and the pragmatic approach operators take to testing a new product under live network conditions, our trial prospects to date have opted to initially test IQstream in base station locations with relatively low to moderate traffic volumes. While these test environments have proven invaluable in validating IQstream’s core system functionality and reliability, the traffic volumes and characteristics at trial sites to date have not been sufficient to demonstrate the potential bandwidth-saving performance levels we believe are attainable in sites with higher traffic volumes and greater repetitive traffic patterns. As IQstream was designed to mitigate service-impacting congestion during peak traffic periods through the optimization of repeat traffic patterns, we believe the next step involves expanding the scope of our existing trials to include network sites with higher traffic volumes and increased levels of repetitive traffic.

We are working with our existing trial prospects to expand the test sites to include additional network locations experiencing higher levels of congestion. At the same time, we continue to work toward adding new operators to our trial program. With system functionality and reliability successfully demonstrated, our goal in upcoming activities will be to prove compelling bandwidth savings performance to make the case for commercial deployment in operator networks. While we believe this additional phase of performance testing and validation will likely extend the trial process, and thus lengthen the time to first revenue, we believe it to be a necessary step in moving the product from initial customer interest to successful market adoption.

We will continue to monitor the level of our investments in IQstream with a view toward the timing of its market acceptance and, accordingly, may modulate the amount or timing of further investments based on changing customer requirements, our assessment of evolving market conditions and the level of customer demand.

We also continue to consider other strategic options that may serve to enhance stockholder value. These strategic options may include: acquisitions of, or mergers or other business combinations with, companies with complementary technologies or companies in other market segments; the sale or spin-off of certain assets; strategic alliances with, or investments in, other entities; the discontinuation or divestiture of certain products; and recapitalization alternatives, including stock buybacks, cash distributions or cash dividends.

Our cash, cash equivalents and investments totaled $438.4 million at October 29, 2011. We intend to fund our operations for the foreseeable future, including fixed commitments under operating leases and any required capital expenditures, utilizing these funds. We believe that existing cash, cash equivalents and investments will be sufficient to satisfy our anticipated operating requirements and enable us to pursue a range of strategic alternatives.

Critical Accounting Policies and Estimates

Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011 describes the significant accounting estimates and policies used in the preparation of the financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting policies during the first three months of fiscal 2012.

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Results of Operations

Revenue

The following table presents product and service revenue (in thousands, except percentages):

	Three Months Ended
	October 29, 2011		October 30, 2010		Variance in Dollars			Variance in Percent
Revenue
Product	$	9,898	$	5,724	$	4,174			73	%
Service		5,482		5,985		(503	)		(8	)%
Total revenue	$	15,380	$	11,709	$	3,671			31	%

Total revenue was derived exclusively from our Intelligent Bandwidth Management products and services, and increased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. Product revenue increased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010, primarily due to an increase in demand for our optical switching products. Service revenue consists primarily of fees for services relating to the maintenance of our products, installation services and training. Service revenue decreased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010, primarily due to decreased maintenance and installation services.

For the three months ended October 29, 2011, two customers each accounted for more than 10% of our total revenue. International revenue represented 25% of our total revenue. We expect future revenue to be highly concentrated in a relatively small number of customers. The timing of customer requirements during a fiscal year may cause shifts between quarterly periods in the level and type of revenue, the number of customers who account for more than 10% of our revenue, and in the mix of domestic versus international revenue. The loss or any substantial reduction or delay in orders by any one of these customers could materially adversely affect our business and, accordingly, our financial condition and results of operations.

Gross Profit

The following table presents gross profit for product and services (in thousands, except percentages):

	Three Months Ended
	October 29, 2011			October 30, 2010
Gross profit:
Product	$	5,530		$	1,051
Service		3,588			3,773
Total	$	9,118		$	4,824
Gross profit:
Product		56	%		18	%
Service		65	%		63	%
Total		59	%		41	%

Product gross profit

Cost of product revenue consists primarily of amounts paid to third-party contract manufacturers for purchased materials and services, other fixed manufacturing costs and provisions for warranty, scrap, rework, and provisions which may be taken for excess or slow moving inventory. Product gross profit increased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. The increase was primarily due to higher revenue and a more favorable product mix for our optical switching products. Additionally, the prior period was negatively impacted by a provision of $0.9 million for certain inventory which was deemed to be in excess demand and a provision of $0.3 million for severance and benefits related to the restructuring of our operations organization.

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Product gross profit may fluctuate from period to period due to volume fluctuations, pricing pressures resulting from intense competition in our industry, and the enhanced negotiating leverage of larger customers. In addition, product gross profit may be affected by changes in the mix of products sold, channels of distribution, overhead absorption, sales discounts, increases in labor costs, excess inventory and obsolescence charges, increases in component pricing or other material costs, the introduction of new products, or the entry into new markets with different pricing and cost structures.

Service gross profit

Cost of service revenue consists primarily of costs of providing services under customer service contracts which include salaries and related expenses and other fixed costs. Service gross profit decreased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. The decrease was primarily due to decreased maintenance and installation services. Service gross profit percentage increased primarily due to a reduction in discretionary and fixed costs which were partially offset by decreased maintenance and installation services. As most of our service cost of revenue is fixed, increases or decreases in revenue can have a significant impact on service gross profit. Service gross profit may also be affected in future periods by various factors including, but not limited to, the change in mix between technical support services and advanced services, competitive and economic pricing pressures, the enhanced negotiating leverage of certain larger customers, maintenance contract renewals, and the timing of renewals.

Operating Expenses

The following table presents operating expenses (in thousands, except percentages):

	Three Months Ended
	October 29, 2011			October 30, 2010		Variance in Dollars			Variance in Percent
Research and development	$	6,485		$	7,311	$	(826	)		(11	)%
Sales and marketing		2,670			2,600		70			3	%
General and administrative		1,985			2,126		(141	)		(7	)%
Restructuring		(271	)		—		(271	)		(100	)%
Total operating expenses	$	10,869		$	12,037	$	(1,168	)		(10	)%

Research and Development Expenses

Research and development expenses consist primarily of salaries and related expenses and prototype costs relating to design, development, testing and enhancements of our products. Research and development expenses decreased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. The decrease was primarily due to lower discretionary expenses of $0.6 million and lower fixed and allocated expenses of $0.2 million as a result of our cost containment initiatives.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions and related expenses, and other sales and marketing support expenses. Sales and marketing expenses increased slightly for the three months ended October 29, 2011 compared to the same period ended October 30, 2010, primarily due to higher personnel expenses related to higher commission expense associated with higher period over period revenue. Within our existing spending levels, we continue to allocate sales and marketing resources to those geographic regions where we see the most attractive opportunities.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses, professional fees and other general corporate expenses. General and administrative expenses decreased for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. The decrease was primarily due to a decrease in discretionary spending of $0.1 million related to professional fees.

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Restructuring and Impairment Charges

During the first quarter of fiscal 2012, the Company reversed the balance of a reserve for the consolidation of its Chelmsford, Massachusetts facility totaling $0.2 million. The adjustment relates to a change in the previously estimated restructuring liability resulting from an amendment to extend the term of the facility lease and was recorded to operating expenses.

During the first quarter of fiscal 2011, the Company integrated and realigned its operations group with other functional areas to enhance operational efficiency and realize the benefits of identified synergies within the respective groups. The realignment resulted in the elimination of four positions. The Company recorded a restructuring charge of $0.3 million which was charged to cost of product revenue. This charge relates to employee separation packages including severance pay, benefits continuation and outplacement costs.

There can be no assurance that further restructuring actions may not be required in the future.

Interest and Other Income, Net

The following table presents interest and other income, net (in thousands, except percentages):

	Three Months Ended
	October 29, 2011		October 30, 2010		Variance in Dollars			Variance In Percent
Interest and other income, net	$	234	$	768	$	(534	)		(70	)%

Interest and other income net decreased $0.5 million for the three months ended October 29, 2011 compared to the same period ended October 30, 2010. The decrease was primarily due to a lower average investment balance as a result of the cash distribution in the amount of $185.4 million that was paid on December 22, 2010 and to lower interest rates in fiscal 2012.

Income Tax Expense

Income tax expense was $0.1 million for the three months ended October 29, 2011 and October 30, 2010, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets will not be realized. Therefore, we maintain a full valuation allowance. If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the net operating loss carryforwards may be utilized and the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended, (the “Code”) is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income.

In May 2006, the Company conducted a study to determine if it had undergone an ownership change within the meaning of the Code for the period from its inception through April 2006. The study indicated the occurrence of an ownership change in fiscal 1999. The losses subject to the fiscal 1999 limitation were fully utilized in fiscal 2000. The Company updated its earlier Section 382 study through July 31, 2011 and the results of the updated study showed that no subsequent ownership change within the meaning of the Code had occurred during the period from April 2006, the date of the last study, through July 31, 2011. The Company maintains a full valuation allowance against available net operating loss carryforwards and tax credits.

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Liquidity and Capital Resources

Total cash, cash equivalents and investments were $438.4 million at October 29, 2011 compared to $441.4 million at July 31, 2011. Included in the October 29, 2011 balances were cash and cash equivalents of $51.8 million, compared to $60.8 million at July 31, 2011. The decrease in cash and cash equivalents of $9.0 million was primarily attributable to cash used in investing activities of $6.7 million and cash used in operating activities of $2.5 million, partially offset by cash provided by financing activities of $0.2 million.

Net cash used in investing activities was $6.7 million and consisted of net purchases of investments of $5.9 million and purchases of property and equipment of $0.8 million.

Net cash used in operating activities was $2.5 million. Net loss was $1.6 million and included non-cash charges, including share-based compensation of $1.0 million, an inventory provision of $0.1 million and depreciation and amortization of $0.7 million. Accounts receivable increased to $9.3 million at October 29, 2011 from $8.8 million at July 31, 2011. The increase was primarily due to the increase in revenue. Our accounts receivable and days sales outstanding are impacted primarily by the timing of shipments, collections performance and timing of support contract renewals. Deferred revenue decreased to $8.8 million at October 29, 2011 from $10.9 million at July 31, 2011. The decrease resulted from the excess of deferred revenue accreted into revenue over new service billings.

Net cash provided by financing activities was $0.2 million related to proceeds from the exercise of employee stock options.

Our primary source of liquidity comes from our cash, cash equivalents and investments, which totaled $438.4 million as of October 29, 2011. Our investments are classified as available-for-sale and consist of marketable securities that are readily convertible to cash, including certificates of deposits and government securities. As of October 29, 2011, $351.4 million of investments with maturities of less than one year were classified as short-term investments. Based on our current expectations, we anticipate that some portion of our existing cash and cash equivalents and investments will be consumed by operations. Certain investments have unrealized losses and the Company’s intent and ability is to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our accounts receivable, while not considered a primary source of liquidity, represents a concentration of credit risk because the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of October 29, 2011, more than 50% of our accounts receivable balance was attributable to four of our customers. As of October 29, 2011, we do not have any outstanding debt or credit facilities, and do not anticipate entering into any debt or credit agreements in the foreseeable future. Our fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities and inventory purchase commitments. We currently intend to fund our operations, including our fixed commitments under operating leases, and any required capital expenditures using our existing cash, cash equivalents and investments.

We believe that our current cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. We will continue to consider appropriate action with respect to our cash position in light of present and anticipated business needs as well as providing a means by which our stockholders may realize value in connection with their investment.

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Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

As of October 29, 2011, our future obligations, which consist of contractual commitments for operating leases and inventory and other purchase commitments, were as follows (in thousands):

	Total		Less than 1 Year		1-3 Years		3-5 Years		Thereafter		Other
Operating leases	$	4,107	$	1,189	$	2,060	$	858	$	—	$	—
Inventory and other purchase commitments		5,994		5,994		—		—		—		—
Total	$	10,101	$	7,183	$	2,060	$	858	$	—	$	—

Payments made under operating leases will be treated as rent expense. During the first quarter of fiscal 2012 we extended the term of the lease for our facility in Chelmsford, Massachusetts, which now expires in August of 2015. Payments made for inventory purchase commitments will initially be capitalized as inventory and then be recorded as cost of product revenue as the inventory is sold or otherwise disposed of.

Reserves for unrecognized tax benefits of $1.7 million have not been included in the above table because the periods of cash settlement with the respective tax authority cannot be reasonably estimated.

Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 will be effective for the Company beginning August 1, 2012, with early adoption permitted. The Company is currently considering the appropriate presentation upon adoption.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which provides guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 will be effective for the Company beginning the first day of our third fiscal quarter, which is January 29, 2012. The Company is currently assessing the impact, if any, on its consolidated financial statements.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The primary objective of our current investment activities is to preserve investment principal while maximizing income without significantly increasing risk. We maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of securities including money market funds and government debt securities. These available-for-sale investments are subject to interest rate risk and may decline in value if market interest rates increase. If market interest rates increased immediately and uniformly by 10 percent from levels at October 29, 2011, the fair value of the portfolio would decline by approximately $0.1 million. We have the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

Exchange Rate Sensitivity

While the majority of our operations are based in the United States, our business is global, with international revenue representing 33% of total revenue in fiscal 2011 and 25% of revenue in the first three months of fiscal 2012. To date, our revenue has been primarily denominated in US dollars. Additionally, we have a development center in Shanghai, China. Currency fluctuations to date have not had a significant impact on our financial results. We expect international sales to continue to represent a significant portion of our revenue and that we will continue to incur costs in our Shanghai development center. Should our exposure to foreign currency fluctuations become material, we are prepared to hedge against such fluctuations, although we have not engaged in hedging activities to date.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of October 29, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

Limitations on Effectiveness of Controls. Our management has concluded that our disclosure controls and procedures and internal controls provide reasonable assurance that the objectives of our control system are met. However, our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that the disclosure controls and procedures or internal controls will prevent all error and/or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. The settlement

26

approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant was a class member with standing to appeal. The district court ruled that the appellant has no standing to object to the settlement. The appellant has appealed the district court’s decision. On October 25, 2011, plaintiff/appellees filed a motion to dismiss the appellant objector’s appeal and have requested that the Second Circuit consider the motion on an expedited basis.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. stockholder filed a complaint for violation of Section 16 of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s Initial Public Offering underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., in the District Court for the Western District of Washington (“District Court”) seeks recovery of short-swing profits. On April 28, 2008, the district court established a briefing schedule for motions to dismiss and ruled that all discovery be stayed pending resolution of the motions to dismiss. The District Court found the motions appropriate for oral argument which was held on January 6, 2009. On March 16, 2009, the District Court issued an order dismissing the case. On March 31, 2009, the plaintiff appealed. On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriters’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, the underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days. On April 5, 2011, Appellant filed a petition for writ of certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision. On April 15, 2011, the underwriters filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. The statute of limitations issue has been fully briefed and the Supreme Court has set oral argument for November 29, 2011.

The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. Our management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operations or financial condition.

27

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, as filed with the SEC on September 21, 2011. There have been no material changes to our risk factors from those previously disclosed in our Form 10-K. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company has not: (1) publicly announced any programs to repurchase shares of Common Stock; or (2) sold, within the last three years, Company securities that were not registered under the Securities Act.

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Item 6. Exhibits

Exhibits:

(a) List of Exhibits

Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of the Company (2)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)
3.3	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (5)
3.5	Amended and Restated By-Laws of the Company (4)
4.1	Specimen common stock certificate (1)
4.2	See Exhibits 3.1, 3.2, 3.3 and 3.4, for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company (2)(3)(4)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100.INS*	XBRL Instance Document
100.SCH*	XBRL Taxonomy Extension Schema Document
100.CAL*	XBRL Taxonomy Extension Calculation Linkbase
100.DEF*	XBRL Taxonomy Extension Definition Linkbase
100.LAB*	XBRL Taxonomy Extension Label Linkbase
100.PRE*	XBRL Taxonomy Extension Presentation Linkbase

* Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

(1) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-84635).

(2) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-30630).

(3) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 27, 2001 filed with the Securities and Exchange Commission on March 13, 2001.

(4) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2007 filed with the Securities and Exchange Commission on November 28, 2007.

(5) Incorporated by reference to Sycamore Networks, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2009.

29

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Sycamore Networks, Inc.

/s/ Paul F. Brauneis

Paul F. Brauneis

Chief Financial Officer,

Vice President, Finance and Administration, Treasurer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

Dated: December 1, 2011

30

EX-31.1

EXHIBIT 31.1 – CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel E. Smith, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Sycamore Networks, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 1, 2011

/s/    Daniel E. Smith        

Daniel E. Smith

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2 – CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Paul F. Brauneis, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Sycamore Networks, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 1, 2011

/s/    Paul F. Brauneis        

Paul F. Brauneis

Chief Financial Officer,

Vice President, Finance and Administration,

Treasurer

EX-32.1

EXHIBIT 32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending October 29, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel E. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

/s/ Daniel E. Smith

Daniel E. Smith

President and Chief Executive Officer

December 1, 2011

EX-32.2

EXHIBIT 32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending October 29, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul F. Brauneis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

/s/ Paul F. Brauneis

Paul F. Brauneis

Chief Financial Officer, Vice President,

Finance and Administration,

Treasurer

December 1, 2011

XML

Net Loss Per Share

3 Months Ended

Oct. 29, 2011

Net Loss Per Share

4. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period less unvested restricted stock. Common equivalent shares are not used in the calculation of net loss per share because the effect would be antidilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended
	October 29, 2011			October 30, 2010
Numerator:
Net loss	$	(1,614	)	$	(6,539	)
Denominator:
Weighted-average shares of common stock outstanding		28,741			28,452
Weighted-average shares subject to repurchase		—			(1	)
Shares used in per-share calculation – basic		28,741			28,451
Weighted-average shares of common stock outstanding		28,741			28,451
Weighted common stock equivalents		—			—
Shares used in per-share calculation – diluted		28,741			28,451
Net loss per share:
Basic	$	(0.06	)	$	(0.23	)
Diluted	$	(0.06	)	$	(0.23	)

Employee stock options to purchase 3.0 million shares have not been included in the computation of diluted net loss per share for the three month ended October 29, 2011 because their effect would have been antidilutive. Employee stock options to purchase 2.6 million shares have not been included in the computation of diluted net loss per share for the three ended October 30, 2010 because their effect would have been antidilutive.

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Share-Based Compensation

3 Months Ended

Oct. 29, 2011

Share-Based Compensation

3. Share-Based Compensation

The following table presents share-based compensation expense included in the Company’s consolidated statements of operations (in thousands):

	Three Months Ended
	October 29, 2011		October 30, 2010
Cost of product revenue	$	34	$	33
Cost of service revenue		117		47
Research and development		383		147
Sales and marketing		210		169
General and administrative		230		148
Share-based compensation expense	$	974	$	544

Stock option activity under all of the Company’s stock plans since July 31, 2011 is summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding at July 31, 2011		2,993,840		$	20.33		5.59
Options granted		4,750			16.82
Options exercised		(10,620	)		16.95
Options cancelled		(66,169	)		21.50
Outstanding at October 29, 2011		2,921,801		$	20.31		5.32
Options vested and expected to vest		2,825,726		$	20.30		5.19
Options exercisable at end of period		1,805,479		$	20.23		2.98
Weighted average fair value of options granted for the three months ended October 29, 2011	$	7.58

The intrinsic value of options exercised during the three months ended October 29, 2011 was $0.01 million.

As of October 29, 2011, there was $7.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted-average period of 2.3 years.

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Oct. 29, 2011	Jul. 31, 2011
Current assets:
Cash and cash equivalents	$ 51,781	$ 60,765
Short-term investments	351,430	335,847
Accounts receivable, net of allowance for doubtful accounts of $72 at October 29, 2011 and July 31, 2011	9,336	8,764
Inventories	9,692	11,537
Prepaid and other current assets	1,182	1,770
Total current assets	423,421	418,683
Property and equipment, net	6,133	5,978
Long-term investments	35,160	44,786
Other assets	292	290
Total assets	465,006	469,737
Current liabilities:
Accounts payable	606	1,664
Accrued compensation	2,121	2,325
Accrued warranty	1,136	1,140
Accrued expenses	1,313	1,889
Accrued restructuring costs	4	294
Deferred revenue	7,041	9,141
Other current liabilities	913	1,013
Total current liabilities	13,134	17,466
Long term deferred revenue	1,724	1,812
Other long term liabilities	1,743	1,702
Total liabilities	16,601	20,980
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding
Common stock, $.001 par value; 250,000 shares authorized; 28,749 and 28,739 shares issued and outstanding at October 29, 2011 and July 31, 2011, respectively	29	29
Additional paid-in capital	1,584,278	1,583,124
Accumulated deficit	(1,135,572)	(1,133,958)
Accumulated other comprehensive income (loss)	(330)	(438)
Total stockholders' equity	448,405	448,757
Total liabilities and stockholders' equity	$ 465,006	$ 469,737

XML

Description of Business

3 Months Ended

Oct. 29, 2011

Description of Business

1. Description of Business

The Company operates in one industry segment serving two market areas, bandwidth management and mobile broadband optimization. We develop and market Intelligent Bandwidth Management solutions for fixed line and mobile network operators worldwide and provide services associated with such products. Our current and prospective customers include domestic and international wireline and wireless network service providers, utility companies, large enterprises, multiple systems operators and government entities (collectively referred to as “service providers”). Our existing bandwidth management portfolio of optical switches, multiservice cross-connects and multiservice access platforms serve applications that extend across the network infrastructure, from multiservice access and regional backhaul to the optical core. We also develop and market a mobile broadband optimization solution designed to help mobile operators reduce congestion in mobile access networks. We believe our products enable network operators to efficiently and cost-effectively provision and manage network capacity to support a wide range of converged services such as voice, video and data. As used in this report, “Sycamore,” “we,” “us,” or “our” refers collectively to Sycamore Networks, Inc. (the “Company”) and its subsidiaries.

XML

Basis of Presentation

3 Months Ended

Oct. 29, 2011

Basis of Presentation

2. Basis of Presentation

The accompanying financial data as of October 29, 2011 and for the three months ended October 29, 2011 and October 30, 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC for the fiscal year ended July 31, 2011.

In the opinion of management, the accompanying financial statements include all adjustments necessary to state fairly the financial position as of October 29, 2011 and results of operations and cash flows for the periods ended October 29, 2011 and October 30, 2010. The results of operations and cash flows for the period ended October 29, 2011 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and judgments relied upon in preparing these financial statements include those related to revenue recognition, allowance for doubtful accounts, warranty obligations, inventory allowance, litigation and other contingencies, and share-based compensation. Estimates, judgments, and assumptions are reviewed periodically by management and the effects of revisions are reflected in the consolidated financial statements in the period in which they are made.

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Oct. 29, 2011	Jul. 31, 2011
Accounts receivable, allowance for doubtful accounts	$ 72	$ 72
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	5,000	5,000
Preferred stock, issued	0	0
Preferred stock, outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	250,000	250,000
Common stock, shares issued	28,749	28,739
Common stock, shares outstanding	28,749	28,739

XML

Fair Value Measurements

3 Months Ended

Oct. 29, 2011

Fair Value Measurements

12. Fair Value Measurements

The fair value measurement rules establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities of the Company measured at fair value on a recurring basis as of October 29, 2011, are summarized as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
Description	October 29, 2011		Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash Equivalents	$	51,781	$	51,781	$	—	$	—
Corporate Obligations		15,233		15,233		—		—
Government Obligations		371,357		371,357		—		—
Total assets	$	438,371	$	438,371	$	—	$	—

Cash Equivalents

Cash equivalents of $51.8 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $15.2 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $371.4 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Assets and liabilities of the Company measured at fair value on a recurring basis as of July 31, 2011, are summarized as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
Description	July 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash Equivalents	$	60,765	$	60,765	$	—	$	—
Corporate Obligations		26,856		26,856		—		—
Government Obligations		353,777		353,777		—		—
Total assets	$	441,398	$	441,398	$	—	$	—

Cash Equivalents

Cash equivalents of $60.8 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $26.9 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $353.8 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

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Document and Entity Information	3 Months Ended
	Oct. 29, 2011	Nov. 21, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Oct. 29, 2011
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Trading Symbol	SCMR
Entity Registrant Name	SYCAMORE NETWORKS INC
Entity Central Index Key	0001092367
Current Fiscal Year End Date	--07-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		28,749,971

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Oct. 29, 2011	Oct. 30, 2010
Revenue:
Product	$ 9,898	$ 5,724
Service	5,482	5,985
Total revenue	15,380	11,709
Cost of revenue:
Product	4,368	4,673
Service	1,894	2,212
Total cost of revenue	6,262	6,885
Gross profit	9,118	4,824
Operating expenses:
Research and development	6,485	7,311
Sales and marketing	2,670	2,600
General and administrative	1,985	2,126
Restructuring	(271)
Total operating expenses	10,869	12,037
Loss from operations	(1,751)	(7,213)
Interest and other income, net	234	768
Loss before income taxes	(1,517)	(6,445)
Income tax expense	97	94
Net loss	$ (1,614)	$ (6,539)
Net loss per share:
Basic	$ (0.06)	$ (0.23)
Diluted	$ (0.06)	$ (0.23)
Weighted average shares outstanding:
Basic	28,741	28,451
Diluted	28,741	28,451

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Comprehensive Loss

3 Months Ended

Oct. 29, 2011

Comprehensive Loss

7. Comprehensive Loss

The components of comprehensive loss consisted of the following (in thousands):

	Three Months Ended
	October 29, 2011			October 30, 2010
Net loss	$	(1,614	)	$	(6,539	)
Unrealized gain (loss) on investments		108			(373	)
Comprehensive loss	$	(1,506	)	$	(6,912	)

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Inventories

3 Months Ended

Oct. 29, 2011

Inventories

6. Inventories

Inventories consisted of the following (in thousands):

	October 29, 2011		July 31, 2011
Raw materials	$	4,256	$	4,398
Work in process		1,526		2,193
Finished goods		3,910		4,946
Total	$	9,692	$	11,537

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Recent Accounting Pronouncements

3 Months Ended

Oct. 29, 2011

Recent Accounting Pronouncements

10. Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 will be effective for the Company beginning August 1, 2012, with early adoption permitted. The Company is currently considering the appropriate presentation upon adoption.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which provides guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 will be effective for the Company beginning the first day of our third fiscal quarter, which is January 29, 2012. The Company is currently assessing the impact, if any, on its consolidated financial statements.

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Restructuring Charges

3 Months Ended

Oct. 29, 2011

Restructuring Charges

8. Restructuring Charges

During the first quarter of fiscal 2012, the Company reversed the balance of a reserve for the consolidation of its Chelmsford, Massachusetts facility totaling $0.2 million. The adjustment relates to a change in the previously estimated restructuring liability resulting from an amendment to extend the term of the facility lease and was recorded to operating expenses.

During the first quarter of fiscal 2011, the Company integrated and realigned its operations group with other functional areas to enhance operational efficiency and realize the benefits of identified synergies within the respective groups. The realignment resulted in the elimination of four positions. The Company recorded a restructuring charge of $0.3 million which was charged to cost of product revenue. This charge relates to employee separation packages including severance pay, benefits continuation and outplacement costs.

There can be no assurance that further restructuring actions may not be required in the future.

As of October 29, 2011, the Company has substantially completed its cash restructuring payments. A roll-forward of the restructuring accrual is summarized below (in thousands):

	Accrual Balance at July  31, 2011		Adjustments			Payments		Accrual Balance at October 29, 2011
Workforce reduction	$	67	$	—		$	63	$	4
Facility consolidations		227		(227	)		—		—
Total	$	294	$	(227	)	$	63	$	4

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Income Taxes

3 Months Ended

Oct. 29, 2011

Income Taxes

9. Income Taxes

As of October 29, 2011 and July 31, 2011, the Company had a liability of $1.7 million for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate.

As of October 29, 2011 and July 31, 2011, the Company had $0.5 million and $0.4 million, respectively, accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.

The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2005 through July 31, 2011. However, limited audit adjustments could be made to federal and state tax returns in earlier years resulting in a reducuction of net operating loss carryforwards.

Income tax expense was $0.1 million for the three months ended October 29, 2011 and October 30, 2010, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets will not be realized. Therefore, we maintain a full valuation allowance. If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the net operating loss carryforwards may be utilized and the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended, (the “Code”) is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income.

In May 2006, the Company conducted a study to determine if it had undergone an ownership change within the meaning of the Code for the period from its inception through April 2006. The study indicated the occurrence of an ownership change in fiscal 1999. The losses subject to the fiscal 1999 limitation were fully utilized in fiscal 2000. The Company updated its earlier Section 382 study through July 31, 2011 and the results of the updated study showed that no subsequent ownership change within the meaning of the Code had occurred during the period from April 2006, the date of the last study, through July 31, 2011. The Company maintains a full valuation allowance against available net operating loss carryforwards and tax credits.

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Commitments and Contingencies

3 Months Ended

Oct. 29, 2011

Commitments and Contingencies

11. Commitments and Contingencies

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant was a class member with standing to appeal. The district court ruled that the appellant has no standing to object to the settlement. The appellant has appealed the district court’s decision. On October 25, 2011, plaintiff/appellees filed a motion to dismiss the appellant objector’s appeal and have requested that the Second Circuit consider the motion on an expedited basis.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. stockholder filed a complaint for violation of Section 16 of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s Initial Public Offering underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., in the District Court for the Western District of Washington (“District Court”) seeks recovery of short-swing profits. On April 28, 2008, the district court established a briefing schedule for motions to dismiss and ruled that all discovery be stayed pending resolution of the motions to dismiss. The District Court found the motions appropriate for oral argument which was held on January 6, 2009. On March 16, 2009, the District Court issued an order dismissing the case. On March 31, 2009, the plaintiff appealed. On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriters’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, the underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days. On April 5, 2011, Appellant filed a petition for writ of certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision. On April 15, 2011, the underwriters filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. The statute of limitations issue has been fully briefed and the Supreme Court has set oral argument for November 29, 2011.

The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. Our management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operations or financial condition.

Guarantees

As of October 29, 2011, the Company’s guarantees requiring disclosure consist of its accrued warranty obligations, indemnifications for intellectual property infringement claims and indemnifications for officers and directors.

In the normal course of business, the Company may also agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company with respect to certain matters. The Company has agreed to hold these other parties harmless against losses arising from a breach of representations or covenants, 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 determine 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. Accordingly, the Company has not recorded a liability for these agreements at October 29, 2011 or July 31, 2011 as the Company believes the fair value is not material.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not limited; however, the Company maintains liability insurance coverage that may enable the Company to recover all or a portion of any future amounts paid. The Company did not incur any expense under these arrangements in the first quarter of fiscal year 2012 or fiscal year 2011. Due to the Company’s inability to estimate liabilities in connection with these agreements, if and when they might be incurred, the Company has not recorded any liability for these agreements at October 29, 2011 or July 31, 2011.

Warranty Liability

The following table summarizes the activity related to product warranty liability (in thousands):

	Three Months Ended
	October 29, 2011			October 30, 2010
Beginning balance	$	1,140		$	1,720
Accruals /adjustments		69			57
Settlements		(73	)		(97	)
Ending balance	$	1,136		$	1,680

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Oct. 29, 2011	Oct. 30, 2010
Cash flows from operating activities:
Net loss	$ (1,614)	$ (6,539)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	716	1,088
Share-based compensation	974	544
Adjustments to provision for excess and obsolete inventory	73	859
Changes in operating assets and liabilities:
Accounts receivable	(572)	7,694
Inventories	1,725	(310)
Prepaids and other assets	586	356
Deferred revenue	(2,188)	(3,238)
Accounts payable	(1,058)	(851)
Accrued expenses and other current liabilities	(843)	(651)
Accrued restructuring costs	(290)	271
Net cash used in operating activities	(2,491)	(777)
Cash flows from investing activities:
Purchases of property and equipment	(824)	(126)
Purchases of investments	(51,719)	(131,305)
Proceeds from maturities and sales of investments	45,870	234,413
Net cash provided by (used in) investing activities	(6,673)	102,982
Cash flows from financing activities:
Proceeds from issuance of common stock	180	2,224
Net cash provided by financing activities	180	2,224
Net increase (decrease) in cash and cash equivalents	(8,984)	104,429
Cash and cash equivalents, beginning of period	60,765	104,416
Cash and cash equivalents, end of period	51,781	208,845
Cash paid for income taxes	$ 31	$ 28

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Cash Equivalents and Marketable Securities

3 Months Ended

Oct. 29, 2011

Cash Equivalents and Marketable Securities

5. Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less at the date of acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. At October 29, 2011 the Company’s short and long term investments, as classified on the balance sheet, were $351.4 million and $35.2 million, respectively. These investments are marketable securities classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of short and long term investments is determined based on quoted market prices at the reporting date for those instruments. As of October 29, 2011 and July 31, 2011, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

October 29, 2011:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	51,781	$	—	$	—		$	51,781
Corporate securities		15,230		3		—			15,233
Government securities		371,374		52		(69	)		371,357
Total	$	438,385	$	55	$	(69	)	$	438,371

July 31, 2011:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	60,765	$	—	$	—		$	60,765
Corporate securities		26,819		37		—			26,856
Government securities		353,907		27		(157	)		353,777
Total	$	441,491	$	64	$	(157	)	$	441,398