2. Summary of Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies as described below. The Company believes these accounting policies are significant because changes in such estimates can materially affect the amount of the Company’s reported net income or loss.

Basis of Consolidation and Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

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 at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Cash Distributions and Reverse Stock Split

On December 22, 2010, the Company made a cash distribution to its stockholders of $6.50 per share of its common stock, par value $0.001, $185.4 million in the aggregate. As a result of having an accumulated deficit, the cash distribution was recorded as a reduction to additional paid in capital.

On December 15, 2009, the Company made a cash distribution to its stockholders of $1.00 per share of its common stock, par value $0.001, $284.3 million in the aggregate (or $10.00 per share of common stock after giving effect to the following reverse stock split) and, at the close of business on December 21, 2009, the Company effected a 1-for-10 reverse stock split of its common stock whereby every ten shares of its issued and outstanding common stock at the effective time were combined into one share of common stock. All periods presented in this report have been adjusted to give effect to the reverse stock split. As a result of having an accumulated deficit, the cash distribution was recorded as a reduction to additional paid in capital.

In connection with the reverse stock split, the number of shares of common stock authorized under Company’s Amended and Restated Certificate of Incorporation was reduced from 2.5 billion to 250 million shares, without any change in par value per share of common stock. The number of shares of the Company’s authorized preferred stock was not changed in connection with the reverse stock split and remains at 5 million shares.

See Note 14: “Subsequent Event” for additional information regarding cash distributions.

Cash Equivalents and Investments

Cash equivalents are short-term, highly liquid investments with original or remaining 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. The Company’s investments are 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 investments is determined based on quoted market prices at the reporting date for those instruments. The Company would recognize an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. As of July 31, 2012 and 2011, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

July 31, 2012:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	136,654	$	—	$	—		$	136,654
Government securities		302,695		66		(22	)		302,739

Total	$	439,349	$	66	$	(22	)	$	439,393

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

At July 31, 2012, contractual maturities of the Company’s investment securities were as follows (in thousands):


	Amortized Cost		Fair Market Value
Less than one year	$	234,937	$	234,965
Due in one to three years		67,758		67,774

Total	$	302,695	$	302,739

The following tables provide the breakdown of the investments with unrealized losses at July 31, 2012 and 2011 (in thousands):

July 31, 2012


	Less than 12 Months					12 Months or Greater				Total
	Fair Market Value		Gross Unrealized Losses			Fair Market Value		Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses
Government securities	$	96,449	$	(22	)	$	—	$	—	$	96,449	$	(22	)

Total	$	96,449	$	(22	)	$	—	$	—	$	96,449	$	(22	)

July 31, 2011


	Less than 12 Months					12 Months or Greater				Total
	Fair Market Value		Gross Unrealized Losses			Fair Market Value		Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses
Government securities	$	283,591	$	(157	)	$	—	$	—	$	283,591	$	(157	)

Total	$	283,591	$	(157	)	$	—	$	—	$	283,591	$	(157	)

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value).

Revenue Recognition

The Company sells primarily bundled hardware and software products that function together to deliver the tangible products’ essential functionality (referred to herein collectively as “hardware” products), as well as services related to those hardware products. Services include maintenance arrangements for the products with terms typically of one year, as well as to a lesser extent, professional services and training services. The Company sells a limited amount of stand-alone software products.

The Company recognizes revenue when all of the following criteria have been met:

•

Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of sales contracts or agreements and customer purchase orders;

•

Delivery has occurred. Delivery occurs when title and risk of loss are transferred to the customer or the Company receives written evidence of customer acceptance, when applicable, to verify delivery or performance;

•

Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment; and

•

Collectability is reasonably assured. Collectability is assessed based on the creditworthiness of the customer as determined by credit checks and the customer’s payment history with the Company.

The Company adopted Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) and ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”) on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after August 1, 2010. ASU 2009-14 amends industry-specific revenue accounting guidance for software and software-related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As a result of adopting the new guidance, nearly all of the Company’s products and related services are no longer accounted for under the software revenue recognition rules, Accounting Standards Codification (“ASC”) Topic 985.

For fiscal 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, particularly hardware products and related services, revenue is allocated to each element based on a selling price hierarchy, using a relative selling price allocation approach. The selling price for a deliverable is based on our vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company establishes VSOE for its services based on the price charged for each service element when sold separately. The Company is typically not able to determine TPE for its hardware products or services because the Company’s various product and service offerings contain a significant level of differentiation and therefore, comparable pricing of competitors’ products and services with similar functionality cannot be obtained. The Company determines BESP for products and services based on an assessment of multiple factors, including, but not limited to, pricing practices, customer classes and distribution channels. We then recognize revenue allocated to each deliverable in accordance with the four criteria identified above. Our multiple element arrangements typically include both products and services, with maintenance being the most common service element. Maintenance services are delivered over the contractual support period which can vary in length, but typically is twelve months. In those limited instances where both hardware and stand-alone software products are included in a multiple element arrangement, the hardware and related services and the software and related services are separated and then allocated a pro rata portion of the total transaction value based upon BESP of each of the hardware and software groups, using a relative selling price allocation approach. The hardware group is then accounted for under the ASC Topic 605 guidance described above and the software group is accounted for under the ASC Topic 985 guidance.

For transactions initiated prior to August 1, 2010, revenue for arrangements with multiple elements is accounted for primarily pursuant to ASC Topic 985 because software is considered more than incidental to the functionality of the product. The transaction price is allocated to each element using the residual method based on the VSOE of fair value of the undelivered items pursuant to Topic 985. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. If VSOE of fair value of one or more undelivered items does not exist, revenue from the entire arrangement is deferred and recognized at the earlier of (i) delivery of those elements or (ii) when fair value can be established unless maintenance is the only undelivered element, in which case, the entire arrangement fee is recognized ratably over the contractual support period.

As a result of the adoption of ASU 2009-13 and ASU 2009-14, revenue for the year ended July 31, 2011, was approximately $0.7 million higher than the revenue that would have been recorded under the prior revenue recognition guidance. The Company entered into a multiple element arrangement that included hardware and stand-alone software deliverables. The hardware element was delivered during the fiscal year and the software element was undelivered as of July 31, 2011. The Company recognized $0.7 million in revenue in fiscal 2011 corresponding to the hardware elements based on BESP and deferred $0.1 million corresponding to the stand-alone software elements. Under the prior revenue recognition guidance, the Company would have deferred $0.8 million for this multiple element transaction because the Company does not have VSOE for its software products and the software in this transaction was undelivered.

Service revenues include revenue from maintenance, training, and installation services. Revenue from maintenance service contracts is deferred and recognized ratably over the contractual support period. Revenue from training and installation services is recognized as the services are completed or ratably over the service period.

Share-Based Compensation

The Company accounts for share-based compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The Company has estimated the fair value of share-based options on the date of grant using the Black Scholes pricing model, which is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk free interest rate and expected dividends. The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. This periodic review may result in an adjustment of estimated depreciable lives or asset impairment. When indicators of impairment are present, the carrying values of the asset are evaluated in relation to its operating performance and future undiscounted cash flows of the underlying business. If the future undiscounted cash flows are less than the book value, impairment exists. The impairment is measured as the difference between the book value and the fair value of the underlying asset. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

Property and Equipment

Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method, based upon the following asset lives:


Computer and telecommunications equipment .		2 to 3 years
Computer software .		3 years
Furniture and office equipment .		5 years
Leasehold improvements .		Shorter of lease term or useful life of asset

The cost of significant additions and improvements is capitalized and depreciated while expenditures for maintenance and repairs are charged to expense as incurred. Costs related to internal use software are capitalized. Upon retirement or sale of an asset, the cost and related accumulated depreciation of the assets are removed from the accounts and any resulting gain or loss is reflected in the determination of net income or loss. See Note 4: “Property and Equipment”

Research and Development and Software Development Costs

All research and development costs are expensed as incurred. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Technological feasibility is demonstrated by the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility would be capitalized until the product is available for general release to customers and amortized based on the greater of (i) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (ii) the straight-line method over the remaining estimated life of the product. To date, the period between achieving technological feasibility and the general availability of the related products has been short and software development costs qualifying for capitalization have not been material. Accordingly, the Company has not capitalized any software development costs.

Income Taxes

Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recorded based on temporary differences between the financial statement amounts and the tax bases of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company periodically evaluates the realization of its net deferred tax assets and records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We account for uncertain tax positions by prescribing the minimum recognition threshold a tax position must meet before being recognized in the Company’s financial statements. Generally, recognition is limited to situations where, based solely on the technical merits of the tax position, the Company has determined that the tax position is more likely than not to be sustained on audit.

Concentrations and Significant Customer Information

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, investments and accounts receivable. The Company invests its excess cash primarily in deposits with commercial banks, high-quality corporate securities and U.S. government securities. For the year ended July 31, 2012, three customers accounted for 21%, 16% and 12% of the Company’s revenue. For the year ended July 31, 2011, two customers accounted for 14% and 11% of the Company’s revenue. For the year ended July 31, 2010, three customers accounted for 13%, 12% and 12% of the Company’s revenue. The Company generally does not require collateral for sales to customers, and the Company’s accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. At July 31, 2012, more than 55% of the Company’s accounts receivable balance was attributable to two customers. At July 31, 2011, more than 52% of the Company’s accounts receivable balance was attributable to five customers.

Allowance for Doubtful Accounts

The Company evaluates its outstanding accounts receivable balances on an ongoing basis to determine whether an allowance for doubtful accounts should be recorded. Activity in the Company’s allowance for doubtful accounts is summarized as follows (in thousands):


	Year Ended July 31,
	2012			2011		2010
Beginning balance .	$	72		$	72	$	72
Adjustment		(30	)		—		—
Write off		—			—		—

Ending balance .	$	42		$	72	$	72

Accumulated Other Comprehensive Loss

For all periods presented, the unrealized gain or loss on investments is included in accumulated other comprehensive loss. For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries, which are immaterial for all periods presented, are included in accumulated other comprehensive income (loss).

Net Loss Per Share

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


	Year Ended July 31,
	2012			2011			2010
Net loss .	$	(12,924	)	$	(17,798	)	$	(14,805	)
Denominator:
Weighted-average shares of common stock outstanding .		28,807			28,567			28,432
Weighted-average shares subject to repurchase .		—			—			(10	)

Shares used in per-share calculation—basic .		28,807			28,567			28,422

Weighted-average shares of common stock outstanding .		28,807			28,567			28,422
Weighted common stock equivalents .		—			—			—

Shares used in per-share calculation—diluted .		28,807			28,567			28,422

Net loss per share:
Basic . .	$	(0.45	)	$	(0.62	)	$	(0.52	)

Diluted .	$	(0.45	)	$	(0.62	)	$	(0.52	)

Options to purchase 2.5 million, 1.4 million, 2.9 million shares of common stock have not been included in the computation of diluted net loss per share for the years ended July 31, 2012, 2011 and 2010 because their effect would have been antidilutive.

Segment Information

The Company’s chief operating decision maker is its President and Chief Executive Officer. Decisions regarding resource allocation and assessing performance are made at the company level, as one segment. For the year ended July 31, 2012, the geographical distribution of revenue was as follows: United States – 79%, United Kingdom – 6%, and all other countries – 15%. For the year ended July 31, 2011, the geographical distribution of revenue was as follows: United States – 67%, Netherlands – 9%, and all other countries – 24%. For the year ended July 31, 2010, the geographical distribution of revenue was as follows: United States – 62%, Korea – 13%, and all other countries – 25%. Long-lived assets consisting of property and equipment are primarily located in the United States and China.

Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (the “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. In addition, in December 2011, the FASB issued an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. 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 and its subsidiaries beginning August 1, 2012. 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 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 was effective for the Company and its subsidiaries beginning January 29, 2012, the first day of our third fiscal quarter. The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements but resulted in the presentation of enhanced disclosures.