Overview
We are a leading supplier of networking products and services for businesses and organizations of many types and sizes, including global enterprises, and service providers such as telecommunication firms, cable operators and mobile carriers. Our business model is focused on two key markets, namely our Data Storage business, where we offer storage area network ("SAN") backbones, directors, fabrics, switches, host bus adapters ("HBAs"), and server virtualization solutions, and our Ethernet business, where we offer modular and stackable solutions, Ethernet fabrics, converged network products, as well as application delivery, security and wireless solutions.
Growth opportunities in the Data Storage market are expected to be driven by key customer IT initiatives such as server virtualization, enterprise mobility, data center consolidation, migration to higher performance technologies and "cloud" computing initiatives. Our Ethernet business strategies are intended to increase new Ethernet accounts, and expand our market share. We plan to continue to support our Data Storage and Ethernet growth plans by enhancing our existing partnerships and forming new ones primarily through building out a two-tier distribution channel, through continuous innovation, new product introductions, and through investing in sales and marketing.
We continue to face multiple challenges, including aggressive price discounting from competitors, rapid adoption of new technologies by customers, the uncertainty in the worldwide macroeconomic climate and its impact on IT spending patterns globally, as well as the federal government spending in the United States. We are also cautious about the stability and health of certain international markets, including China and Europe, and current global and country specific dynamics, including inflationary risks in China and the continuing sovereign debt risk in Europe. These factors may impact our business and that of our partners. While the diversification of our business model helps mitigate the effect of some of these challenges and we expect IT spending levels to generally rise in the long-term, it is generally difficult to offset short-term reductions of IT spending.
We expect the number of Data Storage and Ethernet products we ship to fluctuate depending on the demand for our existing and recently introduced products, sales support for our products from our new distribution and resale partners as well as the timing of product transitions by our original equipment manufacturer ("OEM") partners. The average selling prices per port for our Data Storage and Ethernet products have typically declined over time in the past and will likely continue to decline in the future.
Our plans for our operating cash flows are to build our cash balance, reduce our existing term loan and repurchase our stock to offset the dilutive effects of our equity award programs. From time-to-time we may also opportunistically repurchase our stock.
Results of Operations
Our results of operations for the three and six months ended April 28, 2012 and April 30, 2011 are reported in this discussion and analysis as a percentage of total net revenues, except for gross margin for each segment, which is presented as a percentage of the respective segment net revenues.
Revenues. Our revenues are derived primarily from sales of our Data Storage products, Ethernet products, and Support and Services related to these products which we call Global Services.

Our total net revenues are summarized as follows (in thousands, except percentages):

                                     Three Months Ended
                       April 28,    % of Net     April 30,    % of Net      Increase/        %
                         2012       Revenues       2011       Revenues     (Decrease)      Change
Data Storage Products $  342,922       63.1 %   $  328,836       60.0 %   $    14,086       4.3  %
Ethernet Products        113,182       20.8 %      128,659       23.4 %       (15,477 )   (12.0 )%
Global Services           87,335       16.1 %       90,869       16.6 %        (3,534 )    (3.9 )%
Total net revenues    $  543,439      100.0 %   $  548,364      100.0 %   $    (4,925 )    (0.9 )%


                                       Six Months Ended
                       April 28,     % of Net     April 30,     % of Net      Increase/        %
                          2012       Revenues        2011       Revenues     (Decrease)     Change
Data Storage Products $   695,794       63.0 %   $   659,739       60.3 %   $    36,055      5.5  %
Ethernet Products         236,612       21.4 %       254,785       23.3 %       (18,173 )   (7.1 )%
Global Services           171,675       15.6 %       179,596       16.4 %        (7,921 )   (4.4 )%
Total net revenues    $ 1,104,081      100.0 %   $ 1,094,120      100.0 %   $     9,961      0.9  %

The decrease in total net revenues for the three months ended April 28, 2012 compared to the three months ended April 30, 2011 was due to lower revenues from Ethernet products and Global Services offerings partially offset by higher Data Storage products revenues.

• The increase in Data Storage product revenues for the period was driven by our high-end, higher bandwidth Director products in the three months ended April 28, 2012. The number of ports shipped during the three months ended April 28, 2012 decreased by 2%, offset by an increase of 6% in average selling price per port due to a favorable product mix shift;

• The decrease in Ethernet product revenues was due to lower revenues from our enterprise and federal customers which was partially offset by higher revenues from our service provider customers. Our Ethernet business continued to be impacted by slower Federal spending and a more competitive Enterprise environment. In addition, Enterprise business revenue decreased due in part to the transition to a two-tier distribution channel model that adversely impacted sales volumes and average selling prices; and

• The decrease in Global Services revenues was primarily attributed to the sale of Strategic Business Systems, Inc. ("SBS"), a wholly-owned subsidiary of the Company, which the Company sold during the fourth quarter of fiscal year 2011.

The increase in total net revenues for the six months ended April 28, 2012 compared to the six months ended April 30, 2011 reflects higher sales of our Data Storage products, partially offset by lower revenues from our Ethernet products and Global Services offerings.

• The increase in Data Storage product revenues for the period was driven by our high-end, higher bandwidth Director and Switch products in the six months ended April 28, 2012. The number of ports shipped during the six months ended April 28, 2012 increased by 1%, and average selling price per port increased by 4%;

• The decrease in Ethernet product revenues reflects lower revenues from our enterprise and federal customers. Our Ethernet business continued to be impacted by slower Federal spending and the competitive Enterprise environment. In addition, Enterprise business revenue decreased due in part to the transition to a two-tier distribution channel model that adversely impacted sales volumes and average selling prices; and

• The decrease in Global Services revenues was primarily attributed to the sale of SBS, a wholly-owned subsidiary of the Company, which the Company sold during the fourth quarter of fiscal year 2011.

Our total net revenues by geographical area are summarized as follows (in thousands, except percentages):

                                         Three Months Ended
                         April 28,      % of Net     April 30,      % of Net      Increase/         %
                            2012        Revenues        2011        Revenues     (Decrease)       Change
United States           $  354,009         65.1 %   $  338,581         61.7 %   $    15,428         4.6  %
Europe, the Middle East
and Africa                 109,985         20.2 %      122,829         22.4 %       (12,844 )     (10.5 )%
Asia Pacific                43,809          8.1 %       56,557         10.3 %       (12,748 )     (22.5 )%
Japan                       23,985          4.4 %       19,485          3.6 %         4,500        23.1  %
Canada, Central and
South America               11,651          2.2 %       10,912          2.0 %           739         6.8  %
Total net revenues      $  543,439        100.0 %   $  548,364        100.0 %   $    (4,925 )      (0.9 )%

                                                Six Months Ended
                                              % of Net                          % of Net      Increase/         %
                          April 28, 2012      Revenues      April 30, 2011      Revenues     (Decrease)       Change
United States           $        695,643         63.0 %   $        663,247         60.6 %   $    32,396         4.9  %
Europe, the Middle East
and Africa                       242,859         22.0 %            262,865         24.0 %       (20,006 )      (7.6 )%
Asia Pacific                      99,398          9.0 %            110,053         10.1 %       (10,655 )      (9.7 )%
Japan                             42,629          3.9 %             36,425          3.3 %         6,204        17.0  %
Canada, Central and
South America                     23,552          2.1 %             21,530          2.0 %         2,022         9.4  %
Total net revenues      $      1,104,081        100.0 %   $      1,094,120        100.0 %   $     9,961         0.9  %

International revenues decreased slightly as a percentage of total net revenues for the three and six months ended April 28, 2012 compared to the three and six months ended April 30, 2011 as a result of decreased product sales volumes in Europe, the Middle East and Africa (''EMEA'') and the Asia Pacific region. Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM partners take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM partners, but we believe that international revenues comprise a larger percentage of our total net revenues than the attributed revenues may indicate.
A significant portion of our revenues is concentrated among a relatively small number of OEM customers. For the three months ended April 28, 2012, four customers accounted for 20%, 15%, 13% and 10%, respectively, of the Company's total net revenues for a combined total of 58% of total net revenues. For the three months ended April 30, 2011, four customers accounted for 15%, 14%, 13% and 11%, respectively, of the Company's total net revenues for a combined total of 53% of total net revenues. We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM partners and to the United States ("U.S.") federal government and its individual agencies through our distributors. Therefore, the loss of, or a decrease in the level of sales to, or a change in the ordering pattern of any one of these customers could seriously harm our financial condition and results of operations.

Gross margin. Gross margin as stated below is indicated as a percentage of the respective segment net revenues, except for total gross margin, which is stated as a percentage of total net revenues. Gross margin is summarized as follows (in thousands, except percentages):

                                         Three Months Ended
                         April 28,      % of Net     April 30,      % of Net      Increase/      % Points
                            2012        Revenues        2011        Revenues     (Decrease)       Change
Data Storage Products   $  252,565         73.7 %   $  231,005         70.2 %   $    21,560         3.5  %
Ethernet Products           39,362         34.8 %       55,415         43.1 %       (16,053 )      (8.3 )%
Global Services             45,155         51.7 %       42,189         46.4 %         2,966         5.3  %
Total gross margin      $  337,082         62.0 %   $  328,609         59.9 %   $     8,473         2.1  %


                                          Six Months Ended
                         April 28,      % of Net     April 30,      % of Net      Increase/      % Points
                            2012        Revenues        2011        Revenues     (Decrease)       Change
Data Storage Products   $  509,599         73.2 %   $  461,436         69.9 %   $    48,163         3.3  %
Ethernet Products           83,223         35.2 %      104,397         41.0 %       (21,174 )      (5.8 )%
Global Services             89,029         51.9 %       83,659         46.6 %         5,370         5.3  %
Total gross margin      $  681,851         61.8 %   $  649,492         59.4 %   $    32,359         2.4  %

For the three months ended April 28, 2012 compared to the three months ended April 30, 2011, total gross margin increased in absolute dollars and percentage due to an increase in margins on Data Storage products and Global Services offerings and a favorable mix due to the relative increased volume of Data Storage products which yield higher gross margins. This was partially offset by a decrease in margins on Ethernet products.
Gross margin percentage by reportable segment increased or decreased for the three months ended April 28, 2012 compared to the three months ended April 30, 2011 primarily due to the following factors (the percentages below reflect the impact on gross margin):

• Data Storage gross margins relative to net revenues increased due to a 1.2% decrease in product costs relative to net revenues. Additionally, amortization of Data Storage related intangible assets decreased by 1.0% and other manufacturing costs decreased by 1.3%, both relative to net revenues;

• Ethernet products gross margins relative to net revenues decreased due to a 2.3% increase in product costs relative to net revenues driven by the impact of lower average selling prices and product mix, a 5.0% increase in manufacturing costs overhead relative to lower revenues, which was offset partially by an improvement in excess and obsolescence inventory reserves. Additionally, amortization of Ethernet products related intangible assets increased by approximately 1.0%, relative to net revenues and;

• Global Services gross margins relative to net revenues increased due to a 5.3% decrease in service and support costs, primarily from decreased headcount as a result of the sale of SBS.

For the six months ended April 28, 2012 compared to the six months ended April 30, 2011, total gross margin increased in absolute dollars and percentage due to an increase in margins on Data Storage products and Global Services offerings and a favorable mix due to the relative increased volume of Data Storage products which yield higher gross margins. This was partially offset by a decrease in margins on Ethernet products.

Gross margin percentage by reportable segment increased or decreased for the six months ended April 28, 2012 compared to the six months ended April 30, 2011 primarily due to the following factors (the percentages below reflect the impact on gross margin):

• Data Storage gross margins relative to net revenues increased due to a 1.5% decrease in product costs relative to net revenues. Additionally, amortization of Data Storage related intangible assets decreased by 0.5% and other manufacturing costs relative to net revenues decreased by 1.3%;

• Ethernet products gross margins relative to net revenues decreased due to a 2.1% increase in product costs relative to net revenues which includes primarily the impact of lower average selling prices and product mix, a 3.1% increase in other manufacturing costs overhead relative to lower revenues. which was offset partially by an improvement in excess and obsolescence inventory reserves. Additionally, amortization of Ethernet products related intangible assets and stock-based compensation increased relative to net revenues by 0.6%; and

• Global Services gross margins relative to net revenues increased due to a 5.5% decrease in service and support costs, primarily from decreased headcount as a result of the sale of SBS.

Gross margin is primarily affected by the mix of products and service, the average selling price per port, number of ports shipped and cost of revenues. We believe that we have the ability to partially mitigate the effect of declines in average selling price per port on gross margins by reducing our product and manufacturing operations costs but may not be able to reduce these costs quickly or in sufficient amounts to offset the selling price declines.
Stock-based compensation expense. Stock-based compensation expense is summarized as follows (in thousands, except percentages):

                    April 28,     % of Net     April 30,     % of Net      Increase/        %
                       2012       Revenues        2011       Revenues     (Decrease)     Change
Three months ended $    23,858       4.4 %    $    22,530       4.1 %    $      1,328      5.9 %
Six months ended   $    45,677       4.1 %    $    42,436       3.9 %    $      3,241      7.6 %

The increase in stock-based compensation expense for the three and six months ended April 28, 2012 compared to the three and six months ended April 30, 2011 was due to higher expense associated with new restricted stock units granted during the six months ended April 28, 2012 and lower forfeiture rate in the three months ended April 28, 2012 partially offset by lower ESPP expense and a decrease in acquisition related stock-based compensation expense. Research and development expenses. Research and development ("R&D") expenses consist primarily of compensation and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, engineering expenses which primarily consist of nonrecurring engineering charges and prototyping expenses related to the design, development, testing and enhancement of our products, depreciation related to engineering and test equipment, and related IT and facilities expenses.
R&D expenses are summarized as follows (in thousands, except percentages):

                         April 28,      % of Net     April 30,      % of Net      Increase/         %
                            2012        Revenues        2011        Revenues     (Decrease)       Change
Three months ended      $   92,931         17.1 %   $   91,941         16.8 %   $       990         1.1  %

R&D expenses increased slightly for the three months ended April 28, 2012 compared to the three months ended April 30, 2011 due to the following (in thousands):

                                                                          Increase (Decrease)
Outside services                                                         $            1,211
Engineering expenses                                                                    862
Depreciation and amortization expense                                                   547
Various individually insignificant items                                                222
The increase in R&D expenses was partially offset by the following:
Decrease in salaries and wages                                                         (927 )
Increase in sustaining engineering expenses allocated to cost of revenue               (925 )
                                                                         $              990

Outside services increased by $1.2 million primarily due to projects related to testing of our new product offerings and new product certifications. Engineering expenses increased by $0.9 million primarily due to higher engineering spending related to chip design and higher prototype costs. In addition, depreciation and amortization expense increased by $0.5 million primarily due to additional depreciation expenses related to our new laboratories. This was partially offset by the decrease in salaries and wages of $0.9 million primarily driven by the reallocation of some of the research and development activities to lower cost territories and lower bonuses. In addition, sustaining engineering allocations to cost of goods sold increased by $0.9 million, therefore decreasing research and development expenses, primarily due to an increase in the level of post sales product support required with the release of new products.
R&D expenses decreased for the six months ended April 28, 2012 compared to the six months ended April 30, 2011 due to the following (in thousands):

                                                                        Increase
                                                                       (Decrease)
Engineering expenses                                                 $      (3,885 )
Engineering equipment                                                       (1,727 )
The decrease in R&D expenses was partially offset by the increase in
the following
Outside services                                                             2,730
Depreciation and amortization expense                                        1,089
Various individually insignificant items                                       694
                                                                     $      (1,099 )

Engineering expenses decreased by $3.9 million primarily due to lower engineering spending related to chip design and lower prototype costs. In addition, expenses related to R&D equipment decreased by $1.7 million primarily due to the timing of R&D projects. Outside services increased by $2.7 million primarily due to projects related to testing of our new product offerings and new product certifications. Depreciation and amortization expense increased by $1.1 million primarily due to additional depreciation expenses related to our new laboratories.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales, marketing and customer service functions, costs associated with promotional and marketing programs, travel expenses, and expenses related to IT and facilities and other shared functions.
Sales and marketing expenses are summarized as follows (in thousands, except percentages):

                         April 28,      % of Net     April 30,      % of Net      Increase/          %
                            2012        Revenues        2011        Revenues      (Decrease)      Change
Three months ended      $  158,855         29.2 %   $  156,979         28.6 %   $      1,876         1.2 %
Six months ended        $  311,543         28.2 %   $  309,646         28.3 %   $      1,897         0.6 %

Sales and marketing expenses increased for the three months ended April 28, 2012 compared to the three months ended April 30, 2011 due to the following (in thousands):

                                                                      Increase (Decrease)
Expenses related to IT, facilities and other shared functions        $            3,033
Marketing and advertising expenses                                                1,190
Stock-based compensation                                                          1,067
The increase in sales and marketing expenses was partially offset by
the decrease in the following:
Salaries and wages                                                               (2,132 )
Travel and entertainment expenses                                                (1,248 )
Various individually insignificant items                                            (34 )
Total change                                                         $            1,876

Expenses related to IT, facilities and other shared functions increased due to an increase in IT, legal and facilities expenses allocated to sales and marketing activities. Marketing and advertising expenses increased primarily due to our marketing awareness campaigns and various other marketing activities. Stock-based compensation increased mainly due to higher expense associated with new restricted stock awards issued and lower forfeiture rate used during the three months ended April 28, 2012. Salaries and wages decreased primarily due to a reduction in variable compensation mainly attributable to lower sales commissions and lower headcount partially offset by an increase in bonuses. Travel and entertainment expenses decreased due to lower headcount and cost control initiatives.
Sales and marketing expenses increased for the six months ended April 28, 2012 compared to the six months ended April 30, 2011 due to the following (in thousands):

                                                                      Increase (Decrease)
Marketing and advertising expenses                                   $            6,929
Expenses related to IT, facilities and other shared functions                     3,540
Stock-based compensation expenses                                                 2,051
The increase in sales and marketing expenses was partially offset by
the decrease in the following:
Salaries and wages                                                               (6,366 )
Travel and entertainment expenses                                                (2,486 )
Other facilities expenses                                                        (1,133 )
Various individually insignificant items                                           (638 )
Total change                                                         $            1,897

Marketing and advertising expenses increased primarily due to our marketing awareness campaigns and various other marketing activities. Expenses related to IT, facilities and other shared functions increased due to an increase in IT, . . .