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 April 30, 2013

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: 001-33347

_________________________________________________ 

Aruba Networks, Inc.

(Exact name of registrant as specified in its charter)

 _________________________________________________

Delaware	02-0579097
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

1344 Crossman Ave.

Sunnyvale, California 94089-1113

(408) 227-4500

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

_________________________________________________ 

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 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	x	Accelerated filer	¨
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 of the registrant’s common stock, par value $0.0001, outstanding as of June 4, 2013 was 114,167,932.

ARUBA NETWORKS, INC.

INDEX

	Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of April 30, 2013 and July 31, 2012	3
Consolidated Statements of Comprehensive Income for the three and nine months ended April 30, 2013 and 2012	4
Consolidated Statements of Cash Flows for the nine months ended April 30, 2013 and 2012	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3. Defaults Upon Senior Securities	53
Item 4. Mine Safety Disclosure	53
Item 5. Other Information	53
Item 6. Exhibits	54
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ARUBA NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	April 30, 2013			July 31, 2012
	(in thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents	$	177,446		$	133,629
Short-term investments	263,436			212,601
Accounts receivable, net	71,014			80,190
Inventory, net	27,873			22,202
Deferred cost of revenue	8,148			11,241
Prepaids and other	20,665			18,996
Deferred income tax assets, current	36,064			34,584
Total current assets	604,646			513,443
Property and equipment, net	26,607			19,901
Goodwill	56,947			56,947
Intangible assets, net	21,341			27,036
Deferred income tax assets, non-current	15,062			20,664
Other non-current assets	6,417			10,905
Total assets	$	731,020		$	648,896
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	16,936		$	22,504
Accrued liabilities	56,570			52,375
Income taxes payable, current	4,428			2,032
Deferred revenue, current	89,342			80,602
Total current liabilities	167,276			157,513
Deferred revenue, non-current	29,108			22,375
Other non-current liabilities	7,544			2,118
Total liabilities	203,928			182,006
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock: $0.0001 par value; 350,000 shares authorized at April 30, 2013 and July 31, 2012; 115,677 and 111,529 shares issued and outstanding at April 30, 2013 and July 31, 2012, respectively	12			11
Additional paid-in capital	658,402			582,077
Accumulated other comprehensive loss	(1,502		)	(1,405		)
Accumulated deficit	(129,820		)	(113,793		)
Total stockholders’ equity	527,092			466,890
Total liabilities and stockholders’ equity	$	731,020		$	648,896

See Notes to Consolidated Financial Statements.

3

ARUBA NETWORKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands, except per share data)
Revenue
Product	$	121,195		$	110,531		$	371,318		$	317,632
Professional services and support	25,941			21,363			75,662			59,889
Total revenue	147,136			131,894			446,980			377,521
Cost of revenue
Product	36,782			34,014			110,608			96,535
Professional services and support	7,190			5,497			20,138			15,073
Total cost of revenue	43,972			39,511			130,746			111,608
Gross profit	103,164			92,383			316,234			265,913
Operating expenses
Research and development	34,983			27,383			101,634			79,776
Sales and marketing	57,199			49,974			168,516			145,309
General and administrative	13,405			11,723			37,755			35,521
Total operating expenses	105,587			89,080			307,905			260,606
Operating income (loss)	(2,423		)	3,303			8,329			5,307
Other income (loss), net
Interest income	266			301			875			876
Other income (loss), net	(114		)	(675		)	1,140			2,883
Total other income (loss), net	152			(374		)	2,015			3,759
Income (loss) before income taxes	(2,271		)	2,929			10,344			9,066
Provision for (benefit from) income taxes	17,920			(3,099		)	26,371			14,887
Net income (loss)	$	(20,191	)	$	6,028		$	(16,027	)	$	(5,821	)
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of tax	—			770			11			(1,546		)
Unrealized gain (loss) on short-term investments, net of tax	(46		)	14			(108		)	18
Comprehensive income (loss)	$	(20,237	)	$	6,812		$	(16,124	)	$	(7,349	)
Shares used in computing net income (loss) per common share—basic	114,411			110,236			112,975			108,086
Net income (loss) per common share—basic	$	(0.18	)	$	0.05		$	(0.14	)	$	(0.05	)
Shares used in computing net income (loss) per common share—diluted	114,411			121,895			112,975			108,086
Net income (loss) per common share—diluted	$	(0.18	)	$	0.05		$	(0.14	)	$	(0.05	)

See Notes to Consolidated Financial Statements.

4

ARUBA NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended April 30,
	2013			2012
	(in thousands)
Cash flows from operating activities
Net loss	$	(16,027	)	$	(5,821	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	16,976			14,217
Provision for doubtful accounts	313			17
Write-downs for excess and obsolete inventory	4,891			3,845
Stock-based compensation expense	70,995			61,973
Accretion of purchase discounts on short-term investments	888			869
Loss on disposal of fixed assets	205			539
Change in carrying value of contingent rights liability	(1,665		)	(2,992		)
Deferred income taxes	4,033			20,862
Recovery of escrow funds	—			(702		)
Excess tax benefit associated with stock-based compensation	(6,274		)	(11,648		)
Changes in operating assets and liabilities:
Accounts receivable	8,862			(14,635		)
Inventory	(13,098		)	3,694
Prepaids and other	(939		)	(11,214		)
Deferred costs	3,092			(2,113		)
Other assets	5,982			(11,572		)
Accounts payable	(5,234		)	(7,206		)
Deferred revenue	15,473			22,884
Other current and non-current liabilities	6,704			(273		)
Income taxes payable	12,726			10,051
Net cash provided by operating activities	107,903			70,775
Cash flows from investing activities
Purchases of short-term investments	(246,406		)	(136,524		)
Proceeds from sales of short-term investments	75,806			48,030
Proceeds from maturities of short-term investments	118,023			44,200
Purchases of property and equipment	(15,990		)	(8,805		)
Investment in privately-held company	(1,500		)	—
Cash paid in acquisitions, net of cash acquired	—			(21,086		)
Net cash used in investing activities	(70,067		)	(74,185		)
Cash flows from financing activities
Proceeds from issuance of common stock	30,199			31,186
Repurchases of common stock under stock repurchase program	(30,511		)	—
Excess tax benefit associated with stock-based compensation	6,274			11,648
Net cash provided by financing activities	5,962			42,834
Effect of exchange rate changes on cash and cash equivalents	19			(143		)
Net increase in cash and cash equivalents	43,817			39,281
Cash and cash equivalents, beginning of period	133,629			80,773
Cash and cash equivalents, end of period	$	177,446		$	120,054
Supplemental disclosure of cash flow information
Income taxes paid	$	2,933		$	4,986
Supplemental disclosure of non-cash investing and financing activities
Common stock issued for acquisitions	$	—		$	12,000

See Notes to Consolidated Financial Statements.

5

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. The Company and its Significant Accounting Policies

The Company

Aruba Networks, Inc. (the “Company”), incorporated in the state of Delaware on February 11, 2002, is a leading provider of next-generation network access solutions for the mobile enterprise. The Company's Mobile Virtual Enterprise (“MOVE”) architecture leverages its diverse products (including its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, and multi-vendor management solution software) to unify wired and wireless network infrastructures into one seamless access solution for its customers, enabling them to provide network access to traveling business professionals, remote workers and employees and guests of branch offices and corporate headquarters. The Company derives its revenue from sales of its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, multi-vendor management solution software, and professional services and support. The Company has offices in the Americas, Europe, the Middle East and the Asia Pacific and Japan regions and employs staff around the world.

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances, transactions and cash flows have been eliminated. The accompanying statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission ("SEC") on October 11, 2012. The July 31, 2012 Consolidated Balance Sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. The unaudited Consolidated Financial Statements have been prepared on the same basis as the Company's audited financial statements as of and for the year ended July 31, 2012 and include all adjustments necessary for the fair statement of the Company’s financial position as of April 30, 2013, its consolidated comprehensive income for the three and nine months endedApril 30, 2013 and 2012, and its cash flows for the nine months endedApril 30, 2013 and 2012. The results for the three and nine months endedApril 30, 2013 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending July 31, 2013.

Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies during the nine months endedApril 30, 2013, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2012 except for the inclusion of the software development cost policy which became a significant accounting policy during the nine months ended April 30, 2013.

Software Development Costs

The Company capitalizes certain costs incurred to develop software for internal use and amortizes the capitalized costs on a straight-line basis over the estimated useful life of two to five years. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the applications. Capitalization of such costs begins when the internal-use software system has reached the application development stage and ceases at the point in which the project is substantially complete and ready for its intended purpose. Capitalized internal-use software is included in the computer software category within property and equipment, net, in the Company's Consolidated Balance Sheets. The Company capitalized costs associated with internal-use software totaling $2.2 million as of April 30, 2013. There were no capitalized costs as of July 31, 2012.

The Company expenses costs to develop software products or the software component of products to be marketed to external users, before technological feasibility of such products is reached. The Company assesses whether the development costs incurred after the establishment of technological feasibility but before the release of its products should be capitalized. As of April 30, 2013, the Company has determined that technological feasibility was reached shortly before the release of these products and as a result, the development costs were not material, and accordingly, were expensed as incurred.

6

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

Prior Period Adjustment

In the three months ended October 31, 2012, the Company recorded an out-of-period adjustment to correct an error that increases the provision for income taxes by $1.8 million which related to the three months ended July 31, 2012. The impact of this correction would have resulted in an increase in net loss of $1.8 million for the three months and fiscal year ended July 31, 2012. The Company has assessed the impact of this adjustment on previously reported financial statements and to projected fiscal 2013 results and concluded that the adjustment is not material, either individually, or in the aggregate. On that basis, the Company has recorded the adjustment in the three months ended October 31, 2012.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. As of July 31, 2012 and 2011, accrued trade payables of $14.7 million and $16.7 million, respectively, have been reclassified from accrued liabilities to accounts payable in order to provide improved disclosure relating to invoices that have been received as of the reporting period-ends but have not yet been processed. The corresponding amount included within accounts payable as of April 30, 2013 is $3.7 million.

The following table discloses the amounts as previously filed and the amounts after the reclassification.

	As of July 31, 2012							As of July 31, 2011
	As  Previously Filed		Reclassified Amount			As Reclassified		As  Previously Filed		Reclassified Amount			As Reclassified
	(in thousands)							(in thousands)
Current liabilities
Accounts payable	$	7,807	$	14,697		$	22,504	$	11,278	$	16,704		$	27,982
Accrued liabilities	67,072		(14,697		)	52,375		61,461		(16,704		)	44,757

In addition, the ratable product and related professional services and support revenue and the related cost of revenue in fiscal 2012 have been reclassified to professional services and support revenue and related cost of revenue, both of which are recorded in the revenue and cost of revenue sections of the Consolidated Statements of Comprehensive Income, respectively. The Company believes the ratable product and related professional services and support revenue and related cost of revenue are not material to total revenue and cost of revenue, and the nature of these amounts are consistent with professional services and support revenue and related cost of revenue. The amount for the prior period has been reclassified to conform with the current year presentation.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted. The adoption of this accounting standard update is not expected to have a material impact on the Company's Consolidated Financial Statements.

In February 2013, the FASB issued an accounting standard update which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. Otherwise, an entity is required to provide other disclosures that will provide additional detail about those amounts. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures.

2. Fair Value of Financial Instruments

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.

7

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

The Company determines the fair values of its financial instruments based on a three-level 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 classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Such unobservable inputs include an estimated discount rate used in the Company's discounted present value analysis of future cash flows, which reflects the Company's estimate of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.

Level 1 instruments are valued based on quoted market prices in active markets for identical instruments. Level 1 instruments consist primarily of bank deposits with third-party financial institutions and highly liquid money market securities with original maturities at date of purchase of 90 days or less and are stated at cost, which approximates fair value.

Level 2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques and include the Company’s investments in certain corporate bonds, U.S. government agency securities, U.S. treasury bills, and commercial paper.

Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The Company classified its contingent rights liability as a Level 3 liability (See Note 3—Contingent Rights Liability Arising from Business Combinations, for details). This liability was estimated using a lattice model and was based on significant inputs not observable in the market and thus represented a Level 3 instrument. The inputs include stock price as of the valuation date, strike price of the contingent right, maximum payoff per share, number of shares held in escrow, exercise period, historical volatility of the Company's stock price based on weekly stock price returns, and risk-free interest rate interpolated from the Constant Maturity Treasury Rate.

There were no transfers between different levels during the three and nine months endedApril 30, 2013 and 2012.

The following tables present the Company’s fair value measurements that are measured at the estimated fair value, on a recurring basis, categorized in accordance with the fair value hierarchy:

8

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Level 1		Level 2		Level 3		Total
	(in thousands)
As of April 30, 2013
Assets
Cash and cash equivalents:
Cash deposits with third-party financial institutions	$	160,251	$	—	$	—	$	160,251
Money market funds	13,695		—		—		13,695
U.S. government agency securities	—		2,000		—		2,000
Commercial paper	—		1,500		—		1,500
Short-term investments:
Certificates of deposit	5,013		—		—		5,013
Corporate bonds	—		80,791		—		80,791
U.S. government agency securities	—		125,090		—		125,090
U.S. treasury bills	—		41,946		—		41,946
Commercial paper	—		8,991		—		8,991
Municipal notes and bonds	—		1,605		—		1,605
Total assets measured and recorded at fair value	$	178,959	$	261,923	$	—	$	440,882

	Level 1		Level 2		Level 3		Total
	(in thousands)
As of July 31, 2012
Assets
Cash and cash equivalents:
Cash deposits with third-party financial institutions	$	129,786	$	—	$	—	$	129,786
Money market funds	3,843		—		—		3,843
Short-term investments:
Certificates of deposit	8,832		—		—		8,832
Corporate bonds	—		47,128		—		47,128
U.S. government agency securities	—		105,429		—		105,429
U.S. treasury bills	—		43,930		—		43,930
Commercial paper	—		7,282		—		7,282
Total assets measured and recorded at fair value	$	142,461	$	203,769	$	—	$	346,230
Liabilities
Contingent rights liability related to the Azalea acquisition	$	—	$	—	$	1,665	$	1,665
Total liabilities measured and recorded at fair value	$	—	$	—	$	1,665	$	1,665

The following table represents the change in the contingent rights liability related to the Azalea acquisition (see Note 3 – Contingent Rights Liability Arising from Business Combinations, for details):

9

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Level 3 Amount
	(in thousands)
As of July 31, 2011	$	5,888
Changes to fair value	(2,318		)
Cash payments made	(1,905		)
As of July 31, 2012	$	1,665
Changes to fair value	(401		)
Release of liability upon expiration of the rights	(1,264		)
As of April 30, 2013	$	—

The change in fair value from the acquisition date was primarily driven by changes in the Company's stock price, the settlement date, and the claim activities that have taken place. During the three months ended January 31, 2013, the Company released the contingent rights liability as a result of the payment period expiring on December 31, 2012, resulting in a $1.3 million gain recorded in other income, net. For the nine months ended April 30, 2013, the Company recorded other income, net, of $1.7 million consisting of a $0.4 million gain from revaluation of the contingent rights liability and a $1.3 million gain relating to the expiration of the payment period for the Contingent Rights.

The fair values of accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term nature.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

In December 2012, the Company invested $1.5 million in the form of a convertible security in a privately-held company. The investment is classified as a Level 3 asset, as the fair value was based on unobservable inputs, including changes in the privately-held company's financial metrics. There were no similar investments as of July 31, 2012.

As of April 30, 2013 and July 31, 2012, the Company had no other assets or liabilities measured at fair value on a non-recurring basis.

10

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

3. Contingent Rights Liability Arising from Business Combinations

On September 2, 2010, the Company completed its acquisition of Azalea Networks (“Azalea”) for a total purchase price of $42.0 million. As part of the purchase consideration for each share of the Company received by the Azalea shareholders, each Azalea shareholder also received a right ("Contingent Rights") to receive an amount of cash equal to the shortfall generated if a share was sold below the target value within the payment period, as specified in the arrangement. For shares not held in escrow, the payment period began August 1, 2011 and ended on December 31, 2011. The Contingent Rights related to these shares were settled in cash of $1.9 million in January 2012. For shares held in escrow, the payment period began on the later of January 2, 2012 or the date such shares are released from escrow to the Azalea shareholders, if at all, and ending on the earlier of thirty calendar days following such release date or December 31, 2012. The rights related to the escrow shares are subject to forfeiture in certain circumstances.

For shares held in escrow, the Company made claims against all of the escrow shares prior to the claim period expiration, which was April 1, 2012. Currently the escrow shares remain in escrow pending the resolution of the Company’s claims.

During the three months ended January 31, 2013, the Company released the contingent rights liability as a result of the payment period expiring on December 31, 2012, resulting in a $1.3 million gain recorded in other income, net. For the nine months ended April 30, 2013, the Company recorded other income, net, of $1.7 million consisting of a $0.4 million gain from revaluation of the contingent rights liability and a $1.3 million gain relating to the expiration of the payment period for the Contingent Rights.

For the three and nine months ended April 30, 2012, the Company recorded other expense of $0.2 million and other income, net of $3.0 million, respectively as a result of the revaluation of the contingent rights liability for these periods.

4. Goodwill and Intangible Assets

The following table presents details of the Company’s goodwill:

	Amount
	(in thousands)
As of July 31, 2011	$	33,143
Goodwill acquired in acquisitions	23,804
As of July 31, 2012	$	56,947
Changes in goodwill	—
As of April 30, 2013	$	56,947

The following table presents details of the Company’s total intangible assets:

	Estimated Useful Lives	Gross Value		Accumulated Amortization			Net Value
	(in thousands, except estimated useful lives)
As of April 30, 2013
Existing technology	2 to 7 years	$	35,183	$	(19,726	)	$	15,457
Patents/core technology	4 to 6 years	7,046		(4,568		)	2,478
Customer contracts	6 to 7 years	7,233		(5,224		)	2,009
Support agreements	5 to 6 years	2,917		(2,797		)	120
Tradenames/trademarks	1 to 5 years	750		(750		)	—
Non-compete agreements	2 years	912		(835		)	77
Sub-total		$	54,041	$	(33,900	)	$	20,141
In-process research and development		1,200		—			1,200
Total		$	55,241	$	(33,900	)	$	21,341

11

ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Estimated Useful Lives	Gross Value		Accumulated Amortization			Net Value
	(in thousands, except estimated useful lives)
As of July 31, 2012
Existing technology	2 to 7 years	$	35,183	$	(15,931	)	$	19,252
Patents/core technology	4 to 6 years	6,806		(4,041		)	2,765
Customer contracts	6 to 7 years	7,233		(4,321		)	2,912
Support agreements	5 to 6 years	2,917		(2,425		)	492
Tradenames/trademarks	1 to 5 years	750		(673		)	77
Non-compete agreements	2 years	912		(814		)	98
Sub-total		$	53,801	$	(28,205	)	$	25,596
In-process research and development		1,440		—			1,440
Total		$	55,241	$	(28,205	)	$	27,036

Amortization expense is recorded in the Consolidated Statements of Comprehensive Income under the following:

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Cost of product revenues	$	1,451	$	1,723	$	4,322	$	4,436
Cost of professional services and support revenues	61		135		331		405
Sales and marketing	340		353		1,024		1,459
Research & development	6		—		18		—
Total amortization expense	$	1,858	$	2,211	$	5,695	$	6,300

The following table consists of estimated future amortization expense of intangible assets as of April 30, 2013, and excludes in-process research and development assets of $1.2 million as of April 30, 2013, which will be amortized when the projects related to those assets are complete. These assets are expected to be placed into service in the fourth quarter of fiscal 2013 and will be amortized over their remaining useful life upon completion.

	Amount
	(in thousands)
Remaining three months of fiscal 2013	$	1,767
Years ending July 31,
2014	6,768
2015	5,992
2016	2,866
2017	1,281
Thereafter	1,467
Total	$	20,141

5. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by giving effect to all potentially dilutive common shares, including stock options and awards, unless the result is anti-dilutive. The following tables set forth the computation of net income (loss) per share:

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(unaudited) - Continued

	Three months ended April 30,					Nine months ended April 30,
	2013			2012		2013			2012
	(in thousands, except per					(in thousands, except per
	share data)					share data)
Net income (loss)	$	(20,191	)	$	6,028	$	(16,027	)	$	(5,821	)
Weighted-average common shares outstanding—basic	114,411			110,236		112,975			108,086
Dilutive effect of potential common shares	—			11,659		—			—
Weighted-average common shares outstanding—diluted	114,411			121,895		112,975			108,086
Net income (loss) per share—basic	$	(0.18	)	$	0.05	$	(0.14	)	$	(0.05	)
Net income (loss) per share—diluted	$	(0.18	)	$	0.05	$	(0.14	)	$	(0.05	)

The following outstanding stock options and awards were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect.

	Three months ended April 30,		Nine months ended April 30,
	2013	2012	2013	2012
	(in thousands)		(in thousands)
Options to purchase common stock	9,021	1,673	9,334	12,556
Restricted stock awards	3,159	2,587	3,332	3,583
Contingently issuable shares	549	—	533	272
Employee stock purchase plan	60	226	223	60

6. Short-Term Investments

Short-term investments consist of the following:

	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
As of April 30, 2013
Corporate bonds	$	80,785	$	40	$	(34	)	$	80,791
U.S. government agency securities	125,033		63		(6		)	125,090
U.S. treasury bills	41,900		46		—			41,946
Commercial paper	8,986		5		—			8,991
Certificates of deposit	5,000		13		—			5,013
Municipal notes and bonds	1,608		—		(3		)	1,605
Total short-term investments	$	263,312	$	167	$	(43	)	$	263,436

	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
As of July 31, 2012
Corporate bonds	$	47,011	$	118	$	(1	)	$	47,128
U.S. government agency securities	105,358		79		(8		)	105,429
U.S. treasury bills	43,896		34		—			43,930
Commercial paper	7,280		2		—			7,282
Certificates of deposit	8,805		27		—			8,832
Total short-term investments	$	212,350	$	260	$	(9	)	$	212,601

The cost basis and fair value of the short-term investments by contractual maturity are presented below:

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(unaudited) - Continued

	Cost Basis		Fair Value
	(in thousands)
As of April 30, 2013
One year or less	$	149,953	$	150,037
One to two years	113,359		113,399
Total short-term investments	$	263,312	$	263,436

	Cost Basis		Fair Value
	(in thousands)
As of July 31, 2012
One year or less	$	102,675	$	102,794
One to two years	109,675		109,807
Total short-term investments	$	212,350	$	212,601

The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. The Company determined that as of April 30, 2013 and July 31, 2012, there were no investments in its portfolio that were other-than-temporarily impaired.

The following table summarizes the fair value and gross unrealized losses of the Company’s investments with unrealized losses aggregated by type of investment instrument and the length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 Months
	Fair Value		Unrealized Loss
	(in thousands)
As of April 30, 2013
Corporate bonds	$	38,778	$	(34	)
U.S. government agency securities	37,937		(6		)
U.S. treasury bills	1,605		(3		)
	$	78,320	$	(43	)

	Less than 12 Months
	Fair Value		Unrealized Loss
	(in thousands)
As of July 31, 2012
Corporate bonds	$	3,922	$	(1	)
U.S. government agency securities	44,105		(8		)
	$	48,027	$	(9	)

As of April 30, 2013 and July 31, 2012, no securities were in a continuous unrealized loss position for more than twelve months.

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(unaudited) - Continued

7. Balance Sheet Components

The following tables provide details of selected balance sheet items:

	April 30, 2013		July 31, 2012
	(in thousands)
Inventory, net
Raw materials	$	329	$	269
Finished goods	27,544		21,933
Total	$	27,873	$	22,202

	April 30, 2013		July 31, 2012
	(in thousands)
Accrued Liabilities
Compensation and benefits	$	17,887	$	20,054
Marketing	24,052		15,191
Contingent rights	—		1,665
Other	14,631		15,465
Total	$	56,570	$	52,375

8. Property and Equipment, Net

Property and equipment, net consists of the following:

	Estimated Useful Lives	April 30, 2013			July 31, 2012
	(in thousands, except estimated useful lives)
Computer equipment	2 years	$	20,413		$	16,893
Computer software	2 to 5 years	12,295			7,560
Machinery and equipment	2 years	28,025			19,965
Furniture and fixtures	5 years	4,266			3,952
Leasehold improvements	1 to 6 years	5,810			4,847
Total property and equipment, gross		70,809			53,217
Less: Accumulated depreciation		(44,202		)	(33,316		)
Total property and equipment, net		$	26,607		$	19,901

Depreciation and amortization expense for property and equipment, net were $4.3 million and $3.0 million for the three months ended April 30, 2013 and April 30, 2012, respectively. Depreciation and amortization expense for property and equipment, net was $11.3 million and $7.9 million for the nine months endedApril 30, 2013 and April 30, 2012, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

9. Deferred Revenue

Deferred revenue consists of the following:

	April 30, 2013		July 31, 2012
	(in thousands)
Product	$	26,066	$	28,215
Professional services and support	63,276		52,387
Total deferred revenue, current	89,342		80,602
Professional services and support, non-current	29,108		22,375
Total deferred revenue, non-current	29,108		22,375
Total deferred revenue	$	118,450	$	102,977

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred professional services and support revenue primarily represents customer payments made in advance for support contracts. Support contracts are typically billed in advance and revenue is recognized ratably over the support period, typically one to five years.

10. Income Taxes

Income tax expense is recognized based on management's best estimate of the annual income tax rate expected for the full fiscal year. The estimated annual effective tax rate used for the year ending July 31, 2013 is 252.7%, which has been applied to the income before taxes for the nine months ended April 30, 2013. The Company's estimated annual effective tax rate differs from the federal statutory rate of 35% due to state taxes and significant permanent differences. These permanent differences arise primarily from the amortization of deferred tax charges related to an intercompany sale of intellectual property rights, non-deductible stock-based compensation expense, a valuation allowance on California research and development (“R&D”) tax credits, and U.S. tax reserves on foreign tax matters. The estimated annual effective tax rate for the year ending July 31, 2012, applied to income before taxes for the nine months ended April 30, 2012, was 173.7%.

The actual tax rate for the three and nine months ended April 30, 2013 was (789.1)% and 254.9%, respectively. The significant negative tax rate for the three months ended April 30, 2013 is caused primarily by the decrease in the Company's annual forecasted income for income taxes as of April 30, 2013 compared to its prior forecast as of January 31, 2013. This decrease in annual forecasted income before income taxes, combined with the effect of fixed amortization of the deferred charge on the sale of intellectual property increased the Company's annual effective tax rate to 252.7% and resulted in a significant tax expense adjustment in the three months ended April 30, 2013.

The actual tax rate for the three and nine months ended April 30, 2012 was (105.8)% and 164.2%, respectively. The actual tax rate for the three and nine months ended April 30, 2012 was impacted by permanent differences which arose primarily from the amortization of deferred tax charges related to an intercompany sale of intellectual property rights, non-deductible stock-based compensation expense, and U.S. tax reserves on foreign tax matters.

In fiscal 2012, the Company implemented a new structure of its corporate organization to more closely align its corporate organization with the international nature of its business activities and to reduce its overall effective tax rate through changes in how it develops and uses its intellectual property and the structure of its international procurement and sales, including transfer-price arrangements for intercompany transactions.

The Company recorded a deferred charge during the first quarter of fiscal 2012 related to the deferral of income tax expense on intercompany profits that resulted from the sale of its intellectual property rights outside of North and South America to its Irish subsidiary. The deferred charge is included in prepaid and other assets and other non-current assets on the Consolidated Balance Sheets. As of April 30, 2013, the balance in prepaid and other assets was $7.6 million, and $0.7 million in other non-current assets. The deferred charge is amortized on a straight-line basis as a component of income tax expense over three to five years, based on the economic life of the intellectual property and will increase the Company's effective tax rate during the amortization period. The deferred charge resulted in a 95.2 point increase to the Company's projected annual effective tax rate before discrete tax items as of April 30, 2013 from 157.5% to 252.7%. While the Company has not realized

16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

any tax savings to date, it expects to realize a reduction in its effective tax rate as a result of its corporate reorganization after the deferred charges have been fully amortized.

The Company evaluates the realization of its deferred tax assets based on the expiration period of the asset, projections of future taxable income in the relevant tax jurisdiction, the effect of tax planning strategies, and other factors. Both positive and negative evidence is weighed using significant judgment. Based on an evaluation of these factors, the Company believes that the realization of its deferred tax assets is more likely than not; therefore, its deferred tax assets are without a valuation allowance. However, the Company believes it is more likely than not that certain California R&D tax credits will not be realized. Therefore, the Company has recorded a valuation allowance on certain California R&D tax credit carryforward generated in prior fiscal years , and a full valuation on the current fiscal year generated California R&D tax credit carryforward generated in prior fiscal years. In future periods, positive and negative evidence can change due to revised projections of future taxable income in the relevant jurisdictions and other factors listed above. If negative evidence were to outweigh positive evidence, the Company would record a higher valuation allowance with an increase in tax expense in the Consolidated Statements of Comprehensive Income and without any change in net cash provided by operating activities in the Consolidated Statements of Cash Flows.

11. Equity Incentive Plans

Stock Option Activity

The following table summarizes the information about shares available for grant and outstanding stock option activity:

			Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Fair Value per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
As of July 31, 2011	274,103		18,164,944		$	6.59			5.0	$	297,688,111
Shares reserved for issuance	5,245,243		—
Restricted stock awards granted	(7,713,936	)	—
Restricted stock awards forfeited	1,579,751		—
Options granted	(177,568	)	177,568		23.71		$	13.08
Options exercised	—		(3,753,478	)	5.71					$	56,578,795
Options cancelled	1,325,003		(1,325,003	)	10.87
As of July 31, 2012	532,596		13,264,031		$	6.63			3.9	$	112,867,587
Shares reserved for issuance	5,576,433		—
Restricted stock awards granted	(4,641,401	)	—
Restricted stock awards forfeited	987,626		—
Options exercised	—		(2,315,239	)	7.00					$	33,168,956
Options cancelled	255,642		(255,642	)	17.24
As of April 30, 2013	2,710,896		10,693,150		$	6.29			3.2	$	173,463,844

Restricted Stock Award Activity

The following table summarizes the non-vested restricted stock awards outstanding:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Shares		Weighted Average Grant Date Fair Value per Share
As of July 31, 2011	5,093,839		$	20.98
Awards granted	7,713,936		19.34
Awards vested	(2,805,343	)	20.29
Awards forfeited	(1,579,751	)	22.15
As of July 31, 2012	8,422,681		$	19.49
Awards granted	4,641,401		20.11
Awards vested	(2,603,130	)	22.70
Awards forfeited	(987,626	)	19.98
As of April 30, 2013	9,473,326		$	18.86

Fair Value Disclosures

There were no stock option grants during the three and nine months ended April 30, 2013 and during the three months ended April 30, 2012. The Company granted 177,568 stock options during the nine months ended April 30, 2012.

Employee Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:

	Nine months ended April 30, 2012
Risk-free interest rate	1.2%
Expected term (in years)	4.0
Dividend yield	—%
Volatility	74%

Employee Stock Purchase Plan

The fair value of the purchase right for the Employee Stock Purchase Plan is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:

	Three months ended April 30,		Nine months ended April 30,
	2013	2012	2013	2012
Risk-free interest rates	0.1% to 0.3%	0.1% to 0.3%	0.1% to 0.3%	0.1% to 0.3%
Expected term (in years)	0.5 to 2.0	0.5 to 2.0	0.5 to 2.0	0.5 to 2.0
Dividend yield	—%	—%	—%	—%
Volatility	54% to 61%	56% to 77%	54% to 63%	56% to 77%

Purchase date	March 1, 2013		March 1, 2012
Shares issued	489,587		442,758
Weighted average purchase price per share	$	16.74	$	16.37

Stock-based Compensation Expense

Stock-based compensation expense consists primarily of expenses for stock options, restricted stock awards, and employee stock purchase rights granted to employees. The following table summarizes stock-based compensation expense:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Cost of revenue	$	1,585	$	1,208	$	4,765	$	3,844
Research and development	9,052		7,090		26,691		22,696
Sales and marketing	9,358		8,415		28,142		26,301
General and administrative	3,405		3,071		11,397		9,132
Total	$	23,400	$	19,784	$	70,995	$	61,973

The following table presents stock-based compensation expense by award-type:

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Stock options	$	2,358	$	3,982	$	7,591	$	13,393
Stock awards	18,822		13,775		55,795		42,477
Employee stock purchase plan	2,220		2,027		7,609		6,103
Total	$	23,400	$	19,784	$	70,995	$	61,973

Stock-based compensation expense for the three months ended April 30, 2013 included $2.4 million for stock awards issuable under the Company's executive officer and corporate bonus plans. No stock-based compensation expense related to stock awards issuable under the bonus plan was recorded for the three months ended April 30, 2012. For the nine months ended April 30, 2013 and April 30, 2012, stock-based compensation expense included $9.1 million and $5.0 million, respectively, for stock awards issuable under the bonus plans.

Stock Repurchase Program

On June 13, 2012, the Company announced a stock repurchase program for up to $100.0 million of the Company's common stock. The Company is authorized to make repurchases in the open market until June 6, 2014, and any such repurchases will be funded from available working capital. The number of share repurchases and the timing of repurchases are based on the price of its common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in capital.

During the nine months ended April 30, 2013, the Company repurchased a total 1,604,142 shares for a total purchase price of $30.5 million. As of April 30, 2013, the Company repurchased a cumulative total of 3,012,646 shares for a total purchase price of $50.4 million, with $49.6 million remaining authorized under the stock repurchase program. The Company did not make any stock repurchases during the three months ended April 30, 2013 or during the three and nine months ended April 30, 2012.

12. Segment Information and Significant Customers

The Company operates in one reportable segment—selling its ArubaOS operating system, controllers, wireless access points, switches, application software modules, access management solution, multi-vendor management solution software, and professional services and support.

A reportable segment is defined as a component of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, for resource allocation and for assessing performance. The Company’s chief operating decision maker is its chief executive officer (“CEO”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Because the Company has one business segment, the Company reports a single operating segment and the CEO evaluates performance based primarily on revenue in the geographic locations in which the Company operates. Revenue is attributed by geographic location based on the ship-to location of the Company’s customers. The Company’s assets are primarily located in the U.S. and not allocated to any specific region.

The following presents total revenue by geographic region:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
United States	$	90,978	$	77,445	$	277,735	$	235,092
Europe, Middle East and Africa	28,165		24,443		78,294		67,092
Asia Pacific and Japan	22,794		25,646		75,263		64,362
Rest of World	5,199		4,360		15,688		10,975
Total	$	147,136	$	131,894	$	446,980	$	377,521

The Company’s product revenue was $121.2 million and $110.5 million for the three months ended April 30, 2013 and April 30, 2012, respectively. The Company’s product revenue was $371.3 million and $317.6 million for the nine months endedApril 30, 2013 and April 30, 2012, respectively.

Professional services and support revenue was $25.9 million and $21.4 million for the three months ended April 30, 2013 and 2012, respectively. The Company’s professional services and support revenue was $75.7 million and $59.9 million for the nine months endedApril 30, 2013 and April 30, 2012, respectively.

The following table presents significant channel partners contributing revenue in excess of 10% of total revenue (* indicates less than 10%):

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
ScanSource, Inc. (“Catalyst”)	19.2	%	21.0	%	19.8	%	20.3	%
Synnex Corp.	12.3	%	*		10.3	%	*
Avnet Logistics U.S. LP	*		12.8	%	*		13.7	%

The following table presents significant channel partners as a percentage of total gross accounts receivable (* indicates less than 10%):

	April 30, 2013		July 31, 2012
ScanSource, Inc. (“Catalyst”)	20.0	%	15.7	%
Avnet Logistics U.S. LP	*		19.0	%

13. Commitments and Contingencies

Legal Matters

The Company is involved in disputes, claims, litigation, investigations, proceedings and other legal actions, consisting of intellectual property, commercial, securities, and employment matters from time to time that arise in the ordinary course of business, including the legal matters identified below.

U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.

Nomadix, Inc v. Aruba Networks, Inc. In November 2009, Nomadix, Inc. filed a lawsuit against multiple defendants including Aruba Networks. The suit is filed in the United States District Court for the Central District of California. The plaintiff claims that the defendants infringe several of their patents; however, only one patent has been asserted against Aruba, U.S. Patent No. 6,636,894. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.

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(unaudited) - Continued

The Company reviews all legal matters at least quarterly and assesses whether an accrual for loss contingencies needs to be recorded. The assessment reflectsthe impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company records an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable; however, the Company believes that it has valid defenses with respect to its pending legal matters. Actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods. As of April 30, 2013, the Company has accrued loss contingencies for certain legal matters; however, the accrual for loss contingencies associated with such matters is not material.

In addition, these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Furthermore, the resolution of any patent related litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected in any particular period by an unfavorable resolution of one or more of these contingencies.

Lease Obligations

The Company leases office spaces under non-cancelable operating leases with various expiration dates through June 2018. The terms of certain operating leases provide for rental payments on a graduated scale. Future minimum lease payments under non-cancelable operating leases are as follows:

	Operating Leases
	(in thousands)
Remaining three months of fiscal 2013	$	1,809
Year ending July 31,
2014	7,164
2015	6,812
2016	6,926
2017	2,600
Thereafter	1,341
Total minimum payments	$	26,652

Non-cancelable purchase commitments

The Company outsources the production of its hardware to third-party contract manufacturers, and enters into various inventory-related purchase commitments with these contract manufacturers and other suppliers. In addition, from time to time, the Company also enters into significant information technology and marketing agreements with its vendors, which are non-cancelable. The Company had $31.5 million and $46.1 million in non-cancelable purchase commitments as of April 30, 2013 and July 31, 2012, respectively. The Company expects to sell all products that it has committed to purchase from its third-party contract manufacturers and other suppliers.

Warranties

The warranty liability is included as a component of accrued liabilities on the Consolidated Balance Sheets. Changes in the warranty liability are as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

	Warranty Amount
	(in thousands)
As of July 31, 2012	$	818
Provision	539
Obligations fulfilled during period	(678		)
As of April 30, 2013	$	679

	Warranty Amount
	(in thousands)
As of July 31, 2011	$	404
Provision	645
Obligations fulfilled during period	(374		)
As of April 30, 2012	$	675

Indemnification

In its sales agreements, the Company may agree to indemnify its indirect sales channels and end user customers for certain expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification provisions are generally perpetual any time after execution of the agreement. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. In certain circumstances, the Company may be subject to uncapped indemnity obligations. To date the Company has not paid any amounts to settle claims or defend lawsuits pursuant to such indemnification provisions. The Company believes the likelihood of such claims is remote and is unable to reasonably estimate the maximum amount that could be payable under these provisions because these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of April 30, 2013 and July 31, 2012.

14. Subsequent Event

Business Combinations

On May 13, 2013, the Company acquired Meridian Apps, Inc. (“Meridian”), a privately-held mobile-software company providing indoor location-based software. As a result of the acquisition, Meridian became a wholly owned subsidiary of the Company.

The purchase price was $15.7 million, all of which was paid in cash. In addition, the Company is obligated to make additional cash consideration of up to $10.2 million to certain former Meridian employees who became the Company’s employees, which will be made over a period of approximately three years from the closing date, subject to certain continued employment restrictions. Acquisition-related costs, included in general and administrative expenses, were not material.

As a result of the acquisition, the Company expects to offer new location-based services by combining its unique, network-based contextual information about users, devices and applications with Meridian's Wi-Fi based wayfinding solution for smartphones and tablets.

The initial accounting for the business combination is still ongoing as of June 6, 2013, the date which this Form 10-Q is issued. It is expected that intangible assets and goodwill will be recorded on the consolidated balance sheets; however, as the initial accounting for the business combination has not been completed at the time of the issuance of these consolidated financial statements, further details have not yet been disclosed. Based on the evaluation of the significance of the acquisition, the Company determined that the acquisition does not meet the conditions needed to file separate financial statements and related pro-forma financial statements.

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ARUBA NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) - Continued

Legal Matters

U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss is not reasonably estimable.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements concerning our expectations:

• that revenue from our indirect channels will continue to constitute a significant majority of our future revenue;

• that mobile devices will surpass desktop connections;

• that competition will intensify in the future as other companies introduce new products in the same markets we serve or intend to enter;

• that our product offerings associated with our Mobile Virtual Enterprise (“MOVE”) architecture, including our new ClearPass and Aruba Instant products, will enable broader networking initiatives by both our current and potential customers;

• that we will increase offshore operations by establishing additional offshore capabilities for certain engineering and general and administrative functions;

• that, within our indirect channel, sales through our value-added distributors (“VADs”) and original equipment manufacturers (“OEMs”) will continue to be significant;

• that our momentum in our MOVE architecture initiatives, including network rightsizing and adoption of our ClearPass access management system and Aruba Instant will continue;

• that international revenue will increase in absolute dollars and increase as a percentage of total revenue in fiscal 2013 compared to fiscal 2012;

• that research and development expenses for fiscal 2013 will increase on an absolute dollar basis and increase as a percentage of revenue compared to fiscal 2012;

• that sales and marketing expenses for fiscal 2013 will continue to be our most significant operating expense and will increase on an absolute dollar basis as we continue to invest strategically in this area and remain consistent or decrease as a percentage of revenue compared to fiscal 2012;

• that general and administrative expenses for fiscal 2013 will increase in absolute dollars and decrease as a percentage of revenue compared to fiscal 2012;

• that our existing cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet our needs;

• that we will ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk; and

• that we will increase our market penetration and extend our geographic reach through our network of channel partners,

as well as other statements regarding our future operations, financial condition, prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and related notes included elsewhere in this report.

Overview

We are a leading provider of next-generation network access solutions for the mobile enterprise. Our MOVE architecture leverages Aruba’s diverse products (including our ArubaOS operating system, controllers, wireless access points, switches,

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application software modules, access management solution, and multi-vendor management solution software) to unify wired and wireless network infrastructures into one seamless access solution for our customers, enabling them to provide network access to traveling business professionals, remote workers and employees and guests of branch offices and corporate headquarters. With the Aruba MOVE architecture, access privileges are linked to a user’s identity and context. That means an enterprise workforce has consistent, secure access to network resources based on who they are, where they are, what devices and applications they are using, and how they are connected.

Demand for our products is driven by mobility and the proliferation of Wi-Fi-enabled mobile devices. These devices – which have no Ethernet port – are connecting to enterprise networks in unprecedented numbers and we expect they will surpass desktop connections. Aruba meets this challenge by designing and selling products intended to eliminate the cost and complexity of managing separate wired and wireless access policies. By implementing our solutions, our customers need fewer ports and consequently less equipment in the wiring closet – effectively rightsizing our customers’ access infrastructure.

Aruba’s MOVE architecture provides context-aware networking for the post-PC era. Mobility network services are delivered centrally from the data center across thin network access devices or on-ramps. At the heart of Aruba MOVE, a single set of mobility network services manages security, policy and network performance for every user and device on the network. This mobility and user-centric approach makes it possible to re-architect the access network to simultaneously provide workforce mobility and reduce costs. To connect users into the network, whether at work, home, or on the road, Aruba access on-ramps include wireless, wired, and VPN products. Device configuration, security policies, and reporting are centrally managed, effectively making installation a zero-touch experience.

A key new addition to our MOVE architecture is our ClearPass Access Management System. ClearPass is designed to make it easy for IT-issued and personal mobile devices to securely connect to any network, which we believe makes ClearPass an attractive solution for "bring you own device," or BYOD, provisioning and onboarding. By centralizing access policies across the entire network, ClearPass automates differentiated user and device access, policy management and the provisioning of devices for secure network access and posture assessment. This ensures that each user has the right access privileges based on who they are and what device they are using. Given the increasing numbers of consumer devices – Windows, Mac OS X, iOS, Android and Linux – attempting to connect to enterprise networks and the increasing demand for access to those networks by a broader range of users – employees, visitors, customers and contractors – we believe ClearPass provides a compelling solution to these customer needs.

Another addition to the MOVE architecture is Aruba Instant, a controller-less Wi-Fi solution that is designed to combine ease-of-use and cost-effectiveness with best-in-class security, resiliency and intelligence. In Aruba Instant mode, a single access point manages the other Aruba Instant APs in the WLAN, while the free Aruba Activate service offers zero-touch provisioning and cloud-based inventory management. This allows our customers to power-up one Aruba Instant AP, which will then automatically obtain its configuration and become operational. To grow the network, customers simply plug in additional access points. The deployment process is thereby substantially simplified, saving our customers’ time and operational expenses.

Our products have been sold to over 20,000 customers worldwide, including some of the largest and most complex global organizations. We have implemented a two-tier distribution model in most areas of the world, including the U.S., with value added distributors (“VADs”) and original equipment manufacturers (“OEMs”) selling our portfolio of products, including a variety of our support services, to a diverse number of value added resellers (“VARs”) and managed service providers. We also sell our products and support services directly through our own sales force. In addition to direct sales, our sales force is engaged with our VARs and VADs to provide solutions for our end customers. Our focus continues to be management of our channel including selection and growth of high prospect partners, activation of our VARs and VADs through active training and field collaboration, and evolution of our channel programs in consultation with our partners.

Major Trends Affecting Our Financial Results

Worldwide Economic Conditions

Our business depends on the overall demand for IT initiatives and on the economic health and general willingness of our current and prospective customers to make capital commitments. If the conditions in the global economic environment remain uncertain or continue to be volatile, or if it deteriorates further, our business, operating results, and financial condition may be adversely affected in a material way. Economic weakness, customer financial difficulties and constrained spending on IT initiatives have resulted, and may in the future result, in challenging and delayed sales cycles and could negatively impact our ability to forecast future periods. Sequestration or other significant cuts in U.S. government spending could adversely affect our future results. We cannot be assured of the level of IT spending, the deterioration of which could have a material adverse effect on our results of operations and growth rates.

Revenue

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Our ability to increase our product revenue will depend significantly on continued growth in the market for enterprise mobility and remote networking solutions, continued acceptance of our products in the marketplace, our ability to continue to attract new customers, our ability to compete, the willingness of customers to displace wired networks with wireless LANs, our ability to retain existing distribution partners, and our ability to continue to sell into our installed base of existing customers. Our growth in support revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth, if any, will also be directly affected by the timing and size of orders, product and channel mix, average selling prices, costs of our products, our ability to effectively manage our two-tier distribution model, general economic conditions, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.

The revenue growth that we have experienced has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers. We believe the growth we have experienced is the result of business enterprises and other organizations needing to provide secure mobility to their users in a manner that we believe is more cost effective than the traditional approach of using port-centric networks. While our revenue growth rate was slower than that in the previous fiscal year, our revenue grew 11.6% and 18.4% in the three and nine months endedApril 30, 2013, respectively, compared to our revenue for the same periods in fiscal 2012. We believe that our slower revenue growth was attributable to overall weakness in the global macroeconomic conditions, particularly in the Asia Pacific and Japan region, as well as increased competition during the third quarter of fiscal 2013.

We believe that our product offerings associated with our Mobile Virtual Enterprise (“MOVE”) architecture, including our new ClearPass and Aruba Instant products, will enable broader networking initiatives by both our current and potential customers. Each quarter, our ability to meet our product revenue expectations is dependent upon (1) new orders received, shipped, and recognized in a given quarter, (2) the amount of orders booked but not shipped in prior quarters that are shipped in the current quarter, and (3) the amount of deferred revenue entering a given quarter that is recognized as revenue in the quarter. Our product deferred revenue is comprised of:

• product orders that have shipped but where the terms of the agreement, typically with our large customers, contain acceptance terms and conditions or other terms that require that the revenue be deferred until all revenue recognition criteria are met; and

• product orders shipped to our VADs and OEMs for which we have not yet received persuasive evidence of sell-through from the VADs or OEMs.

We typically ship products within 10 days after the receipt of an order.

Costs and Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses in each of these categories is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation for employees. As of April 30, 2013, we had 1,460 employees worldwide compared to 1,407 employees at January 31, 2013, 1,293 employees at October 31, 2012, and 1,223 employees at July 31, 2012. The increase in employees is the most significant driver behind the increase in costs and operating expenses in the three and nine months endedApril 30, 2013. Despite the slowdown in our revenue growth, we expect to continue investing in our infrastructure and operations, including continuation of hiring of employees throughout the company.

Stock Repurchase

On June 13, 2012, we announced a stock repurchase program for up to $100.0 million of our common stock. We are authorized to make repurchases in the open market until June 6, 2014, and any such repurchases will be funded from available working capital. The number of share repurchases and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital.

During the nine months ended April 30, 2013, we repurchased a total of 1,604,142 shares for a total purchase price of $30.5 million. As of April 30, 2013, we repurchased a cumulative total of 3,012,646 shares for a total purchase price of $50.4 million, with $49.6 million remaining authorized under the stock repurchase program. We made no stock repurchase during the three months ended April 30, 2013, and no repurchases during the three and nine months ended April 30, 2012.

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Revenue, Cost of Revenue and Operating Expenses

Revenue

We derive our revenue from sales of our ArubaOS operating system, controllers, wired and wireless access points, switches, application software modules, access-management solution, multi-vendor management solution software, and professional services and support.

We sell our products directly through our sales force and indirectly through partners including VADs, VARs, service providers and OEMs. We expect revenue from indirect channels to continue to constitute a significant majority of our future revenue.

We sell our products to channel partners and end customers located in the United States, Europe, Middle East, Africa, Asia Pacific, Japan and other parts of the world. We continue to expand into international locations and introduce our products in new markets, and we expect international revenue to increase in absolute dollars and increase as a percentage of total revenue in fiscal 2013 compared to fiscal 2012. For more information about our international revenue, see Note 12 of the Notes to Consolidated Financial Statements.

Professional services revenue consists of consulting and training services. Consulting services primarily consist of installation support services. Training services are typically instructor led courses on the use of our products. Support services typically consist of software updates, on a when-and-if available basis, telephone and internet access to technical support personnel and hardware support. We provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period.

Cost of Revenue

Cost of product revenue consists primarily of manufacturing costs for our products, shipping and logistics costs, and expenses for inventory obsolescence and warranty obligations. We utilize third parties to manufacture our products and perform shipping logistics. We have outsourced the substantial majority of our manufacturing, repair and supply chain operations. Accordingly, the substantial majority of our cost of product revenue consists of payments to our contract manufacturers. Our contract manufacturers produce our products in China and Singapore using quality assurance programs and standards that we jointly established. Manufacturing, engineering and documentation controls are conducted at our facilities in Sunnyvale, California, Bangalore, India and Beijing, China. Cost of product revenue also includes amortization expense from our intangible assets.

Cost of professional services and support revenue is primarily comprised of personnel costs, including stock-based compensation, of providing technical support. In addition, we engage third-party support vendors to complement our internal support resources, the costs of which are included within costs of professional services and support revenue.

Gross Margin

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

• the proportion of our products that are sold through direct versus indirect channels;

• product mix and average selling prices;

• new product introductions, such as ClearPass and Aruba Instant additions to our MOVE architecture, and product enhancements made by us as well as those made by our competitors;

• pressure to discount our products in response to our competitors’ discounting and/or product bundling practices;

• mix of revenue attributed to our international regions and vertical markets;

• demand for our products and services;

• our ability to attain volume manufacturing pricing from our contract manufacturers and our component suppliers;

• losses associated with excess and obsolete inventory;

• growth in our headcount and other related costs incurred in our customer support organization;

• costs associated with manufacturing overhead;

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• our ability to manage freight costs; and

• amortization expense from our intangible assets.

Due to higher net effective discounts for products sold through our indirect channel, our overall gross margins for indirect channel sales are typically lower than those associated with direct sales. We expect product revenue from our indirect channel to continue to constitute a significant majority of our total revenue, which, by itself, negatively impacts our gross margins. Further, we expect that within our indirect channel, sales through our VADs and OEMs will continue to be significant, which will negatively impact our gross margins as VADs and OEMs generally experience a larger net effective discount than our other channel partners.

Research and Development Expenses

Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred except for costs associated with the development of internal-use software, which meet certain capitalization criteria. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe it is essential to maintaining our competitive position. For fiscal 2013, we expect research and development expenses to increase on an absolute dollar basis and increase as a percentage of revenue compared to fiscal 2012.

Sales and Marketing Expenses

Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, marketing programs and facilities costs. A portion of the amortization expense related to our intangible assets is also included in sales and marketing expenses. Marketing programs are intended to generate revenue from new and existing customers and are expensed as incurred. We plan to continue to invest strategically in sales and marketing with the intent to add new customers and increase penetration within our existing customer base, expand our domestic and international sales and marketing activities, build brand awareness and sponsor additional marketing events. We expect future sales and marketing expenses to continue to be our most significant operating expense. Generally, sales personnel are not immediately productive, and thus, the increase in sales and marketing expenses that we experience as we hire additional sales personnel is not expected to immediately result in increased revenue. As a result, these expenses will reduce our operating margin until such sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. For fiscal 2013, we expect sales and marketing expenses to increase on an absolute dollar basis and remain consistent or decrease as a percentage of revenue compared to fiscal 2012.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel and facilities costs related to our executive, finance, human resource, information technology and legal organizations, as well as insurance, investor relations, and information technology ("IT") infrastructure costs related to our enterprise resource planning (“ERP”) system. Further, our general and administrative expenses include professional services consisting of outside legal, audit, Sarbanes-Oxley and IT consulting costs. We have incurred in the past, and may continue to incur, significant legal costs defending ourselves against claims made by third parties. These expenses are expected to continue as part of our ongoing operations and depending on the timing and outcome of lawsuits and the legal process, could have a significant impact on our financial statements. For fiscal 2013, we expect general and administrative expenses to increase in absolute dollars and decrease as a percentage of revenue compared to fiscal 2012. However, fluctuations in third-party professional services can cause an increase in any particular quarter.

Other Income (Loss), Net

Other income (loss), net includes interest income on cash balances, accretion of discount or amortization of premium on short-term investments, losses or gains on foreign exchange rate changes, and in connection with our acquisition of Azalea Networks ("Azalea") in September 2010, changes in the fair value or gains from the release of our contingent rights liability.

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make estimates and judgments that affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon

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information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our Consolidated Financial Statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, share-based compensation, inventory valuation, allowance for doubtful accounts, impairment of goodwill and intangible assets, and accounting for income taxes. Our critical accounting policies are disclosed in our Form 10-K for the fiscal year ended July 31, 2012. There were no changes to our critical accounting policies during the three and nine months endedApril 30, 2013.

Results of Operations

The following table presents our historical operating results as a percentage of revenue for the periods indicated:

	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
Revenue
Product	82.4	%	83.8	%	83.1	%	84.1	%
Professional services and support	17.6	%	16.2	%	16.9	%	15.9	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue
Product	25.0	%	25.8	%	24.8	%	25.6	%
Professional services and support	4.9	%	4.2	%	4.5	%	4.0	%
Gross profit	70.1	%	70.0	%	70.7	%	70.4	%
Operating expenses
Research and development	23.7	%	20.7	%	22.7	%	21.1	%
Sales and marketing	38.9	%	37.9	%	37.7	%	38.5	%
General and administrative	9.1	%	8.9	%	8.4	%	9.4	%
Total operating expenses	71.7	%	67.5	%	68.8	%	69.0	%
Operating income (loss)	(1.6	)%	2.5	%	1.9	%	1.4	%
Other income (loss), net
Interest income	0.2	%	0.2	%	0.2	%	0.2	%
Other income (loss), net	(0.1	)%	(0.4	)%	0.2	%	0.8	%
Total other income (loss), net	0.1	%	(0.2	)%	0.4	%	1.0	%
Income (loss) before income taxes	(1.5	)%	2.3	%	2.3	%	2.4	%
Provision for (benefit from) income taxes	12.2	%	(2.3	)%	5.9	%	3.9	%
Net income (loss)	(13.7	)%	4.6	%	(3.6	)%	(1.5	)%

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Revenue

The following table presents our revenue, by revenue source, for the periods presented:

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Total revenue	$	147,136		$	131,894		$	446,980		$	377,521
Type of revenue:
Product	$	121,195		$	110,531		$	371,318		$	317,632
Professional services and support	25,941			21,363			75,662			59,889
Total revenue	$	147,136		$	131,894		$	446,980		$	377,521
% revenue by type:
Product	82.4		%	83.8		%	83.1		%	84.1		%
Professional services and support	17.6		%	16.2		%	16.9		%	15.9		%
Revenue by geography:
United States	$	90,978		$	77,445		$	277,735		$	235,092
Europe, the Middle East and Africa	28,165			24,443			78,294			67,092
Asia Pacific and Japan	22,794			25,646			75,263			64,362
Rest of World	5,199			4,360			15,688			10,975
Total revenue	$	147,136		$	131,894		$	446,980		$	377,521
% revenue by geography:
United States	61.8		%	58.7		%	62.1		%	62.3		%
Europe, the Middle East and Africa	19.2		%	18.5		%	17.5		%	17.8		%
Asia Pacific and Japan	15.5		%	19.5		%	16.9		%	17.0		%
Rest of World	3.5		%	3.3		%	3.5		%	2.9		%
Total revenue by sales channel:
Indirect	$	138,421		$	121,291		$	416,474		$	347,735
Direct	8,715			10,603			30,506			29,786
Total revenue	$	147,136		$	131,894		$	446,980		$	377,521
% revenue by sales channel:
Indirect	94.1		%	92.0		%	93.2		%	92.1		%
Direct	5.9		%	8.0		%	6.8		%	7.9		%

For the three months ended April 30, 2013, total revenue increased 11.6% compared to the same period of fiscal 2012. An increase in product revenue of 9.6% for the three months ended April 30, 2013 compared to the same period of fiscal 2012 drove the overall increase in total revenue. For the nine months ended April 30, 2013, total revenue increased 18.4% compared to the same period of fiscal 2012, which was also driven by an increase in product revenue of 16.9%. The revenue growth that we have experienced has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers and is the result of business enterprises and other organizations needing to provide secure mobility to their users in a manner that we believe is more cost effective than the traditional approach of using port-centric networks.

The rapid proliferation of Wi-Fi enabled mobile devices, the increase in demand for multimedia-rich mobility applications, and the rise of both server and desktop virtualization is driving the increase in demand for our products. Our MOVE architecture continues to gain momentum as companies move toward a new access network, resulting in significant growth in the sales of our access point products and an increase in hardware product sales. We continue to add new customers each quarter. As of April 30, 2013, our cumulative customer total was over 20,000.

Professional services and support revenue increased 21.4% for the three months ended April 30, 2013 compared to the same period in fiscal 2012, and 26.3% during the nine months ended April 30, 2013 compared to the same period in fiscal 2012. This increase is primarily a result of both increased first year support sales and the renewal of support contracts by existing customers as our customer base continues to grow.

Revenue from our indirect sales channel increased 14.1% and 19.8% for the three and nine months ended April 30, 2013, respectively, compared to the same periods in fiscal 2012 as we continue to derive a significant majority of our total revenue

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from indirect channels which is consistent with our focus on improving the efficiency of marketing and selling our product through the indirect channels.

Revenue from shipments to locations outside the U.S. increased for the three and nine months ended April 30, 2013 compared to the same periods in fiscal 2012 due to increased demand across some of our non-U.S. regions. Our international revenue increased 3.1% and 18.8% for the three and nine months ended April 30, 2013, respectively, when compared to the same periods in fiscal 2012. As a percentage of total revenue, international revenue decreased in the three months ended April 30, 2013 compared to the three months ended April 30, 2012 due mainly to a decrease in demand in the Asia Pacific and Japan region. We continue to expand into international locations and introduce our products in new markets, and we expect international revenue to increase in absolute dollars and increase as a percentage of total revenue in fiscal 2013 compared to fiscal 2012.

Cost of Revenue and Gross Margin

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Total revenue	$	147,136		$	131,894		$	446,980		$	377,521
Cost of product	$	36,782		$	34,014		$	110,608		$	96,535
Cost of professional services and support	7,190			5,497			20,138			15,073
Total cost of revenue	43,972			39,511			130,746			111,608
Gross profit	$	103,164		$	92,383		$	316,234		$	265,913
Gross margin	70.1		%	70.0		%	70.7		%	70.4		%

For the three and nine months ended April 30, 2013, total cost of revenue increased 11.3% and 17.1%, respectively, compared to the same periods in fiscal 2012. This increase was primarily due to the corresponding increase in our product revenue. The substantial majority of our cost of product revenue consists of payments to our contract manufacturers. Additionally, cost of revenue was impacted by stock-based compensation which increased by $0.4 million and $0.9 million for the three and nine months ended April 30, 2013, respectively, compared to the same periods in fiscal 2012.

Cost of professional services and support revenue increased 30.8% and 33.6% for the three and nine months ended April 30, 2013, respectively, compared to the same periods in fiscal 2012. This increase was primarily due to the corresponding increase in our service revenue, as well as increased outside services as we expanded our customer support call centers and increased costs associated with our initiative to increase professional services delivery capabilities.

As we expand internationally, we will likely incur additional costs to conform our products to comply with local laws or local product specifications. In addition, we plan to continue to hire additional personnel to support our growing international customer base, which would increase our cost of professional services and support.

Gross margin increased to 70.1% for the three months ended April 30, 2013 compared to 70.0% for the same period of fiscal 2012, primarily due to changes in our product and geographical mix. Additionally, as a percentage of total revenue, professional services and support, which has a higher margin percentage relative to product, increased during three months ended April 30, 2013 compared to the same period in fiscal 2012. Gross margin increased to 70.7% in the nine months ended April 30, 2013 compared to 70.4% in the same period of fiscal 2012, primarily due to changes in our product and geographical mix, as well as increased mix of professional services and support relative to the product.

Research and Development Expenses

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Research and development expenses	$	34,983		$	27,383		$	101,634		$	79,776
Percent of total revenue	23.7		%	20.7		%	22.7		%	21.1		%

For the three months ended April 30, 2013, research and development expenses increased 27.8% compared to the three months ended April 30, 2012, primarily due to an increase of $5.2 million in personnel and related costs, including an increase

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in salaries and wages of $2.8 million and an increase in stock-based compensation of $2.0 million. The increase is directly related to an increase in headcount. Depreciation expenses increased $1.0 million as we continue to purchase tooling and equipment to support our research and development efforts. Facilities and IT-related expenses related to our worldwide research and development efforts also increased $0.9 million to support business growth.

For the nine months ended April 30, 2013, research and development expenses increased 27.4% compared to the same period in fiscal 2012. As the result of the increase in headcount, personnel and related costs increased $13.7 million, including an increase in stock-based compensation of $4.0 million. Depreciation expenses increased $2.5 million as we continue to purchase tooling and equipment to support our research and development efforts. Facilities and IT-related expenses related to our worldwide research and development efforts also increased $3.6 million, of which $2.9 million is to support business growth and $0.7 million is due to increased allocations which were previously classified in General and Administrative expenses.

Sales and Marketing Expenses

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Sales and marketing expenses	$	57,199		$	49,974		$	168,516		$	145,309
Percent of total revenue	38.9		%	37.9		%	37.7		%	38.5		%

For the three months ended April 30, 2013, sales and marketing expenses increased 14.5% compared to the three months ended April 30, 2012. Personnel and related costs increased $4.6 million primarily due to an increase in headcount. These costs include an increase in salaries and wages of $2.4 million and an increase in stock-based compensation of $0.9 million. Commission expense remained relatively consistent during the periods. Marketing expenses increased $0.7 million due to field marketing efforts and product launches. Facilities and IT-related expenses related to our worldwide sales and marketing efforts also increased $1.1 million to support business growth.

For the nine months ended April 30, 2013, sales and marketing expenses increased 16.0% compared to the same period in fiscal 2012. As the result of the increase in headcount, personnel and related costs increased $15.3 million, including an increase in stock-based compensation of $1.8 million. Marketing expenses increased $1.8 million due to field marketing efforts and product launches. Facilities and IT-related expenses related to our sales and marketing efforts also increased $3.4 million, of which $2.4 million is to support business growth and $1.0 million is due to increased allocations which were previously classified in General and Administrative expenses.

General and Administrative Expenses

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
General and administrative expenses	$	13,405		$	11,723		$	37,755		$	35,521
Percent of total revenue	9.1		%	8.9		%	8.4		%	9.4		%

General and administrative expenses for the three months ended April 30, 2013 increased 14.3% compared to the three months ended April 30, 2012. The increase was primarily driven by the increase in personnel and related costs of $1.7 million, of which $0.3 million is due to an increase in stock-based compensation expenses.

For the nine months ended April 30, 2013, general and administrative expenses increased 6.3% compared to the same period in fiscal 2012. The increase was primarily driven by an increase in personnel and related costs of $5.1 million, of which $2.3 million is due to an increase in stock-based compensation expense. This increase in expense was partially offset by the decrease in allocation expenses charged to General and Administrative expenses of $2.0 million due to certain expenses related to facilities and IT being allocated out from the General and Administrative department to other functional departments and a $2.1 million decrease in professional services.

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Other Income (Loss), Net

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013		2012
	(in thousands)						(in thousands)
Interest income	$	266		$	301		$	875	$	876
Other income (loss), net	(114		)	(675		)	1,140		2,883
Total other income (loss), net	$	152		$	(374	)	$	2,015	$	3,759

Interest income remained relatively consistent for the three month and nine months ended April 30, 2013 compared to the same periods in fiscal 2012. The primary source of our interest income is our cash and investment balances in interest-earning accounts. Our average interest-earning cash and investment balance for the three months ended April 30, 2013 was $264.1 million compared to $230.5 million for the same period in fiscal 2012. Our average interest-earning cash and investment balance for the nine months ended April 30, 2013 was $242.2 million compared to $200.3 million for the same period of fiscal 2012.

Other income (loss), net increased for the three months ended April 30, 2013 and decreased for the nine months ended April 30, 2013 compared to the same periods in fiscal 2012 primarily as a result of the change in the valuation of our contingent rights liability related to the acquisition of Azalea. The change in valuation of the contingent rights liability resulted in a $0.2 million of other expense recorded during the three months ended April 30, 2012 and other income of $3.0 million during the nine months ended April 30, 2012. For the nine months ended April 30, 2013, the contingent rights liability related to Azalea expired in December 2012 resulting in a gain of $1.3 million. This gain was partially offset by losses due to changes in foreign exchange rates. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of the Azalea contingent rights liability.

Provision for Income Taxes

	Three months ended April 30,						Nine months ended April 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Income before income taxes	$	(2,271	)	$	2,929		$	10,344		$	9,066
Provision for income taxes	$	17,920		$	(3,099	)	$	26,371		$	14,887
Effective tax rate	(789.1		)%	(105.8		)%	254.9		%	164.2		%

Income tax expense is recognized based on management's best estimate of the annual income tax rate expected for the full fiscal year. The estimated annual effective tax rate used for the year ending July 31, 2013 is 252.7%, which has been applied to the income before taxes for the nine months ended April 30, 2013. Our estimated annual effective tax rate differs from the federal statutory rate of 35% due to state taxes and significant permanent differences. These permanent differences arise primarily from the amortization of deferred tax charges related to an intercompany sale of intellectual property rights, non-deductible stock-based compensation expense, a valuation allowance on California R&D tax credits, and U.S. tax reserves on foreign tax matters. The estimated annual effective tax rate for July 31, 2012, at April 30, 2012, was 173.65%. The increase in annual effective tax rate between April 30, 2013 and April 30, 2012 is due to a decrease in our annual forecasted income before income taxes, an increase in non-deductible stock-based compensation expense, a valuation allowance on California R&D tax credits, and U.S. tax reserves on foreign tax matters for fiscal year 2013.

The actual tax rate for the three and nine months ended April 30, 2013 was (789.1)% and 254.9%, respectively. The significant negative tax rate for the three months ended April 30, 2013 is caused primarily by the decrease in our annual forecasted income before income taxes compared to our prior forecast as of January 31, 2013. The decrease in our annual forecasted income before income taxes is due to uncertainties in the global macroeconomic environment and increased competition. This decrease in annual forecasted income before income taxes, combined with the effect of fixed amortization of the deferred charge on intellectual property increased our annual effective tax rate to 252.7% and resulted in a significant adjustment in the three months ended April 30, 2013. The actual tax rate for the three and nine months ended April 30, 2012 was (105.8)% and 164.2%, respectively. The difference between the three and nine months ended April 30, 2013 and April 30, 2012 actual tax rates are mainly due to an increase in the estimated annual effective tax rate for fiscal year 2013.

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Our effective tax rate for the three months ended April 30, 2012 and the three months ended April 30, 2013 varied from the nine months ended April 30, 2012 and the nine months ended April 30, 2013 mainly due to the change in our annual effective tax rate relative to our annual effective tax rate forecasted as of January 31, 2012 and January 31, 2013, respectively. These changes result in adjustments in the three months ended April 30, 2012 and April 30, 2013.

In fiscal 2012, we implemented a new structure of corporate organization to more closely align our corporate organization with the international nature of our business activities and to reduce our overall effective tax rate through changes in how we develop and use our intellectual property and the structure of our international procurement and sales, including transfer-price arrangements for intercompany transactions.

We recorded a deferred charge during the first quarter of fiscal 2012 related to the deferral of income tax expense on intercompany profits that resulted from the sale of our intellectual property rights outside of North and South America to our Irish subsidiary. The deferred charge is included in prepaid and other non-current assets on the Consolidated Balance Sheets. As of April 30, 2013, the balance in prepaids and other assets was $7.6 million, and $0.7 million in other non-current assets. The deferred charge is amortized on a straight-line basis as a component of income tax expense over three to five years, based on the economic life of the intellectual property and will increase our effective tax rate during the amortization period. The deferred charge resulted in a 95.2 point increase to our projected annual effective tax rate before discrete tax items as of April 30, 2013 from 157.5% to 252.7%. While we have not realized any tax savings to date, we expect to realize a reduction in our effective tax rate as a result of our corporate reorganization after the deferred charges have been fully amortized.

We evaluate the realization of our deferred tax assets based on the expiration period of the asset, projections of future taxable income in the relevant tax jurisdiction, the effect of tax planning strategies, and other factors. Both positive and negative evidence is weighed using significant judgment. Based on an evaluation of these factors, we believe that the realization of our deferred tax assets is more likely than not and therefore our deferred tax assets are without a valuation allowance. However, we believe it is more likely than not that certain California R&D tax credits will not be realized. Therefore, we have recorded a valuation allowance on certain California R&D tax credit carryforward generated in prior fiscal years, and a full valuation on the current year generated California R&D tax credits. In future periods, positive and negative evidence can change due to revised projections of future taxable income in the relevant jurisdictions and other factors listed above. If negative evidence were to outweigh positive evidence, we would record a higher valuation allowance with an increase in tax expense in the Consolidated Statements of Comprehensive Income and without any change in net cash provided by operating activities in the Consolidated Statements of Cash Flows.

Liquidity and Capital Resources

	April 30, 2013		July 31, 2012
	(in thousands)
Working capital	$	437,370	$	355,930
Cash and cash equivalents	177,446		133,629
Short-term investments	$	263,436	$	212,601

	Nine months ended April 30,
	2013			2012
	(in thousands)
Cash provided by operating activities	$	107,903		$	70,775
Cash used in investing activities	(70,067		)	(74,185		)
Cash provided by financing activities	$	5,962		$	42,834

As of April 30, 2013, our principal sources of liquidity were our cash, cash equivalents and short-term investments. Cash and cash equivalents are primarily comprised of cash, sweep funds and money market funds with an original maturity of 90 days or less at the time of the purchase. Short-term investments include corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, and certificates of deposit. Cash, cash equivalents and short-term investments increased by $94.7 million for the nine months ended April 30, 2013 to $440.9 million as of April 30, 2013. As of April 30, 2013, we had $67.4 million of cash and cash equivalents held by our foreign subsidiaries outside the United States. Historically, we have required capital principally to fund our working capital needs and acquisition activities. It is our investment policy to invest excess cash in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes current income within our policy’s framework. We are averse to principal loss and will ensure the safety and preservation of our

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invested funds by limiting default risk, market risk and reinvestment risk. Our investment policy is designed to prevent fluctuations in market value that materially affect our financial results.

Cash Flows from Operating Activities

Our cash flows from operating activities will continue to be affected principally by our profitability, working capital requirements, the continued growth in revenue and cash collections and the extent to which we increase spending on personnel. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and cash flows from sales personnel. In the future, we also anticipate achieving cash tax savings and a reduction in our overall effective tax rate as a result of the new structure of our corporate organization implemented in fiscal 2012. Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel related expenditures, purchases of inventory, and consulting and outside services.

For the nine months ended April 30, 2013, net cash provided by operating activities increased $37.1 million compared to the same period of fiscal 2012. This increase is primarily attributable to an increase from the change in operating assets and liabilities.

Cash Flows from Investing Activities

Cash used in investing activities for the nine months ended April 30, 2013 decreased $4.1 million compared to the same period of fiscal 2012. Although we continue to invest our excess cash balances in short-term investments, the timing of maturities and reinvestment can vary from quarter to quarter. Some of the proceeds from the sale and maturity of these investments were used to purchase property and equipment of $16.0 million during the nine months ended April 30, 2013. In addition, we used $21.1 million of cash, net of cash acquired, to purchase Avenda during the nine months ended April 30, 2012 compared to a $1.5 million investment in a privately-held company in the same period of fiscal 2013.

Cash Flows from Financing Activities

Cash provided by financing activities was $6.0 million for the nine months ended April 30, 2013 compared to cash provided by financing activities of $42.8 million during the same period in fiscal 2012. We used $30.5 million for repurchases of common stock under our stock repurchase program during the nine months ended April 30, 2013. We had no stock repurchase program in the comparable period of fiscal 2012. In addition, excess tax benefits associated with stock-based compensation decreased by $5.4 million for the nine months ended April 30, 2013 compared to the same period of fiscal 2012.

Based on our current cash, cash equivalents and short-term investments we expect that we will have sufficient resources to fund our operations for the next 12 months. We intend to fund our acquisition of Meridian Apps, Inc. using our available working capital. However, in the future, we may need to raise additional capital or incur indebtedness to fund our operations or support acquisition activity. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of introductions of new products and enhancements to existing products, and the continuing market acceptance of our products and potential future acquisitions.

Contractual Obligations & Commitments

Leases and purchase obligations

The following is a summary of our contractual obligations and commitments:

	Total		Less than  1 year		1 - 3 years		3 - 5 years		More than 5 years
	(in thousands)
Operating leases	$	26,652	$	7,219	$	17,638	$	1,795	$	—
Purchase obligations (1)	$	31,531	23,324		5,566		600		2,041
Total contractual obligations	$	58,183	$	30,543	$	23,204	$	2,395	$	2,041

(1) Purchasing obligations represent contractual amounts that will be due to purchase goods and services to be used in our operations, and exclude contractual amounts that are cancelable without penalty. The contractual amounts are related principally to inventory, information technology and marketing related purchase agreements. We outsource the production of our hardware to various third-party manufacturing suppliers, one of which is our main contract manufacturer. Under the agreement with our main contract manufacturer, 40% of the order quantities can be rescheduled

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or are cancelable by giving notice 60 days prior to the expected shipment date, and 20% of the order quantities can be rescheduled or are cancelable by giving notice 30 days prior to the expected shipment date. Orders are not cancelable within 30 days prior to the expected shipment date.

Uncertain Tax Positions

As of April 30, 2013, the net recorded tax liability for uncertain tax positions was approximately $6.4 million. We are currently under tax audit in certain tax jurisdictions. Due to our tax loss carryforwards, we believe that no cash payments will be required during the next twelve months associated with our uncertain tax positions.

Off-Balance Sheet Arrangements

We consider our investments in unconsolidated variable interest entities to be off-balance sheet arrangements. In the ordinary course of business, we have invested in a privately held company. This privately held company may be considered to be a variable interest entity. We evaluate on an ongoing basis our investment in this privately held company, and we have determined that as of April 30, 2013 we do not have a material unconsolidated variable interest entity.

As of July 31, 2012, we did not have any relationships with unconsolidated entities or financial partnerships.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

As of April 30, 2013, foreign currency cash accounts totaled $14.8 million, primarily in Euros, British Pounds, and Indian Rupees.

Most of our sales contracts are denominated in U.S. Dollars, and therefore, our revenue is not subject to significant foreign currency risk. Our operating expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound, Euro, Indian Rupee, and Chinese Yuan. To date, we have not entered into any hedging contracts because expenses in foreign currencies have been insignificant, and exchange rate fluctuations have had little impact on our operating results and cash flows.

We assessed the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $1.5 million change in the value of our foreign currency cash accounts.

Interest Rate Sensitivity

We had cash, cash equivalents and short-term investments totaling $440.9 million and $346.2 million as of April 30, 2013, and July 31, 2012, respectively. The cash, cash equivalents and short-term investments are held for working capital purposes. We do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified as “available-for-sale securities.” These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. Due to the short duration and conservative nature of our investment portfolio, a movement of 10% in market interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year. If overall interest rates had fallen by 10% during the nine months ended April 30, 2013, our interest income on cash, cash equivalents and short-term investments would have declined by $0.1 million assuming consistent investment levels.

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 pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of April 30, 2013, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the third quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting means a process designed 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under the “Legal Matters” section in Note 13, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 1 of Part I of this Report, is incorporated herein by reference.

Item 1A. Risk Factors

Set forth below and elsewhere in this report, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and in our other public statements. Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The description below includes any material changes to and supersedes the description of the risk factors affecting our business previously discussed in “Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012 and the risk factors set forth in our Quarterly Report on Form 10-Q for the three-month periods ended October 31, 2012 and January 31, 2013.

Risks Related to Our Business and Industry

Our operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future, which makes it difficult for us to predict our future results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing and volatile global economic environment, any of which may cause our stock price to fluctuate. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

Furthermore, our product revenue generally reflects orders shipped in the same quarter they are received, and a substantial portion of our orders are often received in the last month of each fiscal quarter, a trend that we expect to continue. As a result, if we are unable to ship orders received in the last month of each fiscal quarter, even though we may have business indicators about customer demand during a quarter, we may experience revenue shortfalls, and such shortfalls may have a material adverse impact on our earnings because we may not be able to adequately and timely adjust our expense levels. For example, in our third quarter of fiscal 2012, we experienced a higher than normal percentage of orders in the third month of the quarter, which put increased pressure on our operations to fulfill orders in a timely manner. If this occurs in future quarters, our revenue performance could be affected, and we may fail to meet securities analysts’ and investors’ expectations, which may cause the price of our stock to decline.

In addition to other risk factors listed in this “Risk Factors” section, factors that may cause our operating results to fluctuate include:

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• the impact of unfavorable worldwide economic and market conditions, including the restricted credit environment impacting the credit of our channel partners and end user customers;

• our ability to develop and maintain our relationships with our VARs, VADs, OEMs and other partners;

• fluctuations in demand, sales cycles and prices for our products and services;

• the amount of orders booked but not shipped in prior quarters that are shipped in the current quarter;

• reductions in customers’ budgets for information technology purchases and delays in their purchasing cycles;

• the sale of our products in the timeframes we anticipate, including the number and size of orders in each quarter;

• our ability to develop, introduce and ship in a timely manner, new products and product enhancements that meet customer requirements;

• our dependence on several large vertical markets, including the government, healthcare, retail, enterprise and education vertical markets;

• the timing of product releases or upgrades by us or our competitors;

• any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;

• our ability to control costs, including our operating expenses, and the costs of the components we purchase;

• product mix and average selling prices, as well as increased discounting of products by us and our competitors;

• the proportion of our products that are sold through direct versus indirect channels;

• our ability to maintain volume manufacturing pricing from our contract manufacturers and component suppliers;

• our contract manufacturers and component suppliers’ ability to meet our product demand forecasts;

• the potential need to record incremental inventory reserves for products that may become obsolete due to our new product introductions;

• growth in our headcount and other related costs incurred in our customer support organization;

• changing market conditions, including current and potential customer consolidation;

• any decision to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;

• our ability to derive benefits from our investments in sales, marketing, engineering or other activities;

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

• fluctuations in our effective tax rate, changes in the valuation of our deferred tax assets or liabilities, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof;

• the timing of revenue recognition in any given quarter as a result of timing of the orders meeting the relevant revenue recognition criteria;

• the regulatory environment for the certification and sale of our products; and

• seasonal demand for our products, some of which may not be currently evident due to our revenue growth during recent fiscal years, including thus far in fiscal 2013.

As a result, our quarterly operating results are difficult to predict even in the near term. In one or more future quarterly periods, our operating results may fall below the expectations of securities analysts and investors or below any guidance we may provide to the market. In this event, the trading price of our common stock could decline significantly. Such a stock price decline could occur even when we have met our publicly stated revenue and/or earnings guidance.

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Our business, operating results and growth rates may be adversely affected by unfavorable economic and market conditions.

Our business depends on the overall demand for IT and on the economic health and general willingness of our current and prospective customers to make capital commitments. If the conditions in the global economic environment remain uncertain or continue to be volatile, or if they deteriorate further, our business, operating results, and financial condition may be adversely affected in a material way. As we experienced in the third quarter of fiscal 2013, economic weakness, customer financial difficulties and constrained spending on IT initiatives have resulted, and may in the future result, in challenging and delayed sales cycles and could negatively impact our ability to meet our expectations and forecast future periods. In particular, we cannot be assured of the level of IT spending, the deterioration of which could have a material adverse effect on our results of operations and growth rates. The purchase of our products or willingness to replace existing infrastructure in some vertical markets may be discretionary and may involve a significant commitment of capital and other resources. Therefore, weak economic conditions, or a reduction in IT spending would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services, and reduced unit sales. A reduction in IT spending could occur or persist even if economic conditions improve. In addition, if interest rates rise or foreign exchange rates weaken for our international customers, overall demand for our products and services could be further dampened, and related IT spending may be reduced. Furthermore, any increase in worldwide commodity prices may result in higher component prices and increased shipping costs, both of which may negatively impact our financial results.

The market in which we compete is highly competitive, and competitive pressures from existing and new companies may have a material adverse effect on our business, revenue, growth rates and market share.

The market in which we compete is highly competitive and is influenced by the following competitive factors:

• comprehensiveness of the solution;

• performance of software and hardware products;

• ability to deploy easily into existing networks;

• interoperability with other devices;

• scalability of solution;

• ability to provide secure mobile access to the network;

• speed of mobile connectivity offering;

• initial price, total cost of ownership, and return-on-investment;

• ability to allow centralized management of products; and

• ability to obtain regulatory and other industry certifications.

We expect competition to intensify in the future as other companies introduce new products in the same markets we serve or intend to enter and as the market continues to consolidate. This competition could result in increased pricing pressure, reduced profit margin, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, there could be a material adverse effect on our competitive position, revenue and prospects for growth.

Competitive products may in the future have better performance, more and/or better features, lower prices and broader acceptance than our products. A number of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. In addition, some of our competitors offer a broader range of products than we do, which could allow them to bundle products in a manner that make it challenging for us to compete based on price. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. Currently, we compete with a number of large and well-established public companies, including Cisco Systems, Hewlett-Packard and Motorola, as well as smaller companies and new market entrants, any of which could reduce our market share, require us to lower our prices, or both.

We expect increased competition from our current competitors, as well as other established and emerging companies, as our market continues to develop and expand. Our channel partners could market products and services that compete with our products and services. In addition, some of our competitors have made acquisitions or entered into partnerships or other

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strategic relationships with one another to offer a more comprehensive solution than they individually had offered. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry and as companies enter into partnerships or are acquired. Many of the companies driving this consolidation trend have significantly greater financial, technical and other resources than we do and are better positioned to acquire and offer complementary products and technologies. The companies resulting from these possible consolidations may create more compelling product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. Continued industry consolidation may adversely impact customers’ perceptions of the viability of smaller and even medium-sized technology companies and, consequently, customers’ willingness to purchase from such companies. These pressures could adversely affect our business, operating results and financial condition in a material way.

We expect our gross margin to vary over time and our recent level of product gross margin may not be sustainable.

Our product gross margins vary from quarter to quarter and the recent level of gross margin may not be sustainable and may be adversely affected in the future by numerous factors, including product or sales channel mix shifts, the percentage of revenue from international regions, increased price competition, increases in material or labor costs, excess product component or obsolescence charges from our contract manufacturers, write-downs for obsolete or excess inventory, increased costs due to changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand, warranty-related issues, product discounting, freight charges, or our introduction of new products or new product platforms or entry into new markets with different pricing and cost structures. As a result of any of these factors, or other factors, our gross margin may be adversely affected, which in turn would harm our operating results.

Our international sales and operations subject us to additional risks that may adversely affect our operating results.

We derive a significant portion of our revenue from customers outside the United States. We have sales and technical support personnel in numerous countries worldwide. In addition, our product configuration and fulfillment are handled in Singapore and a portion of our engineering and order management efforts are currently handled by personnel located in India and China, and we expect to expand our offshore development efforts within India and China and possibly in other countries. We expect to continue to add personnel in additional countries. Our international operations subject us to a variety of risks, including:

• the difficulty and cost of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

• the difficulty in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

• the need to localize our products for international customers;

• the risks and costs in obtaining product compliance certifications;

• unfavorable changes in tax treaties or laws;

• tariffs and trade barriers, export regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

• increased exposure to foreign currency exchange rate risk;

• increased exposure to political and economic instability, war and terrorism;

• limited protection for intellectual property rights in some countries; and

• increased cost of terminating international employees in some countries.

Moreover, local laws and customs in many countries differ significantly from those in the United States. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. There can be no assurance that our employees, contractors, and agents will not take actions in violation of our policies and procedures, which are designed to ensure compliance with U.S. and foreign laws and policies. Violations of laws or key control policies by our employees, contractors, or agents could result in financial reporting problems, fines, penalties, or prohibition on the importation or exportation of our products, and could have a material adverse effect on our business, financial condition and results of operations.

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Foreign currencies periodically experience rapid fluctuations in value against the U.S. dollar. Any foreign currency devaluation against the U.S. dollar increases the real cost of our products to our customers and partners in foreign markets where we sell in U.S. dollars, which has resulted in the past and may result in the future in delayed or cancelled purchases of our products and, as a result, lower revenue. In addition, this increase in cost increases the risk to us that we will be unable to collect amounts owed to us by such customers or partners, which in turn would impact our revenue and could adversely impact our business and financial results in a material way. Any devaluation may also lead us to more aggressively discount our prices in foreign markets in order to maintain competitive pricing, which would negatively impact our revenue and gross margin. Conversely, a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we purchase components in foreign currencies.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.

Changes in our tax rates could adversely affect our future results.

We are a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates, which are difficult to predict, could be unfavorably affected by the mix of international revenue, nondeductible stock-based compensation, changes in research and development tax credit laws, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in jurisdictions where we have higher statutory rates, transfer pricing adjustments, not meeting the terms and conditions of tax holidays or incentives, changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof. Further, the accounting for stock compensation expense in accordance with Accounting Standards Codification Topic 718 Stock Compensation and uncertain tax positions in accordance with Accounting Standards Codification Topic 740 Income Taxes could result in more unpredictability and variability to our future effective tax rates.

We are also subject to the periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We may underestimate the outcome of such examinations which, if significant, would have a material adverse effect on our results of operations and financial condition.

Claims by others that we infringe their intellectual property rights could harm our business.

Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against us or against our customers or channel partners for which we may be liable. Due to the rapid pace of technological change in our industry, much of our business and many of our products rely on proprietary technologies of third parties, and we may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As our business expands and the number of products and competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products or performing certain services. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, or require us to pay substantial settlement amounts or judgment damages. In light of our operating results, a large settlement or non-appealable judgment could have a material adverse effect to our financial condition.

Sequestration or other actions of the U.S. Government resulting in significant cuts in U.S. government spending could adversely affect our sales and future results.

On August 2, 2011, the President signed into law the Budget Control Act of 2011 (the "Budget Control Act"), which raised the debt ceiling and put into effect a series of actions for deficit reduction. The Budget Control Act created a Congressional Joint Select Committee on Deficit Reduction (the "Committee") that was tasked with proposing additional deficit reduction of at least $1.5 trillion over ten years. As the Committee was unable to achieve its targeted savings, the Budget

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Control Act triggered automatic reductions in discretionary and mandatory spending, known as "sequestration" starting in 2013. In addition, the nation's debt ceiling is currently expected to be reached during the first half of calendar 2013. While Congress and the Administration continue to debate how the nation should proceed on these issues, the outcome of that debate could have a significant impact on future U.S. Government spending plans.

We depend on several large vertical markets, including government, healthcare and education. Should sequestration take effect or other actions be taken that significantly cut U.S. Government spending in those areas, our sales and future results may be adversely impacted.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and financial condition.

In the future we may acquire businesses, products or technologies. However, we may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals. These acquisitions and any future acquisitions may be viewed negatively by customers, financial markets or investors. In addition, these acquisitions and any future acquisitions that we may make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. We may also encounter difficulties in maintaining uniform standards, controls, procedures and policies across locations, or in managing geographically or culturally diverse locations. We may experience significant problems with acquired or integrated product quality. We may also experience significant liabilities associated with acquired or integrated technology. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and adversely impact our business, operating results and financial condition. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, which could harm our business, operating results and financial condition.

We compete in new and rapidly evolving markets and have a limited operating history, which makes it difficult to predict our future operating results.

We were incorporated in February 2002 and began commercial shipments of our products in June 2003. As a result of our limited operating history, it is very difficult to forecast our future operating results. In addition, we operate in an industry characterized by rapid technological change. Our prospects should be considered and evaluated in light of the risks and uncertainties frequently encountered by companies in rapidly evolving markets characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. These risks and difficulties include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories.

In addition, our products are designed to be compatible with industry standards for secure communications over wireless and wireline networks. As we encounter changing standards, customer requirements and competitive pressures, we likely will be required to reposition our product and service offerings and introduce new products and services. We may not be successful in doing so in a timely and appropriately responsive manner, or at all. Our failure to address these risks and difficulties successfully could materially harm our business and operating results.

We sell a majority of our products through VADs, VARs, and OEMs. If these channel partners on which we rely do not perform their services adequately or efficiently, or if they exit the industry, are acquired by a competitor, or have financial difficulties, there could be a material adverse effect on our revenue and our cash flow.

Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of VADs, VARs, and OEMs, which we refer to as our indirect channel. We have dedicated a significant amount of effort to increase the use of our VADs and VARs in each of our theatres of operations. The percentage of our total revenue fulfilled from sales through our indirect channel was 94.1% and 92.0% for the third quarter of fiscal 2013 and fiscal 2012, respectively. We expect that over time, indirect channel sales will continue to constitute a significant majority of our total revenue. Accordingly, our revenue depends in large part on the effective performance of our channel partners. The table below represents the percentage of total revenue from our top channel partners (*indicates less than 10%):

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	Three months ended April 30,				Nine months ended April 30,
	2013		2012		2013		2012
ScanSource, Inc. (“Catalyst”)	19.2	%	21.0	%	19.8	%	20.3	%
Synnex Corp.	12.3	%	*		10.3	%	*
Avnet Logistics U.S. LP	*		12.8	%	*		13.7	%

Our agreements with our channel partners generally provide that they use reasonable commercial efforts to sell our products on a perpetual basis unless the agreement is otherwise terminated by either party. Our agreements with our top channel partners, ScanSource, Inc., Synnex Corp, and Avnet Logistics U.S. LP automatically renew each year for one year terms unless written notification of termination is received at least 60 to 180 days prior to the end of the term then in effect. In addition, our agreement with ScanSource, Inc. contains a most-favored nation clause, pursuant to which we represent that the price charged and the terms offered to ScanSource, Inc. will be no less favorable than those made available to other channel partners who purchase similar quantities. However, the scope of such most-favored nation clause is narrow and specific, and we have not to date incurred any obligations related to such term in the agreement.

Some of our indirect channel partners may have insufficient financial resources and may not be able to withstand changes in worldwide business conditions, including economic downturns, abide by our inventory and credit requirements, or have the ability to meet their financial obligations to us. The table below represents the percentage of total accounts receivable from our top channel partners (* indicates less than 10%):

	April 30, 2013		July 31, 2012
ScanSource, Inc. (“Catalyst”)	20.0	%	15.7	%
Avnet Logistics U.S. LP	*		19.0	%

If the indirect channel partners on which we rely do not perform their services adequately or efficiently, fail to meet their obligations to us, exit the industry, elect to replace our products with products of our competitors or otherwise reduce or terminate our contractual relationship, and we are not able to quickly find adequate replacements, there could be a material adverse effect on our revenue, cash flow and market share. By relying on these indirect channels, we may have less contact with the end users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, service ongoing customer requirements and respond to evolving customer needs. Reduced contact with the end users of our products also would make it more difficult and more costly to establish direct sales relationships with these end users in the event our indirect relationships terminate. In addition, we may be exposed to risks of sales by our indirect channel partners into restricted jurisdictions. Furthermore, our indirect channel partners may receive pricing terms that allow for volume discounts off of list prices for the products they purchase from us, which reduce our margin to the extent revenue from such channel partners increases as a proportion of our overall revenue.

Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel partners, including investment in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. We have no minimum purchase commitments with any of our VADs, VARs, or OEMs, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours or from terminating our contract on short notice. Our competitors may be effective in providing incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our products. Our channel partners may choose not to focus primarily on the sale of our products or offer our products at all. Our failure to establish and maintain successful relationships with indirect channel partners would likely have a material adverse impact on our business, operating results and financial condition.

Our products are highly technical and may contain undetected hardware errors or software bugs, which could cause harm to our reputation and adversely affect our business.

Our products are highly technical and complex and, when deployed, are critical to the operation of many networks. We have focused, and intend to focus in the future, on getting our new products to market quickly. Due to our rapid product introductions, defects and bugs that may be contained in our products may not have manifested. Our products have contained and may contain undetected errors, bugs or security vulnerabilities when our products are first introduced and as new versions are released. Some errors in our products may only be discovered after a product has been installed and used by customers. Any errors, bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of current or prospective customers, damage to our brand and reputation, reduction in the market acceptance of our new products or new versions of our products, increased development costs,

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incurrence of product reengineering expenses, increased inventory costs and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.

System security risks, data protection breaches, and cyber-attacks on our systems or products could compromise our proprietary information, disrupt our internal operations and harm public perception of our products, which could cause our business and reputation to suffer, create additional liabilities and adversely affect our financial results and stock price.

In the ordinary course of business, we store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners on our internal systems and networks. Additionally, we design and sell products that allow our customers to wirelessly access sensitive data on their own systems. Our products incorporate complex technology and must operate and support a wide range of mobile devices that use Wi-Fi as well as the complex applications that run on those devices, which use multiple Wi-Fi communication industry standards. The secure maintenance of sensitive information on our own networks and the intrusion protection features of our products are both critical to our operations and business strategy.

Increasingly, companies are facing a wide variety of attacks from computer “hackers” who develop and deploy destructive software programs (such as viruses and worms) to attack networks. Due to our business model, we have faced and are likely to face similar threats that target both our internal systems and our products, which, in turn, may threaten our customers' networks, devices and applications. Because the techniques used by hackers to access or sabotage networks are becoming increasingly sophisticated, change frequently and generally are not recognized until launched against a target, even with the significant efforts we take to create security barriers to such attacks, it is virtually impossible for us to entirely eliminate this risk. Additionally, our information technology and infrastructure may be breached due to employee error, malfeasance (either internal or external and either at home or abroad) or other disruptions.

Although we make significant efforts to maintain the security and integrity of our systems and products, any destructive or intrusive breach of our internal systems could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. Additionally, an effective attack on our products could disrupt the proper functioning of our products, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, disrupt or temporarily interrupt customers' networking traffic, or cause other destructive outcomes. If an actual or perceived breach of security occurs in our network or in the network of a customer of one of our products, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. In addition, the economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify. Also, we may become subject to liability to our customers, suppliers, business partners and others, our reputation may suffer, customers may stop buying our products, and we may face lawsuits. If any of these were to occur, our financial performance could be negatively impacted and our stock price could suffer.

If we fail to manage future growth effectively, our business would be harmed.

We have expanded our operations significantly since inception and anticipate that further significant expansion will be required. We intend to increase our market penetration and extend our geographic reach through our network of channel partners. We also plan to increase offshore operations by establishing additional offshore capabilities for certain engineering and general and administrative functions. This growth has placed and, if it continues, will further place significant demands on our management, infrastructure and other resources. To manage any future growth, we will need to hire, integrate and retain highly skilled and motivated employees. We will also need to continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. To keep pace with the growth in our business, we will be required to make significant investments in our information technology infrastructure. Further, we will continuously enhance our information technology infrastructure to address any actual or potential deficiencies in our IT systems and related control environment. We recently identified several deficiencies in our IT systems. If we fail to improve our systems and processes in general, and our information technology systems and these deficiencies in particular, to keep pace with our growth, or if our systems and processes fail to operate in the intended manner, we could experience a material weakness in our internal control over financial reporting, or be unable to manage the growth of our business, accurately forecast our revenue, expenses and earnings, or prevent certain losses. Any future growth would add complexity to our organization and require effective coordination within

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our organization. If we do not effectively manage our growth, our business, operating results and financial condition could be adversely affected.

If we do not achieve increased tax benefits as a result of our new corporate structure, our financial condition and operating results could be adversely affected.

We implemented a new structure of our corporate organization during the first quarter of fiscal 2012 to more closely align our corporate organization with the international nature of our business activities and to reduce our overall effective tax rate through changes in how we develop and use our intellectual property and the structure of our international procurement and sales, including by entering into transfer-pricing arrangements that establish transfer prices for our intercompany transactions. We anticipate achieving a reduction in our overall effective tax rate in the future as a result. There can be no assurance that the taxing authorities of the jurisdictions in which we operate or to which we are otherwise deemed to have sufficient tax nexus will not challenge the tax benefits that we expect to realize as a result of the new structure. In addition, future changes to U.S. or non-U.S. tax laws, including proposed legislation to reform U.S. taxation of international business activities, would negatively impact the anticipated tax benefits of the new structure. Any benefits to our tax rate will also depend on our ability to operate our business in a manner consistent with the new structure of our corporate organization and applicable taxing provisions, including by eliminating the amount of cash distributed to us by our subsidiaries. If the intended tax treatment is not accepted by the applicable taxing authorities, changes in tax law negatively impact the structure or we do not operate our business consistent with the new structure and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the new structure, and our future operating results and financial condition may be negatively impacted.

In our recent history we have incurred net losses and we may not achieve profitability in the future.

We have a history of losses, with a few quarters of profitability during fiscal 2013, 2012 and 2011. We experienced a net loss of $20.2 million and $0.8 million during the three months ended April 30, 2013 and three months ended October 31, 2012, respectively, and a net loss of $8.9 million for fiscal 2012. As of April 30, 2013 and July 31, 2012, our accumulated deficit was $129.8 million and $113.8 million, respectively. Expenses associated with the continued development and expansion of our business, including expenditures to hire additional personnel for sales and marketing and technology development, could limit our ability to sustain operating profits. If we fail to increase revenue or manage our cost structure, we may not achieve profitability again in the future. As a result, our business could be harmed, and our stock price could decline.

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.

The timing of our revenue is difficult to predict. Our sales efforts involve educating our customers about the use and benefits of our products, including the technical capabilities of our products and the potential cost savings achieved by organizations that utilize our products. Customers typically undertake a significant evaluation process, which frequently involves not only our products but also those of our competitors and can result in a lengthy sales cycle, which typically ranges four to nine months in length but can be as long as 18 months. For example, we recently introduced Aruba ClearPass, a new product that is designed to securely provision and onboard iOS, Android, Mac OS X and Windows 7 Mobile devices on any network. Because this is a new product offering, potential customers may require a lengthy evaluation period before they make a purchase decision. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. Even after making the decision to purchase, customers may deploy our products slowly and deliberately. In addition, product purchases are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Specifically, we view the federal vertical as highly dependent on large transactions, and therefore we could experience fluctuations from period to period in this vertical. Customers may also defer purchases as a result of anticipated or announced releases of new products or enhancements by our competitors or by us. Product purchases could be delayed by the volatile global economic environment, which have introduced additional risk into our ability to accurately forecast sales in a particular quarter. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial condition could be adversely affected in a material way.

We depend upon the development of new products and enhancements to our existing products. If we fail to predict and respond to emerging technological trends and our customers’ changing needs, we may not be able to remain competitive.

We may not be able to anticipate future market needs or be able to develop new products or product enhancements to meet such needs, either on a timely basis or at all. For example, we anticipate a need to continue to increase the mobility of our solution, and certain customers have delayed, and may in the future delay, purchases of our products until either new versions of those products are available or the customer evaluations are completed. If we fail to develop new products or product enhancements, our business could be adversely affected, especially if our competitors are able to introduce solutions with such

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increased functionality. In addition, as new mobile applications are introduced, our success may depend on our ability to provide a solution that supports these applications.

We are active in the research and development of new products and technologies and enhancing our current products. However, research and development in the enterprise mobility industry is complex and filled with uncertainty. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction of high quality products that are competitive in the marketplace, there could be a material adverse effect on our business, operating results, financial condition and market share. In addition, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low initial volume production, fewer product features than originally considered desirable and higher production costs than initially budgeted, which may result in lost market opportunities. In addition, any new products or product enhancements that we introduce may not achieve any significant degree of market acceptance or be accepted into our sales channel by our channel partners. There could be a material adverse effect on our business, operating results, financial condition and market share due to such delays or deficiencies in the development, quality, manufacturing and delivery of new products.

Once a product is in the marketplace, its selling price often decreases over the life of the product, especially after a new competitive product is publicly announced. To lessen the effect of price decreases, our product management team attempts to reduce development and manufacturing costs in order to maintain or improve our margin. However, if cost reductions do not occur in a timely manner, there could be a material adverse effect on our operating results and market share. Further, the introduction of new products may decrease the demand for older products currently included in our inventory balances. As a result, we may need to record incremental inventory reserves for the older products that we do not expect to sell. This may have a material adverse effect on our operating results and market share.

We manufacture our products to comply with standards established by various standards bodies, including the Institute of Electrical and Electronics Engineers, Inc. (“IEEE”). If we are not able to adapt to new or changing standards that are ratified by these bodies, our ability to sell our products may be adversely affected. For example, prior to the ratification of the 802.11n wireless LAN standard (“11n”) by the IEEE in 2009, we had been developing and were offering for sale products that complied with the draft standard that the IEEE had not yet ratified. Although the IEEE ratified the 11n standard and did not modify the draft of the 11n standard, the IEEE could modify the standard in the future. We remain subject to any changes adopted by various standards bodies, which would require us to modify our products to comply with the new standards, require additional time and expense and could cause a disruption in our ability to market and sell the affected products.

As a result of the fact that we outsource the manufacturing of our products to contract manufacturers, we do not have the ability to ensure quality control over the manufacturing process. Furthermore, if there are significant changes in the financial or business condition of our contract manufacturers, our ability to supply quality products to our customers may be disrupted.

As a result of the fact that we outsource the manufacturing of our products to contract manufacturers, we are subject to the risk of supplier failure and customer dissatisfaction with the quality or performance of our products. Quality or performance failures of our products or changes in the financial or business condition of our contract manufacturers could disrupt our ability to supply quality products to our customers and thereby have a material adverse effect on our business, revenue and financial condition.

We rely on purchase orders or long-term contracts with our contract manufacturers. Some of our contract manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price. Our orders with our contract manufacturers represent a relatively small percentage of the overall orders received by them from their customers. As a result, fulfilling our orders may not be considered a priority in the event our contract manufacturers are constrained in their abilities to fulfill all of their customer obligations in a timely manner. We provide demand forecasts to our contract manufacturers. To the extent that any such demand forecast is binding, if we overestimate our requirements, our contract manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross margin. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, our contract manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in shipments and deferral or loss of revenue. In addition, on occasion we have underestimated our requirements, and, as a result, we have been required to pay additional fees to our contract manufacturers in order for manufacturing to be completed and shipments to be made on a timely basis.

It is time consuming and costly to qualify and implement contract manufacturer relationships. If any of our contract manufacturers suffer an interruption in their business, or experiences delays, disruptions or quality control problems in their manufacturing operations, or we have to change or add additional contract manufacturers, our ability to ship products to our

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customers would be delayed, and our business, operating results and financial condition would be adversely affected. In addition, the majority of our manufacturing is performed overseas and is therefore subject to risks associated with doing business in other countries.

Our contract manufacturers purchase some components, subassemblies and products from a single supplier or a limited number of suppliers, and with respect to some of these suppliers, we have entered into license agreements that allow us to use their components in our products. The loss of any of these suppliers or the termination of any of these license agreements may cause us to incur additional set-up costs, result in delays in manufacturing and delivering our products, or cause us to carry excess or obsolete inventory.

Shortages in components that we use in our products are possible, and our ability to predict the availability of such components may be limited. While components and supplies are generally available from a variety of sources, we currently depend on a limited number of suppliers for several components for our equipment and certain subassemblies and products. We rely on our contract manufacturers to obtain the components, subassemblies and products necessary for the manufacture of our products, including those components, subassemblies and products that are only available from a single supplier or a limited number of suppliers.

For example, our solution incorporates both software products and hardware products, including a series of high-performance programmable mobility controllers and a line of wired and wireless access points. The chipsets that our contract manufacturers source and incorporate in our hardware products are currently available only from a limited number of suppliers, with whom neither we nor our contract manufacturers have entered into supply agreements. All of our access points incorporate components from Atheros, and some of our mobility controllers incorporate components from Broadcom Corporation (“Broadcom”) and Netlogic Microsystems Inc. (“Netlogic”). We have entered into license agreements with Atheros, Broadcom and Netlogic, the termination of which could have a material adverse effect on our business. Our license agreements with Atheros, Broadcom and Netlogic have perpetual terms in that they will automatically be renewed for successive one-year periods unless the agreement is terminated prior to the end of the then-current term. As there are no other sources for identical components, in the event that our contract manufacturers are unable to obtain these components from Atheros, Broadcom or Netlogic, we would be required to redesign our hardware and software in order to incorporate components from alternative sources. All of our product revenue is dependent upon the sale of products that incorporate components from Atheros, Broadcom or Netlogic.

In addition, increased demand by third parties for the components, subassemblies and products we use in our products may lead to decreased availability and higher prices for those components, subassemblies and products. For certain components, subassemblies and products for which there are multiple sources, we are still subject to potential price increases and limited availability due to market demand for such components, subassemblies and products. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts. If such shortages occur in the future, our business would be adversely affected. We carry very little to no inventory of our product components, and we and our contract manufacturers rely on our suppliers to deliver necessary components in a timely manner. We and our contract manufacturers rely on purchase orders rather than long-term contracts with these suppliers. As a result, even if available, we or our contract manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner and, therefore, may not be able to meet customer demands for our products, which would have a material adverse effect on our business, operating results and financial condition.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. There can be no assurance that these protections will be available in all cases or will be adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. For example, the laws of certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired. To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual

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property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Impairment of our goodwill or other assets would negatively affect our results of operations.

Our acquisitions have resulted in total goodwill of $56.9 million and intangible assets, net of $21.3 million as of April 30, 2013. Goodwill is reviewed for impairment at least annually or sooner under certain circumstances. Other intangible assets that are deemed to have finite useful lives are amortized over their useful lives but must be reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Screening for and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires significant judgment. Therefore, we cannot assure investors that a charge to operations will not occur as a result of future goodwill and intangible asset impairment tests. If impairment is deemed to exist, we would write down the recorded value of these intangible assets to their fair values. If and when these write-downs do occur, they could harm our business, financial condition, and results of operations.

If we lose members of our senior management or are unable to recruit and retain key employees on a cost-effective basis, or if we fail to effectively integrate new officers or key personnel into our organization, our business could be harmed.

Our success is substantially dependent upon the performance of our senior management. All of our executive officers are at-will employees, and we do not maintain any key-man life insurance policies. The loss of the services of any members of our management team may significantly delay or prevent the achievement of our product development and other business objectives and could harm our business. Our success also is substantially dependent upon our ability to attract additional personnel for all areas of our organization, particularly in our sales, research and development, and customer service departments. Experienced management and technical, sales, marketing and support personnel in the IT industry are in high demand, and competition for their talents is intense. Additionally, fluctuations or a sustained decrease in the price of our stock could affect our ability to attract and retain such personnel. When our stock price declines, our equity incentive awards may lose retention value, which may negatively affect our ability to attract and retain such personnel. We may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. The loss of, or the inability to recruit, such employees could have a material adverse effect on our business.

Our future performance will depend in part on our ability to successfully integrate any new executive officers or key personnel into our management team and develop an effective working relationship among senior management. When key personnel depart the company, we have needed to transition their responsibilities to both current and new employees within the organization. If we fail to integrate any executive officer or key personnel whom we may hire in the future, and create effective working relationships among them and other members of management, our business operating results and financial condition could be adversely affected.

Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.

Once our products are deployed within our end customers’ networks, our customers depend on our support organization to resolve any issues relating to our products. A high level of support is critical for the successful marketing and sale of our products. If we or our channel partners do not effectively assist our end customers in deploying our products, succeed in helping our end customers quickly resolve post-deployment issues, or provide effective ongoing support, it would adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure, or the failure of our channel partners, to maintain high quality support and services would have a material adverse effect on our business, operating results and financial condition.

Enterprises are increasingly concerned with the security of their data, and to the extent they elect to encrypt data between the end user and the server, our products will become less effective.

Our products depend on the ability to identify applications. Our products currently do not identify applications if the data is encrypted as it passes through our mobility controllers. Since most organizations currently encrypt most of their data transmissions only between sites and not on the LAN, the data is not encrypted when it passes through our mobility controllers. If more organizations elect to encrypt their data transmissions from the end user to the server, our products will offer limited benefits unless we have been successful in incorporating additional functionality into our products that address those encrypted transmissions. At the same time, if our products do not provide the level of network security expected by our customers, our reputation and brand would be damaged, and we would expect to experience decreased sales. Our failure to provide such

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additional functionality and expected level of network security could adversely affect our business, operating results and financial condition.

Our use of open source software could impose limitations on our ability to commercialize our products.

We incorporate open source software into our products. Although we monitor our use of open source closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software incorporated into our products. In either event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

We rely on the availability of third-party licenses.

Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.

Enterprises may have slow WAN connections between some of their locations that may cause our products to become less effective.

Our mobility controllers and network management software were initially designed to function at LAN-like speeds in an office building or campus environment. In order to function appropriately, our mobility controllers synchronize with each other over network links. The ability of our products to synchronize may be limited by slow or congested data-links, including digital subscriber line (“DSL”) and dial-up. Our failure to provide such additional functionality could adversely affect our business, operating results and financial condition.

New regulations or changes in existing regulations related to our products may result in unanticipated costs or liabilities, which could have a material adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.

Our products are subject to governmental regulations in a variety of jurisdictions. If any of our products becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and results of operations. For example, radio emissions are subject to regulation in the United States and in other countries in which we do business. In the United States, various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union (“EU”) have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions, and chemical substances and use standards.

If any of our products becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and our results of operations.

In addition, our wireless communication products operate through the transmission of radio signals. Currently, operation of these products in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could become more burdensome and could have a material adverse effect on our business, results of operations and future sales.

Compliance with environmental matters and worker health and safety laws could be costly, and noncompliance with these laws could have a material adverse effect on our results of operations, expenses and financial condition.

Some of our operations use substances regulated under various federal, state, local and international laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. Some of our products are subject to various federal, state, local and international laws governing chemical substances in electronic products. We

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could be subject to increased costs, fines, civil or criminal sanctions, third-party property damage or personal injury claims if we violate or become liable under environmental and/or worker health and safety laws.

In addition, rules adopted by the SEC implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act impose diligence and disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in our products. Compliance with these rules is likely to result in additional cost and expense, including the cost associated with the due diligence required to determine and verify the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the manufacture of our products, as there may be only a limited number of suppliers offering “conflict free” metals that can be used in our products.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Because we incorporate encryption technology into our products, our products are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and radio frequency transmission equipment and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may increase the cost of building and selling our products, create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In addition, because we sell through indirect channel partners, we may incur liabilities on account of actions by our channel partners, including such actions as inadvertent sales of our products to countries in violation of applicable import or export regulations. Any decreased use of our products or limitation on our ability to export or sell our products would harm our business, operating results and financial condition.

We incur significant costs as a result of operating as a public company, and our Board of Directors and management devote substantial time to compliance initiatives.

We incur significant legal, accounting and other expenses as a public company, including costs resulting from regulations regarding corporate governance practices and costs relating to compliance with the Sarbanes-Oxley Act. For example, the listing requirements of the Nasdaq Stock Market’s Global Select Market require that we satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains various provisions applicable to the corporate governance functions of public companies. Our Board of Directors, management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and will make some activities more time consuming and costly. Moreover, these rules and regulations and their associated costs both in terms of time and expense could make it more difficult for us to attract, recruit and retain qualified persons to serve on our Board of Directors, our board committees or as executive officers or other key personnel.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as computer viruses or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters or in either China or Singapore, where our major contract manufacturers are located, could have a material adverse impact on our business, operating results and financial condition. In addition, our support operations are largely concentrated in a single location in India. A natural catastrophe in this location can bring down our support operation. Our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. We also rely on information technology systems to communicate among our workforce and with third parties. Any disruption to our communications, whether caused by a natural disaster or by manmade problems, such as power disruptions, could adversely affect our business. To the extent

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that any such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, operating results and financial condition would be adversely affected.

Risks Related to Ownership of our Common Stock

Our stock price may be volatile.

The trading price of our common stock has been and may continue to be volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Factors that could affect the trading price of our common stock could include:

• variations in our operating results;

• announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors;

• the gain or loss of significant customers;

• recruitment or departure of key personnel;

• the impact of unfavorable worldwide economic and market conditions;

• variations between our actual financial results and the published expectations of analysts;

• developments or disputes concerning our intellectual property or other proprietary rights;

• commencement of, or our involvement in, litigation;

• announcements by or about us regarding events or news adverse to our business;

• the loss or bankruptcy of any of our major customers, distribution partners or suppliers;

• variations in the operating results of other publicly traded corporations deemed by investors to be in our peer group;

• an announced acquisition of or by a competitor, or an announced acquisition of or by us;

• rumors and market speculation involving us or other companies in our industry;

• providing estimates of our future operating results, or changes in these estimates, either by us or by any securities analysts who follow our common stock, or changes in recommendations by any securities analysts who follow our common stock;

• significant sales, or announcement of significant sales, of our common stock by us or our stockholders;

• adoption or modification of regulations, policies, procedures or programs applicable to our business; and

• other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. All of these factors could cause the market price of our common stock to decline, and investors may lose some or all of the value of their investment.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to

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publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We may choose to raise additional capital. Such capital may not be available, or may be available on unfavorable terms, which may dilute the ownership of our common stock.

If we choose to raise additional funds through public or private debt or equity financings, due to unforeseen circumstances or material expenditures, we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and any additional financings could result in additional dilution to our existing stockholders. In addition, capital raised through debt financing may require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business.

Provisions in our charter documents, Delaware law, employment arrangements with certain of our executives, and our OEM supply agreement with Alcatel-Lucent could discourage a takeover that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

• our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;

• our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President;

• our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

• stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the Board of Directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and

• our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us.

Certain of our executives may be entitled to accelerated vesting of their stock options pursuant to the terms of their employment arrangements upon a change of control of our company. In addition to the arrangements currently in place with some of our executives, we may enter into similar arrangements in the future with other executives. Such arrangements could delay or discourage a potential acquisition of our company.

In addition, our OEM supply agreement with Alcatel-Lucent provides that, in the event of a change of control that would cause Alcatel-Lucent to purchase our products from an entity that is an Alcatel-Lucent competitor, we must, without additional consideration, (1) provide Alcatel-Lucent with any information required by Alcatel-Lucent to make, test and support the products that we distribute through our OEM relationship with Alcatel-Lucent, including all hardware designs and software source code, and (2) otherwise cooperate with Alcatel-Lucent to transition the manufacturing, testing and support of these products to Alcatel-Lucent. We are also obligated to promptly inform Alcatel-Lucent if and when we receive an inquiry concerning a bona fide proposal or offer to effect a change of control and will not enter into negotiations concerning a change of control without such prior notice to Alcatel-Lucent. Each of these provisions could delay or result in a discount to the proceeds our stockholders would otherwise receive upon a change of control or could discourage a third party from making a change of control offer.

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We are required to evaluate our internal control over financial reporting under the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

The Sarbanes-Oxley Act requires us to furnish a report by our management on our internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Although we were able to assert in our Form 10-K for the fiscal year ended July 31, 2012 that our internal control over financial reporting was effective as of July 31, 2012, we did identify several deficiencies in our IT systems, which we are in the process of remediating.  As a result of these deficiencies, we were not able to timely complete our assessment of the review, analysis and testing of the design and operating effectiveness of our internal control over financial reporting.  This delay required us to file a Form 12b-25 in order to extend the filing deadline for our Form 10-K for the fiscal year ended July 31, 2012.  We did subsequently file our Form 10-K on October 11, 2012, within the 15 calendar days allowed under the applicable rule. We must continue to monitor, enhance and assess our internal control over financial reporting. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

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

(a) Sales of Unregistered Securities

None.

(b) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On June 13, 2012, we announced a stock repurchase program for up to $100.0 million of our common stock. We are authorized to make repurchases in the open market until June 6, 2014, and any such repurchases will be funded from available working capital. The number of share repurchases and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital.

During the nine months ended April 30, 2013, we repurchased a total of 1,604,142 shares for a total purchase price of $30.5 million. As of April 30, 2013, we repurchased a cumulative total of 3,012,646 shares for a total purchase price of $50.4 million, with $49.6 million remaining authorized under the stock repurchase program. There was no such repurchase during the three months ended April 30, 2013, and there were no such repurchases during the three and nine months ended April 30, 2012.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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.

Dated: June 6, 2013

ARUBA NETWORKS, INC.
By:	/s/ Dominic P. Orr
	Dominic P. Orr
	President and Chief Executive Officer (Principal Executive Officer)

Dated: June 6, 2013

ARUBA NETWORKS, INC.
By:	/s/ Michael M. Galvin
	Michael M. Galvin
	Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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