Bill Slakey - CFO Gordon Stitt - President, CEO

Jennifer Tennenbaum - RBC Capital Markets Alex Henderson - Citigroup Samuel Wilson - JMP Securities Subu Subrahmanyan - Sanders Morris Jiong Shao - Lehman Brothers Stan Koval - Merrill Lynch Jason Ader - Thomas Weisel Partners Pria Basramen - Oppenheimer Manny Recarey - Kaufman Brothers

Good afternoon, ladies and gentlemen and welcome to the Extreme Networks Q3 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Bill Slakey, Chief Financial Officer with Extreme Networks. Please go ahead, sir.

Thanks, operator. Good afternoon, everyone. On the call with me today is Gordon Stitt, President and CEO of Extreme Networks. This afternoon we issued a press release announcing our financial results for Q3 of FY 2006. A copy of this release is available on our website at extremenetworks.com. This call is being broadcast live over the Internet today and it will be posted on our website and available for replay shortly after the conclusion of the call. Let me note that some of the remarks made during this call may contain forward-looking statements about financial and business guidance, product introductions, customer development, and a prospective real estate transaction. These reflect the Company's current judgment on these issue. Because such statements deal with future events, they are subject to risks and uncertainties that could cause the actual results to differ materially. In addition to the factors that may be discussed during the call, all important factors that could cause actual results to differ materially are contained in the Company's 10-Qs and 10-Ks on file with the SEC and available on our website. With that, let me turn the call over to Gordon Stitt.

Thanks, Bill, and thanks to everyone for joining us. I'll begin this call with a summary of the financial results, review some quarterly highlights, and then spend a few minutes talking about our strategy. Bill will then follow with a detailed discussion of our financials. This quarter was a disappointment to us. Our revenue missed our internal goals and our guidance. The top line miss impacted our bottom line, masking some good progress on cost control. We're working very hard to do better. We continued to execute on our stock buyback program and entered into a contract to sell our campus for $70 million. The second time IS sales accounted for 10% of revenue; this includes sales through Avaya and through Avaya business partners reflecting our strong focus on converged network sales. Net revenue for the quarter was $85.5 million and net income for the quarter was $2.8 million or $0.02 per diluted share on a GAAP basis. Excluding stock-based compensation expense of $1.3 million, non-GAAP net income for the quarter was $4.2 million or $0.03 per diluted share. This is a decline from the $0.06 per diluted share on a non-GAAP basis in the December quarter, but an increase on a year-over-year basis. We increased gross margins during the past quarter. This marked nine consecutive quarters in which gross margins have increased on a year-over-year basis. Our gross margins for the third quarter on a GAAP basis were 54.1%, and excluding expense for stock-based compensation gross margin was 54.3%. This is an increase from 51.4% from the same quarter last year. Again, this was the ninth consecutive quarter of gross margin increases on a year-over-year basis. During Q1 we have announced a $50 million stock repurchase program and during the two quarters we have repurchased $20.6 million in stock. So we are executing to our internal plan and will continue to do so going forward. Bill, will go into a little more detail a little later. Let me talk about some operational actions first. During the previous quarter we executed on a number of plans to improve our top line performance, particularly in the U.S. We began recruiting last quarter to increase our sales head count but did not meet our internal goals. We believe that incremental revenue opportunities are available with better sales coverage and we have stepped out our efforts considerably. We now have dedicated recruiters focused on growing our sales organization and we expect to meet our hiring goals this quarter. During Q2 we reengineered our U.S. channels program and began recruiting both datacentric and converged resellers. This new reinvigorated program is taking hold and we are getting excellent reviews from our reseller base. We are hitting our goals for channel recruitment and hitting our goals for reseller certification and training. As we move forward through this calendar year we expect to see increased leverage and more significant contributions from our channels in North America. We are currently recruiting a Vice President of Sales for the Americas and expect to make an appointment before the end of the quarter. So that's a brief review of the tactics that we are executing in our field organization to get the revenue line growing. Clearly to reignite the growth in our Company will take more than adding salespeople. In this market, we have to meet customers' needs and provide a future vision that the market embraces. This combination will drive our growth. At this point, I'd like to review our strategy for going forward, talk about our vision, and some upcoming events that we expect will play a role in reenergizing Extreme. First, let me address customer needs and talk in reference to our key markets metro Ethernet and large enterprise. First, a few comments about metro Ethernet. I will keep my comments relatively brief as we talked about this extensively at our analyst meeting in February. The metro Ethernet market is entering its second phase. The first phase in which we were very successful can be characterized as an IP-centric, high performance, low cost, business network. The builders of metro Ethernet networks addressed business customers with the promise of much higher performance than could be achieved with traditional TDM technologies or data over TDM technologies. The flexibility of Ethernet allowed carriers to build out networks very quickly and deliver what we call Ethernet economics. It is very low cost of capital and very low cost of operations that allows for breakthrough bandwidth pricing. The strength of Ethernet is the economics. The limitation is the ability to deliver deterministic services at legacy voice technologies such as SONET deliver. Extreme has developed extensive Q-RISC capabilities early in the market cycle to overcome this limitation. This allowed our customers to deliver better than best efforts Ethernet service and to capture more customers. During this phase of the market there was tremendous growth as carriers captured those business customers that were focused on economics and performance. That market has been running strong for five years now and has been very successful for us. But the market is changing and we are poised at the start of a new growth cycle that we believe will begin during the latter part of this calendar year, perhaps early next. To capture the broader metro market, Ethernet technology must provide the scale, the subscriber management and the broad range of services that traditional TDM over IP or TDM technologies have provided. The market itself is ready for Ethernet economics. Over the last five years we have developed a deep understanding of metro Ethernet requirements and put that customer knowledge together with our technology teams to come up with what we call multidimensional Ethernet. This service layer that we build on top of Ethernet economics allows carriers to deliver a broad range of services including voice to both residential and business customers. To do this requires several technologies and solution sets. To deliver voice, very fine grained traffic management is required; and to deliver residential service requires subscriber management and dramatic scale. Again, we talked about this quite a bit at our analyst conference in February so I won't repeat the discussion of technology here. Our first multidimensional Ethernet product, the BlackDiamond 12K, which was code named Olympic, was delivered to customers during March -- on time, I might add. We had extensive trials that began last year and we were able to recognize revenue from some of those customers during the quarter. This is our first product in this new category and brings a rich set of capabilities to the market, capabilities that our competitors can't match. We are excited about this opportunity and will continue to invest in meeting the needs of this next generation of metro Ethernet rollouts. A larger part of our business is enterprise, specifically large and mid-size enterprise customers across a fairly broad range of industries. It is clear from enterprise customers, either through our direct experience or through consolidated information from market research firms, that there are two topics that are top of mind for enterprises in their consideration of network requirements: convergence and security. Let's talk about convergence first. In the near term, convergence means Voice over IP support. We have a broad set of initiatives to offer best-in-class Voice over IP. On the technology and product side our switching platforms have extensive QOS support which is a baseline requirement for Voice over IP. QOS, quality of service, is one of our core competencies. It's an area where we've been investing for 10 years now and an area where we have extensive intellectual property. The other area that we've been investing in is high availability solutions. Converged networks require a higher level of network reliability, referred to as availability, than do traditional data networks. A blip in network availability of only a few seconds can have a major impact on a voice call, but would be relatively minor in a pure data network. Now we've developed hardware and software solutions that deliver high availability, but we've also developed network protocols that keep the network running when failures do happen. One of these protocols, EAPS, (Ethernet Automatic Protection Switching) is widely deployed, and delivers high availability with response times similar to that of traditional TDM telephony networks. EAPS is a key differentiator for us in this marketplace and one of the technologies that we deploy to deliver high availability. Our strategic partnership with Avaya puts us in a unique position to deliver our technology to the market; and through our joint development, provides unique capabilities that ease the installation, deployment, and maintenance of these systems. This quarter, 10% of our revenue came through Avaya channels, the second quarter that this has occurred. We have joined together at many customers to provide an open approach for delivery of Voice over IP. The open approach that we provide gives customers choices and is in stark contrast to Cisco's proprietary single-vendor approach. Next week at the Interop show in Las Vegas I will have the privilege of sharing the podium with Don Peterson, CEO of Avaya at our joint keynote address where we will discuss our open approach to converged networks. Also at Interop, Extreme and Avaya will jointly be providing the converged infrastructure for the show. We will be highlighting some of the jointly-developed technologies in the Interop show net operations center. These products provide a simple way to effectively manage a large scale converged networks. Also, later this year we will be providing a network infrastructure for the FIFA World Cup of Europe, of which Avaya is an official sponsor. This will be the largest converged communications network ever built for a sporting event with over 30,000 devices connected and will provide voice and data for press, teams, and event participants. Overall I'm very happy with our ability to deliver best in class converged solutions to enterprise customers throughout our addressed markets. The second area of critical requirements in enterprise is in security. You all know that this has been a very robust market for the last several years with a number of companies achieving dramatic success in this dynamic, growing market. It is also a complex market with a number of different strategies being proposed by different users and by different vendors. This market represents challenges and significant opportunities. Our approach is to study this market and determine how we can add significant values -- value to customers -- while leveraging our core technology strengths to offer a unique solution. Let me be clear. We don't have any intention to take on incumbent point products or solutions. Those problems have been solved. What we are doing is embedding security in the network and finding ways to provide strong solutions by leveraging the network infrastructure. One of our core technologies here is called CLEAR-Flow. CLEAR-Flow is an ASIC-based programmable security rules engine that is built into our network of core products. Because CLEAR-Flow is ASIC-based, it operates at full 10-gigabit per second speeds, making it very high performance and suitable for use even in the largest networks. CLEAR-Flow is a tool, an underpinning technology for the delivery of embedded network security. It allows security to be delivered on every port of a switch as opposed to the in-line model that the rest of the industry uses. Now let me explain this. Traditional security solutions are placed in line, that is between two network elements. They secure that network connection, and only that network connection. Our switch-based embedded security is actually in the switch so it can protect all network connections that are connected to that switch. The programming that we provide for CLEAR-Flow is done in conjunction with a security appliance, something we call a virtual security resource, or VSR. The VSR can be connected anywhere on the network. It automatically programs CLEAR-Flow and provides advanced analysis capabilities. This network model, a switch with embedded security, combined with a VSR is our strategy to deliver security in a differentiated fashion. Last year we introduced our first VSR under the Extreme brand, the Sentriant, and you can expect us to introduce additional security products during this year that provide additional VSRs that can deal with new security threats. This model will allow us to continually evolve our security solution through new products, but also and perhaps more importantly, through partnerships. The exciting part of the VSR model is that we, Extreme, don't need to design and build the VSRs. We provide an open interface into CLEAR-Flow and through that work with partners to allow them to provide VSRs that embed their security solutions into the network. This is a very powerful model and is something that is unique in the industry. The concept of openness and the ability to truly integrate a broad range of security solutions gives customers choices. So we've talked about the metro Ethernet market entering its next phase of growth and how we are well positioned. We talked about our enterprise business and how we have unique solutions for convergence. We just talked about security and our unique approach to build security into the network with partners. This is a pretty broad agenda, and how do we plan to do this? And, most importantly, how can we provide unique benefits to our customers and to the market that will help us grow our business? The answer to this lies in our core technology investments and how those core investments put us in position to capitalize on where the market is going. Both of our primary markets, metro Ethernet and large mid-size enterprise are moving toward intelligent networks. As we discussed, in metro Ethernet, it's about delivering services to residential and business customers and about customization of those services. To do this, the network has to be smarter in understanding the traffic that is being carried and being able to act on that. In the enterprise the two key trends, Voice over IP and security, also rely on increased intelligence in the network. Voice over IP needs the intelligence to assure that conversations are not disrupted. Security needs to have traffic that can be inspected, authenticated, and ultimately directed. All of this required intelligence relies on an integrated network core and network edge; and most importantly, on software. Which highlights the importance of our most important investment specifically our investment in Extreme XOS, our modular operating system. I'd like to spend a couple of minutes talking about the history of XOS, where it started, and how we have invested in the last four years; how we have increased the capabilities and where this technology will take us in the future. I'll also address how we are uniquely positioned. We introduced XOS in late 2003 on our BlackDiamond 10K core switch. At that time, it was first Linux-based networking operating system for enterprises. The Linux foundation allowed us to build in many capabilities, the first of which was high availability. Work actually began in late 2000 when we first started developing XOS by rewriting and porting ExtremeWare, our initial network operating system for Linux. We restructured the code for high availability and then chose a platform that could extend that high availability. In 2004 we opened up XOS by announcing open XML interfaces. This invention provided the foundation to have the network interoperate with other devices and with applications. By adding XML interfaces, developers could develop products, whether they be appliances such as security appliances, or software such as network monitors that could interact with the network and provide intelligence; and provide that intelligence over an open interface that would encourage innovation. So first we developed high availability in the platform, then we opened the interfaces with XML. In 2005 we delivered the first two integrated applications. The first was jointly developed with Avaya, and that's called CNA, or the Converged Network Analyzer. CNA provides embedded virtualized analysis of the ability of the network to carry and route voice calls. You can see CNA demoed at Interop. The second application was our Sentriant VSR. I talked earlier about how VSRs utilize security in the switch to provide a network-wide solution. Now we're in 2006 and we've built a foundation. We have high availability, open interfaces, and two applications. Let's call these two applications proofs of concept. We've been out showing the industry what can be done with this platform and this year, in 2006, you will see us announce a series of partnerships with other companies, all innovators in their respective product categories that have developed solutions that link with XOS and build upon the foundation that we are delivering. This series of integrated solutions will dramatically increase the intelligence in the network and position us to meet the evolving needs in metro, convergence, and security. So why do customers care and how will this drive growth? Because customers want choices. They want solutions that are integrated that meet their needs today. Most importantly they want intelligence in the network and a simple way of managing that intelligence. But they also want functions, want solutions that are flexible; that give them choices and will evolve with them. We are in a unique position to accomplish that. We have spent the last several years putting the foundation together and this is the year that we'll deliver solutions. So that is our vision: an intelligent network, one running a consistent open operating system that provides the foundation for delivery of evolving network services. I'd like to conclude my comments with a review of some of the many customers that rely on our open approach to converged networks to run their businesses. First of all, the Rocky Mountain Clothing Company, a western gear apparel maker with a rich 85-year history, selected an all Extreme infrastructure to enhance its business. The company sought an entirely new network that supports converged voice, video for its collaboration applications, and support of a much faster information uptake from its thousands of retail partners. Extreme was chosen over Cisco Systems based on our high availability, ease of management and wire speed performance. Just as importantly, the Extreme open infrastructure approach gave Rocky Mountain Clothing flexibility to choose an IP telephony vendor that suits them best. Our converged network and wireless LAN solutions are also key to allowing customers to innovate and support rich communications environments. For example in healthcare, Extreme and our partner Avaya have built a fully revitalized network and IP telephony system for the Angleton Danbury Medical Center just outside of Houston, Texas. This medical facility made an ambitious upgrade to support wireless technology with our Summit WM solution and a new wired network that is both reliable and resilient for voice and data. They now have wireless throughout all of their buildings, working to improve bed-side patient care, optimize daily business operations, and support dynamic healthcare applications such as electronic charting, a PAX imaging system, wireless voice, and telemedicine featuring full duplex video. In Georgia the Fous group, a leading manufacturer and distributor of high quality flooring, selected Extreme for a new wireless LAN implementation as well as a converged voice network throughout its facilities. The wireless network covers 100,000 square foot facility providing consistent connectivity that saves time and costs. Extreme's solution delivers secure connectivity and one network for both wired and wireless. Education continues to be a strong user of Extreme's high performance technology to support education applications as well as voice and video. Some recent wins are highlighted with Gardner Web University in North Carolina, Kansas State University, University of California at San Francisco, The Hamilton Wentworth School District of Ontario, Canada; Panama Buenos School District in Southern California. As I mentioned earlier, we launched a technology platform called multidimensional Ethernet early last quarter. This greatly improves the carrier's ability to offer enhanced services, utilize standards-based Ethernet to scale VPNs, and to direct subscribers to a variety of different content networks. Multidimensional Ethernet allows residential triple play and business LAN services to be offered on the same network at low cost and scalable deployment. Early deployments of multidimensional Ethernet on our new carrier switch, the BlackDiamond 12K have been promising, including ten customers highlighted with Wilhelm Tel of Germany, which is rolling our IPTV to new residential markets. With that I'll turn things over to Bill.

Thank you, Gordon. I'm going to briefly review our financial results for the quarter and then provide you with some information regarding our outlook for Q4. The results we are announcing this afternoon are at the high end of the range we laid out in our preliminary results which were released on April 6th. This was a quarter in which we once again improved on our year-over-year profitability both in dollar and percentage terms, and I think it's fair to say we have improved our business model a great deal over the past year. We saw brisk revenue growth in European operations and in some parts of Asia. We also saw signs of improvement in the U.S. with revenues up 6% sequentially. At the same time, our results in the U.S. and Japan were ultimately below our plans entering the quarter. As Gordon has discussed, we have already taken several steps to improve business in both areas. On the balance sheet, cash generated from operations was in line with profitability and we continued our $50 million share repurchase program. We have now repurchased 3.4% of the shares that were outstanding when we announced the program in October. Now turning to revenues. Revenue for the quarter was $85.5 million, consisting of $69.2 million in product revenue and $16.3 million in service revenue. Our book to bill was below one. Service revenues were up 8% compared to the year ago quarter and up 3% sequentially. Product revenue decreased 10% sequentially and year-over-year. Shipment of modular products represented 45% of sales, with stackable products representing 55%. This is consistent with the mix in Q2. The split of enterprise sales and service provider sales was 75% to 25%, similar to Q2 and generally consistent with our typical mix. XOS-based products continued to increase as a percentage of our total revenues. All told, sales of XOS-based products represented 30% of product bookings, up from 25% of total bookings in the second quarter. We did ship the BlackDiamond 12K for revenue during the quarter and we saw solid contributions from the BlackDiamond 10-K and our XOS-based stackables as well. Sales of some of our older chassis and stackable products declined which is consistent with a shift towards newer products. New bookings for POE ports were up sequentially. We saw a solid increase in the sale of POE blades for the BlackDiamond 8800. New bookings of POE ports represented more than 10% of our total port bookings. We expect POE ports to continue on a growth trajectory driven by demand for IP telephony and wireless. Bookings through our Avaya channels, both direct and resellers, increased sequentially and were approximately 10% of total product bookings. This was a solid rebound off the seasonally slow quarter for Avaya sales in December. Avaya revenues were up sequentially in the U.S., in EMEA, and in Asia, and in total were up more than 25% compared to Q3 a year ago. Looking at revenues geographically, in EMEA our European operations -- which includes the Middle East and Africa -- our revenues were $33.5 million for the quarter, up a very good 22% compared to the same quarter a year ago, and up 7% sequentially in what is typically a down quarter. During the quarter we saw strong growth in Germany, Eastern Europe, and France in particular. Our performance in Europe has been very good through the fiscal year, with sales up 15% on a year-to-date basis. Revenues in Japan were $7.7 million, down from $11 million sequentially. This was a disappointing result after two consecutive quarters of flat to up revenues. We are working to expand our enterprise channel in Japan, and we anticipate adding new channel partners shortly. In addition, the BlackDiamond 12K is in testing with a number of Japanese carrier customers. Looking at Asia outside of Japan, revenues were $9.3 million, down as expected from an unusually high $16.6 million in the December quarter. Revenues in Asia are lumpy for us from quarter to quarter as a result of high contribution from the service provider business and a high concentration of larger enterprise customers. On a year-to-date basis, revenues in Asia Pacific are up 21% compared to last fiscal year. In the U.S., revenues were $33.9 million, up 6% from $31.9 million in the December quarter. While these revenues were lower than we had anticipated, we did see some encouraging signs during the quarter, including response to our channel program changes and increased sales through our Avaya channel partners. Gordon has taken you through the steps we are taking to address our revenue growth in the U.S. and combined with a usually positive impact from seasonality in June, we are optimistic that the table is set for a better result in the coming quarter. The cost of goods and operating expense figures in comparisons I will now be discussing as I turn to cost and expenses will not include stock-based compensation expenses. These expenses added $1.3 million to our total cost for the quarter. For those of you who want to note it in your model, the breakout of these expenses by P&L line item in the quarter was as follows: $147,000 increase to product cost, $77,000 increase to service costs, a $500,000 increase to sales and marketing expense, $363,000 increase to R&D expense and a $228,000 increase to G&A expense. This breakout is also included in table form in our press release. Looking at gross margins, total gross margins as a percentage of sales was 54.3%. This was down 55% sequentially and up from 51.4% in the third quarter a year ago. Product gross margins were 56.2% compared to 56.7% in the December quarter and 53.5% in the year ago quarter. Product margins are down sequentially due primarily to lower volumes. They are up on a year-over-year basis, primarily as a result of lower overhead costs and per unit product costs. Service gross margins were 46.5% compared to 46.8% in the December quarter and 40.6% in the same period a year ago. Service gross margins are up on a year-over-year basis as a result of lower return rates, lower per unit repair costs and better pricing. Service margins are down slightly sequentially as a result of costs incurred to comply with upcoming environmental regulations in Europe. At 54.3% total gross margins we are operating in the target range for gross margins that we have previously laid out for investors. We do believe that gross margins on both products and services can continue to improve over time through a combination of higher revenue, operational improvements, and new product sales. That said, given the number of pricing, mix, cost and volume variables involved we do not expect that gross margins will improve lockstep each and every quarter. Turning to operating expenses, sales and marketing, R&D, and G&A expenses for the quarter were $43 million, not including stock-based compensation. This was down from $44.4 million sequentially and from $46.5 million in Q3 a year ago. Sales and marketing expenses declined by $800,000 sequentially primarily as a result of lower compensation costs. R&D expenses declined by $1.1 million due primarily to lower engineering project-related expenses. Compared to Q3 of last year, sales and marketing, R&D, and G&A expenses are down $3.5 million. Expenses in the year ago quarter included higher engineering project costs, higher R&D costs associated with the amortization of warrants related to the Avaya agreement; higher R&D and sales costs related to the introduction of the BlackDiamond 8800; and higher G&A expenses related to legal activities and Sarbanes-Oxley compliance. Also included in total operating expenses in Q3 a year ago was a $2 million expense related to a technology agreement signed during that quarter. Including that cost, total operating expenses are down $5.5 million from a year ago. Head count at quarter end stood at 820, down from 835 at the end of December quarter. Headcount was lower in manufacturing operations in some G&A areas. Looking at net income then, in Q3 on a GAAP basis we reported operating profits of $2.1 million, adding in $1.4 million in net other income results in a profit before tax of $3.5 million and a profit after tax of $2.8 million or $0.02 per share on a diluted EPS basis. On a non-GAAP basis, excluding $1.3 million in stock-based compensation, operating profitability was $3.4 million or 4% of sales. Profit after tax was $4.2 million or $0.03 per share on a diluted basis. This was up from a loss of $1.2 million or a loss of $0.01 per share in the third quarter a year ago, as better gross margins and lower expenses in the current quarter offset the impact of lower revenues compared to Q3 a year ago. Tax rate for the quarter was 19%. Total shares used to calculate diluted EPS in the current quarter was 122.8 million. Total shares outstanding at quarter end were 119.8 million, down 2.5 million from the end of the December quarter. Looking at the balance sheet, cash, cash equivalents, and short-term investments and marketable securities on April 2, totaled $444.7 million, down $11.6 million sequentially. Cash flow from operations during the quarter was $3.1 million. Net inventory at quarter end was $20.6 million, down slightly from the end of Q2. Inventory turns stood at eight for the quarter in line with the December quarter. Accounts receivable were $27.5 million, down from $33.6 million sequentially. DSOs at quarter end stood at 30 days, down from 33 days at the end of Q2. Accounts payable were $21.6 million, down slightly sequentially. Current deferred revenue was down $3.8 million in the quarter. This is due primarily to the seasonal pattern in our service bookings which are typically down in Q3 because customers prefer to arrange annual renewal dates that fall in the December and June quarters rather than March. This coincides with customer fiscal year end. During the quarter, we used $13.8 million to repurchase 2.8 million shares, reflecting a pace that was generally in line with our previous stated goal completing our $50 million program within a 12-month period. To date we have used $20.6 million to repurchase 4.2 million shares since the beginning of the program. Some other items to note. Depreciation and amortization for the quarter was $4 million and capital expenditures for the quarter were $2.9 million. Of note, relating to the balance sheet yesterday we announced that we have signed an agreement to sell our real estate in Santa Clara for a price of $70 million. The sale is contingent on successful rezoning of the property for residential development. We anticipate that process will take 15 to 21 months and that the sale will be completed at the end of that time. We anticipate moving to a new facility in the Santa Clara Valley in calendar year 2007. Some notes on the sale. We will receive the purchase price when the sale is complete. The book value of the campus and equipment that will be left in the buildings is between $35 million and $40 million, depending on final decisions on equipment that will be made at the time we relocate. We anticipate that previous net operating losses will be used to offset taxes due, if any, on the sale of the campus. Turning now to Q4. Given our recent results relative to our own expectations, we have decided to suspend offering specific financial guidance for upcoming quarters. Instead, we will offer some thoughts on issues or trends that could affect our financial performance positively or negatively in the coming months. Looking first at revenues, on the plus side, the June quarter is typically a seasonally strong quarter for us. Many of our state and local government and education customers have fiscal year ends which can lead to more spending decisions. This is also our fourth fiscal quarter, which has a positive impact on our sales team. Our product line will be improved with the BlackDiamond 12K product being available in both the carrier configuration that was introduced last quarter and in enterprise configuration. On the revenue risk side, as Gordon mentioned, our plans include hiring a number of new salespeople, the rate at which we are able to get these people on board and productive will be an important gating item to our success. On gross margins, on the plus side were revenues to improve this quarter, the incremental volume would be a positive for both our product and services gross margin. At the same time, on the product side we will be seeing some incremental costs associated with the early ramp of the BlackDiamond 12K production. On the services side, we will see some incremental costs associated with upcoming environmental regulations. On operating expenses, we've done a very solid job in controlling expenses over the last nine months. However, we believe additional sales head count and marketing expenses will play an important part in increasing our revenues and returning the positive year-over-year revenues comparison, particularly in the U.S. We will also continue to drive our XOS-based new product cycle which is likely to increase R&D spending slightly as well. We have previously laid out a target operating model of 54% to 57% gross margin and the operating expenses in a range of $44 million to $46 million quarterly. While that remains a target for us, there will be quarters in which we operate above or below those ranges, as a result of near-term opportunities or near-term issues. As for the balance sheet we will continue to monitor our balance sheet metrics which I believe are generally very good relative to our peers in the industry. We expect to continue our share repurchase program. As always, I will note that there are risks associated with our business. Investors should note that our quarters are back end loaded with approximately 50% of our business done in the last month of the quarter, so it is fair to say our visibility can be limited. It is still a case where one or two large deals a quarter can make the difference between sequentially up or sequentially down revenue. With that, let me turn the call back over to Gordon.

Thanks, Bill. To conclude, I want to thank our team of very dedicated employees for their hard work in the last quarter. I am particularly proud of the team delivering our new carrier platform of Olympic, the BlackDiamond 12K, on time and with a very, very successful launch. With that I'd like to open the call to questions.

(Operator Instructions) Our first question comes from Mark Sue with RBC Capital Markets. Jennifer Tennenbaum - RBC Capital Markets: This is actually Jennifer Tennenbaum dialing in for Mark. A couple of questions if I could. First, can you talk about trends in North America; what you're seeing on the enterprise side, in the federal government? And also can you talk about what you miss in Japan? Was there not enough of a fiscal year spending flush?

Hi, Jennifer this is Gordon. On Japan, there's not been a big year end flush actually for sometime. We used to see that when the government was pumping a lot of money into the market, particularly into the universities, giving them end of year money to spend but recently, I say recently, the last couple of years we've seen a more conservative approach. On the North America market, we were disappointed by our federal performance, but as I mentioned last quarter we did appoint a new leader there to build up that pipeline which we expect would take more than one or two quarters. Jennifer Tennenbaum - RBC Capital Markets: Can you just talk about what you're seeing in terms of competition, any changes there, and just the pricing environment?

No major changes in competition and no major adjustments in pricing. I think our issue is primarily one of coverage right now, and we hope to remedy that. Jennifer Tennenbaum - RBC Capital Markets: Could you just repeat the share repurchase numbers? I missed that. What you did for the quarter.

Just a minute. Bill's looking at--. Bill Slakey: Want to get the numbers for you exactly.

It was $13.8 million year to date. Bill Slakey: $13.8 million during the quarter to repurchase 2.8 million shares and program to date, $20.6 million to repurchase 4.2 million shares. Jennifer Tennenbaum - RBC Capital Markets: Thank you very much. Bill Slakey: Next question please.

Next question comes from Alex Henderson with Citigroup. Alex Henderson - Citigroup: Hey, guys. I have a couple of questions for you. The first one is, you've been talking about your open system architecture for quite awhile. You've had a program with Avaya where they've utilized the open architecture for quite a while, yet you seemingly haven't really announced a lot of adoption of other companies taking advantage of that technology and getting to the point where people actually are utilizing that to drive your strategy. Without that, one has to wonder if you can actually drive a competitive edge in the marketplace without somebody actually stepping up to the plate and taking advantage of the open system characteristic. That is, I think, at the heart of what you're trying to do there. Where are we on that? Can you give us some updates on when we might see some meaningful announcements along that beyond the Avaya and the one security product that you've got out today?

Yes. As I mentioned, Alex. We do expect to make some announcements over the next several quarters during this calendar year. Most of these relationships take some time to form. The Avaya relationship itself we spent well over a year developing before we made that announcement. And as I outlined in my formal comments, there have been various stages we've gone through in terms of proof of concept. This is a unique approach and it took quite awhile to develop and to really figure out how to build these open interfaces such that they were useable by others and also such that we could support it. So I view the two that we introduced last year -- that is Avaya and our Sentriant product -- as proofs of concept. We have been working for quite sometime with a series of companies to develop additional products and we'll announce those as soon as we are able. Alex Henderson - Citigroup: Can you at least give us some sense of how many companies are working with you and what the scale of those companies are? As to whether it's a meaningful number from our perspective -- so we can judge whether it's meaningful or not?

I'm not comfortable saying how many are in the pipeline just because I don't know how long it will take to announce, but I would say that there are both large companies as well as smaller, innovative companies. So it's a pretty interesting mix of established large companies, public companies and some smaller private companies. Alex Henderson - Citigroup: Second question is on the sales force. Cannibalization of your sales force by people leaving or being picked off by other competitors or other industries obviously is part of the contributing problem here. Can you give us some scaling of how much of an issue that is? What number of people left? How many people need to be replaced to be net flat? What are you modeling relative to any further potential erosion on that front, so we can get a sense of how much work it is just to stand still?

I'm not comfortable going into too many details there. Sales reps do move around in our industry. Not only from Extreme, but to Extreme. What our goal is this quarter is to end up this quarter with more heads than we ended last quarter.A net increase. Alex Henderson - Citigroup: You made the comment that a big part of the potential for improving sales sequentially was hiring salespeople. I guess I'm a little confused by that. Wouldn't you require them to be on board for a couple of quarters for them to really produce any meaningful improvement in revenues or contribute? I assume the sales cycle is still three to six months.

Yes, that depends whether we are opening a new territory, which does take longer or whether we're putting somebody into an existing territory with an existing pipeline, and being better able to service that pipeline. Alex Henderson - Citigroup: One last question. On the book to bill of 1, is it reasonable to think that you're going try to get your book to bill back above 1? Running below 1 here in the quarter, but presumably that's part of the exercise. Bill Slakey: Alex, yes, the goal would be to run with book to bills above 1 on a consistent basis. Alex Henderson - Citigroup: Thanks. Bill Slakey: Thank you.

Next question comes from Samuel Wilson with JMP Securities. Samuel Wilson - JMP Securities: Good afternoon. A little bit of a follow-up question to Alex's, but can you give us a sense quantitatively kind of the number of quota carrying salespeople you had at that time end of last quarter, at the end of this quarter and what you hope to achieve over the next quarter?

Sam, we don't want to get into specifics. But generally speaking the number of quota carrying sales reps was about flat sequentially. We had hoped to have more on board at that point so that was part of the issue and I won't go into precisely what it was with the flat, up a bit, down a bit. Samuel Wilson - JMP Securities: That's fine. But in general what are you trying to grow it? Are you trying to grow it 50%? 10%?

It's something nearer, on a year-over-year basis or looking out over the next 12 months or so, it's something nearer 10% to 20% than 50%. Samuel Wilson - JMP Securities: Got it. Maybe this is a question for Gordon. But can you talk a little bit more in depth about Japan? In Japan the business fell off. Is that still going through the service provider issue, the spending tailing off there and the enterprise not ramping yet? Then on the U.S. you've made a number of changes to your channel programs. Do you think the issue with the quarters here was simply that those haven't had a chance to work yet or do you think there may be some more tweaking required?

In reverse order, on the channel programs we've been tracking that very closely over the last several months, and all the signs are pointing in the right direction. I don't think it's showing up in a big way in the numbers yet, but everything's positive and we see new channel partners coming into the fold and we see productivity going up. We have better visibility into their pipelines now, so all those signs are positive. I think it's just a matter of timing on that one. On Japan I would generally agree with your remarks that the softness we saw is due to two factors. One is just the lumpiness of carrier spending that we've seen, and also just not doing as well in enterprise there as we had hoped. Samuel Wilson - JMP Securities: Thank you very much, gentlemen.

Thank you, Sam.

Next question comes from Subu Subrahmanyan with Sanders Morris. Please go ahead. Subu Subrahmanyan - Sanders Morris: Thank you. My question is on the outlook. I know you're not providing specific guidance and you talked about puts and takes; but is it reasonable to assume things going on plan that you should see some sort of an improvement next quarter, especially given the issues you talked about? In the near term should we see OpEx go towards the higher end of the range, because of these hires that you're doing.

Okay. We're going to intentionally not give specific numeric guidance. As you mentioned, typically in this quarter this would be an up quarter for us, but we are going to leave it to individuals to determine whether they think that will be the case this quarter; and if so, by how much. We aren't going to into any specifics there. On operating expenses, I think that some of the things that I outlined there were places where I think spending a little bit more money would benefit the top line and ultimately benefit the bottom line, but again I'm not going to go into specific targets on spending for this quarter or outlooks beyond that. Subu Subrahmanyan - Sanders Morris: Understood. Just on the sales side, I know there's a lot of different things going on in the market but between two or three quarters ago and March, can you just talk about what changed in terms of the sales environment? Or what necessitated a change as revenues were closer to $100 million probably four or five quarters ago and have declined. Can you just talk about what the changes were in terms of the environment?

This is Gordon, I'm not sure I can address that in a short answer other than the general observations that we've seen a lot of strength in Europe and we've seen a great recovery in Asia, particularly from year-ago results. We've seen Japan be soft, and that's not something unique to us. I've certainly heard that from a number of companies that sell into the carrier business there that as the markets there prepare for their next generation network; it's been lumpy for a lot of carrier providers in Japan. I think the real specific issue is the U.S. or specifically North America, and that's where I think we're a little bit light on our sales coverage both in existing regions and also in areas where we just don't have a presence, and that's our focus in the near term from purely a sales perspective. Subu Subrahmanyan - Sanders Morris: Thank you. Bill Slakey: Thank you, Subu.

Next question comes from Jiong Shao with Lehman Brothers. Jiong Shao - Lehman Brothers: I have a clarification first and a three quick questions if I may. Bill, could you please repeat the regional revenue? For some reason they don't add up. I'm missing like $1 million. Bill Slakey: Right. The difference that you're missing in a 10-K or 10-Q would be classified as other. It's places like Mexico. Jiong Shao - Lehman Brothers: Okay. Got it. That's easy enough. Okay. Excellent. Then second, the first real question is, I think when you provided an update a couple weeks ago, you talked about pro forma EPS, if I remember correctly it was breakeven. Now you are doing $0.03. Bill, could you just talk about what went to your benefit as you finalized the numbers? Bill Slakey: Really, a question of, on each line item a little bit coming out better than we had hoped. The range that we had laid out, not including stock compensation, was breakeven to a profit of $0.02. We are rounding to a profit of $0.03. It is literally a difference of a few hundred thousand dollars on the profit line. Jiong Shao - Lehman Brothers: Okay. Great. The second question I had was the BD12K. Could you just give a rough sort of range for the revenue contribution? I know, Gordon, you talked about 10 customers and highlighting this particular customer in Germany. Could you just talk about some of the primary deployment usages for this particular product?

Yes, let me touch on that. First of all we began shipping the BlackDiamond 12K on March 23, so it was at the tail end of the quarter, and that was our target date to ship. We had a number of beta sites, and all of those beta sites said they will use the platform; some immediately ordered and are counted in as what we recognized as revenue. So the number, given that there was literally a week or so, 10 days to recognize, was modest but again the reaction from customers was very positive. All of these went into carrier environments. Many of them targeted at an IPTV environment. Looking at the technologies that we developed there in terms of subscriber management; in terms of content delivery management; are really targeted at the residential market which is frankly a new area for us or for our product and our unique ability to handle both residential and business customers on a single platform. Jiong Shao - Lehman Brothers: Gordon, just to clarify, are these products deployed in a way to aggregate the VSLAMs or the Palm Network?

I can't answer specifically on the customers that we installed because I don't know the answer to that. But I can tell you that this product is a service delivery point; and that is, it is intended to sit behind the VSLAMs. It can work with Palm Networks as well as a directly attached fiber-based business customer. So as we deliver to a broad audience I think you will see it in all of those configurations. I'm just not sure the specifics of the first few sites. Jiong Shao - Lehman Brothers: Last question before I go to another call. Just quickly on U.S. softness, you talked about U.S. is up 6% quarter over quarter. That's not bad in a seasonally sort of slower period, in the U.S.; but yet it's below your internal expectation. Could you just talk about where you feel like you fell a little bit short vis-à-vis your internal expectation?

Well, as you said, we saw some evidence that the steps we had taken on channel programs, some hiring on the sales team, some marketing of the new products, all showed signs of success in that we were up sequentially in a seasonally weak period, albeit off an easier comparison. In general we had planned for those programs in aggregate to simply drive higher revenues. I think we got off to a good start, but now we'll need to keep pushing that in order to get the U.S. revenues back to an appropriate level. Jiong Shao - Lehman Brothers: Thanks, guys.

Thank you.

Our next question comes from Tal Liani with Merrill Lynch. Stan Koval - Merrill Lynch: Good afternoon, it's actually Stan Koval in for Tal. I was just wondering if you could go over, from a high level, the trends you're seeing in the carrier Ethernet space in light of some of the consolidation that's going on in the customer base for the integrators that are servicing a lot of the service providers and generally speaking how you intend to attack this vertical? Is it through additional sales people, direct touch that you're going after it, and it may be a little bit more color on the differentiation between the 12K and some of the offerings that Cisco was offering product specifically for this market boundary and a slew of others. Just wondering if you can develop that story for us a little bit better?

Sure. So in looking at the consolidation of both carriers and equipment providers, the metro Ethernet business is based largely outside of North America. There are metro Ethernet services in North America but they are really pseudo Ethernet services in a lot of cases where an incumbent carrier will run Ethernet over their SONET network and deliver an Ethernet interface out to the customer. The bulk of the pure Ethernet carriers are outside the U.S. and that would be in Europe and Asia, and in Japan. So from a geographic perspective, the consolidation of carriers is not having that level of impact because of it being largely outside the U.S. Our targets are incumbent carriers in small to mid-sized countries and the alternative carriers in mid and large markets. So our market is fairly diverse. We do go outside the U.S., we go exclusively through channels, and we use a direct touch approach. You asked on products -- competitively, particularly the 12K versus Cisco. The 12K is differentiated in its ability to deliver on a broad range of services at very large scale. Hence what we call multidimensional Ethernet. Where, if not the first, one of the very first few to deliver on a broad range of services at very large scale, hence what we call multidimensional Ethernet. We're the first --, if not the first, one of the first very few -- to deliver what's called Mac and Mac technology, which is a layer 2 Ethernet VPN which provides dramatic scale, particularly in the business network. I don't believe either of the companies that you mentioned, either Cisco or Foundry, have that capability yet or are delivering that yet. The other capabilities are specifically the capability for subscriber management and the bandwidth management at reasonable scale. Frankly, Alcatel is the existing incumbent there and the leader. Cisco just introduced some product but my understanding is the list price of a blade for a 6509 for a single blade is actually about $90,000, making the blade more expensive than our entire platform. So I think they have a very, very expensive solution, and we haven't seen to what extent it can scale. Foundry tends to be in a different part of the network and I'm not aware of them having any of the subscriber management bandwidth capabilities or the content management capabilities. So I hope that gives you a quick overview. Stan Koval - Merrill Lynch: Great. Thanks. And then if I could just follow-up with some housekeeping related questions, as far as the product gross margin is concerned, I noticed some provisions for inventory that were increased. Could you possibly quantify what the impact on product gross margin was related to obsolete inventory? Bill Slakey: Several hundred thousand dollars. Stan Koval - Merrill Lynch: By looking at the R&D line, a significant drop-off this quarter in particular, and just in light of the comments that you're making, growing the security business and developing additional features, just wondered if you can talk about the evolution of that line going forward. Bill Slakey: Well, we're not going to make specific projections as to what that's going to be in dollar terms in any particular quarter, but generally speaking, as I mentioned, our operating expenses in total right now are below the sort of range we've laid out as a target. So that might lead you to draw some conclusions. But we're not going to make any specific projections on rates of change or specific numbers.

Just one comment there. There is some lumpiness. Clearly an engineering budget is comprised of certainly a lot of labor costs, which is very predictable but there's also some project costs which tend to be lumpy ,and particularly when you look at building ASICs. So that can cause some quarter to quarter fluctuations even though from our perspective, it represents a consistent level of investment.

Next question comes from Jason Ader with Thomas Weisel Partners. Jason Ader - Thomas Weisel Partners: Good afternoon, guys. Just wanted to ask you, Gordon, about some of the comments you've made in the past about an upgrade cycle in the LAN really getting going. We had talked about second half of '05, and obviously the results so far haven't shown that that's the case from Extreme. Just trying to get a sense of whether you have changed your tune there at all? You're less bullish on the upgrade cycle after Y2K; or you still think it's there and you just haven't executed.

I think it's still there and I continually see examples of that, of customers that we've won recently including this quarter, where we are going in and upgrading systems that were either pre Y2K or right around that time frame. So the cycle is definitely still out there. We do see people holding on to gear longer than I would have expected. What spurs them to have an upgrade cycle is a new capability and the two there particularly are Voice over IP which does require a network upgrade and also, Security Solutions, which, can be a driver, although a secondary driver of an upgrade. Again, I think to give an accurate answer you'll have to break it down by network size. Frankly, for a lot of small networks at the very low end of our business, a lot of the early Y2K stuff is perfectly fine unless they're going to use voice. In the larger enterprise because the needs have changed, those are a little more aggressive an upgrade. Jason Ader - Thomas Weisel Partners: So fair to say you think it's there, but maybe it's happened a little slower than you would have expected?

I'm sure it's there and it has happened slower than we anticipated originally. Jason Ader - Thomas Weisel Partners: We talked about North America and some of the issues there, but when we talked about some of the investments you want to make in sales, obviously you've lost some salespeople and you don't have the coverage. What has been the problem there? Why have you lost salespeople? Why has the coverage not been what you had hoped for? Is there a specific product issue? Is there a leadership issue? What has been the main problem in North America that has caused the problems? Because obviously in the other geographies, at least in Europe, you haven't had any of these issues.

Europe has been very strong for us. There's a lot of things certainly going on. One of the things that we're doing is the redesign of our channel program and as I mentioned that's been positively received, gotten a lot of good comments from both new resellers and some old timers that that's a much better approach. We currently do not have a Vice President in place in North America. That's a slot that we want to fill as soon as possible. And I have to believe that that has an impact there in not having that seat filled. So we're working hard to do that. Jason Ader - Thomas Weisel Partners: Okay. Thanks. Last question for Bill. I think a lot of people are assuming that we take the real estate and then add it to the cash just as conceptually in terms of your net cosh position; but I'm assuming you're going to have some leasing or renting expenses associated with moving to a new headquarters? How should we be thinking about that in terms of the cost of selling the real estate? Bill Slakey: Sure. As far as it relates to the purchase price there will certainly be some modest transaction costs and some move costs that will take a little bit off that from a cash standpoint. In terms of an income statement or operating expense standpoint going forward I think that it is possible that we can make this move into another campus and leave operating expenses generally where they are now or if up, up only slightly and certainly not up enough to offset the benefits of having that much incremental cash on the balance sheet. Jason Ader - Thomas Weisel Partners: So how does that work? Today are you paying? You own the property, you're not paying rent or leasing it obviously. So why would you not have additional costs? Bill Slakey: There's a fair amount of depreciation that goes with owning this much land. It was originally purchased for $80 million, so there's some of that that's going on. There is costs and upkeep in such that in a leasing situation are often passed on to the landlord. Essentially the economic logic of keeping this transaction is that in the Santa Clara Valley right now residential property is selling at a premium and commercial space is widely available so I think it's a good time for us to arbitrage that and essentially sell residential at the same time that commercial space is widely and inexpensively available.

Your next question comes from William Becklean with Oppenheimer please go ahead. Pria Basramen - Oppenheimer: This is actually Pria Basramen for Bill. I was wondering were you also looking at adding additional reseller partners in the U.S. or are you looking at most of the revenue growth going forward coming from existing resellers?

Yes, the answer is, is yes, in that we are signing up new resellers. We're also putting in much stricter rules for reseller certification, and so what we're doing is really rebalancing the reseller base. We'll see some people that are not willing to make the investment going forward. And we see others that want to work with us because we are requiring an investment and because we are providing tools. I expect that our reseller base a year from now will be somewhat different than it is today. I'd also note that just over the last year a shift in terms of having more resellers that are from the voice business that are selling converged solution where, two years ago most of our resellers were pure data sellers. Now a lot of them are converged resellers. They sell voice solutions as well as data solutions. I think that mix will continue for awhile. Pria Basramen - Oppenheimer: You had talked last quarter about deal slippages and I was wondering, are those still in the pipeline or have they been lost to competitors?

There are, without naming specific deals, since we didn't do that previously, there are some of those deals that I'm personally familiar with that have come in, or I should say that did come in during the quarter and there's at least a couple that are still hanging out there. A lot of those are with schools and universities where a funding source has been a little uncertain and the deal has been won but the district or university has not released the funds yet. Pria Basramen - Oppenheimer: Just one last one. In Japan, going forward do you expect some increased competition to your 12K due to similar products announced by Foundry and how do you expect that to shape up for you?

I don't expect that foundry will provide this type of capability in the near term. Their approach has been very different, and they haven't really been in the service delivery part of the network, which is really where the volume is going to be. Also in Japan their experience level isn't what ours is. Pria Basramen - Oppenheimer: Thank you.

Okay. Why don't we take one last question, please.

Our final question comes from Manny Recarey with Kaufman Brothers. Please go ahead. Manny Recarey - Kaufman Brothers: Thanks for getting me in under the wire there. You had spoken about adding salespeople that the ones that you add within territories are thought to be contributing sooner than those outside territory. So it would be fair to assume that your first focus will be on adding within the territories as opposed to looking for new markets?

That would be a fair statement, Manny. But it would always be that first and foremost would be to get the best people that we can, but certainly we would prefer to have those in existing markets where we could build pipelines more quickly. Manny Recarey - Kaufman Brothers: Okay. Can you just talk a little bit about linearity in the quarter? Bill Slakey: Manny this is Bill. Linearity was actually relative to the number we eventually ended up with was actually a little better this quarter than some other quarters. You see that in our DSOs. Manny Recarey - Kaufman Brothers: Then one last question. The 10-gigabit market, I think you had mentioned in the last quarter that it was over 5% of revenue. Did that grow sequentially? Is it still above 5%? Bill Slakey: Manny, I'm not sure we have that at our fingertips. Manny Recarey - Kaufman Brothers: Okay. I'll follow-up with you afterwards then. Bill Slakey: Great. Thanks so much.

Operator, I think we're concluded.

Please continue with any closing comments you may have.

Yes, no particular closing comments. Thank you everyone, and for those of you planning to be at Interop Las Vegas, we look forward to seeing you there.

Thank you, ladies and gentlemen that concludes today's teleconference. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000 or 1-800-405-2236 followed by access code of 11058294. Thank you again for your participation in today's conference and at this time you may disconnect.