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.…

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…

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.

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.

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.

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.

Thank you very much. Bill Slakey: Next question please.

Next question comes from Alex Henderson with 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.

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.

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.

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.

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.

Thanks. Bill Slakey: Thank you.

Next question comes from Samuel Wilson with 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.

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%.

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.

Thank you very much, gentlemen.

Thank you, Sam.

Next question comes from Subu Subrahmanyan with Sanders Morris. Please go ahead.

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.

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.

Thank you. Bill Slakey: Thank you, Subu.

Next question comes from Jiong Shao with 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.

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.

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.

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.

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.

Thanks, guys.

Thank you.

Our next question comes from Tal Liani with 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.