UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10- Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-12867

 

3COM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		94-2605794
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
350 Campus Drive
Marlborough, Massachusetts		01752
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (508) 323-1000

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ

As of September 25, 2009, 392,168,650 shares of the registrant’s common stock were outstanding.

 

 

3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 28, 2009
TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION			1
Item 1.		Financial Statements			1
		Condensed Consolidated Statements of Operations (unaudited) Three Months Ended August 31, 2009 and 2008			1
		Condensed Consolidated Balance Sheets (unaudited) August 31 and May 31, 2009			2
		Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended August 31, 2009 and 2008			3
		Notes to Condensed Consolidated Financial Statements (unaudited)			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
Item 4.		Controls and Procedures			32
PART II.		OTHER INFORMATION			32
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6.		Exhibits			45
SIGNATURES					47
EXHIBITS					48
EX-10.1 Form of Performance-Based Restricted Stock Unit Agreement - 2003 Stock Plan
EX-10.2 3Bonus Plan for Executive Officers (approved July 7, 2009)
EX-31.1 Certification of Principal Executive Officer
EX-31.2 Certification of Principal Financial Officer
EX-32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

We use a 52 or 53 week fiscal year ending on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest August 31, November 30 and February 28. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable. Our H3C legal entity (“H3C”) follows a calendar year basis of reporting and therefore results for our China-based sales segment are consolidated on a two-month time lag.

3Com, the 3Com logo, H3C, Digital Vaccine, NBX, OfficeConnect, Comware, IRF, TippingPoint, TippingPoint Technologies and VCX are registered trademarks or trademarks of 3Com Corporation or one of its wholly owned subsidiaries. Other product and brand names may be trademarks or registered trademarks of their respective owners.

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the following aspects of our business: global economic slowdown and effects and strategy; core business strategy to leverage China and emphasize larger enterprise business; China-based sales region strategy, growth, dependence, expected benefits, tax rate, sales from China, expected decline in sales to Huawei and manage operations; impact of recent accounting regulations; expected annual amortization expense; environment for enterprise networking equipment; challenges relating to sales growth; trends and goals for segments and regions; pursuit of termination fee; supply of components; research and development focus; execution of our strategy; strategic product and technology development plans; goal of sustaining profitability; short-term management of cash during economic slowdown; intercompany dividends from China; ability to satisfy cash requirements for at least the next twelve months; stock repurchase program; restructuring activities and expected charges to be incurred; expected cost savings from restructuring activities and integration; potential acquisitions and strategic relationships; future contractual obligations; recovery of deferred tax assets and balance of unrecognized tax benefits; reserves; market risk; outsourcing; competition and pricing pressures; expectation regarding base interest rates; impact of foreign currency fluctuations; belief regarding meritorious defenses to litigation claims and effects of litigation; and you can identify these and other forward-looking statements by the use of words such as “may,” “can,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any forward-looking statements.

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II Item 1A Risk Factors. All forward-looking statements included in this document are based on our assessment of information available to us at the time this report is filed. We have no intent, and disclaim any obligation, to update any forward-looking statements.

In this Form 10-Q we refer to the People’s Republic of China as China or the PRC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended
		August 31,
(In thousands, except per share data)		2009				2008
Sales		$	290,502			$	342,650
Cost of sales			123,931				153,023
Gross profit			166,571				189,627
Operating expenses (income):
Sales and marketing			84,788				87,482
Research and development			38,968				47,147
General and administrative			21,370				24,454
Amortization			17,071				25,164
Patent dispute resolution			—				(70,000	)
Restructuring charges			1,133				1,997
Operating expenses, net			163,330				116,244
Operating income			3,241				73,383
Interest expense, net			(1,088	)			(1,251	)
Other income, net			11,547				12,871
Income before income taxes			13,700				85,003
Income tax provision			(6,239	)			(5,166	)
Net income		$	7,461			$	79,837
Basic and diluted net income per share		$	0.02			$	0.20
Shares used in computing per share amounts:
Basic			389,774				402,889
Diluted			396,266				404,072

The accompanying notes are an integral part of these condensed consolidated financial statements.

3COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		August 31,				May 31,
(In thousands)		2009				2009
ASSETS
Current assets:
Cash and equivalents		$	625,908			$	545,818
Short-term investments			39,915				98,357
Notes receivable			46,926				40,590
Accounts receivable, less allowance for doubtful accounts of $9,072 and $9,645 respectively			101,536				112,771
Inventories			86,232				90,395
Other current assets			47,229				56,982
Total current assets			947,746				944,913
Property and equipment, less accumulated depreciation and amortization of $179,616 and $172,717 respectively			38,228				40,012
Goodwill			609,297				609,297
Intangible assets, net			181,578				198,624
Deposits and other assets			24,860				22,511
Total assets		$	1,801,709			$	1,815,357
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	67,928			$	68,350
Current portion of long-term debt			88,000				48,000
Accrued liabilities and other			360,369				394,103
Total current liabilities			516,297				510,453
Deferred taxes and long-term obligations			41,328				40,729
Long-term debt			112,000				152,000
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; none outstanding			—				—
Common stock, $0.01 par value, 990,000 shares authorized; shares issued and outstanding: 391,828 and 389,284 respectively			2,348,180				2,336,961
Retained deficit			(1,283,061	)			(1,290,522	)
Accumulated other comprehensive income			66,965				65,736
Total stockholders’ equity			1,132,084				1,112,175
Total liabilities and stockholders’ equity		$	1,801,709			$	1,815,357

The accompanying notes are an integral part of these condensed consolidated financial statements.

3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months Ended
		August 31,
(In thousands)		2009				2008
Cash flows from operating activities:
Net income		$	7,461			$	79,837
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			21,657				33,131
Stock-based compensation expense			4,885				6,442
Loss on property and equipment disposals			38				13
Deferred income taxes			(1,522	)			(3,377	)
Changes in assets and liabilities:
Accounts and notes receivable			4,948				(50,684	)
Inventories			4,633				(18,566	)
Other assets			7,175				(1,483	)
Accounts payable			(85	)			6,941
Other liabilities			(32,327	)			(12,940	)
Net cash provided by operating activities			16,863				39,314
Cash flows from investing activities:
Proceeds from maturities and sales of investments			58,699				—
Purchases of property and equipment			(2,970	)			(7,598	)
Proceeds from sale of property and equipment			8				68
Net cash provided by (used in) investing activities			55,737				(7,530	)
Cash flows from financing activities:
Issuances of common stock			7,631				286
Repurchases of common stock			(1,216	)			(543	)
Net cash provided by (used in) financing activities			6,415				(257	)
Effect of exchange rate changes on cash and equivalents			1,075				6,257
Net change in cash and equivalents during period			80,090				37,784
Cash and equivalents, beginning of period			545,818				503,644
Cash and equivalents, end of period		$	625,908			$	541,428

The accompanying notes are an integral part of these condensed consolidated financial statements.

3COM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our financial position as of August 28, 2009 and May 29, 2009, our results of operations for the three months ended August 28, 2009 and August 29, 2008 and our cash flows for the three months ended August 28, 2009 and August 29, 2008.

We use a 52 or 53 week fiscal year ending on the Friday nearest to May 31. For convenience, the condensed consolidated financial statements have been shown as ending on the last day of the calendar month. Accordingly, the three months ended August 31, 2009 ended on August 28, 2009, the three months ended August 31, 2008 ended on August 29, 2008, and the year ended May 31, 2009 ended on May 29, 2009. The results of operations for the three months ended August 28, 2009 may not be indicative of the results to be expected for the fiscal year ending May 28, 2010 or any future periods. Our wholly-owned subsidiary, H3C, follows a calendar year basis of reporting and our China-based sales region segment is therefore consolidated on a two-month-lag. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended May 30, 2008.

Certain prior period amounts have been reclassified to conform to the current year presentation. Specifically, in the condensed consolidated statements of operations we have reclassified $2.6 million from general and administrative expenses to sales and marketing and research and development expenses, $1.2 million and $1.4 million, respectively, for the three months ended August 31, 2008.

Recently issued accounting pronouncements

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”) to improve reporting and to create greater consistency in the accounting and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141R amends SFAS 109, “Accounting for Income Taxes”, such that adjustments made to valuation allowances on deferred income taxes and acquired income tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141R would apply the provisions of SFAS No. 141R. The Company adopted SFAS 141R on May 30, 2009. Since we have had no acquisition activity the adoption of SFAS 141R has not had a material impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as required in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring that they be treated as equity transactions. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS No. 160 has not had a material impact on our consolidated financial position, results of operations or cash flows.

In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one-year deferral of the effective date of FAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Effective June 1, 2008, we adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities recorded at fair value, which had no material impact on our consolidated financial position, results of operations or cash flow. Effective May 30, 2009, we adopted the portion of SFAS No. 157, for which the implementation had been deferred, which had no material impact on our consolidated financial position, results of operations or cash flow. Under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”), entities are permitted to choose to measure many financial instruments and certain other items at fair value that previously were not required to be measured at fair value. We did not elect the fair value measurement option under SFAS No. 159 for any of these financial assets or liabilities.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS No. 142-3”). FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No. 142”). The intent of FSP FAS No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R “Business Combinations”, and other accounting principles generally accepted in the United States of America. FSP FAS No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP FAS No. 142-3 has not had a material impact on our consolidated financial position, results of operations or cash flow.

In June 2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which became effective in 2009 via retrospective application. Under FSP EITF 03-6-1, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (“EPS”) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The company adopted FSP EITF 03-6-1 on May 30, 2009. The impact of adopting FSP EITF 03-6-1 had no material effect on basic or diluted EPS for the three months ended August 31, 2009 or 2008.

In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 intends to establish general standards of accounting for and disclosures of subsequent events that occurred after the balance sheet date but prior to the issuance of financial statements. SFAS 165 is effective for financial statements issued for interim or fiscal years ending after June 15, 2009. The adoption of SFAS 165 did not have a significant impact on our financial position, results of operations or cash flows.

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles,” a replacement of FASB Statement No. 162 (the Codification)”. The Codification, which was launched on July 1, 2009, became the single source of authoritative non-governmental U.S. generally accepted accounting principles (“GAAP”), superseding various existing authoritative accounting pronouncements. The Codification eliminates the GAAP hierarchy contained in Statement 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We will adopt the Codification in the second quarter of fiscal 2010. There will be no change to our consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in our consolidated financial statements.

On September 23, 2009, the FASB reached a consensus on two new pronouncements; EITF No. 08-1, “Revenue Arrangements with Multiple Deliverables” (previously titled, “Revenue Recognition for a Single Unit of Accounting”) and EITF No. 09-3, “Applicability of Statement of Position 97-2 to Certain Arrangements That Include Software Elements”. These new pronouncements are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted only at the beginning of the company’s fiscal year 2011. The Company is currently evaluating the impact that adoption of these EITFs will have on its consolidated financial statements.

NOTE 2. STOCK-BASED COMPENSATION

In order to determine the fair value of stock options and employee stock purchase plan shares, we use the Black-Scholes option pricing model and apply the single-option valuation approach. In order to determine the fair value of restricted stock awards and restricted stock units we use the closing market price of 3Com common stock on the date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period of time-based vesting awards for stock options, restricted stock awards, restricted stock units, and stock issued under the employee stock purchase plan. Certain of the stock options may vest on an accelerated basis and certain restricted stock units are earned contingent on the future achievement of financial performance metrics. Performance metrics for the performance period are determined by the Compensation Committee of the Board of Directors in its sole discretion. For unvested stock options outstanding as of May 31, 2006, we continue to recognize stock-based compensation expense using the accelerated amortization method prescribed in FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”.

As of August 31, 2009, total unrecognized stock-based compensation expense relating to unvested employee stock options, restricted stock awards, restricted stock units and stock issued under employee stock purchase plan, adjusted for estimated forfeitures, was $6.8 million, $2.1 million, $22.1 million and $0.1 million, respectively. These amounts are expected to be recognized over a weighted-average period of 2.2 years for stock options, 1.6 years for restricted stock awards, 2.3 years for restricted stock units and 0.1 years for stock issued under the employee stock purchase plan. If actual forfeitures differ from current estimates, total unrecognized stock-based compensation expense will be adjusted for future changes in estimated forfeitures.

Stock-based compensation expense recognized and disclosed is based on the Black-Scholes option pricing model for estimating the fair value of options granted under the company’s equity incentive plans. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The underlying weighted-average assumptions used in the Black-Scholes model for options and employee stock purchase plan and the estimates of the weighted average grant date fair value per share were as follows for options, restricted stock awards and restricted stock units granted during the three months ended August 31, 2009 and 2008:

		Three Months Ended
		August 31,
		2009				2008
Employee stock options:
Volatility			57.0	%			48.8	%
Risk-free interest rate			2.1	%			3.1	%
Dividend yield			0.0	%			0.0	%
Expected life (years)			4.1				4.0
Weighted average grant date fair value		$	1.83			$	1.02
Restricted stock awards:
Weighted average grant date fair value			*			$	2.48
Restricted stock units:
Weighted average grant date fair value		$	4.04			$	2.56
Employee stock purchase plan:			*				*

The following table presents stock-based compensation expense included in the accompanying condensed consolidated statements of operations (in thousands):

		Three Months Ended
		August 31,
		2009				2008
Cost of sales		$	540			$	758
Sales and marketing			1,590				1,758
Research and development			476				884
General and administrative			2,279				3,042
Stock-based compensation expense before tax		$	4,885			$	6,442

Stock Options. Stock option activity for the three months ended August 31, 2009 and 2008, was as follows (shares in thousands):

		Three Months Ended August 31,
		2009								2008
						Weighted								Weighted
		Number of				average				Number of				average
		shares				exercise price				shares				exercise price
Outstanding May 31, 2009 and 2008			28,361			$	4.92				43,925			$	4.98
Granted			2,419				4.00				300				2.48
Exercised			(1,916	)			3.98				(191	)			1.50
Forfeited			(111	)			4.10				(1,554	)			4.75
Expired			(1,802	)			5.54				(2,174	)			5.99
Outstanding August 31, 2009 and 2008			26,951			$	4.86				40,306			$	4.93

As of August 31, 2009, there were approximately 17.1 million options exercisable with a weighted-average exercise price of $5.70 per share. By comparison, there were approximately 27.3 million options exercisable as of August 31, 2008 with a weighted-average price of $5.58 per share.

During the three months ended August 31, 2009 and 2008 approximately 1.9 million and 0.2 million options were exercised at an aggregate intrinsic value of $1.6 million and $0.1 million, respectively. The exercise intrinsic value is calculated as the difference between the market value on the exercise date and the exercise price of the options. The closing market value as of August 28, 2009 was $4.39 per share as reported by the NASDAQ Global Select Market. The aggregate intrinsic value of options outstanding and options exercisable as of August 31, 2009 was $19.0 million and $9.2 million, respectively. The weighted-average remaining contractual life of options outstanding and options exercisable were 3.9 and 2.8 years, respectively. The aggregate options outstanding and options exercisable intrinsic value is calculated for options that are in-the-money as the difference between the market value as of August 31, 2009 and the exercise price of the options.

Options outstanding that are vested and are expected to vest as of August 31, 2009 are as follows:

Weighted

Weighted

Average

Number of

average

Remaining

Aggregate

Shares

Grant-Date

Contractual Life

Intrinsic Value

(in thousands)

Fair Value

(in years)

(in thousands)

Vested and expected to vest at August 31, 2009

23,833

$

5.05

3.6

$

15,968

Restricted Stock Awards. Restricted stock award activity during the three months ended August 31, 2009 and 2008 was as follows (shares in thousands):

		Three Months Ended August 31,
		2009								2008
						Weighted								Weighted
		Number of				average Grant-				Number of				average Grant-
		Shares				Date Fair				Shares				Date Fair
		(unvested)				Value				(unvested)				Value
Outstanding May 31, 2009 and 2008			1,459			$	2.94				3,095			$	3.43
Granted			—				—				75				2.48
Vested			(115	)			4.04				(305	)			4.19
Forfeited			(7	)			5.05				(420	)			3.80
Outstanding August 31, 2009 and 2008			1,337			$	2.84				2,445			$	3.24

During the three months ended August 31, 2009 and 2008 approximately 0.1 million and 0.3 million restricted awards with an aggregate fair value of $0.5 million and $0.6 million, respectively, became vested. Total aggregate intrinsic value of restricted stock awards outstanding as of August 31, 2009 was $5.9 million.

Restricted Stock Units. Restricted stock unit activity during the three months ended August 31, 2009 and 2008 was as follows (shares in thousands):

		Three Months Ended August 31,
		2009								2008
						Weighted								Weighted
		Number of				average Grant-				Number of				average Grant-
		Shares				Date Fair				Shares				Date Fair
		(unvested)				Value				(unvested)				Value
Outstanding May 31, 2009 and 2008			6,161			$	2.78				5,744			$	3.59
Granted			5,542				4.04				1,743				2.56
Vested			(933	)			3.01				(673	)			3.70
Forfeited			(201	)			3.01				(326	)			3.54
Outstanding August 31, 2009 and 2008			10,569			$	3.42				6,488			$	3.30

During the three months ended August 31, 2009 and 2008 approximately 0.9 million and 0.7 million restricted awards with an aggregate fair value of $3.7 million and $1.3 million, respectively, became vested. Total aggregate intrinsic value of restricted stock units outstanding at August 31, 2009 was $46.4 million. Restricted stock units outstanding at August 31, 2009 had a weighted-average remaining contractual life of 1.6 years. Total aggregate intrinsic value of restricted stock units outstanding and expected to vest at August 31, 2009 was $31.8 million. Restricted stock units outstanding and expected to vest at August 31, 2009 had a weighted-average remaining contractual life of 1.4 years.

Employee Stock Purchase Plan. We have an employee stock purchase plan (“ESPP”) under which eligible employees may authorize payroll deductions of up to ten percent of their compensation, as defined, to purchase common stock at a price of 85 percent of the lower of the fair market value as of the beginning or the end of the six-month offering period. In September 2008, our stockholders approved an increase of eight million shares available for issuance under the ESPP. We recognized $0.4 million and $0.5 million of stock-based compensation expense in the three months ended August 31, 2009 and 2008, respectively, associated with the ESPP. Employee stock purchases generally occur only in the quarters ended November 30 and May 31.

NOTE 3: FAIR VALUE

Fair Value Hierarchy

The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, accounts payable, and long-term debt. The carrying value of cash, short-term investments, accounts receivable, notes receivable and accounts payable approximates their fair market values due to their short-term nature. The Company believes that the carrying value of its outstanding debt approximates fair value.

SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs which are supported by little or no market activity.

In accordance with SFAS 157, we measure our cash equivalents at fair value and classify them within Level 1 or Level 2 of the fair value hierarchy. The classification has been determined based on the manner in which we value our cash equivalents, primarily using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis consisted of the following types of instruments and were reported as cash equivalents as of August 31, 2009:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		in Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Instruments				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)				Balance
						(In thousands)
Assets
Cash equivalents:
Time deposits and bank deposits with a maturity less than 3 months		$	—			$	288,382			$	—			$	288,382
Money market fund deposits			245,741				—				—				245,741
China government bonds and bank bills with a maturity of less than 3 months			91,785												91,785
Total assets measured at fair value		$	337,526			$	288,382			$	—			$	625,908

Money market funds, China government bonds and bank bills are measured based on quoted market prices. Time deposits and bank deposits are measured based on similar assets and/or subsequent transactions.

NOTE 4. REALTEK PATENT DISPUTE RESOLUTION

On July 11, 2008, 3Com Corporation and Realtek Semiconductor Corp. (the “Realtek Group”) entered into three agreements which document the resolution of a several-year-long patent litigation between the parties and provide for the non-exclusive license by 3Com to the Realtek Group of certain patents and related network interface technology for license fees totaling $70.0 million, all of which was received in the three months ended August 31, 2008.

The basic agreement between 3Com and the Realtek Group documents the resolution of the litigation between the parties and provides for the dismissal of the lawsuit and mutual releases between the parties.

Under the terms of the agreements, the payments are non-refundable and the Company has no future performance obligations, apart from certain customary covenants not to sue Realtek, its customers or its suppliers on the licensed technology, and non-material notice and tax assistance obligations. Accordingly the $70.0 million was recognized as income in the three months ended August 31, 2008 in the operating expense (income) section of the condensed consolidated statement of operations.

NOTE 5. RESTRUCTURING CHARGES

In recent fiscal years, we have undertaken several initiatives involving significant changes in our business strategy and cost structure.

We continued a restructuring of our business to enhance the focus and cost effectiveness of our businesses in serving their respective markets. These restructuring efforts continued into fiscal 2010. We took the following specific actions in fiscal 2007 through 2010 (the “Fiscal 2007 — 2010 Actions”):

	•		reduced our workforce;
	•		continued efforts to consolidate and dispose of excess facilities; and
	•		shifting the focus of our direct-touch sales force to accommodate our shift to the enterprise market

Restructuring charges related to these various initiatives were $1.1 million in the three months ended August 31, 2009 compared to $2.0 million in the three months ended August 31, 2008. The $1.1 million of net expense in the first quarter of fiscal 2010 consists of severance and outplacement costs of $1.0 million and $0.1 million of facilities and other restructuring items. The severance and outplacement costs primarily relate to a decrease in headcount of sales and marketing employees as the Company continues to shift our sales force to the enterprise market. The net restructuring charge in the first quarter of fiscal 2009 resulted from severance, outplacement and other costs of $1.9 million and a $0.1 million charge for facilities-related charges. The severance and outplacement costs in the first quarter of fiscal 2009 primarily relate to a decrease in headcount of research and development employees as the Company eliminated duplicate testing activities.

Accrued liabilities associated with restructuring charges total $1.8 million as of August 31, 2009 and are included in the caption “Accrued liabilities and other” in the accompanying consolidated balance sheets. These liabilities are classified as current because we expect to satisfy such liabilities in cash within the next 12 months.

Fiscal 2010 Actions

Activity and liability balances related to the fiscal 2010 restructuring actions, are as follows (in thousands):

		Employee				Other
		Separation				Restructuring
		Expense				Costs				Total
Balance as of May 31, 2009		$	—			$	—			$	—
Provisions			1,064				139				1,203
Payments and non-cash charges			(404	)			(139	)			(543	)
Balance as of August 31, 2009		$	660			$	—			$	660

Employee separation expenses include severance pay, outplacement services, medical and other related benefits. The reduction in workforce affected employees involved in research and development, sales and marketing, customer support, and general and administrative functions. Through August 31, 2009, the total reduction in workforce associated with actions initiated during fiscal 2010 included approximately 35 employees who had been separated or were currently in the separation process. Non-cash charges include depreciation against restructured assets, and stock-based compensation charges as applicable.

We expect to complete any remaining activities related to actions initiated in fiscal 2010 during fiscal 2010.

Fiscal 2007 through 2009 Actions

Activity and liability balances related to the fiscal 2007 through 2009 restructuring actions are as follows (in thousands):

		Employee				Facilities-
		Separation				related
		Expense				Charges				Total
Balance as of May 31, 2009		$	1,477			$	47			$	1,524
Provisions (benefits)			(75	)			5				(70	)
Payments and non-cash charges			(321	)			(8	)			(329	)
Balance as of August 31, 2009		$	1,081			$	44			$	1,125

Employee separation expense includes severance pay, outplacement services, medical and other related benefits. Facilities-related charges related to revised future lease obligations.

We expect to complete any remaining activities related to actions initiated through fiscal 2009 during fiscal 2010.

NOTE 6. INCOME TAXES

The Company provides for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period in which they occur. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

During the three months ended August 31, 2009, the balance of unrecognized tax benefits increased by $1.4 million. As of August 31, 2009, we had unrecognized tax benefits, including interest and penalties, of $23.3 million, all of which, if recognized, would affect our effective tax rate. As of August 31, 2009, the accrued interest and penalties related to uncertain tax positions were $2.9 million and $0, respectively, which has been recorded within the balance of unrecognized tax benefits.

As of August 31, 2009 we estimate that the balance of unrecognized tax benefits will decrease by approximately $4.8 million over the next twelve months as a result of the expiration of various statutes.

See footnote 16 “Subsequent Event” for discussion of the finalization of the calendar year 2008 China tax rate.

NOTE 7. COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows (in thousands):

		Three Months Ended
		August 31,
		2009				2008
Net income		$	7,461			$	79,837
Other comprehensive income:
Change in accumulated translation adjustments			1,229				7,685
Total comprehensive income		$	8,690			$	87,522

NOTE 8. NET INCOME PER SHARE

The following represents a reconciliation from basic earnings per common share to diluted earnings per common share. Stock options and restricted stock (awards and units) of 23.9 million and 8.4 million, respectively, were outstanding at August 31, 2009 but were not included in the computation of diluted earnings per share because they were antidilutive. Stock options and restricted stock (awards and units) of 39.3 million and 8.7 million, respectively, were outstanding at August 31, 2008, but were not included in the computation of diluted earnings per share because they were antidilutive.

		Three Months Ended August 31,
(in thousands except per share data)		2009				2008
Determination of shares:
Weighted average shares outstanding			389,774				402,889
Assumed conversion of dilutive stock options			3,021				968
Assumed conversion of dilutive restricted stock (awards and units)			3,471				215
Diluted weighted average shares outstanding			396,266				404,072
Basic earnings per share		$	0.02			$	0.20
Diluted earnings per share		$	0.02			$	0.20

On June 30, 2009 the Company adopted FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP did not have a material impact on our financial statements.

NOTE 9. INVENTORIES

The components of inventories are as follows (in thousands):

		August 31,				May 31,
		2009				2009
Finished goods		$	62,533			$	69,860
Work-in-process			3,686				3,420
Raw materials			20,013				17,115
Total		$	86,232			$	90,395

NOTE 10. GOODWILL AND INTANGIBLE ASSETS, NET

We apply the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets” to goodwill and intangible assets with indefinite lives which are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. We test our goodwill for impairment annually during our third fiscal quarter. There were no triggering events in the first quarter of fiscal year 2010 that required an additional impairment test.

Intangible assets consist of (in thousands, except for weighted average remaining amortization period):

		August 31, 2009																May 31, 2009
		Weighted																Weighted
		Average																Average
		Remaining																Remaining
		Amortization								Accumulated								Amortization								Accumulated
		Period				Gross				Amortization				Net				Period				Gross				Amortization				Net
Existing technology			3.3			$	398,204			$	(286,101	)		$	112,103				3.6			$	398,178			$	(272,460	)		$	125,718
Trademark		NA					55,502				—				55,502			NA					55,502				—				55,502
Huawei non-compete			0.0				37,288				(37,288	)			—				0.0				37,283				(37,283	)			—
OEM agreement			0.8				26,853				(20,165	)			6,688				1.0				23,777				(14,852	)			8,925
Maintenance agreements			1.5				19,000				(14,516	)			4,484				1.7				19,000				(13,724	)			5,276
Other			1.8				22,698				(19,897	)			2,801				2.0				22,697				(19,494	)			3,203
						$	559,545			$	(377,967	)		$	181,578							$	556,437			$	(357,813	)		$	198,624

During the three months ended August 31, 2009 our gross intangible assets increased by $3.1 million due to the appreciation on the Renminbi affecting the value of certain intangible assets tied to our H3C subsidiary. Net intangible assets at August 31, 2009 in our China-based sales region were $167.6 million and in our TippingPoint segment were $14.0 million.

NOTE 11. ACCRUED WARRANTY

Most products are sold with varying lengths of limited warranty ranging from 90 days to lifetime. Allowances for estimated warranty obligations are recorded in the period of sale, based on historical experience related to product failure rates and actual warranty costs incurred during the applicable warranty period and are recorded as part of cost of goods sold. Also, on an ongoing basis, we assess the adequacy of our allowances related to warranty obligations recorded in previous periods and may adjust the balances to reflect actual experience or changes in future expectations.

The following table summarizes the activity in the allowance for estimated warranty costs for the three months ended August 31, 2009 and 2008 (in thousands):

		Three Months Ended
		August 31,
		2009				2008
Accrued warranty, beginning of period		$	29,587			$	36,897
Cost of warranty claims processed during the period			(6,280	)			(8,217	)
Provision for warranties related to products sold during the period			5,029				6,771
Accrued warranty, end of period		$	28,336			$	35,451

NOTE 12. LONG-TERM DEBT

On May 25, 2007, our subsidiary H3C Holdings Limited (“Borrower”) entered into an amended and restated credit agreement with various lenders, including Goldman Sachs Credit Partners L.P., as Mandated Lead Arranger, Bookrunner, Administrative Agent and Syndication Agent, and Industrial and Commercial Bank of China (Asia) Limited, as Collateral Agent (the “Credit Agreement”). Under the Credit Agreement, the Borrower borrowed $430 million in the form of a senior secured term loan in two tranches (Tranche A and Tranche B) to finance a portion of the purchase price for 3Com’s acquisition of 49 percent of H3C Technologies Co., Limited, or H3C (a Hong Kong entity). The Borrower and its subsidiaries are referred to collectively as the “H3C Group.”

Interest on borrowings is payable semi-annually on March 28 and September 28, and commenced on September 28, 2007. Interest is accrued at the six month LIBOR rate, plus an applicable margin. All amounts outstanding under the Tranche A Term Facility will bear interest, at the Borrower’s option, at the (i) LIBOR, or (ii) Base Rate (i.e., prime rate), in each case plus the applicable margin percentage set forth in the table below, which is based on a “leverage ratio” of consolidated indebtedness of the Borrower and its subsidiaries to EBITDA (as defined in the Credit Agreement) for the relevant twelve-month period:

Leverage Ratio		LIBOR +				Base Rate +
>3.0:10			2.25	%			1.25	%
≤3.0:1.0 but > 2.0:1.0			2.00	%			1.00	%
≤2.0:1.0 but > 1.0:1.0			1.75	%			0.75	%
≤1.0:1.0			1.50	%			0.50	%

All amounts outstanding under the Tranche B Term Facility will bear interest, at the Borrower’s option, at the (i) LIBOR plus 3 percent or (ii) Base Rate (i.e., prime rate) plus 2 percent. We have elected to use LIBOR as the reference rate for borrowings to date. Applicable LIBOR rates at August 31, 2009 were 1.79 percent and the effective interest rate at August 31, 2009 was 3.29 percent for the Tranche A Term Facility and 4.79 percent for the Tranche B Term Facility.

Required payments under the loan are generally expected to be serviced by cash flows from the H3C Group.

Borrowings under the Credit Agreement may be prepaid in whole or in part without premium or penalty. The Borrower will be required to make mandatory prepayments using net proceeds from H3C Group (i) asset sales, (ii) insurance proceeds and (iii) equity offerings or debt incurrence. In addition, to the extent there exists excess cash flow as defined under the Credit Agreement, the Borrower will be required to make annual prepayments. Any excess cash flow amounts not required to prepay the loan may be distributed to and used by the Company outside of the H3C Group, provided certain conditions are met.

H3C and all other existing and future subsidiaries of the Borrower (other than PRC subsidiaries or small “excluded subsidiaries”) will guarantee all obligations under the loans and are referred to as “Guarantors”. The loan obligations are secured by (1) first priority security interests in all assets of the Borrower and the Guarantors, including their bank accounts, and (2) a first priority security interest in 100 percent of the capital stock of the Borrower and H3C and the PRC subsidiaries of H3C. The debt bears interest at floating rates therefore the carrying value approximates fair value.

The Borrower must maintain a minimum debt service coverage, minimum interest coverage, maximum capital expenditures and a maximum total leverage ratio. Negative covenants restrict, among other things, (i) the incurrence of indebtedness by the Borrower and its subsidiaries, (ii) the making of dividends and distributions to the Company outside of the H3C Group, (iii) the ability to make investments including in new subsidiaries, (iv) the ability to undertake mergers and acquisitions and (v) sales of assets. As of August 31, 2009, the H3C Group’s net assets were $858.5 million and are subject to these dividend restrictions. Also, cash dividends from the PRC subsidiaries to H3C, and H3C to the Borrower, will be subject to restricted use pending payment of principal, interest and excess cash flow prepayments. Standard events of default apply.

Remaining payments of the $200 million principal are due on September 28, of each year as follows, (in thousands):

Calendar Year		3Com Fiscal Year		Tranche A				Tranche B
2009		2010		$	46,000			$	2,000
2010		2011			46,000				2,000
2011		2012			—				20,000
2012		2013			—				84,000

On September 28, 2009, in addition to our regular principal payment the Company made a voluntary prepayment of $40.0 million of principal, which the Company did not incur a penalty for, all of which was applied to reduce our fiscal year 2013 Tranche B principal balance. The prepayment amount was classified as current debt in the condensed consolidated balance sheet as of August 31, 2009.

On September 28, 2009 our applicable LIBOR rates reset to 0.64 percent and the effective interest rate for the next six months will be 2.14 percent for the Tranche A Term Facility and 3.64 percent for the Tranche B Term Facility.

NOTE 13. SEGMENT INFORMATION

In the first quarter of fiscal 2010, we changed the measures of segment contribution profit (loss) and segment income to align with how we currently manage our business and report internally. Accordingly, our previously reported segment information has been revised to reflect our new measure of segment contribution profit (loss) and segment income. Based on the information provided to our chief operating decision-maker (“CODM”) for purposes of making decisions about allocating resources and assessing performance, we have two primary businesses, our Networking Business and TippingPoint Security Business. Our Networking Business consists of the following sales regions as operating segments: China-based (including Japan and Hong Kong SAR), Asia Pacific Region excluding China-based sales region (“APR”), Europe Middle East and Africa (“EMEA”), Latin America (“LAT”), and North America (“NA”) regions. The APR, EMEA, LAT and NA operating segments have been aggregated given their similar economic characteristics, products, customers and processes, and have been consolidated as one reportable segment, “Rest of World”. The China-based sales region does not meet the aggregation criteria at this time.

The China-based and Rest of World reporting segments benefit from shared support services on a world-wide basis. The costs associated with providing these shared central functions are not allocated to the China-based and Rest of World reporting segments and instead are reported and disclosed under the caption “Central Functions”. Central Function costs include research and development expenses and “other operating expenses”. “Other operating expenses” in both our Central Function costs and TippingPoint Security business include other costs of sales, such as supply chain operations, indirect sales and marketing, and general and administrative support costs.

Management evaluates the China-based sales region and the Rest of World sales region performance based on segment contribution profit. Segment contribution profit is standard margin less segment direct sales and marketing expenses. Standard margin for these regions is sales less standard costs of sales. Our TippingPoint Security business segment is measured on segment income. Segment income is segment contribution profit less research and development expenses. Eliminations and other include intercompany sales eliminations, stock-based compensation expense, amortization of

intangible assets and restructuring in all periods as well as proceeds from the Realtek patent dispute resolution in the first quarter of fiscal 2009, as these costs are not included in the Company’s segment contribution profit and segment income.

Summarized financial information of our results of operations by segment for the three months ended August 31, 2009 and 2008 is as follows.

		Three Months Ended August 31, 2009
														TippingPoint
		Networking Business												Security Business
		China-based				Rest of World				Central				Tipping				Eliminations/
(in thousands)		sales region				Sales Region				Functions(a)				Point(b)				Other				Total
Sales		$	152,013			$	107,202			$	—			$	32,596			$	(1,309	)c		$	290,502
Standard margin			104,900				62,995				—				27,772				(540	)d			195,127
Direct sales & marketing expenses			35,039				23,327				—				11,028				1,590	d			70,984
Segment contribution profit (loss)			69,861				39,668				—				16,744				(2,130	)			124,143
Research & development expenses			—				—				32,177				6,315				476	d			38,968
Segment income		$	—			$	—			$	—			$	10,429			$	—
Other operating expenses											56,047				5,404				20,483	e			81,934
Operating income																						$	3,241

		Three Months Ended August 31, 2008
														TippingPoint
		Networking Business												Security Business
		China-based				Rest of World				Central				Tipping				Eliminations/
(in thousands)		sales region				Sales Region				Functions(a)				Point(b)				Other				Total
Sales		$	175,397			$	140,314			$	—			$	28,199			$	(1,260	)c		$	342,650
Standard margin			115,527				82,253				—				23,396				(758	)d			220,418
Direct sales & marketing expenses			33,600				28,152				—				10,073				1,758	d			73,583
Segment contribution profit (loss)			81,927				54,101				—				13,323				(2,516	)			146,835
Research & development expenses			—				—				39,317				6,946				884	d			47,147
Segment income		$	—			$	—			$	—			$	6,377			$	—
Other operating expenses (income)											60,022				6,080				(39,797	)e			26,305
Operating income																						$	73,383

		August 31,				May 31,
Identifiable assets (in thousands)		2009				2009
China-based sales region(1)(2)		$	1,341,733			$	1,378,059
Rest of World sales region(1)			1,014,757				875,788
TippingPoint			226,462				228,440
Eliminations(3)			(781,243	)			(666,930	)
Total		$	1,801,709			$	1,815,357

		Three Months Ended
		August 31,
Total Expenditures for Additions to Property and Equipment (in thousands)		2009				2008
China-based sales region(1)		$	1,018			$	2,767
Rest of World sales region(1)			1,637				4,004
TippingPoint			315				827
Total		$	2,970			$	7,598

Certain product groups account for a significant portion of our sales. In the first quarter of fiscal 2010 we expanded the number of individually reported networking equipment products. We have expanded our networking equipment into two categories, switches and routers, and other networking equipment. Other networking equipment revenue includes sales of our VCX™ and NBX® voice-over-internet protocol, or VoIP, IP storage, IP surveillance and our wireless LAN (“WLAN”) products. We have also consolidated voice into other networking equipment. Prior year disclosures have been revised to be comparable with our current year groupings. Security revenue includes our TippingPoint™ products and services, as well as other security products, such as our embedded firewall, or EFW and virtual private network, or VPN, products. Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Sales from these product groups as a percentage of total sales for the respective periods are as follows (in thousands, except percentages):

		Three Months Ended August 31,
		2009								2008
Switches and routers		$	195,211				67.2	%		$	254,176				74.2	%
Other networking equipment			42,395				14.6				41,117				12.0
Security			41,052				14.1				36,339				10.6
Services			11,844				4.1				11,018				3.2
Total		$	290,502				100	%		$	342,650				100	%

NOTE 14. GEOGRAPHIC INFORMATION

Sales by geographic region are as follows (in thousands):

		Three Months Ended August 31,
		2009				2008
China		$	146,362			$	167,527
Europe, Middle East and Africa			49,050				69,377
North America			51,669				52,031
Asia Pacific Rim (excluding-China)			25,246				30,109
Latin and South America			18,175				23,606
Total		$	290,502			$	342,650

All non-Original Equipment Manufacturer (“OEM”) partner sales are reported in geographic categories based on the location of the end customer. Sales to OEM partners are included in the geographic categories based upon the hub locations of the OEM partners.

NOTE 15. LITIGATION

We are a party to lawsuits in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the outcome of claims against the Company described below are uncertain. We believe that we have meritorious defenses in the matter set forth below in which we are named as a defendant. An unfavorable resolution of the lawsuit in which we are a defendant as described below, could adversely affect our business, financial position, results of operations, or cash flow. The Company does not believe that the ultimate disposition of these matters will have a material adverse effect on the Company’s financial position.

On December 5, 2001, TippingPoint and two of its current and former officers and directors, as well as the managing underwriters in TippingPoint’s initial public offering, were named as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The lawsuit, which is part of a consolidated action that includes over 300 similar actions, is captioned In re Initial Public Offering Securities Litigation, Brian Levey vs. TippingPoint Technologies, Inc., et al. (Civil Action Number 01-CV-10976). The principal allegation in the lawsuit is that the defendants participated in a scheme to manipulate the initial public offering and subsequent market price of TippingPoint’s stock (and the stock of other public companies) by knowingly assisting the underwriters’ requirement that certain of their customers had to purchase stock in a specific initial public offering as a condition to being allocated shares in the initial public offerings of other companies. In relation to TippingPoint, the purported plaintiff class for the lawsuit is comprised of all persons who purchased TippingPoint stock from March 17, 2000 through December 6, 2000. The suit seeks rescission of the purchase prices paid by purchasers of shares of TippingPoint common stock. On September 10, 2002, TippingPoint’s counsel and counsel for the plaintiffs entered into an agreement pursuant to which the plaintiffs dismissed, without prejudice, TippingPoint’s former and current officers and directors from the lawsuit. In March 2009, TippingPoint signed a settlement agreement with the plaintiffs. On April 2, 2009, all the parties to the lawsuit (including all plaintiffs, issuers, and underwriters) filed settlement documents with the District Court. On June 10, 2009 the District Court issued its preliminary approval of the settlement and on September 10, 2009 held a Settlement Fairness Hearing. On October 6, 2009 the District Court approved the settlement in all substantive respects. Any direct financial impact of the settlement is expected to be borne by TippingPoint’s insurers. The settlement remains subject to numerous conditions. If the settlement does not occur for any reason and the litigation against TippingPoint continues, we intend to defend this action vigorously, but cannot make any predictions about the outcome. To the extent necessary, we will seek indemnification and/or contribution from the underwriters in TippingPoint’s initial public offering pursuant to its underwriting agreement with the underwriters. However, there can be no assurance that indemnification or contribution will be available to TippingPoint or enforceable against the underwriters.

On July 31, 2008, the Company filed a lawsuit in the Delaware Chancery Court against Diamond II Holdings, Inc., an entity controlled by affiliates of Bain Capital Partners, LLC. The lawsuit seeks interpretation and enforcement of the provisions of the Merger Agreement and Plan of Merger by among 3Com, Diamond II Holdings, Inc., and Diamond II Acquisition Corp., dated as of September 28, 2007. The litigation is in furtherance of our efforts to enforce the provisions of the now-terminated Merger Agreement related to the termination fee. There can be no assurance that 3Com will be able to collect this fee.

NOTE 16. SUBSEQUENT EVENT

Under special agreement with the tax authorities certain of our annual Chinese income tax filings for the calendar year ended December 31, 2008 were not filed until August 14, 2009, pending the resolution of the calendar 2008 applicable tax rate. Calendar year 2008 was the final year of certain tax concessions that our main operating company in China, Hangzhou H3C, was entitled to. The Company provided for taxes for calendar 2008 at a 15 percent rate (the rate that will be in effect on a go forward basis), however in July 2009 the Tax Bureau of Hangzhou Binjiang District notified the Company that we could use a tax rate of 9 percent for calendar 2008. This government approval occurred subsequent to the end of our China subsidiaries’ reporting period of June 30, 2009. Accordingly, it will be reflected in our China subsidiaries’ results for the reporting period of July 1, 2009 through September 30, 2009, which falls within our second fiscal quarter. The impact of this discrete income tax benefit will be approximately $11 million and will be reflected in our fiscal second quarter results.

The Company has evaluated subsequent events through October 6, 2009, which is the filing date of this report on Form 10-Q.

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.

BUSINESS OVERVIEW

We are a global enterprise networking solutions provider incorporated in Delaware. A pioneer in the computer networking industry, we have three global product and solutions brands — H3C, 3Com, and TippingPoint — that offer high-performance networking and security solutions to enterprises large and small. These organizations range across a number of vertical industries, including education, finance, government, healthcare, insurance, manufacturing and real estate. The H3C^® enterprise networking portfolio — one of the leading large enterprise networking equipment brands in China — includes products that span from the data center to the edge of the network and is targeted at large enterprises. The 3Com^® family of products offers a strong price/performance value proposition for small and medium businesses. Our TippingPoint^® security brand features network-based intrusion prevention systems (“IPS”) and network access control (“NAC”) solutions, which deliver in-depth, no-compromise application, infrastructure and performance protection.

We believe our portfolio of products and services enables customers to deploy and manage business-critical voice, video, data and other advanced networking technologies in a secure, scalable, reliable and efficient network environment. We believe we offer customer-driven technology solutions that help enterprises optimize their budgets and resources, increase productivity, and realize their business goals. 3Com designs its solutions to offer customers a unique value proposition: lower total cost of ownership (“TCO”) and expert, responsive service. Our data center-to-edge enterprise networking solutions offer a common operating system to streamline system management, and are based on open standards to enable the use of best-of-breed applications from other vendors. We believe we offer a broad, fresh portfolio of products and solutions that disrupt the industry status quo and deliver true “no-compromise” networking.

We believe we deliver high-quality, high-performance converged networking solutions that provide exceptional business value and help customers address the following fundamental challenges:

	•		Performance — Bandwidth demands have increased along with the number of users and applications — IP telephony, videoconferencing, streaming multimedia and others — on enterprise networks, yet performance requirements never abate. 3Com routers, switches and security devices provide robust throughput and traffic optimization applications to ensure high-quality networking even in the most challenging enterprise network environments.
	•		Cost effectiveness — Today’s enterprise customers are seeking cost-effective solutions that optimize the value of their network infrastructure investment. 3Com products are designed to be cost-effective, competitively priced and energy efficient. 3Com’s single-pane, intuitive network management platform minimizes time spent training IT staff and network administrators, helping to further reduce overall TCO.
	•		Security — Today’s enterprises need to protect themselves from a constantly evolving spectrum of internal and external threats to ensure the safety of their mission-critical information. 3Com’s pervasive network solutions provide granular oversight, control access, quarantine malicious programs and files, and restore data.

We focus on delivering superior networking solutions that offer a cost advantage to our customers through solutions that are less expensive to acquire, power and operationally manage. Our products are designed to provide superior value through capability design as well as other cost conscious features such as lower power requirements, and inter-operability in multi-vendor networks.

We believe that our global presence, brand identity, strong development organization and intellectual property portfolio provide a solid foundation for achieving our objectives.

Our products are sold on a worldwide basis through a combination of value added resellers, distributors and direct-touch sales representatives. We also work with service providers to deliver managed networking solutions for enterprise customers.

Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and

Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and development, and customer service and support capabilities.

Our products and services can generally be classified in the following categories:

	•		Switches and routers;
	•		Other networking equipment;
	•		Security; and
	•		Services.

We have introduced multiple new products targeted at the small, medium and large enterprise markets, including modular and multi-service switches and routers; converged IP solutions such as voice, video and surveillance; security; and unified switching solutions. Our recent product introductions and future product strategy are designed to offer a compelling value proposition to our customers, by leveraging open platform technology with options to integrate best-of-breed application solutions directly into their networks.

Business Environment and Future Trends

We operate today in a rapidly changing business environment due to the severe credit and adverse market conditions in many of the world’s economies. The current global financial crisis has led to significant business slowdowns around the world. It is therefore increasingly difficult to predict future business conditions in the market for enterprise networking equipment. Our business is highly dependent on the Chinese economy, which has experienced strong growth in recent years. Our success in China has been due to the success of the direct-touch enterprise model, a mixture of core and new products and solution selling, and value creation for customers. While we believe that China may have been less affected than other regions by the global economic slowdown, it is now experiencing the effects of the downturn and our growth has slowed in China. It is difficult to predict the extent of the slowdown on our China business at this time. Additionally, we expect a continued significant reduction in sales to our largest customer, Huawei Technologies, during fiscal year 2010. For our operations outside of China, which we call “Rest of World,” we expect the challenging business environment to continue in the foreseeable future. In Rest of World, we are experiencing reduced demand for our products, delayed or cancelled purchases and longer sales cycles. Our Rest of World operations have been adversely impacted by the global economic crisis.

Our strategy to address these adverse business conditions is to market our solutions as providing exceptional quality for a good value and to remain competitive in the enterprise market. At the same time, we recognize that global spending on networking products and solutions is likely to continue to be under significant pressure for the foreseeable future. While the timing of a recovery is unclear we saw some stabilization in certain markets in our first quarter of fiscal 2010 and we strive to be well positioned when the recovery occurs.

Networking industry analysts and participants differ widely in their assessments concerning the prospects for mid to long-term industry growth, especially in light of the current weakness in many of the major global economies. Industry factors and trends also present significant challenges in the medium-term. Such factors and trends include intense competition in the market for higher end, enterprise core routing and switching products and aggressive product pricing by competitors targeted at gaining share in the small to medium-sized business market.

We believe that long-term success in this environment requires us to (1) be a global technology leader, (2) increase our revenue and take market share from competitors outside of China, (3) increase and sustain our profitability and (4) increase our generation of cash from operations.

Technology Strategy

We believe our principal research and development base in China provides a strong foundation for our global product development. Our strategy involves continuing to innovate, using China as a home market to introduce new products in the networking equipment industry and related markets and providing leading solutions for global markets. Our approach is to focus on activities that deliver differentiated products and solutions and drive reductions in product costs. Our current areas of focus include security, convergence of applications over IP, advanced switching, routing solutions and other advanced technologies.

Revenue and Market Share Goals

We believe that our differentiated, comprehensive product portfolio which provides end-to-end IP solutions based on open standards offers a compelling value proposition for customers, particularly in the current economic environment.

Our intention is to leverage our global footprint to more effectively sell these products. A key element of our strategy is to increasingly focus on sales to larger enterprise and government accounts in all of our regions.

We intend to execute on three regional strategies as follows:

•

China — In China, we have been successful in direct-touch sales to enterprise and government customers. To maintain a leadership position in China, we intend to increase our focus on direct-touch sales as well as pursue other distribution channels. We believe that growing market share in China will be more challenging than in the past given that we already have a significant enterprise networking market share in China. We also intend to continue to introduce innovative new product offerings in the China market, such as IP video surveillance and IP storage, which may offer additional growth opportunities.

Our strategy involves leveraging our significant China-based engineering team and strong brand of networking solutions designed for enterprise and government accounts into greater success in markets outside of China, as further described below.

	•		Emerging markets outside of China — We expect to target growth opportunities outside of China in other developing markets. We believe that our successful penetration of the Chinese market has provided experience that is transferable to many emerging markets. We believe this experience will position us to gain market share in developing markets.
	•		Developed global markets — Our goal in developed markets is to increase our market share. Our strategy is to focus on large enterprise and government accounts and to implement this strategy we intend to increase go to market resources. We intend to offer these customers our comprehensive end to end solutions and highlight our products’ price to performance value proposition and energy efficiency. Our goal is to be well positioned for the economic recovery and in fact we saw some stabilization in certain markets in our first fiscal quarter of 2010.

Profitability and Cash Generation Objectives

We believe that our long-term success is also dependent on our ability to increase our overall profit and cash generation. We believe that by continuing to integrate our worldwide operations we can achieve further operational efficiencies to support continued investment in sales and marketing to grow our business. We may also continue to require targeted investments in infrastructure designed to meet our market share growth objectives.

For our TippingPoint business we plan to focus on growing its top line and continuing to improve operational efficiency and segment profitability. We also plan to leverage our existing sales channels and global footprint to more effectively sell TippingPoint products and services. The Company also plans to integrate our TippingPoint® IPS technology into our Networking products to deliver a unified product line that combines security, network infrastructure and policy management.

Segment Reporting

In the first quarter of fiscal 2010, we changed the measures of segment profit and segment income to align to how we currently manage our business and report internally. Accordingly, our previously reported segment information has been revised to reflect our new measure of segment profit and segment income. Based on the information provided to our chief operating decision-maker (“CODM”) for purposes of making decisions about allocating resources and assessing performance, we have two primary businesses, our Networking Business and TippingPoint Security Business. Our Networking Business consists of the following sales regions as operating segments: China-based (including Japan and Hong Kong SAR), Asia Pacific Region excluding China-based sales region (“APR”), Europe Middle East and Africa (“EMEA”), Latin America (“LAT”), and North America (“NA”) regions. The APR, EMEA, LAT and NA operating segments have been aggregated given their similar economic characteristics, products, customers and processes, and have been consolidated as one reportable segment, “Rest of World”. The China-based sales region does not meet the aggregation criteria at this time.

The China-based and Rest of World reporting segments benefit from shared support services on a world-wide basis. The costs associated with providing these shared central functions are not allocated to the China-based and Rest of World reporting segments and instead are reported and disclosed under the caption “Central Functions”. Central Function costs include research and development expenses and “other operating expenses”. “Other operating expenses” in both our Central Function costs and TippingPoint Security Business include indirect cost of sales, such as supply chain operations expenses, indirect sales and marketing, and general and administrative support costs.

Summary of Three Months Ended August 31, 2009 Financial Performance

	•		Our sales in the three months ended August 31, 2009 were $290.5 million, compared to sales of $342.7 million in the three months ended August 31, 2008, a decrease of $52.2 million, or 15.2 percent.
	•		Our gross margin improved to 57.3 percent in the three months ended August 31, 2009 from 55.3 percent in the three months ended August 31, 2008.
	•		Our operating expenses (income) in the three months ended August 31, 2009 were $163.3 million, compared to $116.2 million in the three months ended August 31, 2008, a net increase of $47.1 million, or 40.5 percent. Included in the three months ended August 31, 2008 operating expenses (income) is $70.0 million of income related to the Realtek patent dispute resolution.
	•		Our net income in the three months ended August 31, 2009 was $7.5 million, compared to net income of $79.8 million in the three months ended August 31, 2008. Included in the three months ended August 31, 2008 net income is $70.0 million of income related to the Realtek patent dispute resolution.
	•		Our balance sheet contains cash and equivalents and short term investments of $665.8 million as of August 31, 2009, compared to cash and equivalents and short term investments of $644.2 million at the end of fiscal 2009. The balance sheet also includes debt of $200 million with $88 million classified as a current liability as of August 31, 2009 and $48 million classified as a current liability as of May 31, 2009.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in Annual Report on Form 10-K for the fiscal year ended May 31, 2009. There have been no significant changes to these policies during the three months ended August 31, 2009. These policies continue to be those that we feel are most important to a reader’s ability to understand our financial results.

RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2009 AND 2008

The following table sets forth, for the periods indicated, the percentage of total sales represented by the line items reflected in our condensed consolidated statements of operations:

		Three Months Ended
		August 31,
		2009				2008
Sales			100.0	%			100.0	%
Cost of sales			42.7				44.7
Gross profit margin			57.3				55.3
Operating expenses (income):
Sales and marketing			29.1				25.5
Research and development			13.4				13.8
General and administrative			7.4				7.1
Amortization			5.9				7.3
Realtek patent resolution			—				(20.4	)
Restructuring charges			0.4				0.6
Operating expenses, net			56.2				33.9
Operating income			1.1				21.4
Interest expense, net			(0.4	)			(0.4	)
Other income, net			4.0				3.8
Income before income taxes			4.7				24.8
Income tax provision			(2.1	)			(1.5	)
Net income			2.6	%			23.3	%

Sales

Consolidated sales for the three months ended August 31, 2009 and 2008 by segment were as follows (dollars in millions):

		Three Months Ended
		August 31,
		2009				2008
China-based sales region		$	152.0			$	175.4
Rest of World sales region			107.2				140.3
TippingPoint security business			32.6				28.2
Eliminations and other			(1.3	)			(1.2	)
Consolidated sales		$	290.5			$	342.7

Sales in our China-based sales region decreased $23.4 million, or 13.3 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease is primarily attributable to decreased sales to Huawei of $37.7 million as compared to the same quarter in the prior fiscal year, partially offset by an increase of $16.5 million of China direct-touch sales. The increase in direct-touch sales primarily relate to increased sales in our WLAN products and growth in the finance and banking industries as well as the internet service provider industry.

Sales in our Rest of World sales region segment decreased $33.1 million, or 23.6 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease in sales in the three months ended August 31, 2009 is primarily attributable to decreased sales volume in all regions as we are experiencing longer sales cycles, delayed or cancelled purchases and reduced incoming orders because of the global economic downturn.

Sales in our TippingPoint segment increased $4.4 million, or 15.6 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. This increase is primarily attributable to increased maintenance revenue of $3.8 million due to an increased number of maintenance contracts and a higher maintenance renewal rate in the period.

Consolidated revenues decreased by $52.2 million or 15.2 percent in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease is primarily due to a decrease of $37.7 million in sales to Huawei. When compared to our fourth quarter of fiscal 2009, however, our first quarter of fiscal 2010 consolidated revenues decreased by 1.5 percent, reflecting some recent stabilization in certain markets we experienced in our first quarter of fiscal 2010.

Sales by major product categories are as follows (dollars in millions, except percentages):

		Three Months Ended
		August 31,
		2009								2008
Switches and routers		$	195.2				67	%		$	254.2				74	%
Other networking equipment			42.4				15	%			41.1				12	%
Security			41.1				14	%			36.4				11	%
Services			11.8				4	%			11.0				3	%
Total		$	290.5				100	%		$	342.7				100	%

Switches and routers revenue includes sales of our Layer 2 and Layer 3 stackable 10/100/1000 managed switching lines, our modular switching lines and routers. Sales of these products in the three months ended August 31, 2009 decreased $55.2 million, or 24.7 percent, from the same period in the previous fiscal year. The decrease in sales was primarily driven by decreased sales volume to Huawei as well as decreased volume in our other regions.

Other networking equipment revenue includes sales of our VCX™ and NBX® voice-over-internet protocol, or VoIP, IP storage, IP surveillance and our WLAN products. Sales of our other networking products in the three months ended August 31, 2009 remained essentially flat from the same period in the previous fiscal year.

Security revenue includes our TippingPoint™ products and services, as well as other security products, such as our embedded firewall, or EFW and virtual private network, or VPN, products. Sales of our security products in the three months ended August 31, 2009 increased $4.7 million, or 12.9 percent, from the same period in the previous fiscal year. The increase is primarily attributable to increased maintenance revenue of $3.8 million in our TippingPoint business due to an increased number of maintenance contracts and higher maintenance renewal rates in the period.

Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue in the three months ended August 31, 2009 increased $0.8 million, or 7.3 percent, from the same period in the previous fiscal year. The increase was driven primarily by increased service sales tied to growth in our China direct-touch sales.

Gross Margin

Gross margin for the three months ended August 31, 2009 and 2008 by business were as follows:

		Three Months Ended
		August 31,
		2009				2008
Networking business			55.2	%			54.1	%
TippingPoint security business			72.2	%			69.4	%
Consolidated margin			57.3	%			55.3	%

Gross margin in our Networking business improved 1.1 points to 55.2 percent in the three months ended August 31, 2009 from 54.1 percent in the same period in the previous fiscal year. The improvement in gross profit margin is primarily explained by a change of channel mix with the decline of the lower margin Huawei revenue.

Gross margin in our TippingPoint Security business improved 2.8 points to 72.2 percent in the three months ended August 31, 2009 from 69.4 percent in the same period in the previous fiscal year. The improvement in gross profit margin is primarily explained by improved standard margins due to the recognition of previously deferred revenue as well as improved product mix of higher margin new security products.

Gross margin on a consolidated basis increased 2.0 points to 57.3 percent in the three months ended August 31, 2009 from 55.3 percent in the same period in the previous fiscal year. This increase is mainly due to the items discussed above.

Operating Expenses (Income)

		Three Months Ended
		August 31,								Change
(Dollars in millions, except percentages)		2009				2008				$				%
Sales and marketing		$	84.8			$	87.5			$	(2.7	)			(3	)%
Research and development			38.9				47.1				(8.2	)			(17	)%
General and administrative			21.4				24.4				(3.0	)			(12	)%
Amortization			17.1				25.2				(8.1	)			(32	)%
Patent dispute resolution			—				(70.0	)			70.0				*
Restructuring charges, net			1.1				2.0				(0.9	)			(45	)%
Operating expenses, net		$	163.3			$	116.2			$	47.1				(41	)%

Sales and Marketing

The most significant factor in the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was decreased headcount as part of our restructuring efforts, partially offset by increased agent commissions on higher China direct-touch sales.

Research and Development

The most significant factor contributing to the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was continued savings from integration and consolidation of our Networking research and development to China.

General and Administrative

The most significant factor in the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was lower compensation charges due to headcount reductions and lower discretionary spending, specifically in travel and entertainment.

Amortization of Intangible Assets

Amortization of intangible assets decreased $8.1 million in the three months ended August 31, 2009 when compared to the previous fiscal year due primarily to our Huawei non-compete agreement becoming fully amortized during fiscal 2009.

Patent Dispute Resolution

The Company and Realtek Group reached an agreement with respect to certain networking technologies of the Company that resolved a long-standing patent dispute between the companies. Under the terms of the agreement, Realtek paid the Company $70.0 million, all of which was received in the three months ended August 31, 2008.

The Company recognized the full $70.0 million as operating income in the first quarter of fiscal 2009.

Restructuring Charges

Restructuring charges in the three months ended August 31, 2009 included $1.0 million for severance and outplacement costs and a $0.1 million charge for other restructuring costs primarily related to the change in our sales force as we transition to more enterprise business.

Restructuring charges in the three months ended August 31, 2008 included $1.9 million for severance and outplacement costs and a $0.1 million benefit for facilities-related and other restructuring charges primarily related to a decrease in headcount of research and development employees as the Company eliminated duplicate testing activities.

See Note 5 to Condensed Consolidated Financial Statements for a more detailed discussion of restructuring charges.

Interest Expense, Net

In the three months ended August 31, 2009, the Company incurred $1.1 million in net interest expense, compared to net interest expense of $1.3 million in the same period of the prior fiscal year. The decrease in net interest expense is primarily due to decreased interest income due to lower interest rates as well as due to a lower LIBOR rate on the Company’s H3C loan during the first quarter of fiscal 2010 as compared to the same period in the previous fiscal year.

Other Income, Net

Other income, net was $11.5 million in the three months ended August 31, 2009, a decrease of $1.3 million compared to the three months ended August 31, 2008. The decrease was primarily due to a decrease in foreign currency gains. Included in other income, net is an operating subsidy program by the Chinese VAT authorities in the form of a partial refund of VAT taxes collected by our China-based sales region from purchasers of software products. The subsidy payments are taken into income on a cash basis. The timing of the receipt, and the continuation of the program, are subject to the discretion of the Chinese VAT authorities. This program is scheduled to terminate on December 31, 2010.

Income Tax Provision

Our income tax provision was $6.2 million for the three months ended August 31, 2009, an increase of $1.1 million when compared to the corresponding period in the previous fiscal year. The income tax provision in both periods was the result of providing for taxes in certain foreign jurisdictions at the prevailing statutory tax rates.

See footnote 16 “Subsequent Event” for discussion of the finalization of the calendar year 2008 China tax rate.

Segment Analysis (tables in thousands)

In the first quarter of fiscal 2010, we changed the measures of segment profit and segment income to align to how we currently manage our business and report internally. Accordingly, our previously reported segment information has been revised to reflect our new measures of segment profit and segment income. The results of our regional Networking segments, Central Functions, and our TippingPoint Security business as our CODM reviews their profitability are presented below.

China-based sales region:

		Three months ended
		August 31,
		2009				2008
Sales		$	152,013			$	175,397
Standard margin			104,900				115,527
Direct sales and marketing expenses			35,039				33,600
Segment contribution profit		$	69,861			$	81,927

Segment contribution profit in the three months ended August 31, 2009 decreased $12.1 million to $69.9 million when compared to the same period of the prior fiscal year. Segment contribution profit is standard profit less segment direct sales and marketing expenses. The decrease in segment contribution profit was primarily driven by decreased sales to Huawei of $37.7 million partially offset by increased direct-touch sales of $16.5 million and improved channel mix, particularly decreased lower margin Huawei sales.

Rest of World sales region:

		Three months ended
		August 31,
		2009				2008
Sales		$	107,202			$	140,314
Standard margin			62,995				82,253
Direct sales and marketing expenses			23,327				28,152
Segment contribution profit		$	39,668			$	54,101