##### Table of Contents



united statessecurities 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
 For the quarterly period ended November 28, 2008
 or
 o
    
    transition report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
 For the transition period from                    to
 Commission File No. 0-12867
 
 3COMCORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2605794(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)350 Campus DriveMarlborough, Massachusetts
    
    01752(Address of principal executive offices)
    
    (Zip Code)
 508) 323-1000
 N/A
 þ o
  Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller reporting company o(Do not check is a smaller reporting company)
 o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 28, 2008
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (unaudited) Three and Six Months Ended November 30, 2008 and 2007
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
November 30, 2008 and May 31, 2008
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended November 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    46EXHIBITS
    
    
    47Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    354,562
    
    
    $
    317,801
    
    
    $
    697,212
    
    
    $
    637,235Cost of sales
    
    
    154,770
    
    
    
    165,681
    
    
    
    307,793
    
    
    
    336,179Gross profit
    
    
    199,792
    
    
    
    152,120
    
    
    
    389,419
    
    
    
    301,056Operating expenses (income):Sales and marketing
    
    
    88,620
    
    
    
    80,785
    
    
    
    174,902
    
    
    
    155,189Research and development
    
    
    47,854
    
    
    
    52,199
    
    
    
    93,601
    
    
    
    104,509General and administrative
    
    
    31,352
    
    
    
    31,060
    
    
    
    58,406
    
    
    
    52,538Amortization
    
    
    25,060
    
    
    
    26,260
    
    
    
    50,224
    
    
    
    52,266Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    (70,000
    )
    
    
    Restructuring charges
    
    
    2,504
    
    
    
    3,147
    
    
    
    4,501
    
    
    
    3,572Operating expenses, net
    
    
    195,390
    
    
    
    193,451
    
    
    
    311,634
    
    
    
    368,074Operating income (loss)
    
    
    4,402
    
    
    
    (41,331
    )
    
    
    77,785
    
    
    
    (67,018
    )Interest expense, net
    
    
    (547
    )
    
    
    (3,966
    )
    
    
    (1,798
    )
    
    
    (7,533
    )Other income, net
    
    
    15,899
    
    
    
    10,343
    
    
    
    28,770
    
    
    
    22,754Income (loss) before income taxes
    
    
    19,754
    
    
    
    (34,954
    )
    
    
    104,757
    
    
    
    (51,797
    )Income tax provision
    
    
    (6,884
    )
    
    
    (670
    )
    
    
    (12,050
    )
    
    
    (2,481
    )Net income (loss)
    
    $
    12,870
    
    
    $
    (35,624
    )
    
    $
    92,707
    
    
    $
    (54,278
    )Basic and diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    0.23
    
    
    $
    (0.14
    )Shares used in computing per share amounts:Basic
    
    
    394,036
    
    
    
    398,989
    
    
    
    398,462
    
    
    
    398,015Diluted
    
    
    395,245
    
    
    
    398,989
    
    
    
    399,658
    
    
    
    398,015
  1




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 November 30,
    
    
    May 31,(In thousands, except per share data)
    
    2008
    
    
    2008ASSETSCurrent assets:Cash and equivalents
    
    $
    460,787
    
    
    $
    503,644Notes receivable
    
    
    113,338
    
    
    
    65,116Accounts receivable, less allowance
for doubtful accounts of $13,245 and
$12,253, respectively
    
    
    131,151
    
    
    
    116,281Inventories
    
    
    111,478
    
    
    
    90,831Other current assets
    
    
    35,092
    
    
    
    34,033Total current assets
    
    
    851,846
    
    
    
    809,905Property and equipment, less accumulated
depreciation and amortization of $194,016
and $205,835, respectively
    
    
    49,187
    
    
    
    54,314Goodwill
    
    
    609,297
    
    
    
    609,297Intangible assets, net
    
    
    227,971
    
    
    
    278,385Deposits and other assets
    
    
    19,966
    
    
    
    23,229Total assets
    
    $
    1,758,267
    
    
    $
    1,775,130LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    86,386
    
    
    $
    90,280Current portion of long-term debt
    
    
    48,000
    
    
    
    48,000Accrued liabilities and other
    
    
    378,900
    
    
    
    366,181Total current liabilities
    
    
    513,286
    
    
    
    504,461Deferred taxes and long-term obligations
    
    
    23,122
    
    
    
    22,367Long-term debt
    
    
    165,000
    
    
    
    253,000Stockholders 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:

386,750 and 405,656, respectively
    
    
    2,318,036
    
    
    
    2,353,688Retained deficit
    
    
    (1,312,539
    )
    
    
    (1,405,247
    )Accumulated other comprehensive income
    
    
    51,362
    
    
    
    46,861Total stockholders equity
    
    
    1,056,859
    
    
    
    995,302Total liabilities and stockholders equity
    
    $
    1,758,267
    
    
    $
    1,775,130
  2




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedNovember 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    92,707
    
    
    $
    (54,278
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    65,113
    
    
    
    69,279Stock-based compensation expense
    
    
    12,080
    
    
    
    9,868Loss on property and equipment disposals
    
    
    891
    
    
    
    155Gain on investments, net
    
    
    
    
    
    
    (185
    )Deferred income taxes
    
    
    (2,521
    )
    
    
    (1,234
    )Changes in assets and liabilities:Accounts and notes receivable
    
    
    (63,970
    )
    
    
    (10,418
    )Inventories
    
    
    (25,478
    )
    
    
    16,863Other assets
    
    
    1,056
    
    
    
    113Accounts payable
    
    
    63
    
    
    
    (14,642
    )Other liabilities
    
    
    16,152
    
    
    
    (68,080
    )Net cash provided by (used in) operating activities
    
    
    96,093
    
    
    
    (52,559
    )Cash flows from investing activities:Proceeds from maturities and sales of investments
    
    
    
    
    
    
    442Purchases of property and equipment
    
    
    (11,425
    )
    
    
    (9,746
    )Proceeds from sale of property and equipment
    
    
    150
    
    
    
    864Net cash used in investing activities
    
    
    (11,275
    )
    
    
    (8,440
    )Cash flows from financing activities:Issuances of common stock
    
    
    2,848
    
    
    
    5,656Repurchases of common stock
    
    
    (50,574
    )
    
    
    (1,322
    )Repayment of long term debt
    
    
    (88,000
    )
    
    
    (94,000
    )Net cash used in financing activities
    
    
    (135,726
    )
    
    
    (89,666
    )Effect of exchange rate changes on cash and equivalents
    
    
    8,051
    
    
    
    10,591Net change in cash and equivalents during period
    
    
    (42,857
    )
    
    
    (140,074
    )Cash and equivalents, beginning of period
    
    
    503,644
    
    
    
    559,217Cash and equivalents, end of period
    
    $
    460,787
    
    
    $
    419,143
  3




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3COM CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. BASIS OF PRESENTATION
   Recently issued accounting pronouncements
    4




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NOTE 2. STOCK-BASED COMPENSATION
   5




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Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedNovember 30,
    
    November 30,
    
    November 30,
    
    November 30,2008
    
    2007
    
    2008
    
    2007Employee stock options:Volatility
    
    
    52.1
    %
    
    
    42.9
    %
    
    
    51.3
    %
    
    
    40.5
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    3.9
    %
    
    
    2.6
    %
    
    
    4.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    4.8
    
    
    
    3.8
    
    
    
    4.6
    
    
    
    3.8Fair value per option
    
    $
    1.02
    
    
    $
    1.46
    
    
    $
    1.02
    
    
    $
    1.49Restricted stock awards:Weighted average grant date fair value
    
    $
    2.22
    
    
    $
    3.67
    
    
    $
    2.22
    
    
    $
    3.90Restricted stock units:Weighted average grant date fair value
    
    $
    2.20
    
    
    $
    3.71
    
    
    $
    2.34
    
    
    $
    3.72Employee Stock Purchase Plan:Volatility
    
    
    77.7
    %
    
    
    61.1
    %
    
    
    77.7
    %
    
    
    61.1
    %Risk-free interest rate
    
    
    1.2
    %
    
    
    4.0
    %
    
    
    1.2
    %
    
    
    4.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Fair value per option
    
    $
    0.90
    
    
    $
    1.60
    
    
    $
    0.90
    
    
    $
    1.60
  Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded November
    
    Ended November
    
    Ended November
    
    Ended November30, 2008
    
    30, 2007
    
    30, 2008
    
    30, 2007Cost of sales
    
    $
    562
    
    
    $
    523
    
    
    $
    1,320
    
    
    $
    907Sales and marketing
    
    
    1,613
    
    
    
    1,418
    
    
    
    3,371
    
    
    
    2,393Research and development
    
    
    893
    
    
    
    973
    
    
    
    1,777
    
    
    
    1,694General and administrative
    
    
    2,570
    
    
    
    3,092
    
    
    
    5,612
    
    
    
    4,874Stock-based compensation
expense before tax
    
    $
    5,638
    
    
    $
    6,006
    
    
    $
    12,080
    
    
    $
    9,868
 6




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Stock Options.
 WeightedaverageNumber of
    
    
    exerciseshares
    
    
    priceOutstanding May 31, 2008
    
    
    43,925
    
    
    $
    4.98Granted
    
    
    1,286
    
    
    
    2.27Exercised
    
    
    (792
    )
    
    
    1.61Cancelled
    
    
    (11,100
    )
    
    
    5.17Outstanding November 30, 2008
    
    
    33,319
    
    
    $
    4.89
    WeightedWeighted
    
    AverageNumber of
    
    average
    
    Remaining
    
    AggregateShares
    
    Grant-Date
    
    Contractual
    
    Intrinsic Value(in thousands)
    
    Fair Value
    
    Life (in years)
    
    (in thousands)Vested and expected
to vest at November
30, 2008
    
    
    29,336
    
    
    $
    5.12
    
    
    
    3.5
    
    
    $
    1,240
 Restricted Stock Awards.
 WeightedNumber of
    
    
    averageShares
    
    
    Grant-Date(unvested)
    
    
    Fair ValueOutstanding May 31, 2008
    
    
    3,095
    
    
    $
    3.43Granted
    
    
    325
    
    
    
    2.28Vested
    
    
    (592
    )
    
    
    3.95Forfeited
    
    
    (430
    )
    
    
    3.82Outstanding November 30, 2008
    
    
    2,398
    
    
    $
    3.07
  7




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Restricted Stock Units.
 Number ofShares(unvested)Outstanding May 31, 2008
    
    
    5,744Granted
    
    
    4,630Vested
    
    
    (1,463
    )Forfeited
    
    
    (882
    )Outstanding November 30, 2008
    
    
    8,029
   Employee Stock Purchase Plan.
 NOTE 3: FAIR VALUE
 Fair Value Hierarchy
  Level 1 
 Level 2  .
 Level 3 
   8




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Assets Measured at Fair Value on a Recurring Basis
  Fair Value Measurements at Reporting Date UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs
    
    
    Total(In thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    BalanceAssetsCash equivalents:Time deposits
    
    $
    
    
    
    $
    299,292
    
    
    $
    
    
    
    $
    299,292Money market fund deposits
    
    
    151,300
    
    
    
    
    
    
    
    
    
    
    
    151,300Total assets measured at fair value
    
    $
    151,300
    
    
    $
    299,292
    
    
    $
    
    
    
    $
    450,592
 NOTE 4. REALTEK PATENT DISPUTE RESOLUTION
    NOTE 5. RESTRUCTURING CHARGES
   
    
    reduced our workforce; and
    
    continued efforts to consolidate and dispose of excess facilities
   9




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Fiscal 2008 and 2009 Actions
  Employee
    
    

    
    

    
    
    OtherSeparation
    
    
    Facilities-related
    
    
    RestructuringExpense
    
    
    Charges
    
    
    Costs
    
    
    TotalBalance as of May 31, 2008
    
    $
    687
    
    
    $
    
    
    
    $
    
    
    
    $
    687Provisions
    
    
    3,128
    
    
    
    1,263
    
    
    
    52
    
    
    
    4,443Payments and non-cash charges
    
    
    (3,143
    )
    
    
    
    
    
    
    (52
    )
    
    
    (3,195
    )Balance as of November 30,
2008
    
    $
    672
    
    
    $
    1,263
    
    
    $
    
    
    
    $
    1,935
   Fiscal 2004 through 2007 Actions
  Employee
    
    
    Facilities-Separation
    
    
    relatedExpense
    
    
    Charges
    
    
    TotalBalance as of May 31, 2008
    
    $
    28
    
    
    $
    687
    
    
    $
    715Provisions (benefits)
    
    
    (9
    )
    
    
    67
    
    
    
    58Payments and non-cash charges
    
    
    11
    
    
    
    (341
    )
    
    
    (330
    )Balance as of November 30, 2008
    
    $
    30
    
    
    $
    413
    
    
    $
    443
   NOTE 6. INCOME TAXES
  10




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NOTE 7. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    12,870
    
    
    $
    (35,624
    )
    
    $
    92,707
    
    
    $
    (54,278
    )Other comprehensive income:Net unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210
    )Change in accumulated translation
adjustments
    
    
    (3,184
    )
    
    
    7,622
    
    
    
    4,501
    
    
    
    14,250Total comprehensive income (loss)
    
    $
    9,686
    
    
    $
    (28,002
    )
    
    $
    97,208
    
    
    $
    (40,238
    )
 NOTE 8. NET INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,(in thousands except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Determination of shares:Weighted average shares outstanding
    
    
    394,036
    
    
    
    398,989
    
    
    
    398,462
    
    
    
    398,015Assumed conversion of dilutive stock
options and restricted stock (awards
and units)
    
    
    1,209
    
    
    
    
    
    
    
    1,196
    
    
    
    Diluted weighted average shares outstanding
    
    
    395,245
    
    
    
    398,989
    
    
    
    399,658
    
    
    
    398,015Basic earnings (loss) per share
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    0.23
    
    
    $
    (0.14
    )Diluted earnings (loss) per share
    
    $
    0.03
    
    
    $
    (0.09
    )
    
    $
    0.23
    
    
    $
    (0.14
    )
 11




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NOTE 9. INVENTORIES
  November 30,
    
    
    May 31,2008
    
    
    2008Finished goods
    
    $
    86,513
    
    
    $
    62,055Work-in-process
    
    
    4,101
    
    
    
    6,119Raw materials
    
    
    20,864
    
    
    
    22,657Total
    
    $
    111,478
    
    
    $
    90,831
 NOTE 10. INTANGIBLE ASSETS, NET
  November 30,
    
    
    
    
    
    
    May 31,2008
    
    
    
    
    
    
    2008Weighted

    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage

    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageRemaining

    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    Remaining

    
    
    
    
    
    AccumulatedLife

    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Life

    
    Gross
    
    
    Amortization
    
    
    NetExisting technology
    
    
    3.3
    
    
    $
    380,979
    
    
    $
    (231,480
    )
    
    $
    149,499
    
    
    
    3.6
    
    
    $
    380,254
    
    
    $
    (198,682
    )
    
    $
    181,572Trademark
    
    NA
    
    
    
    55,502
    
    
    
    
    
    
    
    55,502
    
    
    NA
    

    
    
    55,502
    
    
    
    
    
    
    
    55,502Huawei non-compete
    
    
    0.0
    
    
    
    33,016
    
    
    
    (33,016
    )
    
    
    
    
    
    
    0.5
    
    
    
    33,650
    
    
    
    (22,072
    )
    
    
    11,578OEM agreement
    
    
    1.5
    
    
    
    24,813
    
    
    
    (11,909
    )
    
    
    12,904
    
    
    
    2.0
    
    
    
    24,844
    
    
    
    (7,947
    )
    
    
    16,897Maintenance agreements
    
    
    2.2
    
    
    
    19,000
    
    
    
    (12,140
    )
    
    
    6,860
    
    
    
    2.7
    
    
    
    19,000
    
    
    
    (10,556
    )
    
    
    8,444Other
    
    
    1.5
    
    
    
    22,195
    
    
    
    (18,989
    )
    
    
    3,206
    
    
    
    2.0
    
    
    
    22,176
    
    
    
    (17,784
    )
    
    
    4,392$
    535,505
    
    
    $
    (307,534
    )
    
    $
    227,971
    
    
    
    
    
    
    $
    535,426
    
    
    $
    (257,041
    )
    
    $
    278,385
  NOTE 11. ACCRUED WARRANTY
   Six Months EndedNovember 30,2008
    
    
    2007Accrued warranty, beginning of period
    
    $
    36,897
    
    
    $
    40,596Cost of warranty claims processed during the period
    
    
    (16,148
    )
    
    
    (21,377
    )Provision for warranties related to products sold during the period
    
    
    13,302
    
    
    
    20,699Accrued warranty, end of period
    
    $
    34,051
    
    
    $
    39,918
 12




---



##### Table of Contents



NOTE 12. LONG-TERM DEBT
       Calendar year
    
    3Com fiscal year
    
    Tranche A
    
    Tranche B2009
    
    2010
    
    
    $
    46,000
    
    
    $
    2,0002010
    
    2011
    
    
    
    46,000
    
    
    
    2,0002011
    
    2012
    
    
    
    
    
    
    
    20,0002012
    
    2013
    
    
    
    
    
    
    
    97,000
    13




---



##### Table of Contents



NOTE 13. SEGMENT INFORMATION
     Three
Months Ended November 30, 2008Networking Business
    
    
    TippingPointSecurityBusinessRest ofWorldChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    

Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    
    
    
    
    TotalSales
    
    $
    199,815
    
    
    $
    125,688
    
    
    $
    
    
    
    $
    31,016
    
    
    $
    (1,957
    )
    
    
    a
    
    
    $
    354,562Gross profit
    
    
    131,901
    
    
    
    71,861
    
    
    
    (24,405
    )
    
    
    20,997
    
    
    
    (562
    )
    
    
    b
    
    
    
    199,792Direct sales & marketing expenses
    
    
    36,513
    
    
    
    25,742
    
    
    
    
    
    
    
    11,218
    
    
    
    1,613
    
    
    
    b
    
    
    
    75,086Segment
contribution profit (loss)
    
    
    95,388
    
    
    
    46,119
    
    
    
    (24,405
    )
    
    
    9,779
    
    
    
    (2,175
    )
    
    
    
    
    
    
    124,706Other operating expenses
    
    
    
    
    
    
    
    
    
    
    78,336
    
    
    
    10,141
    
    
    
    31,827
    
    
    
    c
    
    
    
    120,304Segment loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (362
    )
    
    $
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,402
 14




---



##### Table of Contents



Three Months Ended November 30, 2007Networking Business
    
    
    TippingPointSecurityBusinessRest ofWorldChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    
    
    
    
    TotalSales
    
    $
    154,418
    
    
    $
    138,572
    
    
    $
    
    
    
    $
    25,785
    
    
    $
    (974
    )
    
    
    a
    
    
    $
    317,801Gross profit
    
    
    96,175
    
    
    
    75,316
    
    
    
    (30,793
    )
    
    
    17,536
    
    
    
    (6,114
    )
    
    
    b
    
    
    
    152,120Direct sales & marketing expenses
    
    
    30,671
    
    
    
    23,544
    
    
    
    
    
    
    
    9,756
    
    
    
    1,418
    
    
    
    b
    
    
    
    65,389Segment contribution profit (loss)
    
    
    65,504
    
    
    
    51,772
    
    
    
    (30,793
    )
    
    
    7,780
    
    
    
    (7,532
    )
    
    
    
    
    
    
    86,731Other operating expenses
    
    
    
    
    
    
    
    
    
    
    79,757
    
    
    
    7,233
    
    
    
    41,072
    
    
    
    c
    
    
    
    128,062Segment profit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    547
    
    
    $
    Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (41,331
    )
 Six Months Ended November 30, 2008Networking Business
    
    
    TippingPointSecurityBusinessRest ofWorldChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    

Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    
    
    
    
    TotalSales
    
    $
    375,212
    
    
    $
    266,002
    
    
    $
    
    
    
    $
    59,215
    
    
    $
    (3,217
    )
    
    
    a
    
    
    $
    697,212Gross profit
    
    
    247,428
    
    
    
    154,114
    
    
    
    (51,381
    )
    
    
    40,578
    
    
    
    (1,320
    )
    
    
    b
    
    
    
    389,419Direct sales & marketing expenses
    
    
    69,613
    
    
    
    53,894
    
    
    
    
    
    
    
    20,591
    
    
    
    3,371
    
    
    
    b
    
    
    
    147,469Segment contribution profit (loss)
    
    
    177,815
    
    
    
    100,220
    
    
    
    (51,381
    )
    
    
    19,987
    
    
    
    (4,691
    )
    
    
    
    
    
    
    241,950Other operating expenses
    
    
    
    
    
    
    
    
    
    
    151,199
    
    
    
    20,052
    
    
    
    (7,086
    )
    
    
    c
    
    
    
    164,165Segment loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (65
    )
    
    $
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    77,785
 Six
Months Ended November 30, 2007Networking Business
    
    
    TippingPointSecurityBusinessRest ofWorldChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    
    
    
    
    TotalSales
    
    $
    310,452
    
    
    $
    276,504
    
    
    $
    
    
    
    $
    51,253
    
    
    $
    (974
    )
    
    
    a
    
    
    $
    637,235Gross profit
    
    
    190,184
    
    
    
    150,754
    
    
    
    (62,018
    )
    
    
    34,162
    
    
    
    (12,026
    )
    
    
    b
    
    
    
    301,056Direct sales & marketing expenses
    
    
    56,495
    
    
    
    46,631
    
    
    
    
    
    
    
    18,849
    
    
    
    2,393
    
    
    
    b
    
    
    
    124,368Segment contribution profit (loss)
    
    
    133,689
    
    
    
    104,123
    
    
    
    (62,018
    )
    
    
    15,313
    
    
    
    (14,419
    )
    
    
    
    
    
    
    176,688Other operating expenses
    
    
    
    
    
    
    
    
    
    
    158,379
    
    
    
    15,320
    
    
    
    70,007
    
    
    
    c
    
    
    
    243,706Segment loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (7
    )
    
    $
    Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (67,018
    )
 15




---



##### Table of Contents



a 
    
    Represents eliminations for inter-company revenue between Networking and TippingPoint
during the respective periods.b 
    
    Includes stock based compensation in all periods and purchase accounting inventory
related adjustments in the three and six months ended November 30, 2007.c 
    
    Includes stock based compensation, amortization, and restructuring in all periods plus
Realtek patent dispute resolution in the six months ended November 30, 2008 and
acquisition related expenses in the three and six months ended November 30, 2007.
   Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,2008
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2007Networking equipment
    
    $
    289,584
    
    
    
    82
    %
    
    $
    256,129
    
    
    
    81
    %
    
    $
    572,047
    
    
    
    82
    %
    
    $
    518,729
    
    
    
    81
    %Security
    
    
    42,790
    
    
    
    12
    %
    
    
    35,062
    
    
    
    11
    %
    
    
    79,129
    
    
    
    12
    %
    
    
    66,545
    
    
    
    11
    %Voice
    
    
    10,515
    
    
    
    3
    %
    
    
    16,657
    
    
    
    5
    %
    
    
    23,345
    
    
    
    3
    %
    
    
    32,978
    
    
    
    5
    %Services
    
    
    11,673
    
    
    
    3
    %
    
    
    9,953
    
    
    
    3
    %
    
    
    22,691
    
    
    
    3
    %
    
    
    18,983
    
    
    
    3
    %Total
    
    $
    354,562
    
    
    
    
    
    
    $
    317,801
    
    
    
    
    
    
    $
    697,212
    
    
    
    
    
    
    $
    637,235
 NOTE 14. GEOGRAPHIC INFORMATION
  Three Months Ended November 30,
    
    
    Six Months Ended November 30,2008
    
    
    2007
    
    
    2008
    
    
    2007China
    
    $
    192,851
    
    
    $
    143,107
    
    
    $
    360,378
    
    
    $
    289,861Europe, Middle East, and Africa
    
    
    58,989
    
    
    
    73,209
    
    
    
    128,366
    
    
    
    142,871North America
    
    
    49,130
    
    
    
    52,589
    
    
    
    101,161
    
    
    
    112,607Asia Pacific (except China)
    
    
    27,188
    
    
    
    25,865
    
    
    
    57,297
    
    
    
    49,247Latin and South America
    
    
    26,404
    
    
    
    23,031
    
    
    
    50,010
    
    
    
    42,649Total
    
    $
    354,562
    
    
    $
    317,801
    
    
    $
    697,212
    
    
    $
    637,235
  NOTE 15. LITIGATION
   16




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##### Table of Contents



In re Initial Public Offering Securities Litigation, Brian Levey vs.
TippingPoint Technologies, Inc., et al.
   NOTE 16. STOCK REPURCHASE PROGRAM
   17




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##### Table of Contents



NOTE 17. SUBSEQUENT EVENT
  
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  BUSINESS OVERVIEW
   §
    
    Significant changes to our executive leadership;§
    
    The formation and subsequent 100 percent acquisition of our China-based subsidiary;§
    
    Financing a portion of the purchase price for our acquisition of H3C by entering
into a $430 million senior secured credit agreement;§
    
    Restructuring activities, which included outsourcing of information technology,
certain manufacturing activities in our Networking business, significant headcount
reductions in other functions, and selling excess facilities;§
    
    Integration activities following our H3C acquisition, including in our research
and development and supply chain organizations; and§
    
    Changing our reporting segments to align with the way we manage our business.
  §
    
    Networking;§
    
    Security;§
    
    Voice; and§
    
    Services.
  18




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##### Table of Contents



Business Environment and Future Trends
    §
    
    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
market segments where we have had a strong position historically, such
as the small to medium-sized enterprise market.
  Technology Strategy
  Revenue and Market Share Goals
    
    
    China In China, we have been successful in direct-touch sales to enterprise and
government customers, and selling our offerings to the carrier market through our Huawei
OEM relationship. We do, however, expect declining sales to Huawei. To maintain a
leadership position in China, we intend to increase our focus on direct-touch sales as well
as pursue other channels into the carrier market. 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 IP video surveillance and
storage, which may offer additional growth opportunities.
  19




---



##### Table of Contents





    
    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 positioned us to grow sales in developing markets generally.

    
    Developed global markets- Our ability to achieve our goal of sales growth in developed
markets depends to a substantial degree on our ability to take market share from our
competitors. Our strategy is to focus on larger enterprise and government accounts and to
implement this strategy we intend to increase go to market resources to address this
opportunity. Our initiatives include increasing enterprise sales by offering these
customers our comprehensive end to end solutions and highlighting our products price to
performance value proposition and energy efficiency.
 Profitability and Cash Generation Objectives
   Segment Reporting
   20




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##### Table of Contents



Summary of Three Months Ended November 30, 2008 Financial Performance
 §
    
    Our sales in the three months ended November 30, 2008 were $354.6 million, compared to
sales of $317.8 million in the three months ended November 20, 2007, an increase of $36.8
million, or 11.6 percent.§
    
    Our gross margin improved to 56.3 percent in the three months ended November 30, 2008
from 47.9 percent in the three months ended November 30, 2007.§
    
    Our operating expenses (income) in the three months ended November 30, 2008 were $195.4
million, compared to $193.5 million in the three months ended November 30, 2007, a net
increase of $1.9 million, or 1.0 percent.§
    
    Our net income in the three months ended November 30, 2008 was $12.9 million, compared
to a net loss of $35.6 million in the three months ended November 30, 2007.§
    
    Our balance sheet contains cash and equivalents of $460.8 million as of November 30,
2008, compared to cash and equivalents of $503.6 million at the end of fiscal 2008. The
balance sheet also includes debt of $213 million with $48 million classified as a current
liability as of November 30, 2008 compared with debt of $301 million with $48 million
classified as a current liability at the end of fiscal 2008.
 Summary of Six Months Ended November 30, 2008 Financial Performance
 §
    
    Our sales in the six months ended November 30, 2008 were $697.2 million, compared to
sales of $637.2 million in the six months ended November 20, 2007, an increase of $60.0
million, or 9.4 percent.§
    
    Our gross margin improved to 55.9 percent in the six months ended November 30, 2008
from 47.2 percent in the six months ended November 30, 2007.§
    
    Our operating expenses (income) in the six months ended November 30, 2008 were $311.6
million, compared to $368.1 million in the six months ended November 30, 2007, a net
decrease of $56.5 million, or 15.3 percent. Included in the six months ended November 30,
2008 operating expenses (income) is $70.0 million of income related to the Realtek patent
dispute resolution.§
    
    Our net income in the six months ended November 30, 2008 was $92.7 million, compared
to a net loss of $54.3 million in the six months ended November 30, 2007. Included in the
six months ended November 30, 2008 net income is $70.0 million of income related to the
Realtek patent dispute resolution.
 CRITICAL ACCOUNTING POLICIES
  21




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##### Table of Contents



RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302008
    
    2007
    
    2008
    
    2007Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    43.7
    
    
    
    52.1
    
    
    
    44.1
    
    
    
    52.8Gross profit margin
    
    
    56.3
    
    
    
    47.9
    
    
    
    55.9
    
    
    
    47.2Operating expenses (income):Sales and marketing
    
    
    25.0
    
    
    
    25.4
    
    
    
    25.1
    
    
    
    24.4Research and development
    
    
    13.5
    
    
    
    16.4
    
    
    
    13.4
    
    
    
    16.4General and administrative
    
    
    8.8
    
    
    
    9.8
    
    
    
    8.4
    
    
    
    8.2Amortization
    
    
    7.1
    
    
    
    8.3
    
    
    
    7.2
    
    
    
    8.2Realtek patent resolution
    
    
    
    
    
    
    
    
    
    
    (10.0
    )
    
    
    Restructuring charges
    
    
    0.7
    
    
    
    1.0
    
    
    
    0.6
    
    
    
    0.5Operating expenses, net
    
    
    55.1
    
    
    
    60.9
    
    
    
    44.7
    
    
    
    57.7Operating income (loss)
    
    
    1.2
    
    
    
    (13.0
    )
    
    
    11.2
    
    
    
    (10.5
    )Interest expense, net
    
    
    (0.2
    )
    
    
    (1.3
    )
    
    
    (0.3
    )
    
    
    (1.2
    )Other income, net
    
    
    4.5
    
    
    
    3.3
    
    
    
    4.1
    
    
    
    3.6Income (loss) before income taxes
    
    
    5.5
    
    
    
    (11.0
    )
    
    
    15.0
    
    
    
    (8.1
    )Income tax provision
    
    
    (1.9
    )
    
    
    (0.2
    )
    
    
    (1.7
    )
    
    
    (0.4
    )Net income (loss)
    
    
    3.6
    %
    
    
    (11.2
    )%
    
    
    13.3
    %
    
    
    (8.5
    )%
 Sales
  Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,2008
    
    2007
    
    2008
    
    2007China-based sales region
    
    $
    199.8
    
    
    $
    154.5
    
    
    $
    375.2
    
    
    $
    310.5Rest of World sales region
    
    
    125.7
    
    
    
    138.5
    
    
    
    266.0
    
    
    
    276.4TippingPoint security business
    
    
    31.0
    
    
    
    25.8
    
    
    
    59.2
    
    
    
    51.3Eliminations and other
    
    
    (1.9
    )
    
    
    (1.0
    )
    
    
    (3.2
    )
    
    
    (1.0
    )Consolidated sales
    
    $
    354.6
    
    
    $
    317.8
    
    
    $
    697.2
    
    
    $
    637.2
   .
 22




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##### Table of Contents



Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302008
    
    2007
    
    2008
    
    2007Networking
    
    $
    289.6
    
    
    
    82
    %
    
    $
    256.1
    
    
    
    81
    %
    
    $
    572.1
    
    
    
    82
    %
    
    $
    518.7
    
    
    
    81
    %Security
    
    
    42.8
    
    
    
    12
    %
    
    
    35.1
    
    
    
    11
    %
    
    
    79.1
    
    
    
    12
    %
    
    
    66.5
    
    
    
    11
    %Voice
    
    
    10.5
    
    
    
    3
    %
    
    
    16.7
    
    
    
    5
    %
    
    
    23.3
    
    
    
    3
    %
    
    
    33.0
    
    
    
    5
    %Services
    
    
    11.7
    
    
    
    3
    %
    
    
    9.9
    
    
    
    3
    %
    
    
    22.7
    
    
    
    3
    %
    
    
    19.0
    
    
    
    3
    %Total
    
    $
    354.6
    
    
    
    100
    %
    
    $
    317.8
    
    
    
    100
    %
    
    $
    697.2
    
    
    
    100
    %
    
    $
    637.2
    
    
    
    100
    %
     23




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##### Table of Contents



Gross Margin
  Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,2008
    
    2007
    
    2008
    
    2007Networking business
    
    
    54.9
    %
    
    
    45.9
    %
    
    
    54.6
    %
    
    
    47.5
    %TippingPoint security business
    
    
    67.5
    %
    
    
    68.0
    %
    
    
    68.5
    %
    
    
    66.7
    %Consolidated margin
    
    
    56.3
    %
    
    
    47.9
    %
    
    
    55.9
    %
    
    
    47.2
    %
    Operating Expenses
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedNovember 30,
    
    
    Change
    
    
    November 30,
    
    
    Change(dollars in millions)
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %Sales and marketing
    
    $
    88.6
    
    
    $
    80.8
    
    
    $
    7.8
    
    
    
    10
    %
    
    $
    174.9
    
    
    $
    155.2
    
    
    $
    19.7
    
    
    
    13
    %Research and development
    
    
    47.9
    
    
    
    52.2
    
    
    
    ( 4.3
    )
    
    
    (8
    )%
    
    
    93.6
    
    
    
    104.5
    
    
    
    (10.9
    )
    
    
    (10
    )%General and administrative
    
    
    31.3
    
    
    
    31.1
    
    
    
    0.2
    
    
    
    1
    %
    
    
    58.4
    
    
    
    52.5
    
    
    
    5.9
    
    
    
    11
    %Amortization
    
    
    25.1
    
    
    
    26.3
    
    
    
    (1.2
    )
    
    
    (5
    )%
    
    
    50.2
    
    
    
    52.3
    
    
    
    (2.1
    )
    
    
    (4
    )%Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *
    
    
    
    (70.0
    )
    
    
    
    
    
    
    (70.0
    )
    
    
    *Restructuring
    
    
    2.5
    
    
    
    3.1
    
    
    
    (0.6
    )
    
    
    (19
    )%
    
    
    4.5
    
    
    
    3.6
    
    
    
    0.9
    
    
    
    3
    %Total
    
    $
    195.4
    
    
    $
    193.5
    
    
    $
    1.9
    
    
    
    1
    %
    
    $
    311.6
    
    
    $
    368.1
    
    
    $
    (56.5
    )
    
    
    (15
    )%
 
 *

    - percentage calculation not meaningful. Sales and Marketing.
 Research and Development.
 24




---



##### Table of Contents



eneral and Administrative.
 Amortization.
 Patent dispute resolution.
   Restructuring Charges
    Interest Expense, Net
  Other Income, Net
  25




---



##### Table of Contents



Income Tax Provision
   Net Income (Loss)
  Segment Analysis (tables in thousands)
  China-based sales region:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    199,815
    
    
    $
    154,418
    
    
    $
    375,212
    
    
    $
    310,452Gross profit (a)
    
    
    131,901
    
    
    
    96,175
    
    
    
    247,428
    
    
    
    190,184Direct sales and marketing expenses
    
    
    36,513
    
    
    
    30,671
    
    
    
    69,613
    
    
    
    56,495Segment contribution profit
    
    $
    95,388
    
    
    $
    65,504
    
    
    $
    177,815
    
    
    $
    133,689
  
 a  Gross profit is defined for this region as standard margin, which is sales less standard
cost of sales.
 26




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##### Table of Contents



Rest of World sales region:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    125,688
    
    
    $
    138,572
    
    
    $
    266,002
    
    
    $
    276,504Gross profit (a)
    
    
    71,861
    
    
    
    75,316
    
    
    
    154,114
    
    
    
    150,754Direct sales and marketing expenses
    
    
    25,742
    
    
    
    23,544
    
    
    
    53,894
    
    
    
    46,631Segment contribution profit
    
    $
    46,119
    
    
    $
    51,772
    
    
    $
    100,220
    
    
    $
    104,123
  
 a  Gross profit is defined for this region as standard margin, which is sales less standard
cost of sales.
 Central Functions:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross profit (a)
    
    $
    (24,405
    )
    
    $
    (30,793
    )
    
    $
    (51,381
    )
    
    $
    (62,018
    )Operating expenses
    
    
    78,336
    
    
    
    79,757
    
    
    
    151,199
    
    
    
    158,379Total costs and expenses
    
    $
    102,741
    
    
    $
    110,550
    
    
    $
    202,580
    
    
    $
    220,397
  
 a  Gross profit represents indirect cost of sales, such as supply chain operations expenses;
these costs not allocated to the sales regions.
 TippingPoint Security business:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    31,016
    
    
    $
    25,785
    
    
    $
    59,215
    
    
    $
    51,253Gross profit
    
    
    20,997
    
    
    
    17,536
    
    
    
    40,578
    
    
    
    34,162Operating expenses
    
    
    21,359
    
    
    
    16,989
    
    
    
    40,643
    
    
    
    34,169Segment (loss) profit
    
    $
    (362
    )
    
    $
    547
    
    
    $
    (65
    )
    
    $
    (7
    )
 27




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Six Months EndedNovember 30,(In millions)
    
    2008
    
    
    2007Cash and equivalents, beginning of period
    
    $
    503.6
    
    
    $
    559.2Net cash provided by (used in) operating activities
    
    
    96.1
    
    
    
    (52.6
    )Net cash used in investing activities
    
    
    (11.3
    )
    
    
    (8.4
    )Net cash used in financing activities
    
    
    (135.7
    )
    
    
    (89.7
    )Currency impact on cash
    
    
    8.1
    
    
    
    10.6Cash and equivalents, end of period
    
    $
    460.8
    
    
    $
    419.1
        28




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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
     29




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  30




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ITEM 1A. RISK FACTORS
  Risks Related to Historical Losses, Financial Condition and Substantial Indebtedness
 While we earned a profit in the first and second quarters of our 2009 fiscal year, we have incurred
significant net losses in recent fiscal periods, including $228.8 million for the fiscal year ended
May 30, 2008, and we may not be able to sustain or increase this profitability in the future.
  
    
    declining sales in certain regions due to price competition and reduced incoming order
rate;
    
    operating expenses that, as a percentage of sales, have exceeded our desired financial
model;
    
    significant senior leadership and other management changes;
    
    significant non-cash accounting charges;
    
    increased sales and marketing expense as part of a strategy to help grow our market
share;
    
    disruptions and expenses resulting from our workforce reductions and employee attrition;
and
    
    interest expense resulting from our senior secured loan.
    Our substantial debt could adversely affect our financial condition; and the related debt service
obligations may adversely affect our cash flow and ability to invest in and grow our businesses.
  31




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##### Table of Contents




    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund growth, working capital, capital expenditures and
other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our
industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 The restrictions imposed by the terms of our senior secured loan facility could adversely impact
our ability to grow our China business.
  Risks Related to China-based Sales region and Dependence Thereon
 We are significantly dependent on our China-based segment; if it is not successful we will likely
experience a material adverse impact to our business, business prospects and operating results.
  
    
    maintain a leading position in the networking equipment market in China;
    
    build profitable operations in other emerging markets throughout the world, but
particularly in the Asia Pacific region;
    
    offer new and innovative products and services to attract and retain a larger customer
base;
    
    increase awareness of the H3C brand and continue to develop customer loyalty;
    
    respond to rapidly changing competitive market conditions, including those presented by
the current global economic slowdown to the extent it affects China and other parts of the
Asia Pacific region;
    
    respond to changes in the regulatory environment;
    
    manage risks associated with intellectual property rights, particularly in China;
    
    maintain effective control of costs and expenses; and
    
    attract, retain and motivate qualified personnel.
 32




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##### Table of Contents



We are dependent on Huawei Technologies, or Huawei, as a significant customer; if, as expected,
Huawei reduces its business with us, it could materially adversely affect our business results.
  We must execute on a global strategy to leverage the benefits of our H3C acquisition, including
significant integration activities; if we are not successful in these efforts, our business will
suffer.
  33




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##### Table of Contents



If we cannot continue to increase our Rest of World segments sales of H3C branded or sourced
products outside of China, and generate additional success in selling to larger enterprise and
government accounts outside of China, we will likely find it increasingly difficult to grow our
overall business.
  Risk Related to Personnel
 Our success is dependent on continuing to hire and retain qualified managers and other personnel,
including at our China-based sales segment, and reducing senior management turnover; if we are not
successful in attracting and retaining these individuals, our business will suffer.
   Risks Related to Competition
 Intense competition in the market for networking solutions could prevent us from increasing revenue
and profitability.
    34




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##### Table of Contents



Our competition with Huawei in the enterprise networking market could have a material adverse
effect on our sales and our results of operations; now that the contractual non-compete period has
expired, Huawei can increase its level of competition, which increased competition would likely
materially and adversely affect our business.
   Risks Related to Business and Technology Strategy
 Our industry is characterized by a short product life cycle, and we may not be successful at
identifying and responding to new and emerging market, technology and product opportunities, or at
responding quickly enough to technologies or markets that are in decline.
  
    
    the convergence of technologies, such as voice, data and video on single, secure
networks;
    
    the timely adoption and market acceptance of industry standards, and timely resolution
of conflicting U.S. and international industry standards; and
    
    our ability to influence the development of emerging industry standards and to introduce
new and enhanced products that are compatible with such standards.
   
    
    identify new market and product opportunities;
    
    predict which technologies and markets will see declining demand;
    
    develop and introduce new products and solutions in a timely manner;
    
    gain market acceptance of new products and solutions, including in targeted emerging
markets; and
    
    rapidly and efficiently transition our customers from older to newer enterprise
networking technologies.
  
    
    there is a delay in introducing new products;
    
    we lose certain channels of distribution or key partners;
    
    our products do not satisfy customers in terms of features, functionality or quality; or
    
    our products cost more to produce than we expect.
 35




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##### Table of Contents



We expect to utilize strategic relationships and other alliances as key elements in our strategy.
If we are not successful in forming these partnerships or if they are not successful, our ability
to achieve our growth and profitability goals could be adversely affected.
   Outsourcing functions and operations may fail to reduce cost and may disrupt our operations.
   We focus on enterprise networking, and our results of operations may fluctuate based on factors
related entirely to conditions in this market.
   36




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##### Table of Contents



Risks Related to Operations and Distribution Channels
 A significant portion of our sales is derived from a small number of distributors. If any of these
partners reduces its business with us, our business could be adversely affected.
  We depend on distributors who maintain inventories of our products. If the distributors reduce
their inventories of our products, our sales could be adversely affected.
  If we are unable to successfully develop relationships with system integrators, service providers,
and enterprise VARs, our sales may be negatively affected.
  We may pursue acquisitions of other companies that, if not successful, could adversely affect our
business, financial position and results of operations.
  We may be unable to manage our supply chain successfully, which would adversely impact our sales,
gross margin and profitability.
  
    
    our ability to accurately forecast demand is diminished;
    
    our reliance on, and long-term arrangements with, third-party manufacturers places much
of the supply chain process out of our direct control and heightens the need for accurate
forecasting and reduces our ability to transition quickly to alternative supply chain
strategies; and
    
    we may experience disruptions to our logistics.
 
 37




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##### Table of Contents



The inability of any contract manufacturer to meet our cost, quality or performance standards could
adversely affect our sales and overall results from operations.
   Risks Related to our Operations in the Peoples Republic of China
 Chinas governmental and regulatory reforms and changing economic environment may impact our
ability to do business in China.
  
    
    the promulgation of new laws and regulations and the interpretation of those laws and
regulations;
    
    enforcement and application of rules and regulations by the Chinese government;
    
    the introduction of measures to control inflation or stimulate growth; or
    
    any actions that limit our ability to develop, manufacture, import or sell our products
in China, or to finance and operate our business in China.
  38




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##### Table of Contents



Uncertainties with respect to the Chinese legal system may adversely affect us.
  If PRC tax benefits available to us in China are reduced or repealed, our business could suffer.
    Our H3C subsidiary is subject to restrictions on paying dividends and making other payments to us.
  39




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##### Table of Contents



We are subject to risks relating to currency rate fluctuations and exchange controls and we do not
hedge this risk in China.
    Risks Related to Intellectual Property
 If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   40




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##### Table of Contents



We may need to engage in complex and costly litigation in order to protect, maintain or enforce our
intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong
as the rights we enjoy in the U.S.
   We may not be able to defend ourselves successfully against claims that we are infringing the
intellectual property rights of others.
   Our open source strategy subjects us to additional intellectual property risks, such as less
control over development of certain technology that forms a part of this strategy and a higher
likelihood of litigation.
  41




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##### Table of Contents



Risks Related to the Trading Market
 Fluctuations in our operating results and other factors may contribute to volatility in the market
price of our stock.
  
    
    fluctuations in our quarterly results of operations and cash flow;
    
    changes in our cash and equivalents and short term investment balances;
    
    our ability to execute on our strategic plan, including, without limitation, our H3C
integration activities;
    
    general economic conditions, such as the current global economic slowdown;
    
    variations between our actual financial results and published analysts expectations;
and
    
    announcements by our competitors or significant customers.
   We may be required to record additional significant charges to earnings if our goodwill or
intangible assets become impaired.
  42




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of SharesNumber
    
    
    Average
    
    
    as Part of Publicly
    
    
    that May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs(1)
    
    
    Plans or ProgramsAugust 30, 2008
through September
26, 2008
    
    
    175,775
    (2)
    
    $
    2.21
    
    
    
    
    
    
    $
    100,000,000September 27, 2008
through October 24,
2008
    
    
    17,180,738
    (2)
    
    
    2.32
    
    
    
    17,174,830
    
    
    
    60,142,965October 25, 2008
through November
28, 2008
    
    
    4,213,025
    (2)
    
    
    2.46
    
    
    
    4,089,600
    
    
    
    50,046,813Total
    
    
    21,569,538
    
    
    $
    2.35
    
    
    
    21,264,430
    
    
    $
    50,046,813
 
 (1)
    
    On September 24, 2008, our Board of Directors approved a stock repurchase program providing
for repurchases of up to $100.0 million through September 23, 2009.(2)
    
    Includes shares surrendered to us to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards and units of 175,775 in September 2008, 5,908 in October
2008 and 123,425 in November 2008. 
 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Annual Meeting of Stockholders was held on September 24, 2008 in
Beijing, China.(b)
    
    Each of the persons named in the Proxy Statement as a nominee for
director was elected and the proposals listed below were approved. The
following are the voting results of the proposals:
 Proposal I
    
    For
    
    WithheldTo elect four Class II
Directors to the Board of
Directors for a
two-year term.Eric A. Benhamou
    
    
    292,857,367
    
    
    
    61,763,527Gary T. DiCamillo
    
    
    276,509,534
    
    
    
    78,111,360James R. Long
    
    
    313,453,251
    
    
    
    41,167,643Ronald A. Sege
    
    
    323,567,732
    
    
    
    31,053,162
  Proposal II
    
    For
    
    Against
    
    AbstainAmendment to 2003 Stock Plan:
    

    192,688,447
    
    
    

    66,686,493
    
    
    

    1,118,430
 Proposal III
    
    For
    
    Against
    
    AbstainAmendment to 1984 Stock Plan:
    

    236,735,687
    
    
    

    22,668,708
    
    
    
    1,088,975
 43




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##### Table of Contents



Proposal IV
    
    
    For
    
    
    Against
    
    
    AbstainRatification of the
appointment of Deloitte
& Touche LLP as the
Companys independent
auditors for the fiscal
year ending May, 2009:
    
    
    346,756,203
    
    
    
    6,244,413
    
    
    
    1,667,196Proposal V
    
    
    For
    
    
    Against
    
    
    AbstainStockholder Proposal
A 
Performance-Based
Options:
    
    
    138,234,318
    
    
    
    118,082,146
    
    
    
    4,223,825Proposal VI
    
    
    For
    
    
    Against
    
    
    AbstainStockholder Proposal B
 Declassification of
Board:
    
    
    215,425,500
    
    
    
    44,306,130
    
    
    
    808,659
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    Master Separation and Distribution Agreement between the
    
    10-Q
    
    002-92053
    
    2.1
    
    4/4/00Registrant and Palm, Inc. effective as of December 13, 19992.2
    
    Indemnification and Insurance Matters Agreement between the
    
    10-Q
    
    002-92053
    
    2.11
    
    4/4/00Registrant and Palm, Inc.2.3
    
    Agreement and Plan of Merger, dated December 13, 2004, by and
    
    8-K
    
    000-12867
    
    2.1
    
    12/16/04among the Registrant, Topaz Acquisition Corporation andTippingPoint Technologies, Inc.2.4
    
    Securities Purchase Agreement by and among 3Com Corporation, 3Com
    
    8-K/A
    
    000-12867
    
    2.1
    
    3/30/06Technologies, Huawei Technologies Co., Ltd. and Shenzen HuaweiInvestment & Holding Co., Ltd., dated as of October 28, 20052.5
    
    Stock Purchase Agreement by and between Shenzhen Huawei Investment
    
    8-K
    
    000-12867
    
    10.1
    
    12/27/06& Holding Co., Ltd. and 3Com Technologies, dated as of December22, 20062.6
    
    Agreement and Plan of Merger by and among 3Com Corporation,
    
    8-K/A
    
    000-12867
    
    2.1
    
    9/28/07Diamond II Holdings Inc. and Diamond II Acquisition Corp., datedSeptember 28, 20073.1
    
    Corrected Certificate of Merger filed to correct an error in the
    
    10-Q
    
    002-92053
    
    3.4
    
    10/8/99Certificate of Merger3.2
    
    Registrants Bylaws, as amended on December 10, 2008
    
    8-K
    
    000-12867
    
    3.1
    
    12/16/083.3
    
    Certificate of Designation of Rights, Preferences and Privileges
    
    10-Q
    
    000-12867
    
    3.6
    
    10/11/01of Series A Participating Preferred Stock
 44




---



##### Table of Contents



Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith4.1
    
    Third Amended and Restated Preferred Shares Rights Agreement,
    
    8-A/A
    
    000-12867
    
    4.1
    
    11/27/02dated as of November 4, 2002 (Rights Agreement)4.2
    
    Amendment No. 1 to Rights Agreement, dated as of September 28, 2007
    
    8-K
    
    000-12867
    
    4.1
    
    9/28/0710.1
    
    3Com Corporation 2003 Stock Plan, as amended and restated
    
    8-K
    
    000-12867
    
    10.2
    
    1/6/09effective January 1, 2009*10.2
    
    Amended and Restated 3Com Corporation 1984 Employee Stock Purchase
    
    8-K
    
    000-12867
    
    10.2
    
    9/24/08Plan, as approved by stockholders on September 24, 2008 (Beijing,China-time)*31.1
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of Chief Executive Officer and Chief Financial
    
    
    
    
    
    
    
    
    
    
    XOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Indicates a management contract or compensatory plan 45




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##### Table of Contents



SIGNATURES
  
 Dated:  January  7, 2009
    By:
    /s/   Jay ZagerJay ZagerExecutive Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer and a duly authorized

officer of the registrant) 46




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    


FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    Master Separation and Distribution Agreement between theRegistrant and Palm, Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    2.1
    
    4/4/002.2
    
    Indemnification and Insurance Matters Agreement between theRegistrant and Palm, Inc.
    
    10-Q
    
    002-92053
    
    2.11
    
    4/4/002.3
    
    Agreement and Plan of Merger, dated December 13, 2004, by andamong the Registrant, Topaz Acquisition Corporation andTippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    2.1
    
    12/16/042.4
    
    Securities Purchase Agreement by and among 3Com Corporation, 3ComTechnologies, Huawei Technologies Co., Ltd. and Shenzen HuaweiInvestment & Holding Co., Ltd., dated as of October 28, 2005
    
    8-K/A
    
    000-12867
    
    2.1
    
    3/30/062.5
    
    Stock Purchase Agreement by and between Shenzhen Huawei Investment& Holding Co., Ltd. and 3Com Technologies, dated as of December22, 2006
    
    8-K
    
    000-12867
    
    10.1
    
    12/27/062.6
    
    Agreement and Plan of Merger by and among 3Com Corporation,Diamond II Holdings Inc. and Diamond II Acquisition Corp., datedSeptember 28, 2007
    
    8-K/A
    
    000-12867
    
    2.1
    
    9/28/073.1
    
    Corrected Certificate of Merger filed to correct an error in theCertificate of Merger
    
    10-Q
    
    002-92053
    
    3.4
    
    10/8/993.2
    
    Registrant's Bylaws, as amended on December 10, 2008
    
    8-K
    
    000-12867
    
    3.1
    
    12/16/083.3
    
    Certificate of Designation of Rights, Preferences and Privilegesof Series A Participating Preferred Stock
    
    10-Q
    
    000-12867
    
    3.6
    
    10/11/014.1
    
    Third Amended and Restated Preferred Shares Rights Agreement,dated as of November 4, 2002 (Rights Agreement)
    
    8-A/A
    
    000-12867
    
    4.1
    
    11/27/024.2
    
    Amendment No. 1 to Rights Agreement, dated as of September 28, 2007
    
    8-K
    
    000-12867
    
    4.1
    
    9/28/0710.1
    
    3Com Corporation 2003 Stock Plan, as amended and restatedeffective January 1, 2009*
    
    8-K
    
    000-12867
    
    10.2
    
    1/6/0910.2
    
    Amended and Restated 3Com Corporation 1984 Employee Stock PurchasePlan, as approved by stockholders on September 24, 2008 (Beijing,China-time)*
    
    8-K
    
    000-12867
    
    10.2
    
    9/24/0831.1
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of Chief Executive Officer and Chief Financial
    
    
    
    
    
    
    
    
    
    
    XOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Indicates a management contract or compensatory plan 47