##### Table of Contents



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
 For the quarterly period ended November 27, 2009
 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
 
 3COM CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2605794(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)350 Campus DriveMarlborough, Massachusetts
    
    01752(Address of principal executive offices)
    
    (Zip Code)
 (508) 323-1000
 N/A
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller
reporting company)
 o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 27, 2009
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (unaudited)
Three and Six Months Ended November 30, 2009 and 2008
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
November 30, 2009 and May 31, 2009
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended November 30, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATION
    
    
    39Item 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 4. Submission of Matters to a Vote of Security Holders
    
    
    52Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    53SIGNATURES
    
    
    55EXHIBITS
    
    
    56Ex-10.1 Form of 3Com Corporation 2003 Stock PlanEx-31.1 Certification of Principal Executive OfficerEx-31.2 Certification of Principal Financial OfficerEx-32.1 Certification of Chief Executive Officer and Chief Financial Officer




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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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    322,164
    
    
    $
    354,562
    
    
    $
    612,666
    
    
    $
    697,212Cost of sales
    
    
    128,542
    
    
    
    154,770
    
    
    
    252,473
    
    
    
    307,793Gross profit
    
    
    193,622
    
    
    
    199,792
    
    
    
    360,193
    
    
    
    389,419Operating expenses (income):Sales and marketing
    
    
    93,754
    
    
    
    89,920
    
    
    
    178,542
    
    
    
    177,402Research and development
    
    
    41,400
    
    
    
    49,254
    
    
    
    80,368
    
    
    
    96,401General and administrative
    
    
    25,786
    
    
    
    28,652
    
    
    
    47,156
    
    
    
    53,106Amortization
    
    
    16,755
    
    
    
    25,060
    
    
    
    33,826
    
    
    
    50,224Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,000
    )Restructuring charges
    
    
    1,552
    
    
    
    2,504
    
    
    
    2,685
    
    
    
    4,501Operating expenses, net
    
    
    179,247
    
    
    
    195,390
    
    
    
    342,577
    
    
    
    311,634Operating income
    
    
    14,375
    
    
    
    4,402
    
    
    
    17,616
    
    
    
    77,785Interest expense, net
    
    
    (1,922
    )
    
    
    (547
    )
    
    
    (3,010
    )
    
    
    (1,798
    )Other income, net
    
    
    5,920
    
    
    
    15,899
    
    
    
    17,467
    
    
    
    28,770Income before income taxes
    
    
    18,373
    
    
    
    19,754
    
    
    
    32,073
    
    
    
    104,757Income tax benefit (provision)
    
    
    1,619
    
    
    
    (6,884
    )
    
    
    (4,620
    )
    
    
    (12,050
    )Net income
    
    $
    19,992
    
    
    $
    12,870
    
    
    $
    27,453
    
    
    $
    92,707Basic and diluted net income per share
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.23Shares used in computing per share amounts:Basic
    
    
    392,688
    
    
    
    394,036
    
    
    
    391,231
    
    
    
    398,462Diluted
    
    
    403,501
    
    
    
    395,245
    
    
    
    399,884
    
    
    
    399,658
  1




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  November 30,
    
    
    May 31,(In thousands, except per share data)
    
    2009
    
    
    2009ASSETSCurrent assets:Cash and equivalents
    
    $
    704,079
    
    
    $
    545,818Short-term investments
    
    
    
    
    
    
    98,357Notes receivable
    
    
    35,697
    
    
    
    40,590Accounts receivable, less allowance
for doubtful accounts of $9,488 and
$9,645, respectively
    
    
    110,297
    
    
    
    112,771Inventories
    
    
    94,844
    
    
    
    90,395Other current assets
    
    
    55,307
    
    
    
    56,982Total current assets
    
    
    1,000,224
    
    
    
    944,913Property and equipment, less accumulated
depreciation and amortization of $176,171
and $172,717, respectively
    
    
    36,805
    
    
    
    40,012Goodwill
    
    
    609,297
    
    
    
    609,297Intangible assets, net
    
    
    164,931
    
    
    
    198,624Deposits and other assets
    
    
    23,761
    
    
    
    22,511Total assets
    
    $
    1,835,018
    
    
    $
    1,815,357LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    81,632
    
    
    $
    68,350Current portion of long-term debt
    
    
    48,000
    
    
    
    48,000Accrued liabilities and other
    
    
    427,943
    
    
    
    394,103Total current liabilities
    
    
    557,575
    
    
    
    510,453Deferred taxes and long-term obligations
    
    
    40,695
    
    
    
    40,729Long-term debt
    
    
    64,000
    
    
    
    152,000Stockholders 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: 395,902 and 389,284,
respectively
    
    
    2,367,273
    
    
    
    2,336,961Retained deficit
    
    
    (1,263,069
    )
    
    
    (1,290,522
    )Accumulated other comprehensive income
    
    
    68,544
    
    
    
    65,736Total stockholders equity
    
    
    1,172,748
    
    
    
    1,112,175Total liabilities and stockholders equity
    
    $
    1,835,018
    
    
    $
    1,815,357
  2




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedNovember 30,(In thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    27,453
    
    
    $
    92,707Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    44,767
    
    
    
    65,113Stock-based compensation expense
    
    
    11,118
    
    
    
    12,080Loss on property and equipment disposals
    
    
    213
    
    
    
    891Deferred income taxes
    
    
    (12,108
    )
    
    
    (2,521
    )Changes in assets and liabilities:Accounts and notes receivable
    
    
    7,445
    
    
    
    (63,970
    )Inventories
    
    
    (3,316
    )
    
    
    (25,478
    )Other assets
    
    
    8,002
    
    
    
    1,056Accounts payable
    
    
    14,494
    
    
    
    63Other liabilities
    
    
    37,033
    
    
    
    16,152Net cash provided by operating activities
    
    
    135,101
    
    
    
    96,093Cash flows from investing activities:Proceeds from maturities and sales of investments
    
    
    98,661
    
    
    
    Purchases of property and equipment
    
    
    (7,414
    )
    
    
    (11,425
    )Proceeds from sale of property and equipment
    
    
    39
    
    
    
    150Net cash provided by (used in) investing activities
    
    
    91,286
    
    
    
    (11,275
    )Cash flows from financing activities:Issuances of common stock
    
    
    21,516
    
    
    
    2,848Repurchases of common stock
    
    
    (2,242
    )
    
    
    (50,574
    )Repayment of long term debt
    
    
    (88,000
    )
    
    
    (88,000
    )Net cash used in financing activities
    
    
    (68,726
    )
    
    
    (135,726
    )Effect of exchange rate changes on cash and equivalents
    
    
    600
    
    
    
    8,051Net change in cash and equivalents during period
    
    
    158,261
    
    
    
    (42,857
    )Cash and equivalents, beginning of period
    
    
    545,818
    
    
    
    503,644Cash and equivalents, end of period
    
    $
    704,079
    
    
    $
    460,787
  3




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3COM CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1. BASIS OF PRESENTATION
    Accounting Pronouncements
 Recently Issued and Adopted Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements
 4




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Fair Value Measurements and Disclosures
  Impairments of Debt Securities
 Earnings Per Share:
 Subsequent Events
 Recently Issued but Not Yet Adopted Accounting Pronouncements
 Revenue Arrangements with Multiple Deliverables
 Revenue Arrangements with Software Elements
 Variable Interest Entities and Transfers of Financial Assets and Extinguishments of
Liabilities
 5




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NOTE 2. STOCK-BASED COMPENSATION
    Three Months Ended November 30,
    
    Six Months Ended November 30,2009
    
    2008
    
    2009
    
    2008Employee stock options:Volatility
    
    
    *
    
    
    
    52.1
    %
    
    
    57.0
    %
    
    
    51.3
    %Risk-free interest rate
    
    
    *
    
    
    
    2.5
    %
    
    
    2.1
    %
    
    
    2.6
    %Dividend yield
    
    
    *
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    *
    
    
    
    4.8
    
    
    
    4.1
    
    
    
    4.6Weighted average grant date fair value
    
    
    *
    
    
    $
    1.02
    
    
    $
    1.83
    
    
    $
    1.02Restricted stock awards:Weighted average grant date fair value
    
    
    *
    
    
    $
    2.22
    
    
    
    *
    
    
    $
    2.22Restricted stock units:Weighted average grant date fair value
    
    $
    5.31
    
    
    $
    2.20
    
    
    $
    4.13
    
    
    $
    2.34Employee Stock Purchase Plan:Volatility
    
    
    64.8
    %
    
    
    77.7
    %
    
    
    64.8
    %
    
    
    77.7
    %Risk-free interest rate
    
    
    0.2
    %
    
    
    1.2
    %
    
    
    0.2
    %
    
    
    1.2
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Weighted average grant date fair value
    
    $
    1.70
    
    
    $
    0.90
    
    
    $
    1.70
    
    
    $
    0.90
 
 *
    
    No grants during the period 6




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Three Months Ended November 30,
    
    
    Six Months Ended November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of sales
    
    $
    591
    
    
    $
    562
    
    
    $
    1,131
    
    
    $
    1,320Sales and marketing
    
    
    2,081
    
    
    
    1,613
    
    
    
    3,671
    
    
    
    3,371Research and development
    
    
    423
    
    
    
    893
    
    
    
    899
    
    
    
    1,777General and administrative
    
    
    3,138
    
    
    
    2,570
    
    
    
    5,417
    
    
    
    5,612Stock-based
compensation expense
before tax
    
    $
    6,233
    
    
    $
    5,638
    
    
    $
    11,118
    
    
    $
    12,080
 Stock Options
 Six Months Ended November 30,2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageshares
    
    
    exercise price
    
    
    Shares
    
    
    exercise priceOutstanding May 31, 2009 and 2008
    
    
    28,361
    
    
    $
    4.92
    
    
    
    43,925
    
    
    $
    4.98Granted
    
    
    2,419
    
    
    
    4.00
    
    
    
    1,286
    
    
    
    2.27Exercised
    
    
    (5,009
    )
    
    
    3.86
    
    
    
    (792
    )
    
    
    1.61Forfeited
    
    
    (262
    )
    
    
    3.96
    
    
    
    (1,926
    )
    
    
    4.63Expired
    
    
    (2,252
    )
    
    
    5.69
    
    
    
    (9,174
    )
    
    
    5.29Outstanding November 30, 2009 and 2008
    
    
    23,257
    
    
    $
    4.98
    
    
    
    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, 2009
    
    
    20,541
    
    
    $
    5.19
    
    
    
    3.5
    
    
    $
    63,095
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Restricted Stock Awards.
 Six Months Ended November 30,2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageShares
    
    
    Grant-Date
    
    
    Shares
    
    
    Grant-Date(unvested)
    
    
    Fair Value
    
    
    (unvested)
    
    
    Fair ValueOutstanding May 31, 2009 and 2008
    
    
    1,459
    
    
    $
    2.94
    
    
    
    3,095
    
    
    $
    3.43Granted
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    2.28Vested
    
    
    (337
    )
    
    
    3.27
    
    
    
    (592
    )
    
    
    3.95Forfeited
    
    
    (17
    )
    
    
    4.64
    
    
    
    (430
    )
    
    
    3.82Outstanding November 30, 2009 and 2008
    
    
    1,105
    
    
    $
    2.82
    
    
    
    2,398
    
    
    $
    3.07
  Restricted Stock Units.
 Six Months Ended November 30,2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageShares
    
    
    Grant-Date
    
    
    Shares
    
    
    Grant-Date(unvested)
    
    
    Fair Value
    
    
    (unvested)
    
    
    Fair ValueOutstanding May 31, 2009 and 2008
    
    
    6,161
    
    
    $
    2.78
    
    
    
    5,744
    
    
    $
    3.59Granted
    
    
    5,928
    
    
    
    4.13
    
    
    
    4,630
    
    
    
    2.34Vested
    
    
    (1,331
    )
    
    
    3.07
    
    
    
    (1,463
    )
    
    
    3.78Forfeited
    
    
    (331
    )
    
    
    3.21
    
    
    
    (882
    )
    
    
    3.22Outstanding November 30, 2009 and 2008
    
    
    10,427
    
    
    $
    3.49
    
    
    
    8,029
    
    
    $
    2.87
  Employee Stock Purchase Plan.
 8




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NOTE 3: FAIR VALUE
 Fair Value Hierarchy
   Level 1 
 Level 2 
 Level 3 
  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(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Balance(In thousands)AssetsCash and equivalents:Time deposits and bank deposits
with a maturity less than
3 months
    
    $
    
    
    
    $
    400,535
    
    
    $
    
    
    
    $
    400,535Money market fund deposits
    
    
    234,944
    
    
    
    
    
    
    
    
    
    
    
    234,944China government bonds and bank
bills with a maturity of less
than 3 months
    
    
    68,600
    
    
    
    
    
    
    
    
    
    
    
    68,600Total assets measured at fair value
    
    $
    303,544
    
    
    $
    400,535
    
    
    $
    
    
    
    $
    704,079
  NOTE 4. REALTEK PATENT DISPUTE RESOLUTION
  9




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NOTE 5. RESTRUCTURING CHARGES
   
    
    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
    Fiscal 2010 Actions
  Employee
    
    
    OtherSeparation
    
    
    RestructuringExpense
    
    
    Costs
    
    
    TotalBalance as of May 31, 2009
    
    $
    
    
    
    $
    
    
    
    $
    Provisions
    
    
    2,467
    
    
    
    150
    
    
    
    2,617Payments and non-cash charges
    
    
    (1,580
    )
    
    
    (150
    )
    
    
    (1,730
    )Balance as of November 30, 2009
    
    $
    887
    
    
    $
    
    
    
    $
    887
 10




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Fiscal 2007 through 2009 Actions
  EmployeeSeparation
    
    
    Facilities-relatedExpense
    
    
    Charges
    
    
    TotalBalance as of May 31, 2009
    
    $
    1,477
    
    
    $
    47
    
    
    $
    1,524Provisions
    
    
    59
    
    
    
    9
    
    
    
    68Payments and non-cash charges
    
    
    (1,336
    )
    
    
    (12
    )
    
    
    (1,348
    )Balance as of November 30, 2009
    
    $
    200
    
    
    $
    44
    
    
    $
    244
   NOTE 6. INCOME TAXES
      11




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NOTE 7. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November, 302009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    19,992
    
    
    $
    12,870
    
    
    $
    27,453
    
    
    $
    92,707Other comprehensive income:Change in accumulated
translation adjustments
    
    
    1,597
    
    
    
    (3,184
    )
    
    
    2,808
    
    
    
    4,501Total comprehensive income
    
    $
    21,589
    
    
    $
    9,686
    
    
    $
    30,261
    
    
    $
    97,208
 NOTE 8. NET INCOME PER SHARE
  Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,(in thousands except per share data)
    
    2009
    
    2008
    
    2009
    
    2008Determination of shares:Weighted average shares outstanding
    
    
    392,688
    
    
    
    394,036
    
    
    
    391,231
    
    
    
    398,462Assumed conversion of dilutive stock options
    
    
    5,601
    
    
    
    860
    
    
    
    4,311
    
    
    
    914Assumed conversion of restricted stock (awards and units)
    
    
    5,212
    
    
    
    349
    
    
    
    4,342
    
    
    
    282Diluted weighted average shares outstanding
    
    
    403,501
    
    
    
    395,245
    
    
    
    399,884
    
    
    
    399,658Basic earnings per share
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.23Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.23
 NOTE 9. INVENTORIES
  November 30,
    
    
    May 31,2009
    
    
    2009Finished goods
    
    $
    73,952
    
    
    $
    69,860Work-in-process
    
    
    4,315
    
    
    
    3,420Raw materials
    
    
    16,577
    
    
    
    17,115Total
    
    $
    94,844
    
    
    $
    90,395
 12




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NOTE 10. INTANGIBLE ASSETS, NET
  November 30, 2009
    
    May 31, 2009Weighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingAmortization
    
    
    
    
    
    Accumulated
    
    
    
    
    
    Amortization
    
    
    
    
    
    AccumulatedPeriod
    
    Gross
    
    Amortization
    
    Net
    
    Period
    
    Gross
    
    Amortization
    
    NetExisting technology
    
    
    3.0
    
    
    $
    398,441
    
    
    $
    (299,559
    )
    
    $
    98,882
    
    
    
    3.6
    
    
    $
    398,178
    
    
    $
    (272,460
    )
    
    $
    125,718Trademark
    
    NA
    
    
    55,502
    
    
    
    
    
    
    
    55,502
    
    
    NA
    
    
    55,502
    
    
    
    
    
    
    
    55,502Huawei non-compete
    
    
    0.0
    
    
    
    37,327
    
    
    
    (37,327
    )
    
    
    
    
    
    
    0.0
    
    
    
    37,283
    
    
    
    (37,283
    )
    
    
    OEM agreement
    
    
    0.5
    
    
    
    26,881
    
    
    
    (22,426
    )
    
    
    4,455
    
    
    
    1.0
    
    
    
    23,777
    
    
    
    (14,852
    )
    
    
    8,925Maintenance agreements
    
    
    1.3
    
    
    
    19,000
    
    
    
    (15,308
    )
    
    
    3,692
    
    
    
    1.7
    
    
    
    19,000
    
    
    
    (13,724
    )
    
    
    5,276Other
    
    
    1.5
    
    
    
    22,705
    
    
    
    (20,305
    )
    
    
    2,400
    
    
    
    2.0
    
    
    
    22,697
    
    
    
    (19,494
    )
    
    
    3,203$
    559,856
    
    
    $
    (394,925
    )
    
    $
    164,931
    
    
    
    
    
    
    $
    556,437
    
    
    $
    (357,813
    )
    
    $
    198,624
   Remainderof 2010
    
    2011
    
    2012
    
    2013
    
    2014Amortization expense
    
    $
    32,939
    
    
    $
    42,222
    
    
    $
    17,134
    
    
    $
    17,134
    
    
    
    
  NOTE 11. ACCRUED WARRANTY
   Six Months EndedNovember 30,2009
    
    
    2008Accrued warranty, beginning of period
    
    $
    29,587
    
    
    $
    36,897Cost of warranty claims processed during the period
    
    
    (12,533
    )
    
    
    (16,148
    )Provision for warranties related to products sold during the period
    
    
    10,426
    
    
    
    13,302Accrued warranty, end of period
    
    $
    27,480
    
    
    $
    34,051
 13




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##### Table of Contents



NOTE 12. LONG-TERM DEBT AND OTHER BANK OBLIGATIONS
 Senior Secured Credit Agreement  H3C Holdings Limited
   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
    %
       Calendar Year
    
    3Com Fiscal Year
    
    Tranche A
    
    Tranche B2010
    
    
    2011
    
    
    
    46,000
    
    
    
    2,0002011
    
    
    2012
    
    
    
    
    
    
    
    20,0002012
    
    
    2013
    
    
    
    
    
    
    
    44,000
 14




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##### Table of Contents



Other Bank Obligations
  NOTE 13. SEGMENT INFORMATION
    15




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##### Table of Contents



Three Months Ended November 30, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    169,297
    
    
    $
    119,259
    
    
    $
    
    
    
    $
    35,870
    
    
    $
    (2,262
    )c
    
    $
    322,164Standard margin
    
    
    115,197
    
    
    
    73,525
    
    
    
    
    
    
    
    30,112
    
    
    
    (591
    )d
    
    
    218,243Direct sales & marketing expenses
    
    
    39,372
    
    
    
    25,982
    
    
    
    
    
    
    
    12,754
    
    
    
    2,081
    d
    
    
    80,189Segment contribution profit (loss)
    
    
    75,825
    
    
    
    47,543
    
    
    
    
    
    
    
    17,358
    
    
    
    (2,672
    )
    
    
    138,054Research & development expenses
    
    
    
    
    
    
    
    
    
    
    34,843
    
    
    
    6,134
    
    
    
    423
    d
    
    
    41,400Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,224
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    52,448
    
    
    
    3,834
    
    
    
    25,997
    e
    
    
    82,279Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,375
 Three Months Ended November 30, 2008Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    199,815
    
    
    $
    125,688
    
    
    $
    
    
    
    $
    31,016
    
    
    $
    (1,957
    )c
    
    $
    354,562Standard margin
    
    
    131,901
    
    
    
    71,861
    
    
    
    
    
    
    
    25,278
    
    
    
    (562
    )d
    
    
    228,478Direct sales & marketing expenses
    
    
    36,513
    
    
    
    25,742
    
    
    
    
    
    
    
    11,918
    
    
    
    1,613
    d
    
    
    75,786Segment contribution profit (loss)
    
    
    95,388
    
    
    
    46,119
    
    
    
    
    
    
    
    13,360
    
    
    
    (2,175
    )
    
    
    152,692Research & development expenses
    
    
    
    
    
    
    
    
    
    
    41,712
    
    
    
    6,649
    
    
    
    893
    d
    
    
    49,254Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,711
    
    
    $
    Other operating expenses (income)
    
    
    
    
    
    
    
    
    
    
    61,029
    
    
    
    7,073
    
    
    
    30,934
    e
    
    
    99,036Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,402
 16




---



##### Table of Contents



Six Months Ended November 30, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    321,310
    
    
    $
    226,461
    
    
    $
    
    
    
    $
    68,466
    
    
    $
    (3,571
    )c
    
    $
    612,666Standard margin
    
    
    220,097
    
    
    
    136,520
    
    
    
    
    
    
    
    57,884
    
    
    
    (1,131
    )d
    
    
    413,370Direct sales & marketing expenses
    
    
    74,411
    
    
    
    49,309
    
    
    
    
    
    
    
    23,782
    
    
    
    3,671
    d
    
    
    151,173Segment contribution profit (loss)
    
    
    145,686
    
    
    
    87,211
    
    
    
    
    
    
    
    34,102
    
    
    
    (4,802
    )
    
    
    262,197Research & development expenses
    
    
    
    
    
    
    
    
    
    
    67,020
    
    
    
    12,449
    
    
    
    899
    d
    
    
    80,368Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,653
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    108,495
    
    
    
    9,238
    
    
    
    46,480
    e
    
    
    164,213Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,616
 Six Months Ended November 30, 2008Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    375,212
    
    
    $
    266,002
    
    
    $
    
    
    
    $
    59,215
    
    
    $
    (3,217
    )c
    
    $
    697,212Standard margin
    
    
    247,428
    
    
    
    154,114
    
    
    
    
    
    
    
    48,674
    
    
    
    (1,320
    )d
    
    
    448,896Direct sales & marketing expenses
    
    
    70,113
    
    
    
    53,894
    
    
    
    
    
    
    
    21,991
    
    
    
    3,371
    d
    
    
    149,369Segment contribution profit (loss)
    
    
    177,315
    
    
    
    100,220
    
    
    
    
    
    
    
    26,683
    
    
    
    (4,691
    )
    
    
    299,527Research & development expenses
    
    
    
    
    
    
    
    
    
    
    81,029
    
    
    
    13,595
    
    
    
    1,777
    d
    
    
    96,401Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,088
    
    
    $
    Other operating expenses (income)
    
    
    
    
    
    
    
    
    
    
    121,051
    
    
    
    13,153
    
    
    
    (8,863
    )e
    
    
    125,341Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    77,785
 
 a
    
     Included in our Central Function results were depreciation expenses of $5.4 million
and $6.3 million for the three months ended November 30, 2009 and 2008, respectively, and $9.8 million and
$12.9 million
for the six months ended November 30, 2009 and 2008, respectively.b
    
     Included in our TippingPoint segment profit were depreciation expenses of $0.9 million and
$1.2 million
for the three months ended November 30, 2009 and 2008, respectively, and $2.0 million and
$2.0 million
for the six months ended November 30, 2009 and 2008, respectively.c
    
     Represents eliminations for inter-company revenue between Networking and TippingPoint
during the respective
periods.d
    
     Represents stock-based compensation in all periods.e
    
     Includes stock based compensation, amortization, and restructuring in all periods plus
proceeds from the Realtek
patent dispute resolution in the six months ended November 30, 2008. 17




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November 30,
    
    
    May 31,Identifiable assets (in thousands)
    
    2009
    
    
    2009China-based sales region(1)(2)
    
    $
    1,265,275
    
    
    $
    1,378,059Rest of World sales region(1)
    
    
    1,026,200
    
    
    
    875,788TippingPoint
    
    
    232,754
    
    
    
    228,440Eliminations(3)
    
    
    (689,211
    )
    
    
    (666,930
    )Total
    
    $
    1,835,018
    
    
    $
    1,815,357
 
 (1)
    
    Included in our identifiable assets for both our China-based sales region and Rest of World sales region are Central Function assets. We do not
segregate these assets as the CODM does not review the segment assets in that manner.(2)
    
    Our China-based sales region identifiable assets are the same as those held by our H3C subsidiary.(3)
    
    The eliminations primarily relate to the Rest of World sales region investment in subsidiaries and intercompany transactions. Six Months EndedNovember 30,Total Expenditures for Additions to Property and Equipment (in thousands)
    
    2009
    
    
    2008China-based sales region(1)
    
    $
    2,205
    
    
    $
    4,213Rest of World sales region(1)
    
    
    4,356
    
    
    
    5,406TippingPoint
    
    
    853
    
    
    
    1,806Total
    
    $
    7,414
    
    
    $
    11,425
 
 (1)
    
    Included in our capital expenditures for both our China-based
sales region and Rest of World sales region are Central Function
expenditures for additions to property and equipment. We do not
segregate these expenditures as the CODM does not review the
segment in that manner. ®
 Three Months Ended November 30,
    
    
    Six Months Ended November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Switches and routers
    
    $
    213,550
    
    
    
    66.3
    %
    
    $
    256,584
    
    
    
    72.3
    %
    
    $
    408,761
    
    
    
    66.7
    %
    
    $
    510,760
    
    
    
    73.3
    %Other networking equipment
    
    
    50,428
    
    
    
    15.6
    %
    
    
    43,515
    
    
    
    12.3
    %
    
    
    92,823
    
    
    
    15.2
    %
    
    
    84,632
    
    
    
    12.1
    %Security
    
    
    46,049
    
    
    
    14.3
    %
    
    
    42,790
    
    
    
    12.1
    %
    
    
    87,101
    
    
    
    14.2
    %
    
    
    79,129
    
    
    
    11.3
    %Services
    
    
    12,137
    
    
    
    3.8
    %
    
    
    11,673
    
    
    
    3.3
    %
    
    
    23,981
    
    
    
    3.9
    %
    
    
    22,691
    
    
    
    3.3
    %Total
    
    $
    322,164
    
    
    
    100
    %
    
    $
    354,562
    
    
    
    100
    %
    
    $
    612,666
    
    
    
    100
    %
    
    $
    697,212
    
    
    
    100
    %
 18




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NOTE 14. GEOGRAPHIC INFORMATION
  Three Months Ended November 30,
    
    
    Six Months Ended November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008China
    
    $
    168,949
    
    
    $
    192,851
    
    
    $
    315,311
    
    
    $
    360,378North America
    
    
    53,770
    
    
    
    49,130
    
    
    
    105,439
    
    
    
    101,161Europe, Middle East, and Africa
    
    
    52,853
    
    
    
    58,989
    
    
    
    101,903
    
    
    
    128,366Asia Pacific (except China)
    
    
    22,443
    
    
    
    27,188
    
    
    
    47,689
    
    
    
    57,297Latin and South America
    
    
    24,149
    
    
    
    26,404
    
    
    
    42,324
    
    
    
    50,010Total
    
    $
    322,164
    
    
    $
    354,562
    
    
    $
    612,666
    
    
    $
    697,212
  NOTE 15. LITIGATION
    19




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20




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NOTE 16. PROPOSED ACQUISITION OF THE COMPANY
          21




---



##### Table of Contents



NOTE 17. SUBSEQUENT EVENT
  
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  BUSINESS OVERVIEW
 ® ® ®
   
    
    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.
  22




---



##### Table of Contents



§
    
    Switches and routers;§
    
    Other networking equipment;§
    
    Security; and§
    
    Services.
  Business Environment and Future Trends
     23




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##### Table of Contents



Technology Strategy
  Revenue and Market Share Goals
    
    
    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.
  
    
    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 a
more robust economic recovery and in fact we have started to see some stabilization in
recent months.
 Profitability and Cash Generation Objectives
  ®
 24




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Significant Event
   Segment Reporting
   25




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##### Table of Contents



Summary of Three Months Ended November 30, 2009 Financial Performance
 §
    
    Our sales in the three months ended November 30, 2009 were $322.2 million, compared to
sales of $354.6 million in the three months ended November 30, 2008, a decrease of $32.4
million, or 9.1 percent.§
    
    Our gross margin improved to 60.1 percent in the three months ended November 30, 2009
from 56.3 percent in the three months ended November 30, 2008.§
    
    Our operating expenses (income) in the three months ended November 30, 2009 were $179.2
million, compared to $195.4 million in the three months ended November 30, 2008, a net
decrease of $16.2 million, or 8.3 percent.§
    
    Our net income in the three months ended November 30, 2009 was $20.0 million, compared
to net income of $12.9 million in the three months ended November 30, 2008. Included in the
three months ended November 30, 2009, is a $10.8 million reduction of income tax benefit
(provision) due to the favorable adjustment recorded to reflect the finalization of our
calendar 2008 China tax rate.§
    
    Our balance sheet contains cash and equivalents and short term investments of $704.1
million as of November 30, 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
long-term debt of $112 million with $48 million classified as a current liability as of
November 30, 2009, compared to long-term debt of $200 million with $48 million classified
as a current liability as of May 31, 2009.
 Summary of Six Months Ended November 30, 2009 Financial Performance
 §
    
    Our sales in the six months ended November 30, 2009 were $612.7 million, compared to
sales of $697.2 million in the six months ended November 30, 2008, a decrease of $84.5
million, or 12.1 percent.§
    
    Our gross margin improved to 58.8 percent in the six months ended November 30, 2009 from
55.9 percent in the six months ended November 30, 2008.§
    
    Our operating expenses (income) in the six months ended November 30, 2009 were $342.6
million, compared to $311.6 million in the six months ended November 30, 2008, a net
increase of $31.0 million, or 9.9 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, 2009 was $27.5 million, compared to
net income of $92.7 million in the six months ended November 30, 2008. Included in the six
months ended November 30, 2009, is a $10.8 million reduction of income tax benefit
(provision) due to the favorable adjustment recorded to reflect the finalization of our
calendar 2008 China tax rate. 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
  26




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##### Table of Contents



RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302009
    
    2008
    
    2009
    
    2008Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    39.9
    
    
    
    43.7
    
    
    
    41.2
    
    
    
    44.1Gross profit margin
    
    
    60.1
    
    
    
    56.3
    
    
    
    58.8
    
    
    
    55.9Operating expenses (income):Sales and marketing
    
    
    29.1
    
    
    
    25.0
    
    
    
    29.1
    
    
    
    25.1Research and development
    
    
    12.8
    
    
    
    13.5
    
    
    
    13.1
    
    
    
    13.4General and administrative
    
    
    8.0
    
    
    
    8.8
    
    
    
    7.7
    
    
    
    8.4Amortization
    
    
    5.2
    
    
    
    7.1
    
    
    
    5.5
    
    
    
    7.2Realtek patent resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Restructuring charges
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.6Operating expenses, net
    
    
    55.6
    
    
    
    55.1
    
    
    
    55.9
    
    
    
    44.7Operating income
    
    
    4.5
    
    
    
    1.2
    
    
    
    2.9
    
    
    
    11.2Interest expense, net
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.3
    )Other income, net
    
    
    1.8
    
    
    
    4.5
    
    
    
    2.9
    
    
    
    4.1Income before income taxes
    
    
    5.7
    
    
    
    5.5
    
    
    
    5.3
    
    
    
    15.0Income tax benefit (provision)
    
    
    0.5
    
    
    
    (1.9
    )
    
    
    (0.8
    )
    
    
    (1.7
    )Net income
    
    
    6.2
    %
    
    
    3.6
    %
    
    
    4.5
    %
    
    
    13.3
    %
 Sales
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008China-based sales region
    
    $
    169.3
    
    
    $
    199.8
    
    
    $
    321.3
    
    
    $
    375.2Rest of World sales region
    
    
    119.3
    
    
    
    125.7
    
    
    
    226.5
    
    
    
    266.0TippingPoint security business
    
    
    35.9
    
    
    
    31.0
    
    
    
    68.5
    
    
    
    59.2Eliminations and other
    
    
    (2.3
    )
    
    
    (1.9
    )
    
    
    (3.6
    )
    
    
    (3.2
    )Consolidated sales
    
    $
    322.2
    
    
    $
    354.6
    
    
    $
    612.7
    
    
    $
    697.2
  27




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##### Table of Contents



Three Months Ended November 30
    
    Six Months Ended  November 302009
    
    2008
    
    2009
    
    2008Switches and routers
    
    $
    213.6
    
    
    
    66
    %
    
    $
    256.6
    
    
    
    73
    %
    
    $
    408.8
    
    
    
    67
    %
    
    $
    510.8
    
    
    
    73
    %Other networking equipment
    
    
    50.4
    
    
    
    16
    %
    
    
    43.5
    
    
    
    12
    %
    
    
    92.8
    
    
    
    15
    %
    
    
    84.6
    
    
    
    12
    %Security
    
    
    46.1
    
    
    
    14
    %
    
    
    42.8
    
    
    
    12
    %
    
    
    87.1
    
    
    
    14
    %
    
    
    79.1
    
    
    
    12
    %Services
    
    
    12.1
    
    
    
    4
    %
    
    
    11.7
    
    
    
    3
    %
    
    
    24.0
    
    
    
    4
    %
    
    
    22.7
    
    
    
    3
    %Total
    
    $
    322.2
    
    
    
    100
    %
    
    $
    354.6
    
    
    
    100
    %
    
    $
    612.7
    
    
    
    100
    %
    
    $
    697.2
    
    
    
    100
    %
  ®
 28




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##### Table of Contents



Gross Margin
  Three Months Ended
    
    Six Months EndedNovember 30,
    
    November 30,2009
    
    2008
    
    2009
    
    2008Networking business
    
    
    57.5
    %
    
    
    54.9
    %
    
    
    56.4
    %
    
    
    54.6
    %TippingPoint security business
    
    
    77.2
    %
    
    
    67.5
    %
    
    
    74.9
    %
    
    
    68.5
    %Consolidated margin
    
    
    60.1
    %
    
    
    56.3
    %
    
    
    58.8
    %
    
    
    55.9
    %
  
    
    An improvement in our China sales region gross profit percent (2 percentage point
improvement for the quarter and 2.6 points for the six months) as the percentage of sales to
Huawei decreased significantly. The Huawei sales generally have a lower gross profit
percentage than China-direct touch sales,
 
    
    an improvement in our Rest of World sales region gross profit of 4.9 percent for the
quarter and 3.3 percent for the six months due primarily to increases in average selling
prices and favorable product mix (approximately 3 percentage points for the three months ended
November 30, 2009 and 1 percentage point for the six months ended November 30, 2009), as well
as lower average costs (approximately 2 percentage points for the three and the six months
ended November 30, 2009),
 
    
    and finally, supply chain costs in the Networking business decreased primarily due to lower
warranty costs, as we have experienced lower product quality claims.
    29




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Operating Expenses (Income)
 Three Months Ended
    
    
    
    
    
    Six Months EndedNovember 30,
    
    
    Change
    
    
    November 30,
    
    
    Change(dollars in millions)
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Sales and marketing
    
    $
    93.8
    
    
    $
    89.9
    
    
    $
    3.9
    
    
    
    4
    %
    
    $
    178.5
    
    
    $
    177.4
    
    
    $
    1.1
    
    
    
    1
    %Research and development
    
    
    41.4
    
    
    
    49.3
    
    
    
    (7.9
    )
    
    
    (16
    )%
    
    
    80.4
    
    
    
    96.4
    
    
    
    (16.0
    )
    
    
    (17
    )%General and administrative
    
    
    25.8
    
    
    
    28.6
    
    
    
    (2.8
    )
    
    
    (10
    )%
    
    
    47.2
    
    
    
    53.1
    
    
    
    (5.9
    )
    
    
    (11
    )%Amortization
    
    
    16.8
    
    
    
    25.1
    
    
    
    (8.3
    )
    
    
    (33
    )%
    
    
    33.8
    
    
    
    50.2
    
    
    
    (16.4
    )
    
    
    (33
    )%Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    (70.0
    )
    
    
    70.0
    
    
    
    *Restructuring charges
    
    
    1.5
    
    
    
    2.5
    
    
    
    (1.0
    )
    
    
    (40
    )%
    
    
    2.7
    
    
    
    4.5
    
    
    
    (1.8
    )
    
    
    (40
    )%Operating expenses, net
    
    $
    179.3
    
    
    $
    195.4
    
    
    $
    (16.1
    )
    
    
    (8
    )%
    
    $
    342.6
    
    
    $
    311.6
    
    
    $
    31.0
    
    
    
    ( 10
    %
 
 *
    
    - percentage calculation not meaningful. Sales and Marketing
  Research and Development
  General and Administrative
  Amortization
  30




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Patent dispute resolution
   Restructuring Charges
    Interest Expense, Net
  Other Income, Net
  31




---



##### Table of Contents



Income Tax Provision
  Segment Analysis (tables in thousands)
  China-based sales region:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    169,297
    
    
    $
    199,815
    
    
    $
    321,310
    
    
    $
    375,212Standard margin
    
    
    115,197
    
    
    
    131,901
    
    
    
    220,097
    
    
    
    247,428Direct sales and marketing expenses
    
    
    39,372
    
    
    
    36,513
    
    
    
    74,411
    
    
    
    70,113Segment contribution profit
    
    $
    75,825
    
    
    $
    95,388
    
    
    $
    145,686
    
    
    $
    177,315
  Rest of World sales region:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    119,259
    
    
    $
    125,688
    
    
    $
    226,461
    
    
    $
    266,002Standard margin
    
    
    73,525
    
    
    
    71,861
    
    
    
    136,520
    
    
    
    154,114Direct sales and marketing expenses
    
    
    25,982
    
    
    
    25,742
    
    
    
    49,309
    
    
    
    53,894Segment contribution profit
    
    $
    47,543
    
    
    $
    46,119
    
    
    $
    87,211
    
    
    $
    100,220
  32




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Central Functions:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Research and development expenses
    
    $
    34,843
    
    
    $
    41,712
    
    
    $
    67,020
    
    
    $
    81,029Other operating expenses
    
    
    52,448
    
    
    
    61,029
    
    
    
    108,495
    
    
    
    121,051Total cost and expenses
    
    $
    87,291
    
    
    $
    102,741
    
    
    $
    175,515
    
    
    $
    202,080
  TippingPoint Security business:
 Three months ended
    
    
    Six months endedNovember 30,
    
    
    November 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    35,870
    
    
    $
    31,016
    
    
    $
    68,466
    
    
    $
    59,215Standard margin
    
    
    30,112
    
    
    
    25,278
    
    
    
    57,884
    
    
    
    48,674Direct sales and marketing expenses
    
    
    12,754
    
    
    
    11,918
    
    
    
    23,782
    
    
    
    21,991Segment contribution profit
    
    
    17,358
    
    
    
    13,360
    
    
    
    34,102
    
    
    
    26,683Research and development expenses
    
    
    6,134
    
    
    
    6,649
    
    
    
    12,449
    
    
    
    13,595Segment income
    
    $
    11,224
    
    
    $
    6,711
    
    
    $
    21,653
    
    
    $
    13,088
  LIQUIDITY AND CAPITAL RESOURCES
  November 30,
    
    
    May 31,2009
    
    
    2009Cash and equivalents
    
    $
    704.1
    
    
    $
    545.8Short-term investments
    
    
    
    
    
    
    98.4Cash and equivalents and short-term investments
    
    $
    704.1
    
    
    $
    644.2
 33




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##### Table of Contents



Six Months EndedNovember 30,2009
    
    
    2008Cash and equivalents, beginning of period
    
    $
    545.8
    
    
    $
    503.6Net cash provided by operating activities
    
    
    135.1
    
    
    
    96.1Net cash provided by (used in) investing activities
    
    
    91.3
    
    
    
    (11.3
    )Net cash used in financing activities
    
    
    (68.7
    )
    
    
    (135.7
    )Effect of exchange rate changes on cash and equivalents
    
    
    0.6
    
    
    
    8.1Cash and equivalents, end of period
    
    $
    704.1
    
    
    $
    460.8
       Calendar Year
    
    3Com Fiscal Year
    
    Tranche A
    
    Tranche B2010
    
    
    2011
    
    
    
    46,000
    
    
    
    2,0002011
    
    
    2012
    
    
    
    
    
    
    
    20,0002012
    
    
    2013
    
    
    
    
    
    
    
    44,000
    34




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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
    %
   35




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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Accounting Pronouncements
 Recently Issued and Adopted Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements
 36




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##### Table of Contents



Fair Value Measurements and Disclosures
  Impairments of Debt Securities
 Earnings Per Share:
 Subsequent Events
 Recently Issued but Not Yet Adopted Accounting Pronouncements
 Revenue Arrangements with Multiple Deliverables
 Revenue Arrangements with Software Elements
 37




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##### Table of Contents



Variable Interest Entities and Transfers of Financial Assets and Extinguishments of Liabilities
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity.
 Foreign Currency Exchange Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES
    38




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risk Related to Proposed Acquisition by Hewlett-Packard Company
 Our proposed acquisition by Hewlett-Packard Company creates unique risks in the time leading up to
closing, and there are also risks relating to completing the conditions to closing; if the
transaction is delayed or does not close, it could result in adverse effects on our business and
stock price.
   
    
    managements and our employees attention may be diverted from our day-to-day
business because matters related to the proposed acquisition may require substantial
commitments of their time and resources;
    
    we may lose key employees;
    
    our relationships with customers, partners and vendors may be substantially disrupted
as a result of uncertainties with regard to our business and prospects;
    
    certain costs related to the proposed acquisition, such as legal and accounting fees
and reimbursement of certain expenses, are payable by us whether or not the proposed
acquisition is completed;
    
    under certain circumstances, if the proposed acquisition is not completed we may be
required to pay a termination (break-up) fee of up to $99 million; and
    
    the market price of shares of our common stock may decline to the extent that the
current market price of those shares reflects a market assumption that the proposed
acquisition will be completed.
 39




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##### Table of Contents



Risk Related to Global Economic Conditions
 If the global economic recovery continues to be slow, or if some or all of the regions in which we
operate experience a return to recessionary economic conditions, our results may suffer.
  
    
    reduced demand for our products in many regions as a result of constraints on information
technology-related capital spending by our customers;
    
    risk of excess and obsolete inventories;
    
    longer sales cycles;
    
    delayed and/or cancelled purchases due to factors such as tight credit conditions and
unfavorable local currency translation (noting that we denominate sales in USD in most
locations outside of China); and
    
    risk of longer cash cycles as customers take longer to pay us for products and services
and some customers deal with insolvency issues.
   40




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Risks Related to Ability to Sustain and Increase Profitability and the Impact of our Secured
Indebtedness
 We may not be able to sustain or increase our profitability in the future.
  
    
    declining sales in certain regions;
    
    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; and
    
    disruptions and expenses resulting from our workforce reductions and employee attrition.
   Our indebtedness could adversely affect our financial condition and ability to grow our business.
   
    
    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 our cash flow from operations to
satisfy debt obligations, reducing the availability of capital to finance operations and
growth;
    
    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.
  41




---



##### Table of Contents



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;
    
    respond to changes in the regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of costs and expenses; and
    
    attract, retain and motivate qualified personnel.
    42




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##### Table of Contents



If, as expected, Huawei Technologies, or Huawei, continues to significantly reduce its business
with us, our business results will be materially adversely affected if we cannot increase other
business to offset the decline.
  Risk Related to Core Business Strategy
 If we cannot increase our enterprise account business outside of China, leveraging China as our
home market, we likely will not reach our growth and profitability goals.
    43




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##### Table of Contents



Risk Related to Personnel
 Our success is dependent on continuing to hire and retain qualified managers and other personnel
and reducing senior management turnover; if we are not successful in attracting and retaining key
personnel, our business will suffer.
   Risks Related to Competition
 Intense competition in the market for networking solutions and new or developing product markets
could prevent us from increasing revenue and profitability.
    44




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##### Table of Contents



Our competition with Huawei could have a material adverse effect on our sales and our results of
operations, particularly if Huawei increases its level of competition against us.
   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.
  
    
    identify new market and product opportunities;
    
    predict which technologies and markets will see declining demand;
    
    develop and introduce new products and solutions (and new features and
functionality for existing products and solutions) in a timely manner;
    
    gain market acceptance of new products and solutions; and
    
    rapidly and efficiently transition our customers from older to newer enterprise
networking technologies.
  
    
    there is a delay in introducing new products, features or functionality;
    
    we lose key channel partners;
    
    our products do not satisfy customers in terms of features, functionality or
quality; or
    
    our products cost more to produce than we expect.
 45




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##### Table of Contents



Risks Related to Operations and Distribution Channels
 If we are not successful at partnering with system integrators and expanding our base of enterprise
channel partners, reaching our growth and profitability goals will be more challenging and we will
likely not reach our full potential.
  A significant portion of our sales is derived from a small number of distributors. If any of these
channel partners reduces its business with us, our business could be adversely affected.
   46




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##### Table of Contents



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 for our products and services;
    
    our reliance on, and long-term arrangements with, third-party manufacturers (which places
much of the supply chain process out of our direct control, heightens the need for accurate
forecasting and reduces our ability to transition quickly to alternative supply chain
strategies); and
    
    our ability to minimize disruptions to our logistics and effectively manage disruptions
that do occur.
   If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, our ability to manage and grow our business may be negatively affected.
  47




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##### Table of Contents



Risks Related to our Operations in the Peoples Republic of China
 Chinas legal and regulatory regime and changing political and economic environment may impact our
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 growth or inflation or stimulate growth;
 
    
    any actions that limit our ability to develop, manufacture, import or sell our products
in China, or export our products outside of China, or to finance and operate our business in
China; or
 
    
    laws, rules or regulations that negatively impact our ability to pay dividends from China
to outside of China, or impose restrictions (including conditions or timing restrictions) or
additional taxes on such dividends.
  Uncertainties with respect to the Chinese legal and regulatory system may adversely affect us.
  If PRC tax benefits available to us are reduced or repealed, our profitability or cash flow could
suffer.
   48




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##### Table of Contents



If the Chinese VAT Authorities discontinue, reduce, or defer the VAT Software Subsidy Program, our results will likely be adversely affected.
  H3C is subject to restrictions on paying dividends and making other payments to us.
  We are subject to risks relating to currency rate fluctuations and exchange controls and we do not hedge this risk in China.
   49




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Risks Related to Intellectual Property
 If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   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.
  50




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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.
  
    
    announcements/expectations concerning the closing of our announced proposed acquisition
by Hewlett-Packard Company;
 
    
    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 our core business strategy to
emphasize larger enterprise and government account business;
 
    
    general economic conditions on a global basis or in our key markets, such as China;
 
    
    variations between our actual financial results and published analysts expectations; and
 
    
    announcements by our competitors, and announcements by, sales to or loss of significant
customers.
  51




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##### Table of Contents



We may be required to record additional significant charges to earnings if our goodwill or intangible assets become impaired.
  
 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
    
    
    Plans or ProgramsAugust 29, 2009
through September
25, 2009
    
    
    59,484
    (1)
    
    $
    4.48
    
    
    
    
    
    
    $
    September 26, 2009
through October 23,
2009
    
    
    34,473
    (1)
    
    
    5.35
    
    
    
    
    
    
    
    October 24, 2008
through November
27, 2009
    
    
    105,200
    (1)
    
    
    5.46
    
    
    
    
    
    
    
    Total
    
    
    199,157
    
    
    $
    5.15
    
    
    
    
    
    
    $
    
 
 (1)
    
    Includes shares surrendered to us to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards and units of 54,484 in September 2009, 34,473 in October
2009 and 105,200 in November 2009. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Annual Meeting of Stockholders was held on September 23, 2009.(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:
  Nominees:Kathleen A. Cote
    
    For
    
    
    341,758,803
    
    
    Withhold
    
    
    7,748,275David H. Y. Ho
    
    For
    
    
    342,070,558
    
    
    Withhold
    
    
    7,436,520Robert Y. L. Mao
    
    For
    
    
    342,356,088
    
    
    Withhold
    
    
    7,150,990J. Donald Sherman
    
    For
    
    
    330,714,470
    
    
    Withhold
    
    
    18,792,608Dominique Trempont
    
    For
    
    
    341,729,464
    
    
    Withhold
    
    
    7,777,613
 Other Directors whose term of office as a director continued after the meeting were
Eric A. Benhamou, Gary T. DiCamillo, James R. Long and Ronald Sege.
 52




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##### Table of Contents



ITEM 2
    
    To amend and restate the Companys Certificate of Incorporation to de-classify the Companys Board of Directors and ensure consistency with the Companys Bylaws.
 For
    
    
    343,257,751Against
    
    
    5,544,599Abstain
    
    
    704,855
 ITEM 3
    
    To ratify the appointment of Deloitte & Touche LLP as the Companys independent public accountants for the fiscal year ending May, 2010.
 For
    
    
    342,300,676Against
    
    
    6,864,716Abstain
    
    
    341,812
 
 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 Registrant 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 the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.4
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & 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
December 22, 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., dated
September 28, 2007
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    9/28/072.7
    
    Agreement and Plan of Merger by and among
3Com Corporation, Hewlett-Packard Company,
and Colorado Acquisition Corporation, dated
November 11, 2009
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    11/12/093.1
    
    Amended and Restated Certificate of
Incorporation filed with the Secretary of
State of the State of Delaware on September
23, 2009
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    9/24/093.2
    
    Registrants Bylaws, as amended on December
10, 2008
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    12/16/08
 53




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##### 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, 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/A
    
    000-12867
    
    
    4.1
    
    
    9/28/074.3
    
    Amendment No. 2 to Rights Agreement, dated
as of November 11, 2009
    
    8-K
    
    000-12867
    
    
    4.1
    
    
    11/12/0910.1
    
    Form of 3Com Corporation 2003 Stock Plan,
as amended, Independent Director Restricted
Stock Unit Grant Award Agreement*
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    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
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 54




---



##### Table of Contents



SIGNATURES
  3Com Corporation
(Registrant)Dated:      January 6, 2010
    By:
    /s/   Jay ZagerJay ZagerExecutive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and a duly authorized
officer of the registrant) 55




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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 the Registrant 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 the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.4
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & 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
December 22, 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., dated
September 28, 2007
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    9/28/072.7
    
    Agreement and Plan of Merger by and among
3Com Corporation, Hewlett-Packard Company,
and Colorado Acquisition Corporation, dated
November 11, 2009
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    11/12/093.1
    
    Amended and Restated Certificate of
Incorporation filed with the Secretary of
State of the State of Delaware on September
23, 2009
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    9/24/093.2
    
    Registrants Bylaws, as amended on December
10, 2008
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    12/16/084.1
    
    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/A
    
    000-12867
    
    
    4.1
    
    
    9/28/074.3
    
    Amendment No. 2 to Rights Agreement, dated
as of November 11, 2009
    
    8-K
    
    000-12867
    
    
    4.1
    
    
    11/12/0910.1
    
    Form of 3Com Corporation 2003 Stock Plan,
as amended, Independent Director Restricted
Stock Unit Grant Award Agreement*
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    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
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 56