##### 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 February 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
 
 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 27, 2009
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended February 28, 2009 and 2008
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
February 28, 2009 and May 31, 2008
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended February 28, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    47EXHIBITS
    
    
    48EX-10.6 2005 Deferred Compensation PlanEX-10.7 Section 16 Officer Severance PlanEX-10.8 First Amendment to Employment Agreement - MaoEX-10.9 First Amendment to Employment Agreement - SegeEX-10.10 Form of First Amendment to Severance Benefits AgreementEX-10.11 Form of Second Agreement to Severance Benefits AgreementEX-10.12 Form of First Amendment to Management Retention AgreementEX-10.13 Form of First AmendmentEX-10.14 Form of Second Agreement to Management Retention AgreementEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERT OF CEO AND CFO




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,(In thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    324,707
    
    
    $
    336,390
    
    
    $
    1,021,919
    
    
    $
    973,625Cost of sales
    
    
    138,878
    
    
    
    156,716
    
    
    
    446,671
    
    
    
    492,895Gross profit
    
    
    185,829
    
    
    
    179,674
    
    
    
    575,248
    
    
    
    480,730Operating expenses (income):Sales and marketing
    
    
    84,241
    
    
    
    82,428
    
    
    
    259,143
    
    
    
    237,617Research and development
    
    
    43,729
    
    
    
    50,530
    
    
    
    137,330
    
    
    
    155,039General and administrative
    
    
    30,393
    
    
    
    26,268
    
    
    
    88,799
    
    
    
    78,806Amortization
    
    
    23,106
    
    
    
    25,778
    
    
    
    73,330
    
    
    
    78,044Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    (70,000
    )
    
    
    Restructuring charges
    
    
    2,860
    
    
    
    736
    
    
    
    7,361
    
    
    
    4,308Operating expenses, net
    
    
    184,329
    
    
    
    185,740
    
    
    
    495,963
    
    
    
    553,814Operating income (loss)
    
    
    1,500
    
    
    
    (6,066
    )
    
    
    79,285
    
    
    
    (73,084
    )Interest expense, net
    
    
    (3,333
    )
    
    
    (2,879
    )
    
    
    (5,131
    )
    
    
    (10,412
    )Other income, net
    
    
    16,528
    
    
    
    10,591
    
    
    
    45,298
    
    
    
    33,345Income (loss) before income taxes
    
    
    14,695
    
    
    
    1,646
    
    
    
    119,452
    
    
    
    (50,151
    )Income tax provision
    
    
    (12,828
    )
    
    
    (9,486
    )
    
    
    (24,878
    )
    
    
    (11,967
    )Net income (loss)
    
    $
    1,867
    
    
    $
    (7,840
    )
    
    $
    94,574
    
    
    $
    (62,118
    )Basic and diluted net income (loss) per share
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    0.24
    
    
    $
    (0.16
    )Shares used in computing per share amounts:Basic
    
    
    384,679
    
    
    
    400,142
    
    
    
    393,868
    
    
    
    398,724Diluted
    
    
    386,377
    
    
    
    400,142
    
    
    
    395,232
    
    
    
    398,724
  1




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  February 28,
    
    
    May 31,(In thousands, except per share data)
    
    2009
    
    
    2008ASSETSCurrent assets:Cash and equivalents
    
    $
    559,961
    
    
    $
    503,644Notes receivable
    
    
    85,795
    
    
    
    65,116Accounts receivable, less allowance
for doubtful accounts of $14,750 and
$12,253, respectively
    
    
    114,083
    
    
    
    116,281Inventories
    
    
    107,103
    
    
    
    90,831Other current assets
    
    
    55,881
    
    
    
    34,033Total current assets
    
    
    922,823
    
    
    
    809,905Property and equipment, less accumulated
depreciation and amortization of $193,494
and $205,835, respectively
    
    
    43,828
    
    
    
    54,314Goodwill
    
    
    609,297
    
    
    
    609,297Intangible assets, net
    
    
    203,838
    
    
    
    278,385Deposits and other assets
    
    
    21,941
    
    
    
    23,229Total assets
    
    $
    1,801,727
    
    
    $
    1,775,130LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    71,636
    
    
    $
    90,280Current portion of long-term debt
    
    
    61,000
    
    
    
    48,000Accrued liabilities and other
    
    
    415,068
    
    
    
    366,181Total current liabilities
    
    
    547,704
    
    
    
    504,461Deferred taxes and long-term obligations
    
    
    40,129
    
    
    
    22,367Long-term debt
    
    
    152,000
    
    
    
    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: 387,269 and 405,656,
respectively
    
    
    2,323,511
    
    
    
    2,353,688Retained deficit
    
    
    (1,310,672
    )
    
    
    (1,405,247
    )Accumulated other comprehensive income
    
    
    49,055
    
    
    
    46,861Total stockholders equity
    
    
    1,061,894
    
    
    
    995,302Total liabilities and stockholders equity
    
    $
    1,801,727
    
    
    $
    1,775,130
  2




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedFebruary 28,(In thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    94,574
    
    
    $
    (62,118
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    97,156
    
    
    
    102,731Stock-based compensation expense
    
    
    18,187
    
    
    
    15,413Impairment of property and equipment
    
    
    1,150
    
    
    
    Loss on property and equipment disposals
    
    
    581
    
    
    
    2,227Gain on investments, net
    
    
    
    
    
    
    (185
    )Deferred income taxes
    
    
    (7,466
    )
    
    
    (448
    )Changes in assets and liabilities:Accounts and notes receivable
    
    
    (13,560
    )
    
    
    (59,344
    )Inventories
    
    
    (22,006
    )
    
    
    22,704Other assets
    
    
    6,771
    
    
    
    7,733Accounts payable
    
    
    (20,929
    )
    
    
    (13,447
    )Other liabilities
    
    
    41,874
    
    
    
    (25,297
    )Net cash provided by (used in) operating activities
    
    
    196,332
    
    
    
    (10,031
    )Cash flows from investing activities:Proceeds from maturities and sales of investments
    
    
    
    
    
    
    442Purchases of property and equipment
    
    
    (12,778
    )
    
    
    (13,269
    )Proceeds from sale of property and equipment
    
    
    223
    
    
    
    944Net cash used in investing activities
    
    
    (12,555
    )
    
    
    (11,883
    )Cash flows from financing activities:Issuances of common stock
    
    
    3,022
    
    
    
    6,124Repurchases of common stock
    
    
    (51,383
    )
    
    
    (2,321
    )Repayment of long term debt
    
    
    (88,000
    )
    
    
    (94,000
    )Net cash used in financing activities
    
    
    (136,361
    )
    
    
    (90,197
    )Effect of exchange rate changes on cash and equivalents
    
    
    8,901
    
    
    
    18,924Net change in cash and equivalents during period
    
    
    56,317
    
    
    
    (93,187
    )Cash and equivalents, beginning of period
    
    
    503,644
    
    
    
    559,217Cash and equivalents, end of period
    
    $
    559,961
    
    
    $
    466,030
  3




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




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5




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NOTE 2. STOCK-BASED COMPENSATION
    Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedFebruary 28,
    
    February 28,
    
    February 28,
    
    February 28,2009
    
    2008
    
    2009
    
    2008Employee stock options:Volatility
    
    
    51.3
    %
    
    
    *
    %
    
    
    51.3
    %
    
    
    40.5
    %Risk-free interest rate
    
    
    1.9
    %
    
    
    *
    %
    
    
    2.6
    %
    
    
    4.7
    %Dividend yield
    
    
    0.0
    %
    
    
    *
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    6.0
    
    
    
    *
    
    
    
    4.7
    
    
    
    3.8Weighted average grant date fair value
    
    $
    1.28
    
    
    $
    *
    
    
    $
    1.04
    
    
    $
    1.49Restricted stock awards:Weighted average grant date fair value
    
    $
    *
    
    
    $
    *
    
    
    $
    2.28
    
    
    $
    3.90Restricted stock units:Weighted average grant date fair value
    
    $
    2.51
    
    
    $
    *
    
    
    $
    2.35
    
    
    $
    3.72Employee Stock Purchase Plan:Volatility
    
    
    *
    %
    
    
    *
    %
    
    
    77.7
    %
    
    
    61.1
    %Risk-free interest rate
    
    
    *
    %
    
    
    *
    %
    
    
    1.2
    %
    
    
    4.0
    %Dividend yield
    
    
    *
    %
    
    
    *
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    *
    
    
    
    *
    
    
    
    0.5
    
    
    
    0.5Weighted average grant date fair value
    
    $
    *
    
    
    $
    *
    
    
    $
    0.90
    
    
    $
    1.60
 
 *
    
    No grants during the period 6




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Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded February
    
    Ended February
    
    Ended February
    
    Ended February28, 2009
    
    28, 2008
    
    28, 2009
    
    28, 2008Cost of sales
    
    $
    596
    
    
    $
    496
    
    
    $
    1,916
    
    
    $
    1,403Sales and marketing
    
    
    1,599
    
    
    
    1,753
    
    
    
    4,970
    
    
    
    4,146Research and development
    
    
    768
    
    
    
    1,100
    
    
    
    2,545
    
    
    
    2,794General and administrative
    
    
    3,144
    
    
    
    2,195
    
    
    
    8,756
    
    
    
    7,070Stock-based compensation
expense before tax
    
    $
    6,107
    
    
    $
    5,544
    
    
    $
    18,187
    
    
    $
    15,413
 Stock Options.
 WeightedaverageNumber of
    
    
    exerciseshares
    
    
    priceOutstanding May 31, 2008
    
    
    43,925
    
    
    $
    4.98Granted
    
    
    1,403
    
    
    
    2.30Exercised
    
    
    (979
    )
    
    
    1.48Cancelled
    
    
    (14,581
    )
    
    
    5.16Outstanding February 28, 2009
    
    
    29,768
    
    
    $
    4.88
    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 February
28, 2009
    
    
    27,105
    
    
    $
    5.08
    
    
    
    3.3
    
    
    $
    1,325
 7




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Restricted Stock Awards.
 WeightedNumber of
    
    
    averageShares
    
    
    Grant-Date(unvested)
    
    
    Fair ValueOutstanding May 31, 2008
    
    
    3,095
    
    
    $
    3.43Granted
    
    
    325
    
    
    
    2.28Vested
    
    
    (734
    )
    
    
    3.94Forfeited
    
    
    (745
    )
    
    
    3.75Outstanding February 28, 2009
    
    
    1,941
    
    
    $
    2.92
  Restricted Stock Units.
 Number ofShares(unvested)Outstanding May 31, 2008
    
    
    5,744Granted
    
    
    5,071Vested
    
    
    (2,445
    )Forfeited
    
    
    (1,246
    )Outstanding February 28, 2009
    
    
    7,124
   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 and government bonds with a maturity less than 3 months
    
    $
    
    
    
    $
    406,118
    
    
    $
    
    
    
    $
    406,118Money market fund deposits
    
    
    136,634
    
    
    
    
    
    
    
    
    
    
    
    136,634Total assets measured at fair value
    
    $
    136,634
    
    
    $
    406,118
    
    
    $
    
    
    
    $
    542,752
 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
    
    
    5,965
    
    
    
    1,283
    
    
    
    68
    
    
    
    7,316Payments and non-cash charges
    
    
    (4,859
    )
    
    
    (319
    )
    
    
    (68
    )
    
    
    (5,246
    )Balance as of February 28, 2009
    
    $
    1,793
    
    
    $
    964
    
    
    $
    
    
    
    $
    2,757
   Fiscal 2004 through 2007 Actions
  Employee
    
    
    Facilities-Separation
    
    
    relatedExpense
    
    
    Charges
    
    
    TotalBalance as of May 31, 2008
    
    $
    28
    
    
    $
    687
    
    
    $
    715Provisions (benefits)
    
    
    (6
    )
    
    
    51
    
    
    
    45Payments and non-cash charges
    
    
    11
    
    
    
    (440
    )
    
    
    (429
    )Balance as of February 28, 2009
    
    $
    33
    
    
    $
    298
    
    
    $
    331
   10




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NOTE 6. INCOME TAXES
      NOTE 7. COMPREHENSIVE (LOSS) INCOME
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    1,867
    
    
    $
    (7,840
    )
    
    $
    94,574
    
    
    $
    (62,118
    )Other comprehensive income:Net unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210
    )Change in accumulated translation adjustments
    
    
    (2,307
    )
    
    
    11,822
    
    
    
    2,194
    
    
    
    26,071Total comprehensive (loss) income
    
    $
    (440
    )
    
    $
    3,982
    
    
    $
    96,768
    
    
    $
    (36,257
    )
 11




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NOTE 8. NET INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,(in thousands except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Determination of shares:Weighted average shares outstanding
    
    
    384,679
    
    
    
    400,142
    
    
    
    393,868
    
    
    
    398,724Assumed conversion of dilutive stock options and restricted stock
(awards and units)
    
    
    1,698
    
    
    
    
    
    
    
    1,364
    
    
    
    Diluted weighted average shares outstanding
    
    
    386,377
    
    
    
    400,142
    
    
    
    395,232
    
    
    
    398,724Basic earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    0.24
    
    
    $
    (0.16
    )Diluted earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    0.24
    
    
    $
    (0.16
    )
 NOTE 9. INVENTORIES
  February 28,
    
    
    May 31,2009
    
    
    2008Finished goods
    
    $
    86,516
    
    
    $
    62,055Work-in-process
    
    
    4,004
    
    
    
    6,119Raw materials
    
    
    16,583
    
    
    
    22,657Total
    
    $
    107,103
    
    
    $
    90,831
 NOTE 10. INTANGIBLE ASSETS, NET
  February 28,
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 31,2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    2008Weighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingAmortization
    
    
    
    
    
    Accumulated
    
    
    
    
    
    Amortization
    
    
    
    
    
    AccumulatedPeriod
    
    Gross
    
    Amortization
    
    Net
    
    Period
    
    Gross
    
    Amortization
    
    NetExisting technology
    
    
    3.0
    
    
    $
    382,050
    
    
    $
    (252,802
    )
    
    $
    129,248
    
    
    
    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
    
    
    1.2
    
    
    
    24,663
    
    
    
    (14,166
    )
    
    
    10,497
    
    
    
    2.0
    
    
    
    24,844
    
    
    
    (7,947
    )
    
    
    16,897Maintenance agreements
    
    
    2.0
    
    
    
    19,000
    
    
    
    (12,931
    )
    
    
    6,069
    
    
    
    2.7
    
    
    
    19,000
    
    
    
    (10,556
    )
    
    
    8,444Other
    
    
    1.2
    
    
    
    20,474
    
    
    
    (17,952
    )
    
    
    2,522
    
    
    
    2.0
    
    
    
    22,176
    
    
    
    (17,784
    )
    
    
    4,392$
    534,705
    
    
    $
    (330,867
    )
    
    $
    203,838
    
    
    
    
    
    
    $
    535,426
    
    
    $
    (257,041
    )
    
    $
    278,385
 12




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##### Table of Contents



NOTE 11. ACCRUED WARRANTY
   Nine Months EndedFebruary 28,2009
    
    
    2008Accrued warranty, beginning of period
    
    $
    36,897
    
    
    $
    40,596Cost of warranty claims processed during the period
    
    
    (23,613
    )
    
    
    (31,040
    )Provision for warranties related to products sold during the period
    
    
    19,308
    
    
    
    29,122Accrued warranty, end of period
    
    $
    32,592
    
    
    $
    38,678
 NOTE 12. LONG-TERM DEBT
      13




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##### Table of Contents



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
    NOTE 13. SEGMENT INFORMATION
    14




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##### Table of Contents



Three Months Ended February 28, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    
    TotalSales
    
    $
    190,385
    
    
    $
    102,836
    
    
    $
    
    
    
    $
    33,284
    
    
    $
    (1,798
    )  a
    
    $
    324,707Gross profit
    
    
    128,160
    
    
    
    61,365
    
    
    
    (25,326
    )
    
    
    22,226
    
    
    
    (596
    )  b
    
    
    185,829Direct sales & marketing expenses
    
    
    36,581
    
    
    
    23,360
    
    
    
    
    
    
    
    10,282
    
    
    
    1,371
    b
    
    
    71,594Segment contribution profit (loss)
    
    
    91,579
    
    
    
    38,005
    
    
    
    (25,326
    )
    
    
    11,944
    
    
    
    (1,967
    )
    
    
    114,235Other operating expenses
    
    
    
    
    
    
    
    
    
    
    68,394
    
    
    
    11,129
    
    
    
    33,212
    c
    
    
    112,735Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    815
    
    
    $
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
      $
    1,500
 Three Months Ended February 28, 2008Networking Business
    
    

    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    TotalSales
    
    $
    179,668
    
    
    $
    134,531
    
    
    $
    
    
    
    $
    23,639
    
    
    $
    (1,448
    )  a
    
    $
    336,390Gross profit
    
    
    114,600
    
    
    
    77,523
    
    
    
    (28,474
    )
    
    
    16,578
    
    
    
    (553
    )  b
    
    
    179,674Direct sales & marketing expenses
    
    
    33,001
    
    
    
    25,151
    
    
    
    
    
    
    
    8,827
    
    
    
    1,753
    b
    
    
    68,732Segment contribution profit (loss)
    
    
    81,599
    
    
    
    52,372
    
    
    
    (28,474
    )
    
    
    7,751
    
    
    
    (2,306
    )
    
    
    110,942Other operating expenses
    
    
    
    
    
    
    
    
    
    
    75,701
    
    
    
    8,510
    
    
    
    32,797
    c
    
    
    117,008Segment profit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (759
    )
    
    $
    Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,066
    )
 15




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##### Table of Contents



Nine Months Ended February 28, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    TotalSales
    
    $
    565,597
    
    
    $
    368,838
    
    
    $
    
    
    
    $
    92,499
    
    
    $
    (5,015
    )  a
    
    $
    1,021,919Gross profit
    
    
    375,588
    
    
    
    215,479
    
    
    
    (76,707
    )
    
    
    62,804
    
    
    
    (1,916
    )  b
    
    
    575,248Direct sales & marketing expenses
    
    
    106,194
    
    
    
    77,254
    
    
    
    
    
    
    
    30,873
    
    
    
    4,742
    b
    
    
    219,063Segment contribution profit (loss)
    
    
    269,394
    
    
    
    138,225
    
    
    
    (76,707
    )
    
    
    31,931
    
    
    
    (6,658
    )
    
    
    356,185Other operating expenses
    
    
    
    
    
    
    
    
    
    
    219,593
    
    
    
    31,181
    
    
    
    26,126
    c
    
    
    276,900Segment profit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    750
    
    
    $
    Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    79,285
 Nine Months Ended February 28, 2008Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/Sales Region
    
    
    Region
    
    
    Functions
    
    
    Point
    
    
    Other
    
    
    TotalSales
    
    $
    490,120
    
    
    $
    411,035
    
    
    $
    
    
    
    $
    74,892
    
    
    $
    (2,422
    )  a
    
    $
    973,625Gross profit
    
    
    304,784
    
    
    
    228,277
    
    
    
    (90,492
    )
    
    
    50,740
    
    
    
    (12,579
    )  b
    
    
    480,730Direct sales & marketing expenses
    
    
    89,496
    
    
    
    71,782
    
    
    
    
    
    
    
    27,676
    
    
    
    4,146
    b
    
    
    193,100Segment contribution profit (loss)
    
    
    215,288
    
    
    
    156,495
    
    
    
    (90,492
    )
    
    
    23,064
    
    
    
    (16,725
    )
    
    
    287,630Other operating expenses
    
    
    
    
    
    
    
    
    
    
    234,080
    
    
    
    23,830
    
    
    
    102,804
    c
    
    
    360,714Segment loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (766
    )
    
    $
    Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (73,084
    )
 
 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
nine months ended February 28, 2008.c
    
    Includes stock based compensation, amortization, and restructuring in all periods plus
Realtek patent dispute resolution in the nine months ended February 28, 2009 and
acquisition related expenses
in the nine months ended February 28, 2008.  16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2009
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    2008Networking equipment
    
    $
    259,045
    
    
    
    80
    %
    
    $
    280,529
    
    
    
    83
    %
    
    $
    830,405
    
    
    
    82
    %
    
    $
    799,258
    
    
    
    82
    %Security
    
    
    43,553
    
    
    
    13
    %
    
    
    30,459
    
    
    
    9
    %
    
    
    122,682
    
    
    
    12
    %
    
    
    97,004
    
    
    
    10
    %Services
    
    
    11,892
    
    
    
    4
    %
    
    
    10,309
    
    
    
    3
    %
    
    
    34,583
    
    
    
    3
    %
    
    
    29,292
    
    
    
    3
    %Voice
    
    
    10,217
    
    
    
    3
    %
    
    
    15,093
    
    
    
    5
    %
    
    
    34,249
    
    
    
    3
    %
    
    
    48,071
    
    
    
    5
    %Total
    
    $
    324,707
    
    
    
    
    
    
    $
    336,390
    
    
    
    
    
    
    $
    1,021,919
    
    
    
    
    
    
    $
    973,625
 NOTE 14. GEOGRAPHIC INFORMATION
  Three Months Ended February 28,
    
    
    Nine Months Ended February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008China
    
    $
    183,758
    
    
    $
    169,864
    
    
    $
    544,136
    
    
    $
    459,725Europe, Middle East, and Africa
    
    
    52,982
    
    
    
    75,368
    
    
    
    181,348
    
    
    
    218,239North America
    
    
    43,300
    
    
    
    42,871
    
    
    
    144,461
    
    
    
    155,478Asia Pacific (except China)
    
    
    23,850
    
    
    
    27,059
    
    
    
    81,147
    
    
    
    76,306Latin and South America
    
    
    20,817
    
    
    
    21,228
    
    
    
    70,827
    
    
    
    63,877Total
    
    $
    324,707
    
    
    $
    336,390
    
    
    $
    1,021,919
    
    
    $
    973,625
  NOTE 15. LITIGATION
  In re Initial Public Offering Securities Litigation, Brian Levey vs.
TippingPoint Technologies, Inc., et al.
 17




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##### Table of Contents



NOTE 16. STOCK REPURCHASE PROGRAM
   18




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##### Table of Contents



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, H3C;§
    
    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 integrating our TippingPoint segment;
and§
    
    Changing our reporting segments to align with the way we manage our business.
  §
    
    Networking;§
    
    Security;§
    
    Voice; and§
    
    Services.
  Business Environment and Future Trends
  19




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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, 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 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 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. As discussed earlier, the results of
these efforts have been hampered by the global economic slowdown.
 20




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##### Table of Contents



Profitability and Cash Generation Objectives
   Segment Reporting
   Summary of Three Months Ended February 28, 2009 Financial Performance
 §
    
    Our sales in the three months ended February 28, 2009 were $324.7 million, compared to
sales of $336.4 million in the three months ended February 28, 2008, a decrease of $11.7
million, or 3.5 percent.§
    
    Our gross margin improved to 57.2 percent in the three months ended February 28, 2009
from 53.4 percent in the three months ended February 28, 2008.§
    
    Our operating expenses (income) in the three months ended February 28, 2009 were $184.3
million, compared to $185.7 million in the three months ended February 28, 2008, a net
decrease of $1.4 million, or 0.8 percent.§
    
    Our net income in the three months ended February 28, 2009 was $1.9 million, compared to
a net loss of $7.8 million in the three months ended February 28, 2008.§
    
    Our balance sheet contains cash and equivalents of $560.0 million as of February 28,
2009, 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 $61 million classified as a current
liability as of February 28, 2009 compared with debt of $301 million with $48 million
classified as a current liability at the end of fiscal 2008.
 21




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##### Table of Contents



Summary of Nine Months Ended February 28, 2009 Financial Performance
 §
    
    Our sales in the nine months ended February 28, 2009 were $1,021.9 million, compared to
sales of $973.6 million in the nine months ended February 28, 2008, an increase of $48.3
million, or 5.0 percent.§
    
    Our gross margin improved to 56.3 percent in the nine months ended February 28, 2009
from 49.4 percent in the nine months ended February 28, 2008.§
    
    Our operating expenses (income) in the nine months ended February 28, 2009 were $496.0
million, compared to $553.8 million in the nine months ended February 28, 2008, a net
decrease of $57.8 million, or 10.4 percent. Included in operating expenses (income) for the
nine months ended February 28, 2009 is $70.0 million of income related to the Realtek
patent dispute resolution.§
    
    Our net income in the nine months ended February 28, 2009 was $94.6 million, compared
to a net loss of $62.1 million in the nine months ended February 28, 2008. Included in
net income for the nine months ended February 28, 2009 is $70.0 million of income related
to the Realtek patent dispute resolution.
 CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 28, 2009 AND 2008
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2009
    
    2008
    
    2009
    
    2008Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    42.8
    
    
    
    46.6
    
    
    
    43.7
    
    
    
    50.6Gross profit margin
    
    
    57.2
    
    
    
    53.4
    
    
    
    56.3
    
    
    
    49.4Operating expenses (income):Sales and marketing
    
    
    25.9
    
    
    
    24.5
    
    
    
    25.3
    
    
    
    24.5Research and development
    
    
    13.5
    
    
    
    15.0
    
    
    
    13.4
    
    
    
    15.9General and administrative
    
    
    9.4
    
    
    
    7.8
    
    
    
    8.7
    
    
    
    8.1Amortization
    
    
    7.1
    
    
    
    7.7
    
    
    
    7.2
    
    
    
    8.0Realtek patent resolution
    
    
    
    
    
    
    
    
    
    
    (6.8
    )
    
    
    Restructuring charges
    
    
    0.8
    
    
    
    0.2
    
    
    
    0.7
    
    
    
    0.4Operating expenses, net
    
    
    56.7
    
    
    
    55.2
    
    
    
    48.5
    
    
    
    56.9Operating income (loss)
    
    
    0.5
    
    
    
    (1.8
    )
    
    
    7.8
    
    
    
    (7.5
    )Interest expense, net
    
    
    (1.0
    )
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (1.1
    )Other income, net
    
    
    5.1
    
    
    
    3.2
    
    
    
    4.4
    
    
    
    3.4Income (loss) before income taxes
    
    
    4.6
    
    
    
    0.5
    
    
    
    11.7
    
    
    
    (5.2
    )Income tax provision
    
    
    (4.0
    )
    
    
    (2.8
    )
    
    
    (2.4
    )
    
    
    (1.2
    )Net income (loss)
    
    
    0.6
    %
    
    
    (2.3
    )%
    
    
    9.3
    %
    
    
    (6.4
    )%
 22




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##### Table of Contents



Sales
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2009
    
    2008
    
    2009
    
    2008China-based sales region
    
    $
    190.4
    
    
    $
    179.7
    
    
    $
    565.6
    
    
    $
    490.1Rest of World sales region
    
    
    102.8
    
    
    
    134.5
    
    
    
    368.8
    
    
    
    411.0TippingPoint security business
    
    
    33.3
    
    
    
    23.6
    
    
    
    92.5
    
    
    
    74.9Eliminations and other
    
    
    (1.8
    )
    
    
    (1.4
    )
    
    
    (5.0
    )
    
    
    (2.4
    )Consolidated sales
    
    $
    324.7
    
    
    $
    336.4
    
    
    $
    1,021.9
    
    
    $
    973.6
      23




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2009
    
    2008
    
    2009
    
    2008Networking
    
    $
    259.0
    
    
    
    80
    %
    
    $
    280.5
    
    
    
    83
    %
    
    $
    830.4
    
    
    
    82
    %
    
    $
    799.3
    
    
    
    82
    %Security
    
    
    43.6
    
    
    
    13
    %
    
    
    30.5
    
    
    
    9
    %
    
    
    122.7
    
    
    
    12
    %
    
    
    97.0
    
    
    
    10
    %Services
    
    
    11.9
    
    
    
    4
    %
    
    
    10.3
    
    
    
    3
    %
    
    
    34.6
    
    
    
    3
    %
    
    
    29.3
    
    
    
    3
    %Voice
    
    
    10.2
    
    
    
    3
    %
    
    
    15.1
    
    
    
    5
    %
    
    
    34.2
    
    
    
    3
    %
    
    
    48.0
    
    
    
    5
    %Total
    
    $
    324.7
    
    
    
    100
    %
    
    $
    336.4
    
    
    
    100
    %
    
    $
    1,021.9
    
    
    
    100
    %
    
    $
    973.6
    
    
    
    100
    %
    ®
 24




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##### Table of Contents



Gross Margin
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2009
    
    2008
    
    2009
    
    2008Networking business
    
    
    55.8
    %
    
    
    51.9
    %
    
    
    54.9
    %
    
    
    47.7
    %TippingPoint security business
    
    
    66.6
    %
    
    
    69.9
    %
    
    
    67.7
    %
    
    
    67.7
    %Consolidated
gross margin
    
    
    57.2
    %
    
    
    53.4
    %
    
    
    56.3
    %
    
    
    49.4
    %
    Operating Expenses
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedFebruary 28,
    
    
    Change
    
    
    February 28,
    
    
    Change(dollars in millions)
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Sales and marketing
    
    $
    84.2
    
    
    $
    82.4
    
    
    $
    1.8
    
    
    
    2
    %
    
    $
    259.1
    
    
    $
    237.6
    
    
    $
    21.5
    
    
    
    9
    %Research and development
    
    
    43.7
    
    
    
    50.5
    
    
    
    (6.8
    )
    
    
    (13
    )%
    
    
    137.3
    
    
    
    155.0
    
    
    
    (17.7
    )
    
    
    (11
    )%General and administrative
    
    
    30.4
    
    
    
    26.3
    
    
    
    4.1
    
    
    
    16
    %
    
    
    88.8
    
    
    
    78.8
    
    
    
    10.0
    
    
    
    13
    %Amortization
    
    
    23.1
    
    
    
    25.8
    
    
    
    (2.7
    )
    
    
    (10
    )%
    
    
    73.4
    
    
    
    78.1
    
    
    
    (4.7
    )
    
    
    (6
    )%Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *
    
    
    
    (70.0
    )
    
    
    
    
    
    
    (70.0
    )
    
    
    *Restructuring
    
    
    2.9
    
    
    
    0.7
    
    
    
    2.2
    
    
    
    314
    %
    
    
    7.4
    
    
    
    4.3
    
    
    
    3.1
    
    
    
    71
    %Total
    
    $
    184.3
    
    
    $
    185.7
    
    
    $
    (1.4
    )
    
    
    (1
    )%
    
    $
    496.0
    
    
    $
    553.8
    
    
    $
    (57.8
    )
    
    
    (10
    )%
 
 *
    
    - percentage calculation not meaningful. Sales and Marketing.
 25




---



##### Table of Contents



Research and Development.
 eneral and Administrative.
 Amortization.
 Patent dispute resolution.
   Restructuring Charges
    Interest Expense, Net
  26




---



##### Table of Contents



Other Income, Net
  Income Tax Provision
   Net Income (Loss)
  27




---



##### Table of Contents



Segment Analysis (tables in thousands)
  China-based sales region:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    190,385
    
    
    $
    179,668
    
    
    $
    565,597
    
    
    $
    490,120Gross profit (a)
    
    
    128,160
    
    
    
    114,600
    
    
    
    375,588
    
    
    
    304,784Direct sales and marketing expenses
    
    
    36,581
    
    
    
    33,001
    
    
    
    106,194
    
    
    
    89,496Segment contribution profit
    
    $
    91,579
    
    
    $
    81,599
    
    
    $
    269,394
    
    
    $
    215,288
  
 a  Gross profit is defined for this region as standard margin, which is sales less standard
cost of sales. Rest of World sales region:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    102,836
    
    
    $
    134,531
    
    
    $
    368,838
    
    
    $
    411,035Gross profit (a)
    
    
    61,365
    
    
    
    77,523
    
    
    
    215,479
    
    
    
    228,277Direct sales and marketing expenses
    
    
    23,360
    
    
    
    25,151
    
    
    
    77,254
    
    
    
    71,782Segment contribution profit
    
    $
    38,005
    
    
    $
    52,372
    
    
    $
    138,225
    
    
    $
    156,495
  
 a  Gross profit is defined for this region as standard margin, which is sales less standard
cost of sales. Central Functions:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Gross profit (a)
    
    $
    (25,326
    )
    
    $
    (28,474
    )
    
    $
    (76,707
    )
    
    $
    (90,492
    )Operating expenses
    
    
    68,394
    
    
    
    75,701
    
    
    
    219,593
    
    
    
    234,080Total costs and expenses
    
    $
    93,720
    
    
    $
    104,175
    
    
    $
    296,300
    
    
    $
    324,572
 28




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##### Table of Contents



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
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales
    
    $
    33,284
    
    
    $
    23,639
    
    
    $
    92,499
    
    
    $
    74,892Gross profit
    
    
    22,226
    
    
    
    16,578
    
    
    
    62,804
    
    
    
    50,740Operating expenses
    
    
    21,411
    
    
    
    17,337
    
    
    
    62,054
    
    
    
    51,506Segment profit (loss)
    
    $
    815
    
    
    $
    (759
    )
    
    $
    750
    
    
    $
    (766
    )
  Goodwill
  LIQUIDITY AND CAPITAL RESOURCES
  Nine Months EndedFebruary 28,(In millions)
    
    2009
    
    
    2008Cash and equivalents, beginning of period
    
    $
    503.6
    
    
    $
    559.2Net cash provided by (used in) operating activities
    
    
    196.3
    
    
    
    (10.0
    )Net cash used in investing activities
    
    
    (12.5
    )
    
    
    (11.9
    )Net cash used in financing activities
    
    
    (136.3
    )
    
    
    (90.2
    )Currency impact on cash
    
    
    8.9
    
    
    
    18.9Cash and equivalents, end of period
    
    $
    560.0
    
    
    $
    466.0
 Goodwill
 29




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30




---



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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 31




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32




---



##### 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
  
 ITEM 1A. RISK FACTORS
  Risk Related to Current Severe Global Economic Conditions and Related Credit Crisis
 Our Operating Results May be Adversely Affected by Current Unfavorable Economic and Credit
Conditions in Many Regions of the World.
  
    
    reduced demand for our products in many regions as a result of constraints on
information technology-related capital spending by our customers, particularly in the
developed markets in North America and Europe;
    
    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.
 33




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Risks Related to Historical Losses and Secured Indebtedness
 While we earned a profit in the first three 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;
    
    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.
   The terms and requirements of our H3C secured 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.
 34




---



##### 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;
    
    develop and execute strategies to operate successfully in the current global economic
downturn, which has begun to negatively impact the Chinese economy and our China-based
business;
    
    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.
    35




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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.
  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.
     36




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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.
     37




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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, 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 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;
    
    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.
   38




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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
channel partners reduces its business with us, our business could be adversely affected.
   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 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
    
    we may experience disruptions to our logistics.
   39




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##### Table of Contents



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.
  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 profitability or cash
flow could suffer.
   40




---



##### Table of Contents



If the Chinese VAT Authorities discontinue the VAT Software Subsidy Program, our results will
likely be adversely affected
  Our H3C subsidiary 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.
   41




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##### Table of Contents



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.
  42




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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 our core business strategy to
leverage China and emphasize larger enterprise business;
    
    general economic conditions, such as the current global economic crisis;
    
    variations between our actual financial results and published analysts expectations;
and
    
    announcements by our competitors or significant customers.
  43




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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 ofShares
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    
    Purchased as
    
    
    Value of SharesNumber
    
    
    
    Average
    
    
    Part of Publicly
    
    
    that May Yet Beof Shares
    
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    
    per Share
    
    
    Programs(1)
    
    
    Plans or ProgramsNovember 29, 2008 through December 26, 2008
    
    
    4,762
    (2
    )
    
    $
    2.12
    
    
    
    
    
    
    $
    50,046,813December 27, 2008 through January 23, 2009
    
    
    29,981
    (2
    )
    
    
    2.46
    
    
    
    
    
    
    
    50,046,813January 24, 2009 through February 27, 2009
    
    
    299,738
    (2
    )
    
    
    2.42
    
    
    
    
    
    
    
    50,046,813Total
    
    
    334,481
    
    
    
    $
    2.42
    
    
    
    
    
    
    $
    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)
    
    Consists of shares surrendered to us to satisfy tax withholding obligations that arose upon
the vesting of restricted stock awards and units of 4,762 in December 2008, 29,981 in January
2009 and 299,738 in February 2009. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  44




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##### Table of Contents



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
    
    
    9/28/073.1
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate 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 Privileges of 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 restated effective January 1,
2009*
    
    8-K
    
    000-12867
    
    
    10.2
    
    
    1/6/0910.2
    
    Form of Stock Option Agreement  2003 Stock
Plan*
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/18/0810.3
    
    Form of Restricted Stock Unit Agreement 
2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.2
    
    
    12/18/0810.4
    
    Form of Restricted Stock Grant Agreement 
2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.3
    
    
    12/18/0810.5
    
    Form of Stock Appreciation Right Agreement
 2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.4
    
    
    12/18/0810.6
    
    3Com Corporation 2005 Deferred Compensation
Plan, Amended & Restated effective as of
January 1, 2009*
    
    
    
    
    
    
    
    
    
    
    
    X10.7
    
    3Com Corporation Section 16 Officer
Severance Plan, Amended & Restated
    
    
    
    
    
    
    
    
    
    
    
    X
 45




---



##### Table of Contents



Exhibit
    
    
    
    
Incorporated by Reference
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewitheffective as of January 15, 2009*10.8
    
    First Amendment to Employment Agreement,
effective as of January 1, 2009  Robert Y.
L. Mao*
    
    
    
    
    
    
    
    
    
    
    
    X10.9
    
    First Amendment to Employment Agreement,
effective as of January 1, 2009  Ronald A.
Sege*
    
    
    
    
    
    
    
    
    
    
    
    X10.10
    
    Form of First Amendment to Severance
Benefits Agreement  Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.11
    
    Form of Second Amendment to Severance
Benefits Agreement  Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.12
    
    Form of First Amendment to Management
Retention Agreement  Mr. Goldman*
    
    
    
    
    
    
    
    
    
    
    
    X10.13
    
    Form of First Amendment to Management
Retention Agreement  All Other Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.14
    
    Form of Second Amendment to Management
Retention Agreement  All Other Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.15
    
    Hangzhou Manufacture Base Tenancy Agreement
for No. 310 Liuhe Road, Binjiang District,
Hangzhou, Zhejiang, China, effective
January 1, 2009, by and between Huawei
Technologies Co., Ltd., as landlord, and
Hangzhou H3C Technologies Co., Ltd., as
tenant
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    1/6/0931.1
    
    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 46




---



##### Table of Contents



SIGNATURES
  3Com Corporation
(Registrant)Dated:
    
    April 8, 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)
 47




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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
    
    
    9/28/073.1
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate 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 Privileges of 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 restated effective January 1,
2009*
    
    8-K
    
    000-12867
    
    
    10.2
    
    
    1/6/0910.2
    
    Form of Stock Option Agreement  2003 Stock
Plan*
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/18/0810.3
    
    Form of Restricted Stock Unit Agreement 
2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.2
    
    
    12/18/0810.4
    
    Form of Restricted Stock Grant Agreement 
2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.3
    
    
    12/18/0810.5
    
    Form of Stock Appreciation Right Agreement
 2003 Stock Plan*
    
    8-K
    
    000-12867
    
    
    10.4
    
    
    12/18/0810.6
    
    3Com Corporation 2005 Deferred Compensation
Plan, Amended & Restated effective as of
January 1, 2009*
    
    
    
    
    
    
    
    
    
    
    
    X10.7
    
    3Com Corporation Section 16 Officer
Severance Plan, Amended & Restated
    
    
    
    
    
    
    
    
    
    
    
    X
 48




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##### Table of Contents



Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewitheffective as of January 15, 2009*10.8
    
    First Amendment to Employment Agreement,
effective as of January 1, 2009  Robert Y.
L. Mao*
    
    
    
    
    
    
    
    
    
    
    
    X10.9
    
    First Amendment to Employment Agreement,
effective as of January 1, 2009  Ronald A.
Sege*
    
    
    
    
    
    
    
    
    
    
    
    X10.10
    
    Form of First Amendment to Severance
Benefits Agreement  Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.11
    
    Form of Second Amendment to Severance
Benefits Agreement  Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.12
    
    Form of First Amendment to Management
Retention Agreement  Mr. Goldman*
    
    
    
    
    
    
    
    
    
    
    
    X10.13
    
    Form of First Amendment to Management
Retention Agreement  All Other Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.14
    
    Form of Second Amendment to Management
Retention Agreement  All Other Executives*
    
    
    
    
    
    
    
    
    
    
    
    X10.15
    
    Hangzhou Manufacture Base Tenancy Agreement
for No. 310 Liuhe Road, Binjiang District,
Hangzhou, Zhejiang, China, effective
January 1, 2009, by and between Huawei
Technologies Co., Ltd., as landlord, and
Hangzhou H3C Technologies Co., Ltd., as
tenant
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    1/6/0931.1
    
    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 49