UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File No. 0-12867

3COM CORPORATION

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

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

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

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

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

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

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

As of March 26, 2010, 398,163,780 shares of the registrant’s common stock were outstanding.

 

 

3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2010
TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION			1
Item 1.		Financial Statements			1
		Condensed Consolidated Statements of Operations (unaudited) Three and Nine Months Ended February 28, 2010 and 2009			1
		Condensed Consolidated Balance Sheets (unaudited) February 28, 2010 and May 31, 2009			2
		Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended February 28, 2010 and 2009			3
		Notes to Condensed Consolidated Financial Statements (unaudited)			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			38
Item 4.		Controls and Procedures			39
PART II.		OTHER INFORMATION			39
Item 1.		Legal Proceedings			39
Item 1A.		Risk Factors			39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 4.		Submission of Matters to a Vote of Security Holders			52
Item 5.		Other Information			52
Item 6.		Exhibits			53
SIGNATURES					54
EXHIBITS					55
EX-31.1
EX-31.2
EX-32.1

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the following aspects of our business: global economic slowdown, nascent economic recovery and effects and strategy; core business strategy to leverage China and emphasize larger enterprise business; China-based sales region strategy, growth, dependence, expected benefits, tax rate, sales from China and expected decline in sales to Huawei; impact of recent accounting regulations; expected annual amortization expense; environment for enterprise networking equipment; challenges relating to sales growth; trends and goals for segments and regions; pursuit of termination fee in connection with now-terminated proposed acquisition by affiliates of Bain Capital; supply of components; research and development focus; execution of our strategy; strategic product and technology development plans; goal of sustaining profitability; short-term management of cash during economic slowdown and nascent recovery; intercompany dividends from China; ability to satisfy cash requirements for at least the next twelve months; restructuring activities and expected charges to be incurred; expected cost savings from restructuring activities and integration; potential acquisitions and strategic relationships; future contractual obligations; recovery of deferred tax assets and balance of unrecognized tax benefits; reserves; market risk; outsourcing; competition; expectation regarding base interest rates; impact of foreign currency fluctuations; belief regarding meritorious defenses to litigation claims and effects of litigation; the ability of our company and Hewlett-Packard Company (“HP”) to consummate the announced acquisition of our company by HP (the “Merger”); satisfaction of closing conditions precedent to the consummation of the proposed Merger, including obtaining antitrust approvals in China; the affect on our business,

operations and financial results of the announcement, the pendency, and activities relating to the Merger; and the affect of certain restrictions on our ability to conduct our business under the acquisition agreement with HP. In some cases, you can identify these and other forward-looking statements by the use of words such as “may,” “can,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any forward-looking statements.

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, without limitation, those set forth under Part II Item 1A Risk Factors. All forward-looking statements included in this document are based on our assessment of information available to us at the time this report is filed. We have no intent, and disclaim any obligation, to update any forward-looking statements.

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended								Nine Months Ended
		February 28,								February 28,
(In thousands, except per share data)		2010				2009				2010				2009
Sales		$	345,880			$	324,707			$	958,546			$	1,021,919
Cost of sales			137,086				138,878				389,559				446,671
Gross profit			208,794				185,829				568,987				575,248
Operating expenses (income):
Sales and marketing			100,543				85,541				279,085				262,943
Research and development			47,997				45,229				128,365				141,630
General and administrative			21,323				27,593				68,479				80,699
Amortization			16,506				23,106				50,332				73,330
Patent dispute resolution			—				—				—				(70,000	)
Restructuring charges			47				2,860				2,732				7,361
Operating expenses, net			186,416				184,329				528,993				495,963
Operating income			22,378				1,500				39,994				79,285
Interest income (expense), net			683				(3,333	)			(2,327	)			(5,131	)
Other income, net			19,676				16,528				37,143				45,298
Income before income taxes			42,737				14,695				74,810				119,452
Income tax provision			(1,346	)			(12,828	)			(5,966	)			(24,878	)
Net income		$	41,391			$	1,867			$	68,844			$	94,574
Basic net income per share		$	0.10			$	0.00			$	0.17			$	0.24
Diluted net income per share		$	0.10			$	0.00			$	0.17			$	0.24
Shares used in computing per share amounts:
Basic			396,253				384,679				392,905				393,868
Diluted			411,546				386,377				403,771				395,232

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

3COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		February 28,				May 31,
(In thousands, except per share data)		2010				2009
ASSETS
Current assets:
Cash and equivalents		$	795,014			$	545,818
Short-term investments			—				98,357
Notes receivable			26,688				40,590
Accounts receivable, less allowance for doubtful accounts of $9,019 and $9,645, respectively			129,998				112,771
Inventories			114,972				90,395
Other current assets			48,977				56,982
Total current assets			1,115,649				944,913
Property and equipment, less accumulated depreciation of $176,652 and $172,717, respectively			36,747				40,012
Goodwill			609,297				609,297
Intangible assets, net			148,432				198,624
Deposits and other assets			22,823				22,511
Total assets		$	1,932,948			$	1,815,357
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	74,907			$	68,350
Current portion of long-term debt			48,000				48,000
Accrued liabilities and other			484,388				394,103
Total current liabilities			607,295				510,453
Deferred taxes and long-term obligations			37,218				40,729
Long-term debt			64,000				152,000
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; none outstanding			—				—
Common stock, $0.01 par value, 990,000 shares authorized; shares issued: 398,088 and 389,284, respectively			2,378,781				2,336,961
Retained deficit			(1,221,678	)			(1,290,522	)
Accumulated other comprehensive income			67,332				65,736
Total stockholders’ equity			1,224,435				1,112,175
Total liabilities and stockholders’ equity		$	1,932,948			$	1,815,357

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

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

		Nine Months Ended
		February 28,
(In thousands)		2010				2009
Cash flows from operating activities:
Net income		$	68,844			$	94,574
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			66,467				97,156
Stock-based compensation expense			17,579				18,187
Impairment of property and equipment			—				1,150
Loss on property and equipment disposals			288				581
Deferred income taxes			(12,123	)			(7,466	)
Changes in assets and liabilities:
Accounts and notes receivable			(3,243	)			(13,560	)
Inventories			(23,319	)			(22,006	)
Other assets			15,667				6,771
Accounts payable			6,247				(20,929	)
Other liabilities			88,393				41,874
Net cash provided by operating activities			224,800				196,332
Cash flows from investing activities:
Proceeds from maturities and sales of investments			98,661				—
Purchases of property and equipment			(11,170	)			(12,778	)
Proceeds from sale of property and equipment			40				223
Net cash provided by (used in) investing activities			87,531				(12,555	)
Cash flows from financing activities:
Issuances of common stock			28,480				3,022
Repurchases of common stock			(4,158	)			(51,383	)
Repayment of long term debt			(88,000	)			(88,000	)
Net cash used in financing activities			(63,678	)			(136,361	)
Effect of exchange rate changes on cash and equivalents			543				8,901
Net change in cash and equivalents during period			249,196				56,317
Cash and equivalents, beginning of period			545,818				503,644
Cash and equivalents, end of period		$	795,014			$	559,961

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

3COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our financial position as of February 26, 2010 and May 29, 2009, our results of operations for the three and nine months ended February 26, 2010 and February 27, 2009 and our cash flows for the nine months ended February 26, 2010 and February 27, 2009.

We use a 52 or 53 week fiscal year ending on the Friday nearest to May 31. For convenience, the condensed consolidated financial statements have been shown as ending on the last day of the calendar month. Accordingly, the three and nine months shown as ended February 28, 2010 actually ended on February 26, 2010, the three and nine months shown as ended February 28, 2009 ended on February 27, 2009, and the balance sheet presented as of February 28, 2010 and May 31, 2009 actually was as of February 26, 2010 and May 29, 2009, respectively. The results of operations for the three and nine months ended February 28, 2010 may not be indicative of the results to be expected for the fiscal year ending May 28, 2010 or any other future periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended May 29, 2009.

Certain prior period amounts have been reclassified to conform to the current year presentation. Specifically, in the condensed consolidated statements of operations we have reclassified $2.8 million from general and administrative expenses to sales and marketing, and to research and development expenses, in the amounts of $1.3 million and $1.5 million, respectively, for the three months ended February 28, 2009, and $8.1 million from general and administrative expenses to sales and marketing, and to research and development expenses, in the amounts of $3.8 million and $4.3 million, respectively, for the nine months ended February 28, 2009.

Accounting Pronouncements — The Financial Accounting Standards Board (“FASB”) is the authoritative body for financial accounting and reporting in the United States. On July 31, 2009, the FASB Accounting Standards Codification (“the Codification”) became the authoritative source of accounting principles to be applied to the financial statements of nongovernmental entities prepared in accordance with GAAP. The following is a list of recent pronouncements issued by the FASB:

Recently Issued and Adopted Accounting Pronouncements

Business Combinations: Effective in the first quarter of fiscal 2010, the Company adopted the revised accounting guidance for business combinations. The more significant changes include an expanded definition of a business and a business combination; recognition of assets acquired, liabilities assumed and noncontrolling interests (including goodwill) measured at fair value at the acquisition date; recognition of acquisition-related expenses and restructuring costs separately from the business combination; recognition of assets acquired and liabilities assumed at their acquisition-date fair values with subsequent changes recognized in earnings; and capitalization of in-process research and development at fair value as an indefinite-lived intangible asset. The guidance also amends and clarifies the application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The impact of this accounting guidance and its relevant updates on the Company’s results of operations or financial position will vary depending on each specific business combination or asset purchase. The Company has not had any business combinations or asset purchases since the adoption of this pronouncement.

Noncontrolling Interests in Consolidated Financial Statements: The pronouncement requires the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment and presentation of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary, and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. The Company adopted the pronouncement in the first quarter of fiscal 2010. The adoption did not have any impact on the Company’s Condensed Consolidated Financial Statements.

Fair Value Measurements and Disclosures: The pronouncements define fair value, establish guidelines for measuring fair value, and expand disclosures regarding fair value measurements. In the first quarter of fiscal 2010, the Company adopted the fair value measurements guidance for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements. See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information. The Company did not choose the fair value option which allows entities to choose to measure many financial instruments and certain other items at fair value that previously were not required to be measured at fair value.

In the second quarter of fiscal 2010, the Company adopted the fair value disclosure provision that requires the reporting of interim disclosures about the fair value of financial instruments previously only disclosed on an annual basis. The adoption did not have any impact on the Company’s Condensed Consolidated Financial Statements as it relates only to disclosures. The required disclosures are included in Note 3 of Notes to Condensed Consolidated Financial Statements.

Impairments of Debt Securities: The pronouncement changed the impairment recognition and presentation model for debt securities. An other-than-temporary impairment is now triggered when there is intent to sell the security, it is more likely than not that the security will be required to be sold before recovery in value, or the security is not expected to recover its entire amortized cost basis (“credit related loss”). Credit related losses on debt securities will be considered an other-than-temporary impairment recognized in earnings, and any other losses due to a decline in fair value relative to the amortized cost deemed not to be other-than-temporary will be recorded in other comprehensive income. The Company adopted the pronouncement in the second quarter of fiscal 2010. The adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

Earnings Per Share: The pronouncement provided guidance on determining whether instruments granted in share-based payment transactions are participating securities. Non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (“EPS”) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The company adopted this pronouncement in the first quarter of fiscal 2010. The adoption had no material effect on basic or diluted EPS for any of the periods presented in these Condensed Consolidated Financial Statements.

Recently Issued but Not Yet Adopted Accounting Pronouncements

Revenue Arrangements with Multiple Deliverables: The guidance amends the current revenue recognition guidance for multiple deliverable arrangements. It allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence, vendor objective evidence, or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements. The guidance is effective for fiscal years beginning on or after June 15, 2010 (the Company’s fiscal 2012), but early adoption is permitted. The Company is currently evaluating the impact that adoption of this pronouncement will have on the Company’s Financial Statements.

Revenue Arrangements with Software Elements: The pronouncement modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010 (the Company’s fiscal 2012), but early adoption is permitted. This guidance must be adopted in the same period an entity adopts the amended revenue arrangements with multiple deliverables guidance described above. The Company is currently evaluating the impact that adoption of this pronouncement will have on the Company’s Financial Statements.

Variable Interest Entities and Transfers of Financial Assets and Extinguishments of Liabilities: The pronouncement on transfers of financial assets and extinguishments of liabilities removes the concept of a qualifying special-purpose entity and removes the exception from applying variable interest entity accounting to qualifying special-purpose entities. The new guidance on variable interest entities requires an entity to perform an ongoing analysis to determine whether the entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. The pronouncements are effective for fiscal years beginning after November 15, 2009. The Company will adopt the pronouncements for interim and annual reporting periods beginning in the first quarter of fiscal 2011. The Company expects that adoption of this pronouncement will not have an impact on the Company’s financial statements.

NOTE 2. STOCK-BASED COMPENSATION

In order to determine the fair value of stock options and employee stock purchase plan shares, we use the Black-Scholes option pricing model and apply the single-option valuation approach to the stock option valuation. In order to determine the fair value of restricted stock awards and restricted stock units we use the closing market price of 3Com common stock on the date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period for time-based vesting awards of stock options, restricted stock awards, restricted stock units, and the employee stock purchase plan. Certain of the stock options may vest on an accelerated basis and certain restricted stock units are earned contingent upon the future achievement of financial performance metrics. Performance metrics for the performance period are determined by the Compensation Committee of the Board of Directors in its sole discretion. For unvested stock options outstanding as of May 31, 2006, we continue to recognize stock-based compensation expense using the accelerated attribution method.

As of February 28, 2010, total unrecognized stock-based compensation expense relating to unvested employee stock options, restricted stock awards, restricted stock units, and the employee stock purchase plan, as adjusted for estimated forfeitures, was $5.2 million, $1.5 million, $18.0 million and $0.2 million, respectively. These amounts are expected to be recognized over a weighted-average period of 2.0 years for stock options, 1.2 years for restricted stock awards, 2.0 years for restricted stock units and 0.1 years for employee stock purchase plan. If actual forfeitures differ from current estimates, total unrecognized stock-based compensation expense will be adjusted for future changes in estimated forfeitures.

Stock-based compensation recognized and disclosed is based on the Black-Scholes option pricing model for estimating the fair value of options granted under the company’s equity incentive plans. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The underlying weighted-average assumptions used in the Black-Scholes model and the resulting estimates of fair value per share were as follows for options granted during the three and nine months ended February 28, 2010 and February 28, 2009:

		Three Months Ended February 28,								Nine Months Ended February 28,
		2010				2009				2010				2009
Employee stock options:
Volatility			*				51.3	%			57.0	%			51.3	%
Risk-free interest rate			*				1.9	%			2.1	%			2.6	%
Dividend yield			*				0.0	%			0.0	%			0.0	%
Expected life (years)			*				6.0				4.1				4.7
Weighted average grant date fair value			*			$	1.28			$	1.83			$	1.04
Restricted stock awards:
Weighted average grant date fair value			*			$	*				*			$	2.28
Restricted stock units:
Weighted average grant date fair value		$	7.49			$	2.51			$	4.20			$	2.35
Employee Stock Purchase Plan:
Volatility			*	%			*	%			64.8	%			77.7	%
Risk-free interest rate			*	%			*	%			0.2	%			1.2	%
Dividend yield			*	%			*	%			0.0	%			0.0	%
Expected life (years)			*				*				0.5				0.5
Weighted average grant date fair value		$	*			$	*			$	1.70			$	0.90

The following table presents stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations (in thousands):

		Three Months Ended February 28,								Nine Months Ended February 28,
		2010				2009				2010				2009
Cost of sales		$	557			$	596			$	1,688			$	1,916
Sales and marketing			2,147				1,371				5,818				4,742
Research and development			538				552				1,437				2,329
General and administrative			3,219				3,144				8,636				8,756
Restructuring charges			—				444				—				444
Stock-based compensation expense before tax		$	6,461			$	6,107			$	17,579			$	18,187

Stock Options. Stock option activity for the nine months ended February 28, 2010 and 2009, was as follows (shares in thousands):

		Nine Months Ended February 28,
		2010								2009
						Weighted								Weighted
		Number of				average				Number of				average
		shares				exercise price				shares				exercise price
Outstanding May 31, 2009 and 2008			28,361			$	4.92				43,925			$	4.98
Granted			2,419				4.00				1,403				2.30
Exercised			(6,590	)			3.99				(979	)			1.48
Forfeited			(326	)			4.01				(3,239	)			4.34
Expired			(2,526	)			6.12				(11,342	)			5.39
Outstanding February 28, 2010 and 2009			21,338			$	4.97				29,768			$	4.88

As of February 28, 2010, there were approximately 13.3 million options exercisable with a weighted-average exercise price of $5.95 per share. By comparison, there were approximately 20.0 million options exercisable as of February 28, 2009 with a weighted-average price of $5.69 per share.

During the nine months ended February 28, 2010 and 2009 approximately 6.6 million and 1.0 million options were exercised at an aggregate intrinsic value of $13.7 million and $0.7 million, respectively. The exercise intrinsic value is calculated as the difference between the market value on the exercise date and the exercise price of the options. The closing market value as of February 26, 2010 was $7.63 per share as reported by the NASDAQ Global Select Market. The aggregate intrinsic value of options outstanding and options exercisable as of February 28, 2010 was $72.8 million and $38.4 million, respectively. The weighted-average remaining contractual life of options outstanding and options exercisable were 3.6 years and 2.6 years, respectively. The aggregate options outstanding and options exercisable intrinsic value is calculated for options that are in-the-money as the difference between the market value as of February 28, 2010 and the exercise price of the options.

Options outstanding that are vested and expected to vest as of February 28, 2010 are as follows:

Weighted

Weighted

Average

Number of

average

Remaining

Aggregate

Shares

Grant-Date

Contractual

Intrinsic Value

(in thousands)

Fair Value

Life (in years)

(in thousands)

Vested and expected to vest at February 28, 2010

18,992

$

5.16

3.3

$

62,927

Restricted Stock Awards. Restricted stock award activity during the nine months ended February 28, 2010 and 2009 was as follows (shares in thousands):

		Nine Months Ended February 28,
		2010								2009
						Weighted								Weighted
		Number of				average				Number of				average
		Shares				Grant-Date				Shares				Grant-Date
		(unvested)				Fair Value				(unvested)				Fair Value
Outstanding May 31, 2009 and 2008			1,459			$	2.94				3,095			$	3.43
Granted			—				—				325				2.28
Vested			(337	)			3.27				(734	)			3.94
Forfeited			(17	)			4.64				(745	)			3.75
Outstanding February 28, 2010 and 2009			1,105			$	2.82				1,941			$	2.92

During the nine months ended February 28, 2010 and 2009 approximately 0.3 million and 0.7 million restricted stock awards with an aggregate fair value of $1.7 million and $1.6 million, respectively, became vested. Total aggregate intrinsic value of restricted stock awards outstanding as of February 28, 2010 was $8.4 million.

Restricted Stock Units. Restricted stock unit activity during the nine months ended February 28, 2010 and 2009 was as follows (shares in thousands):

		Nine Months Ended February 28,
		2010								2009
						Weighted								Weighted
		Number of				average				Number of				average
		Shares				Grant-Date				Shares				Grant-Date
		(unvested)				Fair Value				(unvested)				Fair Value
Outstanding May 31, 2009 and 2008			6,161			$	2.78				5,744			$	3.59
Granted			6,062				4.20				5,071				2.35
Vested			(2,192	)			3.01				(2,445	)			3.51
Forfeited			(536	)			3.40				(1,246	)			3.16
Outstanding February 28, 2010 and 2009			9,495			$	3.60				7,124			$	2.81

During the nine months ended February 28, 2010 and 2009 approximately 2.2 million and 2.4 million restricted units with an aggregate fair value of $12.2 million and $5.4 million, respectively, became vested. Total aggregate intrinsic value of restricted stock units outstanding at February 28, 2010 was $72.4 million. Restricted stock units outstanding at February 28, 2010 had a weighted-average remaining contractual life of 1.3 years. Total aggregate intrinsic value of restricted stock units outstanding and expected to vest at February 28, 2010 was $53.6 million. Restricted stock units outstanding and expected to vest at February 28, 2010 had a weighted-average remaining contractual life of 1.1 years.

Employee Stock Purchase Plan. We have an employee stock purchase plan (“ESPP”) under which eligible employees may authorize payroll deductions of up to ten percent of their compensation, as defined, to purchase common stock at a price of 85 percent of the lower of the fair market value as of the beginning or the end of the six-month offering period. In September 2008, our stockholders approved an increase of eight million shares available for issuance under the ESPP. We recognized $1.4 million and $1.0 million of stock-based compensation expense in the nine months ended February 28, 2010 and 2009, respectively, associated with the ESPP. Employee stock purchases generally occur only in the quarters ending November 30 and May 31.

NOTE 3: FAIR VALUE

Fair Value Hierarchy

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

The accounting pronouncements establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting pronouncements establish three levels of inputs that may be used to measure fair value:

		Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
		Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
		Level 3 — Unobservable inputs which are supported by little or no market activity.

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

Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis consisted of the following types of instruments and were reported as cash and equivalents as of February 28, 2010:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		in Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Instruments				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)				Balance
		(In thousands)
Assets
Cash and equivalents:
Time deposits and bank deposits with a maturity less than 3 months		$	—			$	441,138			$	—			$	441,138
Money market fund deposits			248,776				—				—				248,776
China government bonds and bank bills with a maturity of less than 3 months			105,100				—				—				105,100
Total assets measured at fair value		$	353,876			$	441,138			$	—			$	795,014

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

NOTE 4. REALTEK PATENT DISPUTE RESOLUTION

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

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

Under the terms of the agreements, the payments are non-refundable and the Company has no future performance obligations, apart from certain customary covenants not to sue Realtek, its customers or its suppliers on the licensed technology, and non-material notice and tax assistance obligations. Accordingly the $70.0 million was recognized as income in the first quarter of fiscal 2009 in the operating expense (income) section of the Consolidated Statement of Operations.

NOTE 5. RESTRUCTURING CHARGES

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

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

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

Restructuring charges related to these various initiatives were $0.05 million in the three months ended February 28, 2010 and $2.9 million in the three months ended February 28, 2009. Primarily all of the $0.05 million of net expense in the third quarter of fiscal 2010 consists of severance and outplacement costs. The severance and outplacement costs primarily relate to severance for certain of our sales and marketing employees as the Company continues to shift our focus increasingly on the larger enterprise market. Primarily all of the $2.9 million of net expense in the third quarter of fiscal 2009 resulted from severance and outplacement costs. The severance and outplacement costs in the third quarter of fiscal 2009 primarily relate to the integration of our TippingPoint segment. Restructuring charges for the nine months ended February 28, 2010 were $2.7 million, and restructuring charges for the first nine months of fiscal 2009 were $7.4 million.

Restructuring charges of $0.1 million for the three months ended February 28, 2010 related to our TippingPoint segment, while our Networking segment had a net credit of $0.02 million. Restructuring charges of $1.7 million and $1.0 million for the nine months ended February 28, 2010 related to our Rest of World sales region in our Networking business and TippingPoint segment, respectively. Restructuring charges of $0.9 million and $2.0 million for the three months ended February 28, 2009 related to our Networking business and TippingPoint segment, respectively. Restructuring charges of $5.4 million and $2.0 million for the nine months ended February 28, 2009 related to our Networking business and our TippingPoint segment, respectively.

Accrued liabilities associated with restructuring charges total $0.1 million as of February 28, 2010 and are included in the caption “Accrued liabilities and other” in the accompanying consolidated balance sheets. These liabilities are classified as current because we expect to satisfy such liabilities in cash within the next 12 months.

Fiscal 2010 Actions

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

		Employee				Other
		Separation				Restructuring
		Expense				Costs				Total
Balance as of May 31, 2009		$	—			$	—			$	—
Provisions			2,528				150				2,678
Payments and non-cash charges			(2,416	)			(150	)			(2,566	)
Balance as of February 28, 2010		$	112			$	—			$	112

Employee separation expenses include severance pay, outplacement services, medical and other related benefits. The reduction in workforce affected employees involved in research and development, sales and marketing, customer support, and general and administrative functions. Non-cash charges include stock-based compensation charges as applicable.

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

Fiscal 2007 through 2009 Actions

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

		Employee
		Separation				Facilities-related
		Expense				Charges				Total
Balance as of May 31, 2009		$	1,477			$	47			$	1,524
Provisions			52				2				54
Payments and non-cash charges			(1,529	)			(12	)			(1,541	)
Balance as of February 28, 2010		$	—			$	37			$	37

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

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

NOTE 6. INCOME TAXES

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

During the three and nine months ended February 28, 2010, the balance of unrecognized tax benefits decreased by $1.0 million and increased by $1.6 million, respectively. As of February 28, 2010, we had unrecognized tax benefits, including interest and penalties, of $23.5 million, all of which, if recognized, would impact our effective tax rate. As of February 28, 2010, the accrued interest and penalties related to uncertain tax positions were $3.6 million and $0, respectively, which has been recorded within the balance of unrecognized tax benefits.

As of February 28, 2010 we estimate that the balance of unrecognized tax benefits will decrease by approximately $5.4 million over the next twelve months as a result of the expiration of various statutes of limitations on the assessment of income tax.

Under special agreement with the tax authorities certain of our annual Chinese income tax filings for the calendar year ended December 31, 2008 were not filed until August 14, 2009, pending the resolution of an uncertainty over the applicable 2008 income tax rate in China. Calendar year 2008 was the final year during which our main operating company in China, Hangzhou H3C Technologies Co. Ltd (“HH3C”), was entitled to certain tax concessions under a tax holiday agreement. The Company provided for income taxes in China for calendar 2008 at 15 percent. In July 2009, the Tax Bureau of Hangzhou Binjiang District notified the Company that it could enjoy the reduced rate of 9 percent for the 2008 calendar year. The impact of this discrete income tax item was a benefit of $10.8 million which has been reflected in our fiscal second quarter results as a reduction to income tax provision.

On December 31, 2009, HH3C was granted Key Software Development Enterprise (“KSDE”) status by the Hangzhou Tax Bureau. Status as a KSDE allows the Company to enjoy a 10 percent income tax rate retroactively applied for all of calendar year 2009. The impact of this discrete income tax item is a benefit of $9.9 million for the three months ended February 28, 2010. Status as a KSDE needs to be applied for and granted annually. There can be no assurance that the KSDE status will be granted in future years. Accordingly, the tax rate for calculating HH3C’s deferred tax assets and liabilities as of December 31, 2009 remains at the 15 percent income tax rate applicable to New and High Technology companies.

Income tax payments, net of refunds, were $41.0 million and $9.9 million for the nine months ended February 28, 2010 and 2009, respectively.

NOTE 7. COMPREHENSIVE INCOME (LOSS)

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

		Three Months Ended								Nine Months Ended
		February 28,								February 28,
		2010				2009				2010				2009
Net income		$	41,391			$	1,867			$	68,844			$	94,574
Other comprehensive income:
Change in accumulated translation adjustments			(1,212	)			(2,307	)			1,596				2,194
Total comprehensive income (loss)		$	40,179			$	(440	)		$	70,440			$	96,768

NOTE 8. NET INCOME PER SHARE

The following represents a reconciliation from basic earnings per common share to diluted earnings per common share. Stock options and restricted stock (awards and units) of 12.9 million and 3.8 million, respectively, were outstanding at February 28, 2010 but were not included in the computation of diluted earnings per share because they were antidilutive. Stock options and restricted stock (awards and units) of 29.0 million and 8.2 million, respectively, were outstanding at February 28, 2009, but were not included in the computation of diluted earnings per share because they were antidilutive.

		Three Months Ended								Nine Months Ended
		February 28,								February 28,
(in thousands except per share data)		2010				2009				2010				2009
Determination of shares:
Weighted average shares outstanding			396,253				384,679				392,905				393,868
Assumed conversion of dilutive stock options			8,460				789				5,694				873
Assumed conversion of restricted stock (awards and units)			6,833				909				5,172				491
Diluted weighted average shares outstanding			411,546				386,377				403,771				395,232
Basic earnings per share		$	0.10			$	0.00			$	0.17			$	0.24
Diluted earnings per share		$	0.10			$	0.00			$	0.17			$	0.24

We have consistently applied the two class earnings per share methodology in all periods reported. Earnings per share has been the same under both methods except the nine months ended February 28, 2010. In the nine months ended February 28, 2010 the two class method changes the basic earnings per share from $0.18 per share to $0.17 per share.

NOTE 9. INVENTORIES

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

		February 28, 2010				May 31, 2009
Finished goods		$	93,658			$	69,860
Work-in-process			4,287				3,420
Raw materials			17,027				17,115
Total		$	114,972			$	90,395

NOTE 10. INTANGIBLE ASSETS, NET

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

		February 28, 2010																May 31, 2009
		Weighted																Weighted
		Average																Average
		Remaining																Remaining
		Amortization								Accumulated								Amortization								Accumulated
		Period				Gross				Amortization				Net				Period				Gross				Amortization				Net
Existing technology			2.8			$	398,454			$	(312,636	)		$	85,818				3.6			$	398,178			$	(272,460	)		$	125,718
Trademark		NA					55,502				—				55,502			NA					55,502				—				55,502
OEM agreement			0.3				26,883				(24,668	)			2,215				1.0				23,777				(14,852	)			8,925
Maintenance agreements			1.0				19,000				(16,100	)			2,900				1.7				19,000				(13,724	)			5,276
Other			1.3				22,706				(20,709	)			1,997				2.0				22,697				(19,494	)			3,203
						$	522,545			$	(374,113	)		$	148,432							$	519,154			$	(320,530	)		$	198,624

During the nine months ended February 28, 2010 our gross intangible assets increased by $3.4 million due to the appreciation on the Renminbi affecting the value of certain intangible assets related to our H3C subsidiary. Net intangible assets at February 28, 2010 in our China-based sales region were $139.5 million and in our TippingPoint segment were $8.9 million.

Annual amortization expense related to intangible assets is expected to be as follows for each of the following five succeeding fiscal years (in thousands):

		Remainder
		of 2010				2011				2012				2013				2014				2015
Amortization expense		$	16,451			$	42,242			$	17,144			$	17,093				—				—

We apply the provisions of ASC 350 “Goodwill and Other Intangible Assets” to goodwill and intangible assets with indefinite lives (our trademark) which are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. We performed our annual goodwill impairment review as of February 26, 2010 for our TippingPoint segment and December 31, 2009 for our China-based region (as our China-based region reports on a two month lag), and noted no impairment of goodwill or intangible assets with indefinite lives. In making this assessment, we rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. Reporting unit valuations have been calculated using a combination of an income approach based on the present value of future cash flows of each reporting unit and a market approach. The income approach incorporates many assumptions including future growth rates, discount factors, expected capital expenditures and income tax cash flows. Changes in economic and operating conditions impacting these assumptions could result in a goodwill impairment in future periods. In conjunction with our annual goodwill impairment tests, we reconcile the sum of the valuations of all of our reporting units to our market capitalization as of such dates.

Goodwill as of February 28, 2010 and May 31, 2009 was $609.3 million. Goodwill in our Networking business was $455.9 million for both periods and goodwill in our TippingPoint segment was $153.4 million (net of accumulated impairments of $158.0 million) for both periods.

NOTE 11. ACCRUED WARRANTY

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

The following table summarizes the activity in the allowance for estimated warranty costs for the nine months ended February 28, 2010 and 2009 (in thousands):

		Nine Months Ended
		February 28,
		2010				2009
Accrued warranty, beginning of period		$	29,587			$	36,897
Cost of warranty claims processed during the period			(18,596	)			(23,613	)
Provision for warranties related to products sold during the period			14,994				19,308
Accrued warranty, end of period		$	25,985			$	32,592

NOTE 12. LONG-TERM DEBT AND OTHER BANK OBLIGATIONS

Senior Secured Credit Agreement — H3C Holdings Limited

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

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

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

All amounts outstanding under the Tranche B Term Facility will bear interest, at the Borrower’s option, at the (i) LIBOR plus 3 percent or (ii) Base Rate (i.e., prime rate) plus 2 percent. We have elected to use LIBOR as the reference rate for borrowings to date. Applicable LIBOR rates, which were established on September 28, 2009, at February 28, 2010 were 0.64 percent and the effective interest rate at February 28, 2010 was 2.14 percent for the Tranche A Term Facility and 3.64 percent for the Tranche B Term Facility. On March 29, 2010 the LIBOR rates reset to 0.44 percent and the effective interest rate will be 1.94 percent for the Tranche A Term Facility and 3.44 percent for the Tranche B Term Facility and will remain the rates until September 28, 2010.

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

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

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

The Borrower must maintain a minimum debt service coverage, minimum interest coverage, maximum capital expenditures and a maximum total leverage ratio. Negative covenants restrict, among other things, (i) the incurrence of indebtedness by the Borrower and its subsidiaries, (ii) the making of dividends and distributions to the Company outside of the H3C Group, (iii) the ability to make investments including in new subsidiaries, (iv) the ability to undertake mergers and acquisitions and (v) sales of assets. As of February 28, 2010, the H3C Group’s net assets were $877.3 million and are subject to these dividend restrictions. Also, cash dividends from the PRC subsidiaries to H3C, and H3C to the Borrower, will be subject to restricted use pending payment of principal, interest and excess cash flow prepayments. Standard events of default apply.

Remaining payments of the $112 million principal are due on September 28, of each year as follows, (in thousands):

Calendar Year		3Com Fiscal Year		Tranche A				Tranche B
2010		2011			46,000				2,000
2011		2012			—				20,000
2012		2013			—				44,000

On September 28, 2009, in addition to our regular principal payment of $48.0 million, the Company made a voluntary prepayment of $40.0 million of principal, for which the Company did not incur a penalty and all of which was applied to reduce our fiscal year 2013 Tranche B principal balance. We recorded accelerated amortization of deferred financing fees $0.9 million in our second fiscal quarter related to the voluntary prepayment. The Company also made interest payments of $4.1 million on September 28, 2009 and $1.7 million on March 29, 2010.

In the three and nine months ended February 28, 2010 we recorded interest expense of $1.6 million and $8.0 million, respectively, compared to $6.6 million and $15.3 million in the same period of the prior fiscal year. In the three and nine months ended February 28, 2010 we recorded interest income of $2.2 million and $5.7 million, respectively, compared to $3.2 million and $10.2 million in the same period of the prior fiscal year.

Other Bank Obligations

As of February 28, 2010, bank-issued standby letters of credit and guarantees totaled $7.0 million, including $6.0 million relating to potential foreign tax, custom, and duty assessments. These instruments are entered into in support of our commercial operations. We provide the bank with cash collateral for 100 percent of these amounts. Restricted cash held as collateral was $7.0 million and is included in deposits and other assets on the Condensed Consolidated Balance Sheet.

NOTE 13. SEGMENT INFORMATION

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

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

Management evaluates the China-based sales region and the Rest of World sales region performance based on segment contribution profit. Segment contribution profit is standard margin less segment direct sales and marketing expenses. Standard margin for these regions is sales less standard costs of sales. Our TippingPoint Security business segment is measured on segment income. Segment income is segment contribution profit less research and development expenses.

Eliminations and other include intercompany sales eliminations, stock-based compensation expense, amortization of intangible assets and restructuring in all periods as well as proceeds from the Realtek patent dispute resolution in the first quarter of fiscal 2009, as these costs are not included in the Company’s segment contribution profit and segment income.

Summarized financial information of our results of operations by segment for the three and nine months ended February 28, 2010 and 2009 is as follows.

		Three Months Ended February 28, 2010
		Networking Business												TippingPoint
						Rest of								Security
						World								Business
		China-based				Sales				Central				Tipping				Eliminations/
(in thousands)		sales region				Region				Functions(a)				Point(b)				Other				Total
Sales		$	187,963			$	123,401			$	—			$	37,868			$	(3,352	)c		$	345,880
Standard margin			133,300				79,033				—				32,076				(557	)d			243,852
Direct sales & marketing expenses			43,109				26,354				—				13,543				2,147	d			85,153
Segment contribution profit (loss)			90,191				52,679				—				18,533				(2,704	)			158,699
Research & development expenses			—				—				40,409				7,050				538	d			47,997
Segment income		$	—			$	—			$	—			$	11,483			$	—
Other operating expenses											61,567				4,183				22,574	e			88,324
Operating income																						$	22,378

		Three Months Ended February 28, 2009
		Networking Business												TippingPoint
						Rest of								Security
						World								Business
		China-based				Sales				Central				Tipping				Eliminations/
(in thousands)		sales region				Region				Functions(a)				Point(b)				Other				Total
Sales		$	190,385			$	102,836			$	—			$	33,284			$	(1,798	)c		$	324,707
Standard margin			128,160				61,365				—				28,288				(596	)d			217,217
Direct sales & marketing expenses			36,581				23,360				—				10,882				1,371	d			72,194
Segment contribution profit (loss)			91,579				38,005				—				17,406				(1,967	)			145,023
Research & development expenses			—				—				37,574				7,103				552	d			45,229
Segment income		$	—			$	—			$	—			$	10,303			$	—
Other operating expenses											56,146				9,488				32,660	e			98,294
Operating income																						$	1,500

		Nine Months Ended February 28, 2010
		Networking Business												TippingPoint
						Rest of								Security
						World								Business
		China-based				Sales				Central				Tipping				Eliminations/
(in thousands)		sales region				Region				Functions(a)				Point(b)				Other				Total
Sales		$	509,273			$	349,862			$	—			$	106,334			$	(6,923	)c		$	958,546
Standard margin			353,397				215,553				—				89,960				(1,688	)d			657,222
Direct sales & marketing expenses			117,520				75,663				—				37,325				5,818	d			236,326
Segment contribution profit (loss)			235,877				139,890				—				52,635				(7,506	)			420,896
Research & development expenses			—				—				107,429				19,499				1,437	d			128,365
Segment income		$	—			$	—			$	—			$	33,136			$	—
Other operating expenses											170,062				13,421				69,054	e			252,537
Operating income																						$	39,994

		Nine Months Ended February 28, 2009
		Networking Business												TippingPoint
						Rest of								Security
						World								Business
		China-based				Sales				Central				Tipping				Eliminations/
(in thousands)		sales region				Region				Functions(a)				Point(b)				Other				Total
Sales		$	565,597			$	368,838			$	—			$	92,499			$	(5,015	)c		$	1,021,919
Standard margin			375,588				215,479				—				76,962				(1,916	)d			666,113
Direct sales & marketing expenses			106,194				77,254				—				32,873				4,742	d			221,063
Segment contribution profit (loss)			269,394				138,225				—				44,089				(6,658	)			445,050
Research & development expenses			—				—				118,603				20,698				2,329	d			141,630
Segment income		$	—			$	—			$	—			$	23,391			$	—
Other operating expenses											177,697				22,641				23,797	e			224,135
Operating income																						$	79,285