INTRODUCTION
The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.
BUSINESS OVERVIEW
We provide secure, converged networking solutions, as well as maintenance and support services, for enterprises and public sector organizations of all sizes. Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and development, and customer service and support capabilities.
We have undergone significant change in recent years, including:
§ 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.

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

We have introduced multiple new products targeted at the small, medium and large enterprise markets, including modular and multi-service switches and routers; converged IP solutions such as voice, video and surveillance; security; and unified switching solutions. Our recent product introductions and future product strategy are designed to offer a compelling value proposition to our customers, by leveraging open platform technology with options to integrate best-of-breed application solutions directly into their networks. Business Environment and Future Trends
We operate today in a rapidly changing business environment due to the severe credit and adverse market conditions in many of the world's economies. The current global financial crisis has led to significant business slowdowns around the world. It is therefore increasingly difficult to predict future business conditions in the market for enterprise networking equipment. Our business is highly dependent on the Chinese economy, which has experienced strong growth in recent years. While we believe that China may be less affected than other regions by the global economic slowdown, it is now experiencing the effects of the downturn and our growth has slowed in China. While we believe our China business has been resilient in this market environment, it is difficult to predict the extent of the slowdown on our China business at this time. During our fourth quarter, which is our China business' calendar first quarter, our China-based business as well as many of its customers shutdown for two weeks for the Chinese New Year. For our operations outside of China, which we call "Rest of World," we expect the challenging business environment to continue in the foreseeable future. In Rest of World, we are experiencing reduced demand for our products, delayed or cancelled purchases and longer sales cycles. Our Rest of World operations have been adversely impacted by the global economic crisis.

Our strategy to address these adverse business conditions is to market our solutions as providing exceptional quality for a good value and to remain competitive in the enterprise market. At the same time, we recognize that global spending on networking products and solutions is likely to continue to be under significant pressure for the foreseeable future.
Networking industry analysts and participants differ widely in their assessments concerning the prospects for mid to long-term industry growth, especially in light of the current weakness in many of the major global economies. Industry factors and trends also present significant challenges in the medium-term. Such factors and trends include intense competition in the market for higher end, enterprise core routing and switching products and aggressive product pricing by competitors targeted at gaining share in the small to medium-sized business market.
We believe that long-term success in this environment requires us to (1) be a global technology leader, (2) increase our revenue and take market share from competitors outside of China, (3) increase and sustain our profitability and
(4) increase our generation of cash from operations. Technology Strategy
We believe our principal research and development base in China provides a strong foundation for our global product development. Our strategy involves continuing our tradition of innovation, using China as a home market to introduce new products in the networking equipment industry and related markets and providing leading solutions for global markets. Revenue and Market Share Goals
We believe that our differentiated, comprehensive product portfolio which provides end-to-end IP solutions based on open standards offers a compelling value proposition for customers, particularly in the current economic environment.
Our intention is to leverage our global footprint to more effectively sell these products. A key element of our strategy is to increasingly focus on direct-touch sales to larger enterprise and government accounts in all of our regions. We hope to achieve our goal of revenue growth by executing on three region-centric growth strategies as follows:
• 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.

Our strategy involves leveraging our significant China-based engineering team and strong brand of networking solutions designed for enterprise and government accounts into greater success in markets outside of China, as further described below.
• Emerging markets outside of China - We expect to target growth opportunities outside of China in other developing markets. We believe that our successful penetration of the Chinese market has 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.

Profitability and Cash Generation Objectives We believe that our long-term success is also dependent on our ability to increase our overall profit and cash generation. We believe that by continuing to deliver on the integration of our worldwide operations we can achieve further operational efficiencies which will allow us to support our continued investment in sales and marketing that we require to grow our business. We may also continue to require certain targeted investments in the integration of our business infrastructure designed to drive more profitable near and long-term growth. Integration has involved, and is expected to continue to involve, consolidation, streamlining and aligning our product line management, research and development and supply chain activities, among others.
For our TippingPoint business we plan to focus on growing its top line and improving operational efficiency and segment profitability. We plan to achieve operational efficiency by integrating supply chain and finance activities, among others. We also plan to leverage our existing sales channels and global footprint to more effectively sell TippingPoint products and services. Segment Reporting
In the prior fiscal year we reported H3C, Data and Voice Business Unit ("DVBU"), TippingPoint Security business ("TippingPoint") and Corporate as segments. In the first quarter of fiscal 2009, we realigned the manner in which we manage our business and internal reporting and 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. Accordingly, our previously reported segment information has been restated to reflect our new operating and reporting structure. Our Networking business consists of the following sales regions as operating segments: China-based, Asia Pacific excluding China (APR), Europe Middle East and Africa (EMEA), Latin America (LAT), and North America (NA) regions. The APR, EMEA, LAT and NA operating segments have been aggregated given their similar economic characteristics, products, customers and processes, and have been consolidated as one reportable segment, "Rest of World". The China-based region does not meet the aggregation criteria at this time.
The China-based and Rest of World operating segments benefit from shared support services on a world-wide basis. The costs associated with providing these shared support services are not allocated to the China-based and Rest of World operating segments and instead are reported and disclosed under the caption "Central Functions". Central Functions consist of indirect cost of sales, such as supply chain operations expenses, and centralized operating expenses, such as research and development, indirect sales and marketing, and general and administrative support.
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.

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
Our critical accounting policies are described in Annual Report on Form 10-K for the fiscal year ended May 31, 2008. There have been no significant changes to these policies during the nine months ended February 28, 2009. These policies continue to be those that we feel are most important to a reader's ability to understand our financial results.

RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 28, 2009 AND 2008
The following table sets forth, for the periods indicated, the percentage of
total sales represented by the line items reflected in our condensed
consolidated statements of operations:

                                            Three Months Ended         Nine Months Ended
                                               February 28,              February 28,
                                            2009          2008         2009         2008
     Sales                                   100.0 %     100.0 %       100.0 %     100.0 %
     Cost of sales                            42.8        46.6          43.7        50.6

     Gross profit margin                      57.2        53.4          56.3        49.4
     Operating expenses (income):
     Sales and marketing                      25.9        24.5          25.3        24.5
     Research and development                 13.5        15.0          13.4        15.9
     General and administrative                9.4         7.8           8.7         8.1
     Amortization                              7.1         7.7           7.2         8.0
     Realtek patent resolution                   -           -          (6.8 )         -
     Restructuring charges                     0.8         0.2           0.7         0.4

     Operating expenses, net                  56.7        55.2          48.5        56.9

     Operating 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         3.4

     Income (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 )%

Sales
Consolidated sales for the three and nine months ended February 28, 2009 and
2008 by segment were as follows (dollars in millions):

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

      Consolidated sales                $  324.7      $ 336.4     $ 1,021.9     $ 973.6

Sales in our China-based sales region increased $10.7 million or 6.0 percent, in the three months ended February 28, 2009 and increased $75.5 million, or 15.4 percent in the nine months ended February 28, 2009 compared to the same periods in the previous fiscal year. The increase in sales in the three months ended February 28, 2009 is attributable to appreciation of $14.4 million on the Renminbi as well as increased direct-touch sales of $9.6 million in China, partially offset by decreased sales of $10.1 million to Huawei and decreased sales of $3.5 million in Hong Kong and Japan. The increase in the nine months ended February 28, 2009 is primarily attributable to appreciation of $46.2 million on the Renminbi as well as increased direct-touch sales of $29.3 million and increased sales to Huawei of $6.7 million, partially offset by decreased sales of $6.6 million in Hong Kong and Japan.
Sales in our Rest of World sales region decreased $31.7 million or 23.6 percent, in the three months ended February 28, 2009 and decreased $42.2 million, or 10.3 percent in the nine months ended February 28, 2008 compared to the same periods in the previous fiscal year. The decrease in sales in the three months ended February 28, 2009 is primarily attributable to decreased sales in all regions due primarily to decreased volume as we are experiencing longer sales cycles, delayed or cancelled purchases and reduced incoming orders because of the global economic downturn. We also believe that our SMB business has been impacted more significantly than our larger enterprise business. The decrease in sales in the nine months ended February 28, 2009 is primarily attributable to decreased sales in our SMB business in North America and Europe. These decreases were partially offset by increased sales in our LAT and APR regions where our sales to larger enterprise and government accounts accounted for increased sales compared to prior periods, primarily during the first two quarters of fiscal 2009.
Sales in our TippingPoint security business increased $9.7 million, or 40.8 percent, in the three months ended February 28, 2009 and increased $17.6 million, or 23.5 percent in the nine months ended February 28, 2009 compared to the same periods in the previous fiscal year. The increase in sales in the three months ended February 28, 2009 is primarily attributable to increased software sales of $6.5 million and increased maintenance revenue of $3.0 million due to an increased number of maintenance contracts. Sales for the three months ended February 28, 2008 included a $3.2 million revenue adjustment primarily associated with the deferral of certain Federal Government sales. We are seeing continued interest in security products and services even in the economic downturn. The increase in sales in the nine months ended February 28, 2009 is primarily related to increased maintenance revenue of $9.2 million due to increased maintenance contracts as well as $8.4 million increased software sales due primarily to large account sales. Sales in the nine months ended February 28, 2008 included a $3.2 million revenue adjustment primarily associated with the deferral of certain Federal Government sales. Eliminations and other increased by $0.4 million in the three months ended February 28, 2009 and increased $2.6 million in the nine months ended February 28, 2009 compared to the same period in the previous fiscal year. This increase in both periods is primarily due to increased sales from our TippingPoint segment to our Rest of World sales region.
Consolidated revenues decreased by $11.7 million or 3.5 percent, in the three months ended February 28, 2009 but increased by $48.3 million, or 5.0 percent, in the nine months ended February 28, 2009 compared to the same period in the previous fiscal year.

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

                              Three Months Ended                            Nine Months Ended
                                 February 28,                                 February 28,
                          2009                  2008                   2009                   2008
      Networking   $ 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 %

Networking revenue includes sales of our Layer 2 and Layer 3 stackable 10/100/1000 managed switching lines, our modular switching lines, routers, IP storage and our small to medium-sized enterprise market products. Sales of our networking products decreased $21.5 million or 7.7 percent in the three months ended February 28, 2009 and increased $31.1 million or 3.9 percent in the nine months ended February 28, 2009 compared to the same period in the previous fiscal year. The decrease in the three months ended February 28, 2009 is primarily related to decreased sales in our Rest of World segment, partially offset by an increase in China, primarily due to appreciation of the Renminbi. Decreased sales in our Rest of World segment related primarily to decreased sales in our EMEA, North America and APR regions, sales in these regions decreased $21.6 million, $4.1 million and $3.3 million, respectively. The primary reasons for the decreased sales in these regions related primarily to decreased volume due to longer sales cycles, delayed or cancelled purchases and reduced incoming orders due to the global economic downturn. The increase in the nine months ended February 28, 2009 is primarily attributable to appreciation of the Renminbi, and to a lesser extent, increased direct-touch sales in China, partially offset by decreased sales in Western Europe and North America due to longer sales cycles, delayed or cancelled purchases and reduced incoming orders due to adverse business conditions relating to the global economic downturn. Security revenue includes our TippingPoint™ products and services, as well as other security products, such as our embedded firewall, or EFW and virtual private network, or VPN, products. Sales of our security products increased $13.1 million or 43.0 percent in the three months ended February 28, 2009 and $25.7 million, or 26.5 percent for the nine months ended February 28, 2009 compared to the same period in the previous fiscal year. The increase in sales in the three months ended February 28, 2009 is primarily attributable to increased TippingPoint software sales of $6.5 million and increased maintenance revenue of $3.0 million due to an increased number of maintenance contracts. Sales for the three months ended February 28, 2008 included a $3.2 million revenue adjustment primarily associated with the deferral of certain Federal Government sales. Also contributing to the increase was $3.4 million of increased China-bases security sales. The increase in sales in the nine months ended February 28, 2009 is primarily related to increased maintenance revenue of $9.2 million due to increased maintenance contracts as well as $8.4 million increased hardware sales due primarily to large account sales, as well as increased in sales of security products in our China-based sales region. Sales for the three months ended February 28, 2008 included a $3.2 million revenue adjustment primarily associated with the deferral of certain Federal Government sales.
Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue increased $1.6 million or 15.4 percent in the three months ended February 28, 2009 and $5.3 million, or 18.1 percent, in the nine months ended February 28, 2009 compared to the same periods in the previous fiscal year. The increase in the three and nine months ended February 28, 2009 was driven primarily by increased service sales tied to growth in our China-based sales region of our networking business.
Voice revenue includes our VCX™ and NBX® voice-over-internet protocol, or VoIP, product lines, as well as voice gateway offerings. Sales of our Voice products decreased $4.9 million or 32.3 percent in the three months ended February 28, 2009 and $13.8 million, or 28.8 percent, in the nine months ended February 28, 2009 compared to the same periods in the previous fiscal year. The decrease in the three months ended February 28, 2009 is primarily due to decreased sales in all five of our regions. The most significant decreases occurred in our China, EMEA and North America regions. The primary reasons for the decrease in these regions relate to longer sales cycles, delayed or cancelled purchases and reduced incoming orders due to adverse business conditions relating to the global economic downturn. The decrease in the nine months ended February 28, 2009 is primarily related to decreased sales in our North America region and to a lesser extend decreased sales in our EMEA region.

Gross Margin
Gross margin for the three and nine months ended February 28, 2009 and 2008 by
segment was as follows:

                                          Three Months Ended         Nine Months Ended
                                             February 28,              February 28,
                                           2009          2008         2009         2008
      Networking 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 %

Gross margin in our Networking business improved 3.9 points to 55.8 percent in the three months ended February 28, 2009 from 51.9 percent, and 7.2 points to 54.9 percent in the nine months ended February 28, 2009 from 47.7 percent in the same periods in the previous fiscal year. The improvement in gross profit margin for the three and nine months ended February 28, 2009 is attributable to a change in product mix primarily in all regions to more profitable enterprise related business as well as to reduced costs. The reduced costs primarily relate to a change in our customer service delivery model. During the year we changed from an outsourced service provider in the year ago period to a more cost effective hybrid model involving the use of both outsourced and in-house resources.
Gross margin in our TippingPoint security business decreased 3.3 points to 66.6 percent in the three months ended February 28, 2009 from 69.9 percent in the same period of the previous fiscal year. In the nine months ended February 28, 2009 gross margin remained flat at 67.7 percent from the same period of the previous fiscal year. The decline in the three months ended February 28, 2009 is explained primarily by increased inventory related reserves . . .