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 are a global enterprise networking solutions provider incorporated in Delaware. A pioneer in the computer networking industry, we have three global product and solutions brands - H3C, 3Com, and TippingPoint - that offer high-performance networking and security solutions to enterprises large and small. These organizations range across a number of vertical industries, including education, finance, government, healthcare, insurance, manufacturing and real estate. The H3C®enterprise networking portfolio - one of the leading large enterprise networking equipment brands in China - includes products that span from the data center to the edge of the network and is targeted at large enterprises. The 3Com® family of products offers a strong price/performance value proposition for small and medium businesses. Our TippingPoint®security brand features network-based intrusion prevention systems ("IPS") and network access control ("NAC") solutions, which deliver in-depth, no-compromise application, infrastructure and performance protection.
We believe our portfolio of products and services enables customers to deploy and manage business-critical voice, video, data and other advanced networking technologies in a secure, scalable, reliable and efficient network environment. We believe we offer customer-driven technology solutions that help enterprises optimize their budgets and resources, increase productivity, and realize their business goals. 3Com designs its solutions to offer customers a unique value proposition: lower total cost of ownership ("TCO") and expert, responsive service. Our data center-to-edge enterprise networking solutions offer a common operating system to streamline system management, and are based on open standards to enable the use of best-of-breed applications from other vendors. We believe we offer a broad, fresh portfolio of products and solutions that disrupt the industry status quo and deliver true "no-compromise" networking. We believe we deliver high-quality, high-performance converged networking solutions that provide exceptional business value and help customers address the following fundamental challenges:
• Performance - Bandwidth demands have increased along with the number of users and applications - IP telephony, videoconferencing, streaming multimedia and others - on enterprise networks, yet performance requirements never abate. 3Com routers, switches and security devices provide robust throughput and traffic optimization applications to ensure high-quality networking even in the most challenging enterprise network environments.

• Cost effectiveness - Today's enterprise customers are seeking cost-effective solutions that optimize the value of their network infrastructure investment. 3Com products are designed to be cost-effective, competitively priced and energy efficient. 3Com's single-pane, intuitive network management platform minimizes time spent training IT staff and network administrators, helping to further reduce overall TCO.

• Security - Today's enterprises need to protect themselves from a constantly evolving spectrum of internal and external threats to ensure the safety of their mission-critical information. 3Com's pervasive network solutions provide granular oversight, control access, quarantine malicious programs and files, and restore data.

We focus on delivering superior networking solutions that offer a cost advantage to our customers through solutions that are less expensive to acquire, power and operationally manage. Our products are designed to provide superior value through capability design as well as other cost conscious features such as lower power requirements, and inter-operability in multi-vendor networks. We believe that our global presence, brand identity, strong development organization and intellectual property portfolio provide a solid foundation for achieving our objectives.
Our products are sold on a worldwide basis through a combination of value added resellers, distributors and direct-touch sales representatives. We also work with service providers to deliver managed networking solutions for enterprise customers.
Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and

Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and development, and customer service and support capabilities.
Our products and services can generally be classified in the following categories:
• Switches and routers;

• Other networking equipment;

• Security; and

• Services.

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. Our success in China has been due to the success of the direct-touch enterprise model, a mixture of core and new products and solution selling, and value creation for customers. While we believe that China may have been 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. It is difficult to predict the extent of the slowdown on our China business at this time. Additionally, we expect a continued significant reduction in sales to our largest customer, Huawei Technologies, during fiscal year 2010. 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. While the timing of a recovery is unclear we saw some stabilization in certain markets in our first quarter of fiscal 2010 and we strive to be well positioned when the recovery occurs. 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 to innovate, 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. Our approach is to focus on activities that deliver differentiated products and solutions and drive reductions in product costs. Our current areas of focus include security, convergence of applications over IP, advanced switching, routing solutions and other advanced technologies.

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 sales to larger enterprise and government accounts in all of our regions. We intend to execute on three regional strategies as follows:
• China - In China, we have been successful in direct-touch sales to enterprise and government customers. To maintain a leadership position in China, we intend to increase our focus on direct-touch sales as well as pursue other distribution channels. We believe that growing market share in China will be more challenging than in the past given that we already have a significant enterprise networking market share in China. We also intend to continue to introduce innovative new product offerings in the China market, such as IP video surveillance and IP storage, which may offer additional growth opportunities.

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 provided experience that is transferable to many emerging markets. We believe this experience will position us to gain market share in developing markets.

• Developed global markets - Our goal in developed markets is to increase our market share. Our strategy is to focus on large enterprise and government accounts and to implement this strategy we intend to increase go to market resources. We intend to offer these customers our comprehensive end to end solutions and highlight our products' price to performance value proposition and energy efficiency. Our goal is to be well positioned for the economic recovery and in fact we saw some stabilization in certain markets in our first fiscal quarter of 2010.

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 integrate our worldwide operations we can achieve further operational efficiencies to support continued investment in sales and marketing to grow our business. We may also continue to require targeted investments in infrastructure designed to meet our market share growth objectives.
For our TippingPoint business we plan to focus on growing its top line and continuing to improve operational efficiency and segment profitability. We also plan to leverage our existing sales channels and global footprint to more effectively sell TippingPoint products and services. The Company also plans to integrate our TippingPoint® IPS technology into our Networking products to deliver a unified product line that combines security, network infrastructure and policy management.
Segment Reporting
In the first quarter of fiscal 2010, we changed the measures of segment profit and segment income to align to 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 profit 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, "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 indirect cost of sales, such as supply chain operations expenses, indirect sales and marketing, and general and administrative support costs. Summary of Three Months Ended August 31, 2009 Financial Performance
• Our sales in the three months ended August 31, 2009 were $290.5 million, compared to sales of $342.7 million in the three months ended August 31, 2008, a decrease of $52.2 million, or 15.2 percent.

• Our gross margin improved to 57.3 percent in the three months ended August 31, 2009 from 55.3 percent in the three months ended August 31, 2008.

• Our operating expenses (income) in the three months ended August 31, 2009 were $163.3 million, compared to $116.2 million in the three months ended August 31, 2008, a net increase of $47.1 million, or 40.5 percent. Included in the three months ended August 31, 2008 operating expenses (income) is $70.0 million of income related to the Realtek patent dispute resolution.

• Our net income in the three months ended August 31, 2009 was $7.5 million, compared to net income of $79.8 million in the three months ended August 31, 2008. Included in the three months ended August 31, 2008 net income is $70.0 million of income related to the Realtek patent dispute resolution.

• Our balance sheet contains cash and equivalents and short term investments of $665.8 million as of August 31, 2009, compared to cash and equivalents and short term investments of $644.2 million at the end of fiscal 2009. The balance sheet also includes debt of $200 million with $88 million classified as a current liability as of August 31, 2009 and $48 million classified as a current liability as of May 31, 2009.

CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in Annual Report on Form 10-K for the fiscal year ended May 31, 2009. There have been no significant changes to these policies during the three months ended August 31, 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 MONTHS ENDED AUGUST 31, 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
                                                     August 31,
                                                  2009          2008
                Sales                               100.0 %      100.0 %
                Cost of sales                        42.7         44.7

                Gross profit margin                  57.3         55.3
                Operating expenses (income):
                Sales and marketing                  29.1         25.5
                Research and development             13.4         13.8
                General and administrative            7.4          7.1
                Amortization                          5.9          7.3
                Realtek patent resolution               -        (20.4 )
                Restructuring charges                 0.4          0.6

                Operating expenses, net              56.2         33.9

                Operating income                      1.1         21.4
                Interest expense, net                (0.4 )       (0.4 )
                Other income, net                     4.0          3.8

                Income before income taxes            4.7         24.8
                Income tax provision                 (2.1 )       (1.5 )

                Net income                            2.6 %       23.3 %

Sales
Consolidated sales for the three months ended August 31, 2009 and 2008 by
segment were as follows (dollars in millions):

                                                  Three Months Ended
                                                      August 31,
                                                   2009          2008
               China-based sales region         $    152.0      $ 175.4
               Rest of World sales region            107.2        140.3
               TippingPoint security business         32.6         28.2
               Eliminations and other                 (1.3 )       (1.2 )

               Consolidated sales               $    290.5      $ 342.7

Sales in our China-based sales region decreased $23.4 million, or 13.3 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease is primarily attributable to decreased sales to Huawei of $37.7 million as compared to the same quarter in the prior fiscal year, partially offset by an increase of $16.5 million of China direct-touch sales. The increase in direct-touch sales primarily relate to increased sales in our WLAN products and growth in the finance and banking industries as well as the internet service provider industry.
Sales in our Rest of World sales region segment decreased $33.1 million, or 23.6 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease in sales in the three months ended August 31, 2009 is primarily attributable to decreased sales volume in all regions as we are experiencing longer sales cycles, delayed or cancelled purchases and reduced incoming orders because of the global economic downturn. Sales in our TippingPoint segment increased $4.4 million, or 15.6 percent, in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. This increase is primarily attributable to increased maintenance revenue of $3.8 million due to an increased number of maintenance contracts and a higher maintenance renewal rate in the period.

Consolidated revenues decreased by $52.2 million or 15.2 percent in the three months ended August 31, 2009 compared to the same period in the previous fiscal year. The decrease is primarily due to a decrease of $37.7 million in sales to Huawei. When compared to our fourth quarter of fiscal 2009, however, our first quarter of fiscal 2010 consolidated revenues decreased by 1.5 percent, reflecting some recent stabilization in certain markets we experienced in our first quarter of fiscal 2010.
Sales by major product categories are as follows (dollars in millions, except percentages):

                                                     Three Months Ended
                                                         August 31,
                                                 2009                  2008
             Switches and routers         $ 195.2        67 %   $ 254.2        74 %
             Other networking equipment      42.4        15 %      41.1        12 %
             Security                        41.1        14 %      36.4        11 %
             Services                        11.8         4 %      11.0         3 %

             Total                        $ 290.5       100 %   $ 342.7       100 %

Switches and routers revenue includes sales of our Layer 2 and Layer 3 stackable 10/100/1000 managed switching lines, our modular switching lines and routers. Sales of these products in the three months ended August 31, 2009 decreased $55.2 million, or 24.7 percent, from the same period in the previous fiscal year. The decrease in sales was primarily driven by decreased sales volume to Huawei as well as decreased volume in our other regions.
Other networking equipment revenue includes sales of our VCX™ and NBX® voice-over-internet protocol, or VoIP, IP storage, IP surveillance and our WLAN products. Sales of our other networking products in the three months ended August 31, 2009 remained essentially flat from the same period in the previous fiscal year.
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 in the three months ended August 31, 2009 increased $4.7 million, or 12.9 percent, from the same period in the previous fiscal year. The increase is primarily attributable to increased maintenance revenue of $3.8 million in our TippingPoint business due to an increased number of maintenance contracts and higher maintenance renewal rates in the period.
Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue in the three months ended August 31, 2009 increased $0.8 million, or 7.3 percent, from the same period in the previous fiscal year. The increase was driven primarily by increased service sales tied to growth in our China direct-touch sales.
Gross Margin
Gross margin for the three months ended August 31, 2009 and 2008 by business were as follows:

                                                   Three Months Ended
                                                       August 31,
                                                    2009          2008
               Networking business                   55.2 %       54.1 %
               TippingPoint security business        72.2 %       69.4 %
               Consolidated margin                   57.3 %       55.3 %

Gross margin in our Networking business improved 1.1 points to 55.2 percent in the three months ended August 31, 2009 from 54.1 percent in the same period in the previous fiscal year. The improvement in gross profit margin is primarily explained by a change of channel mix with the decline of the lower margin Huawei revenue.

Gross margin in our TippingPoint Security business improved 2.8 points to 72.2 percent in the three months ended August 31, 2009 from 69.4 percent in the same period in the previous fiscal year. The improvement in gross profit margin is primarily explained by improved standard margins due to the recognition of previously deferred revenue as well as improved product mix of higher margin new security products.
Gross margin on a consolidated basis increased 2.0 points to 57.3 percent in the three months ended August 31, 2009 from 55.3 percent in the same period in the previous fiscal year. This increase is mainly due to the items discussed above.

Operating Expenses (Income)

                                                Three Months Ended
                                                    August 31,                 Change
  (Dollars in millions, except percentages)      2009          2008         $          %
  Sales and marketing                         $     84.8      $  87.5     $ (2.7 )      (3 )%
  Research and development                          38.9         47.1       (8.2 )     (17 )%
  General and administrative                        21.4         24.4       (3.0 )     (12 )%
  Amortization                                      17.1         25.2       (8.1 )     (32 )%
  Patent dispute resolution                            -        (70.0 )     70.0         *
  Restructuring charges, net                         1.1          2.0       (0.9 )     (45 )%

  Operating expenses, net                     $    163.3      $ 116.2     $ 47.1       (41 )%

* percentage calculation not meaningful.

Sales and Marketing
The most significant factor in the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was decreased headcount as part of our restructuring efforts, partially offset by increased agent commissions on higher China direct-touch sales.
Research and Development
The most significant factor contributing to the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was continued savings from integration and consolidation of our Networking research and development to China.
General and Administrative
The most significant factor in the decrease in the three months ended August 31, 2009 compared to the same period in fiscal 2009 was lower compensation charges due to headcount reductions and lower discretionary spending, specifically in travel and entertainment.
Amortization of Intangible Assets
Amortization of intangible assets decreased $8.1 million in the three months ended August 31, 2009 when compared to the previous fiscal year due primarily to our Huawei non-compete agreement becoming fully amortized during fiscal 2009. Patent Dispute Resolution
The Company and Realtek Group reached an agreement with respect to certain networking technologies of the Company that resolved a long-standing patent dispute between the companies. Under the terms of the agreement, Realtek paid the Company $70.0 million, all of which was received in the three months ended August 31, 2008.
The Company recognized the full $70.0 million as operating income in the first quarter of fiscal 2009.

Restructuring Charges
Restructuring charges in the three months ended August 31, 2009 included $1.0 million for severance and outplacement costs and a $0.1 million charge for . . .