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3Com Reports Results for Third Quarter Fiscal Year 2010

3Com Corporation (Nasdaq: COMS) today reported financial results for its fiscal 2010 third quarter, which ended February 26, 2010. Revenue in the quarter was $345.9 million, compared to revenue of $324.7 million in the corresponding period in fiscal year 2009, a 6.5 percent increase.

All regions delivered double-digit revenue growth over the same fiscal year 2009 quarter, except China. Total revenue in our China based operations was down 1.3 percent from the same prior year period, primarily the result of a 77.9 percent decline in sales to Huawei, which were $12.4 million in the quarter. China direct sales were $165.9 million in the quarter, a 29.7 percent increase over the corresponding prior year period.

3Com’s gross margin was 60.4 percent in the third quarter of fiscal year 2010, compared with gross margin of 57.2 percent in third quarter of fiscal year 2009. On a non-GAAP basis, gross margin was 60.5 percent in the third quarter, compared with 57.4 percent in the same prior year period.

3Com’s operating profit margin was 6.5 percent in the quarter, up from 0.5 percent in the corresponding prior year period. On a non-GAAP basis, operating profit margin was 13.9 percent in the third quarter, compared with 11.3 percent in the third quarter of the prior year.

Net income in the quarter was $41.4 million, or $0.10 per diluted share, compared with net income of $1.9 million, or $0.00 per diluted share in the third quarter of the prior fiscal year. On a non-GAAP basis, third quarter fiscal year 2010 net income was $67.2 million, or $0.16 per diluted share, compared with net income of $49.1 million, or $0.13 per diluted share, in the corresponding prior year period.

3Com generated $89.7 million in cash from operations in the quarter. On a year-to-date basis, 3Com generated $224.8 million in cash from operations. 3Com’s cash and equivalents and short term investments balance at February 26, 2010 was $795.0 million.

“We are very pleased with 3Com’s continued strong performance in the quarter,” said Bob Mao, 3Com’s Chief Executive Officer. “We delivered strong sequential and year-over-year revenue growth while improving gross and operating margins, and generating almost ninety million dollars in cash from operations.” Bob continued “I am particularly gratified by our China direct business, which achieved year-over-year growth of almost thirty percent, essentially offsetting the reduced sales to Huawei.”

Safe Harbor

This news release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including forward-looking statements regarding our business objectives and goals. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, risks relating to: our ability to grow profitably, expand outside of China, maintain and expand in China, improve expense controls while making investments to grow and other risks detailed in the Company’s filings with the SEC, including those discussed in the Company’s quarterly report filed with the SEC on Form 10-Q for the fiscal quarter ended November 27, 2009.

3Com Corporation does not intend, and disclaims any obligation, to update any forward-looking information contained in this release or with respect to the announcements described herein.

The non-GAAP measures used by the Company exclude restructuring, amortization, stock-based compensation expense and, if applicable in the relevant period, unusual items, such as those items detailed in the tables attached to this press release. The required reconciliations and other disclosures for all non-GAAP measures used by the Company are set forth later in this press release, in the Current Report on Form 8-K furnished to the SEC on the date hereof and/or in the investor relations section of our Web site, www.3com.com.

References to the financial information included in this news release reflect rounded numbers and should be considered approximate values.

About 3Com Corporation

3Com Corporation is a $1.3 billion global enterprise networking solutions provider that sets a new price/performance standard for customers. 3Com has three global brands—H3C, 3Com, and TippingPoint—that offer high-performance networking and security solutions to enterprises large and small. The H3C enterprise networking portfolio—a market leader in China—includes products that span from the data center to the edge of the network, while TippingPoint network-based intrusion prevention systems and network access control solutions deliver in-depth, no-compromise application, infrastructure and performance protection.

Copyright© 2010 3Com Corporation. 3Com, the 3Com logo, H3C and TippingPoint are registered trademarks of 3Com Corporation or its wholly owned subsidiaries in various countries around the world. All other company and product names may be trademarks of their respective holders.

3Com Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
TABLE A
Three Months Ended Nine Months Ended
February 26, November 27, February 27, February 26, February 27,
2010 2009 2009 2010 2009
Sales $ 345,880 $ 322,164 $ 324,707 $ 958,546 $ 1,021,919
Cost of sales 137,086 128,542 138,878 389,559 446,671
Gross profit 208,794 193,622 185,829 568,987 575,248
Operating expenses (income):
Sales and marketing 100,543 93,754 85,541 279,085 262,943
Research and development 47,997 41,400 45,229 128,365 141,630
General and administrative 21,323 25,786 27,593 68,479 80,699
Amortization of intangibles 16,506 16,755 23,106 50,332 73,330
Patent dispute resolution - - - - (70,000 )
Restructuring charges 47 1,552 2,860 2,732 7,361
Operating expenses, net 186,416 179,247 184,329 528,993 495,963
Operating income 22,378 14,375 1,500 39,994 79,285
Interest income (expense), net 683 (1,922 ) (3,333 ) (2,327 ) (5,131 )
Other income, net 19,676 5,920 16,528 37,143 45,298
Income before income taxes 42,737 18,373 14,695 74,810 119,452
Income tax (provision) benefit (1,346 ) 1,619 (12,828 ) (5,966 ) (24,878 )
Net income $ 41,391 $ 19,992 $ 1,867 $ 68,844 $ 94,574
Basic income per share $ 0.10 $ 0.05 $ 0.00 $ 0.17 $ 0.24
Diluted income per share $ 0.10 $ 0.05 $ 0.00 $ 0.17 $ 0.24
Shares used in computing basic per share amounts 396,253 392,688 384,679 392,905 393,868
Shares used in computing diluted per share amounts 411,546 403,501 386,377 403,771 395,232
3Com Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
TABLE B
February 26, May 29,
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, net 129,998 112,771
Inventories, net 114,972 90,395
Other current assets 48,977 56,982
Total current assets 1,115,649 944,913
Property & equipment, net 36,747 40,012
Goodwill 609,297 609,297
Intangibles, 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 1,224,435 1,112,175
Total liabilities and stockholders' equity $ 1,932,948 $ 1,815,357
3Com Corporation
Reconciliation of Non-GAAP Financial Measures
(in thousands, except margin and per-share data)
(unaudited)
TABLE C
Three Months Ended Nine Months Ended
February 26, November 27, February 27, February 26, February 27,
2010 2009 2009 2010 2009
GAAP gross margin 60.4 % 60.1 % 57.2 % 59.4 % 56.3 %
Stock-based compensation expense [b] 0.1 % 0.2 % 0.2 % 0.1 % 0.2 %
Non-GAAP gross margin 60.5 % 60.3 % 57.4 % 59.5 % 56.5 %
GAAP operating income $ 22,378 $ 14,375 $ 1,500 $ 39,994 $ 79,285
Restructuring 47 1,552 2,860 2,732 7,361
Amortization of intangible assets 16,506 16,755 23,106 50,332 73,330
Patent dispute resolution [a] - - - - (70,000 )
Stock-based compensation expense [b] 6,461 6,233 5,663 17,579 17,743
Acquiree expensed acquisition costs [c] 2,802 4,552 - 7,354 -
TippingPoint special admin costs [d] - - - - 800
Legal contingency accrual [e] - - 2,400 - 2,400
Impairment of property and equipment [f] - - 1,150 - 1,150
Non-GAAP operating income $ 48,194 $ 43,467 $ 36,679 $ 117,991 $ 112,069
GAAP operating profit margin 6.5 % 4.5 % 0.5 % 4.2 % 7.8 %
Restructuring 0.0 % 0.5 % 0.9 % 0.3 % 0.7 %
Amortization of intangible assets 4.8 % 5.2 % 7.1 % 5.3 % 7.2 %
Patent dispute resolution [a] - - - - -6.8 %
Stock-based compensation expense [b] 1.9 % 1.9 % 1.7 % 1.8 % 1.7 %
Acquiree expensed acquisition costs [c] 0.7 % 1.4 % - 0.7 % -
TippingPoint special admin costs [d] - - - - 0.1 %
Legal contingency accrual [e] - - 0.7 % - 0.2 %
Impairment of property and equipment [f] - - 0.4 % - 0.1 %
Non-GAAP operating profit margin 13.9 % 13.5 % 11.3 % 12.3 % 11.0 %
GAAP net income $ 41,391 $ 19,992 $ 1,867 $ 68,844 $ 94,574
Restructuring 47 1,552 2,860 2,732 7,361
Amortization of intangibles 16,506 16,755 23,106 50,332 73,330
Patent dispute resolution [a] - - - - (70,000 )
Stock-based compensation expense [b] 6,461 6,233 5,663 17,579 17,743
Acquiree expensed acquisition costs [c] 2,802 4,552 - 7,354 -
TippingPoint special admin costs [d] - - - - 800
Legal contingency accrual [e] - - 2,400 - 2,400
Impairment of property and equipment [f] - - 1,150 - 1,150
Tax adjustment related to resolution of 2008 tax rate in PRC [g] - (10,801 ) - (10,801 ) -
Charge related to change in tax rates [h] - 12,083 - 12,083
Non-GAAP net income $ 67,207 $ 38,283 $ 49,129 $ 136,040 $ 139,441
GAAP net income per share $ 0.10 $ 0.05 $ 0.00 $ 0.17 $ 0.24
Restructuring 0.00 0.00 0.01 0.01 0.02
Amortization of intangibles 0.04 0.04 0.06 0.12 0.19
Patent dispute resolution [a] - - - - (0.18 )
Stock-based compensation expense [b] 0.01 0.02 0.02 0.04 0.04
Acquiree expensed acquisition costs [c] 0.01 0.01 - 0.02 -
TippingPoint special admin costs [d] - - - - 0.00
Legal contingency accrual [e] - - 0.01 - 0.01
Impairment of property and equipment [f] - - 0.00 - 0.00
Tax adjustment related to resolution of 2008 tax rate in PRC [g] - (0.03 ) - (0.02 ) -
Charge related to change in tax rates [h] - - 0.03 - 0.03
Non-GAAP net income per share, diluted $ 0.16 $ 0.09 $ 0.13 $ 0.34 $ 0.35
Shares used in computing diluted per share amounts 411,546 403,501 386,377 403,771 395,232
[a] Resolution of Realtek patent dispute.
[b] Stock-based compensation expense is included in the following cost and expense categories by period:
Three Months Ended Nine Months Ended
February 26, November 27, February 27, February 26, February 27,
2010 2009 2009 2010 2009
Cost of sales 557 591 596 1,688 1,916
Sales and marketing 2,147 2,081 1,599 5,818 4,970
Research and development 538 423 768 1,437 2,545
General and administrative 3,219 3,138 3,144 8,636 8,756
Note: $444 thousand of stock-based compensation in the three and nine months ended February 27, 2009 has been recorded to restructuring expense
[c] These expenses relate to the proposed acquisition of the Company in November 2009.
[d] Costs incurred in the second quarter of fiscal 2009 to facilitate operation of TippingPoint as a more autonomous business.
[e] Accruals for contingencies relating to patent litigation.
[f] Impairment charge related to the Company's land in Hemel. UK.
[g] We recorded a favorable tax adjustment, reflecting final resolution of our calendar year 2008 tax rate in China.
[h] These expenses result from a change in the statutory rate used to compute the income tax provision in the PRC.
Note: Included in the three months ended February 26, 2010 is a $9.9 million tax benefit related to the change of our PRC statutory tax rate from 15% to
10% as our H3C subsidiary was granted Key Software Development Enterprise status for calendar year 2009.

Contacts:

3Com Corporation
Investor Relations
Gene Skayne, 508-323-1080
gene_skayne@3com.com
or
Media Relations
Anastasia Efstratios
781.782.5873
anastasia_efstratios@lpp.com

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