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;

† 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

† 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;

† Security;

† Voice; 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, an economy that 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 has only recently begun to experience the effects of the downturn, and it is therefore difficult to predict the ultimate impact on our China business. Outside of China, we expect the challenging business environment to continue in the foreseeable future, particularly in the fully developed North American and Western European markets. We also expect to experience longer sales cycles.
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 be under significant pressure in the coming months, and well into 2009.
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 market segments where we have had a strong position historically, such as the small to medium-sized enterprise 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 Beijing, 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 IP video surveillance and 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.

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. 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 November 30, 2008 Financial Performance
† Our sales in the three months ended November 30, 2008 were $354.6 million, compared to sales of $317.8 million in the three months ended November 20, 2007, an increase of $36.8 million, or 11.6 percent.

† Our gross margin improved to 56.3 percent in the three months ended November 30, 2008 from 47.9 percent in the three months ended November 30, 2007.

† Our operating expenses (income) in the three months ended November 30, 2008 were $195.4 million, compared to $193.5 million in the three months ended November 30, 2007, a net increase of $1.9 million, or 1.0 percent.

† Our net income in the three months ended November 30, 2008 was $12.9 million, compared to a net loss of $35.6 million in the three months ended November 30, 2007.

† Our balance sheet contains cash and equivalents of $460.8 million as of November 30, 2008, 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 $48 million classified as a current liability as of November 30, 2008 compared with debt of $301 million with $48 million classified as a current liability at the end of fiscal 2008.

Summary of Six Months Ended November 30, 2008 Financial Performance
† Our sales in the six months ended November 30, 2008 were $697.2 million, compared to sales of $637.2 million in the six months ended November 20, 2007, an increase of $60.0 million, or 9.4 percent.

† Our gross margin improved to 55.9 percent in the six months ended November 30, 2008 from 47.2 percent in the six months ended November 30, 2007.

† Our operating expenses (income) in the six months ended November 30, 2008 were $311.6 million, compared to $368.1 million in the six months ended November 30, 2007, a net decrease of $56.5 million, or 15.3 percent. Included in the six months ended November 30, 2008 operating expenses (income) is $70.0 million of income related to the Realtek patent dispute resolution.

† Our net income in the six months ended November 30, 2008 was $92.7 million, compared to a net loss of $54.3 million in the six months ended November 30, 2007. Included in the six months ended November 30, 2008 net income 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 six months ended November 30, 2008. 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 SIX MONTHS ENDED NOVEMBER 30, 2008 AND 2007
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         Six Months Ended
                                               November 30               November 30
                                            2008          2007        2008         2007
     Sales                                   100.0 %     100.0 %      100.0 %     100.0 %
     Cost of sales                            43.7        52.1         44.1        52.8

     Gross profit margin                      56.3        47.9         55.9        47.2
     Operating expenses (income):
     Sales and marketing                      25.0        25.4         25.1        24.4
     Research and development                 13.5        16.4         13.4        16.4
     General and administrative                8.8         9.8          8.4         8.2
     Amortization                              7.1         8.3          7.2         8.2
     Realtek patent resolution                   -           -        (10.0 )         -
     Restructuring charges                     0.7         1.0          0.6         0.5

     Operating expenses, net                  55.1        60.9         44.7        57.7

     Operating income (loss)                   1.2       (13.0 )       11.2       (10.5 )
     Interest expense, net                    (0.2 )      (1.3 )       (0.3 )      (1.2 )
     Other income, net                         4.5         3.3          4.1         3.6

     Income (loss) before income taxes         5.5       (11.0 )       15.0        (8.1 )
     Income tax provision                     (1.9 )      (0.2 )       (1.7 )      (0.4 )

     Net income (loss)                         3.6 %     (11.2 )%      13.3 %      (8.5 )%

Sales
Consolidated sales for the three and six months ended November 30, 2008 and 2007
by segment were as follows (dollars in millions):

                                           Three Months Ended         Six Months Ended
                                              November 30,              November 30,
                                            2008         2007         2008        2007

       China-based sales region          $  199.8      $ 154.5      $ 375.2     $ 310.5
       Rest of World sales region           125.7        138.5        266.0       276.4
       TippingPoint security business        31.0         25.8         59.2        51.3
       Eliminations and other                (1.9 )       (1.0 )       (3.2 )      (1.0 )

       Consolidated sales                $  354.6      $ 317.8      $ 697.2     $ 637.2

Sales in our China-based sales region increased $45.3 million, or 29.4 percent, in the three months ended November 30, 2008 and increased $64.7 million, or 20.9 percent in the six months ended November 30, 2008 compared to the same periods in the previous fiscal year. The increase in sales in the three and six months ended November 30, 2008 is primarily attributable to increased direct-touch sales in China as well as higher sales to Huawei, and to a lesser extent appreciation on the Renminbi.
Sales in our Rest of World sales region decreased $12.8 million, or 9.3 percent, in the three months ended November 30, 2008 and decreased $10.4 million, or 3.8 percent in the six months ended November 30, 2008 compared to the same periods in the previous fiscal year. The decrease in sales in the three and six months ended November 30, 2008 is primarily attributable to decreased sales in Western Europe and the United States due to adverse business conditions relating to the global economic crisis. These decreases were partially offset by increased sales in our LAT and APR regions where our project business and sales to larger enterprise and government accounts has gained some traction. Sales in our TippingPoint security business increased $5.2 million, or 20.3 percent, in the three months ended November 30, 2008 and increased $7.9 million, or 15.5 percent in the six months ended November 30, 2008 compared to the same periods in the previous fiscal year. The increase in sales in the three and six months ended November 30, 2008 is primarily attributable to an increase in large account sales and increased maintenance revenue.

Eliminations and other increased by $0.9 million in the three months ended November 30, 2008 and increased $2.2 million in the six months ended November 30, 2008 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 increased by $36.8 million, or 11.6 percent, in the three months ended November 30, 2008 and increased by $60.0 million, or 9.4 percent, in the six months ended November 30, 2008 compared to the same period in the previous fiscal year.
Sales by major product categories are as follows (dollars in millions):

                               Three Months Ended                           Six Months Ended
                                   November 30                                 November 30
                           2008                  2007                  2008                  2007
       Networking   $ 289.6        82 %   $ 256.1        81 %   $ 572.1        82 %   $ 518.7        81 %
       Security        42.8        12 %      35.1        11 %      79.1        12 %      66.5        11 %
       Voice           10.5         3 %      16.7         5 %      23.3         3 %      33.0         5 %
       Services        11.7         3 %       9.9         3 %      22.7         3 %      19.0         3 %

       Total        $ 354.6       100 %   $ 317.8       100 %   $ 697.2       100 %   $ 637.2       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 increased $33.5 million or 13.1 percent in the three months ended November 30, 2008 and increased $53.4 million or 10.3 percent in the six months ended November 30, 2008 compared to the same period in the previous fiscal year. The increase in the three and six months ended November 30, 2008 is primarily attributable to increased direct-touch sales in China as well as sales to Huawei, and to a lesser extent appreciation of the Renminbi, partially offset by decreased sales in Western Europe and North America due to adverse business conditions relating to the global economic crisis.
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 $7.7 million or 21.9 percent in the three months ended November 30, 2008 and $12.6 million, or 18.9 percent for the six months ended November 30, 2008 compared to the same period in the previous fiscal year. The increase in the three and six months ended November 30, 2008 is primarily driven by increased sales of our TippingPoint products in our North American region due to a large sales transaction in the second quarter, increased maintenance revenue, and a slight increase in sales of security products in our China-based sales region. Voice revenue includes our VCX™ and NBXฎ voice-over-internet protocol, or VoIP, product lines, as well as voice gateway offerings. Sales of our Voice products decreased $6.2 million or 36.9 percent in the three months ended November 30, 2008 and $9.7 million, or 29.2 percent, in the six months ended November 30, 2008 compared to the same period in the previous fiscal year. The decrease in the three months ended November 30, 2008 is primarily due to decreased sales in our North America and LAT regions. The decrease in the six months ended November 30, 2008 is primarily related to decreased sales in our North America region.
Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue increased $1.8 million or 18.2 percent in the three months ended November 30, 2008 and $3.7 million, or 19.5 percent, in the six months ended November 30, 2008 compared to the same period in the previous fiscal year. The increase in the three and six months ended November 30, 2008 was driven primarily by increased service sales tied to growth in our networking business.

Gross Margin
Gross margin for the three and six months ended November 30, 2008 and 2007 by
segment was as follows (dollars in millions):

                                           Three Months Ended         Six Months Ended
                                              November 30,              November 30,
                                            2008          2007        2008         2007
       Networking business                   54.9 %       45.9 %       54.6 %      47.5 %
       TippingPoint security business        67.5 %       68.0 %       68.5 %      66.7 %
       Consolidated margin                   56.3 %       47.9 %       55.9 %      47.2 %

Gross margin in our Networking business improved 9.0 points to 54.9 percent in the three months ended November 30, 2008 from 45.9 percent, and 7.1 points to 54.6 percent in the six months ended November 30, 2008 from 47.5 percent in the same periods in the previous fiscal year. The improvement in gross profit margin for the three and six months ended November 30, 2008 is attributable to a change in product mix as well as 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. The current period also reflects the absence of the costs incurred in connection with this transition.
Gross margin in our TippingPoint security business decreased 0.5 points to 67.5 percent in the three months ended November 30, 2008 from 68.0 percent in the same period of the previous fiscal year. In the six months ended November 30, 2008 gross margin increased 1.8 points to 68.5 percent from 66.7 percent in the same period of the previous fiscal year. The decline in the three months ended November 30, 2008 is explained by a change in product mix, partially offset by cost reductions. The increase in the six months ended November 30, 2008 was due primarily to support cost reductions from continued improved product quality, partially offset by a change in product mix. Gross margin on a consolidated basis increased 8.4 points to 56.3 percent in the three months ended November 30, 2008 from 47.9 percent, and 8.7 percent to 55.9 percent in the six months ended November 30, 2008 from 47.2 in the same period in the previous fiscal year. This increase in the three and six months ended November 30, 2008 is due principally to the items discussed above, as well as the absence of purchase accounting related adjustments in the current period that were present in the same period of the previous fiscal year.

Operating Expenses (Income)

                                 Three Months Ended                                      Six Months Ended
                                    November 30,                  Change                   November 30,                 Change
(dollars in millions)            2008           2007           $           %            2008          2007           $           %
Sales and marketing           $     88.6       $  80.8      $   7.8          10 %     $   174.9      $ 155.2      $  19.7          13 %
Research and development            47.9          52.2        ( 4.3 )        (8 )%         93.6        104.5        (10.9 )       (10 )%
General and administrative          31.3          31.1          0.2           1 %          58.4         52.5          5.9          11 %
Amortization                        25.1          26.3         (1.2 )        (5 )%         50.2         52.3         (2.1 )        (4 )%
Patent dispute resolution              -             -            -           *           (70.0 )          -        (70.0 )         *
Restructuring                        2.5           3.1         (0.6 )       (19 )%          4.5          3.6          0.9           3 %

Total                         $    195.4       $ 193.5      $   1.9           1 %     $   311.6      $ 368.1      $ (56.5 )       (15 )%

* - percentage calculation not meaningful.

Sales and Marketing. The most significant factors in the increase in the three and six months ended November 30, 2008 compared to the same periods in fiscal 2008 was the increased investment in our direct-touch sales force in our China-based sales region and in our EMEA region as well as increased compensation expense.
Research and Development. The most significant factor contributing to the decrease in the three and six months ended November 30, 2008 compared to the same period in fiscal 2008 was continued savings from integration of research and development in all regions in our Networking business, partially offset by increased compensation expense.

General and Administrative. The most significant factor in the increase in the three and six months ended November 30, 2008 compared to the same periods in fiscal 2008 was increased legal costs resulting from ongoing litigation matters, increased compensation expense and increased depreciation expense. These increases were mostly offset by of the absence in the current period of acquisition related costs from the terminated acquisition by affiliates of Bain Capital Partners in the same period of the prior fiscal year.
Amortization. Amortization decreased $1.2 million and $2.1 million in the three and six months ended November 30, 2008, respectively, when compared to the previous fiscal year due to one of our intangible assets becoming fully depreciated in the fourth quarter of fiscal 2008. 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 . . .