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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10- Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended August 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to
 Commission File No. 0-12867
 
 3COM CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2605794(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 350 Campus DriveMarlborough, Massachusetts
    
    01752(Address of principal executive offices)
    
    (Zip Code)
 (508) 323-1000
 N/A
 þ o
  þ o o
 o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2007
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Operations Three Months
Ended August 31, 2007 and 2006
    
    
    1Condensed Consolidated Balance Sheets August 31 and May 31, 2007
    
    
    2Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39EXHIBITS
    
    
    40EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEO & CFO




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedAugust 31,(In thousands, except per share data)
    
    2007
    
    
    2006Sales
    
    $
    319,434
    
    
    $
    300,144Cost of sales
    
    
    170,498
    
    
    
    163,715Gross profit
    
    
    148,936
    
    
    
    136,429Operating expenses:Sales and marketing
    
    
    74,404
    
    
    
    77,122Research and development
    
    
    52,310
    
    
    
    47,793General and administrative
    
    
    21,478
    
    
    
    20,276Amortization
    
    
    26,006
    
    
    
    12,181Restructuring charges (benefit)
    
    
    425
    
    
    
    (75
    )Total operating expenses
    
    
    174,623
    
    
    
    157,297Operating loss
    
    
    (25,687
    )
    
    
    (20,868
    )Gain on investments, net
    
    
    327
    
    
    
    2,292Interest (expense) income, net
    
    
    (3,567
    )
    
    
    10,090Other income, net
    
    
    12,084
    
    
    
    4,718Loss before income taxes and minority interest
    
    
    (16,843
    )
    
    
    (3,768
    )Income tax provision
    
    
    (1,811
    )
    
    
    (1,358
    )Minority interest in income of consolidated joint venture
    
    
    
    
    
    
    (8,942
    )Net loss
    
    $
    (18,654
    )
    
    $
    (14,068
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.04
    )Shares used in computing per share amounts:Basic and diluted
    
    
    397,041
    
    
    
    391,885
  1




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  August 31,
    
    
    May 31 ,(In thousands, except per share data)
    
    2007
    
    
    2007ASSETSCurrent assets:Cash and equivalents
    
    $
    501,046
    
    
    $
    559,217Accounts receivable, less allowance for doubtful
accounts of $15,643 and $15,292 respectively
    
    
    132,589
    
    
    
    102,952Inventories
    
    
    104,735
    
    
    
    107,988Notes receivable
    
    
    64,883
    
    
    
    77,368Other current assets
    
    
    48,271
    
    
    
    50,157Total current assets
    
    
    851,524
    
    
    
    897,682Property and equipment, less accumulated depreciation
and amortization of $196,473 and $234,554 respectively
    
    
    69,250
    
    
    
    76,460Goodwill
    
    
    767,274
    
    
    
    766,444Intangible assets, net
    
    
    347,368
    
    
    
    371,289Deposits and other assets
    
    
    29,809
    
    
    
    39,217Total assets
    
    $
    2,065,225
    
    
    $
    2,151,092LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    106,262
    
    
    $
    110,430Current portion of long-term debt
    
    
    94,000
    
    
    
    94,000Accrued liabilities and other
    
    
    370,633
    
    
    
    435,638Total current liabilities
    
    
    570,895
    
    
    
    640,068Deferred taxes and long-term obligations
    
    
    14,542
    
    
    
    23,725Long-term debt
    
    
    336,000
    
    
    
    336,000Stockholders equity:Preferred stock, $0.01 par value, 10,000 shares
authorized; none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 990,000 shares
authorized; shares issued: 399,557 and 399,064
respectively
    
    
    2,327,872
    
    
    
    2,323,356Retained deficit
    
    
    (1,195,060
    )
    
    
    (1,176,406
    )Accumulated other comprehensive income
    
    
    10,976
    
    
    
    4,349Total stockholders equity
    
    
    1,143,788
    
    
    
    1,151,299Total liabilities and stockholders equity
    
    $
    2,065,225
    
    
    $
    2,151,092
  2




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months EndedAugust 31,(In thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (18,654
    )
    
    $
    (14,068
    )Adjustments to reconcile net loss to cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    34,666
    
    
    
    20,095Stock-based compensation charges
    
    
    3,863
    
    
    
    3,287Loss (gain) on property and equipment disposals
    
    
    49
    
    
    
    (7,605
    )Gain on investments, net
    
    
    (185
    )
    
    
    (2,422
    )Minority interest in income of consolidated joint venture
    
    
    
    
    
    
    8,942Deferred income taxes
    
    
    (845
    )
    
    
    (3,716
    )Changes in assets and liabilities:Accounts receivable
    
    
    (17,152
    )
    
    
    (5,838
    )Inventories
    
    
    4,697
    
    
    
    (21,662
    )Other assets
    
    
    2,945
    
    
    
    14,314Accounts payable
    
    
    (4,001
    )
    
    
    (6,623
    )Other liabilities
    
    
    (64,390
    )
    
    
    18,582Net cash (used in) provided by operating activities
    
    
    (59,007
    )
    
    
    3,286Cash flows from investing activities:Purchases of investments
    
    
    
    
    
    
    (190,310
    )Proceeds from maturities and sales of investments
    
    
    442
    
    
    
    180,524Purchases of property and equipment
    
    
    (5,607
    )
    
    
    (6,012
    )Proceeds from sale of property and equipment
    
    
    645
    
    
    
    33,108Net cash (used in) provided by investing activities
    
    
    (4,520
    )
    
    
    17,310Cash flows from financing activities:Issuances of common stock
    
    
    837
    
    
    
    2,934Repurchases of common stock
    
    
    (183
    )
    
    
    (187
    )Net cash provided by financing activities
    
    
    654
    
    
    
    2,747Effect of exchange rate changes on cash and equivalents
    
    
    4,702
    
    
    
    737Net change in cash and equivalents during period
    
    
    (58,171
    )
    
    
    24,080Cash and equivalents, beginning of period
    
    
    559,217
    
    
    
    501,097Cash and equivalents, end of period
    
    $
    501,046
    
    
    $
    525,177
  3




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3COM CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1. BASIS OF PRESENTATION
   Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
 Recently issued accounting pronouncements
   4




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NOTE 2. STOCK-BASED COMPENSATION
    Three Months EndedAugust 31,2007
    
    2006Employee stock options:Volatility
    
    
    40.2
    %
    
    
    42.8
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    5.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    3.8
    
    
    
    4.0Fair value per share
    
    $
    1.50
    
    
    $
    1.84
  Three Months EndedAugust 31,2007
    
    
    2006Cost of sales
    
    $
    384
    
    
    $
    319Sales and marketing
    
    
    975
    
    
    
    1,237Research and development
    
    
    721
    
    
    
    1,168General and administrative
    
    
    1,783
    
    
    
    563Stock-based compensation expense before tax
    
    $
    3,863
    
    
    $
    3,287
 5




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WeightedaverageNumber of
    
    
    exerciseshares
    
    
    priceOutstanding May 31, 2007
    
    
    52,280
    
    
    $
    5.23Granted
    
    
    1,296
    
    
    
    4.10Exercised
    
    
    (474
    )
    
    
    1.77Cancelled
    
    
    (2,536
    )
    
    
    6.37Outstanding August 31, 2007
    
    
    50,566
    
    
    $
    5.18Exercisable
    
    
    22,104
    
    
    $
    6.01Weighted average grant-date fair value of options granted
    
    
    
    
    
    $
    1.50
   WeightedWeighted
    
    AverageNumber of
    
    average
    
    Remaining
    
    AggregateShares
    
    Grant-Date
    
    Contractual
    
    Intrinsic Value(in thousands)
    
    Fair Value
    
    Life (in years)
    
    (in thousands)Vested and expected to vest at August 31, 2007
    
    
    36,031
    
    
    $
    5.41
    
    
    
    4.4
    
    
    $
    8,638
  WeightedNumber of
    
    
    averageShares
    
    
    Grant-Date(unvested)
    
    
    Fair ValueOutstanding May 31, 2007
    
    
    2,403
    
    
    $
    4.33Granted
    
    
    300
    
    
    
    4.28Vested
    
    
    (137
    )
    
    
    4.26Forfeited
    
    
    (262
    )
    
    
    4.14Outstanding August 31, 2007
    
    
    2,304
    
    
    $
    4.35
   6




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Number ofShares(unvested)Outstanding May 31, 2007
    
    
    3,111Granted
    
    
    120Vested
    
    
    (27
    )Forfeited
    
    
    (127
    )Outstanding August 31, 2007
    
    
    3,077
    Employee Stock Purchase Plan.
 NOTE 3. ACQUISITIONS
  NOTE 4. RESTRUCTURING CHARGES
   7




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Fiscal 2008 Actions
  EmployeeSeparationExpense
    
    
    TotalBalance as of May 31, 2007
    
    $
    
    
    
    $
    Provisions
    
    
    977
    
    
    
    977Payments and non-cash charges
    
    
    (849
    )
    
    
    (849
    )Balance as of August 31, 2007
    
    $
    128
    
    
    $
    128
   Fiscal 2007 Actions
  Employee
    
    
    Facilities-
    
    
    OtherSeparation
    
    
    related
    
    
    RestructuringExpense
    
    
    Charges
    
    
    Costs
    
    
    TotalBalance as of May 31, 2007
    
    $
    1,330
    
    
    $
    264
    
    
    $
    
    
    
    $
    1,594Provisions (benefits)
    
    
    (64
    )
    
    
    (7
    )
    
    
    39
    
    
    
    (32
    )Payments and non-cash charges
    
    
    (623
    )
    
    
    (103
    )
    
    
    (39
    )
    
    
    (765
    )Balance as of August 31, 2007
    
    $
    643
    
    
    $
    154
    
    
    $
    
    
    
    $
    797
   8




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Fiscal 2001 through 2006 Actions
  Employee
    
    
    
    
    
    OtherSeparation
    
    
    Facilities-
    
    
    RestructuringExpense
    
    
  related Charges

    
    
    Costs
    
    
    TotalBalance as of May 31, 2007
    
    $
    303
    
    
    $
    1,479
    
    
    $
    
    
    
    $
    1,782Provisions (benefits)
    
    
    (2
    )
    
    
    (521
    )
    
    
    3
    
    
    
    (520
    )Payments and non-cash charges
    
    
    
    
    
    
    (416
    )
    
    
    (3
    )
    
    
    (419
    )Balance as of August 31, 2007
    
    $
    301
    
    
    $
    542
    
    
    $
    
    
    
    $
    843
   NOTE 5. INCOME TAXES
      9




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NOTE 6. COMPREHENSIVE LOSS
  Three Months EndedAugust 31,2007
    
    
    2006Net loss
    
    $
    (18,654
    )
    
    $
    (14,068
    )Other comprehensive income:Net unrealized (loss) gain on investments
    
    
    (210
    )
    
    
    1,039Change in accumulated translation adjustments
    
    
    6,838
    
    
    
    682Total comprehensive loss
    
    $
    (12,026
    )
    
    $
    (12,347
    )
 NOTE 7. NET LOSS PER SHARE
  NOTE 8. INVENTORIES
  August 31,
    
    
    May 31,2007
    
    
    2007Finished goods
    
    $
    69,526
    
    
    $
    61,857Work-in-process
    
    
    5,212
    
    
    
    7,143Raw materials
    
    
    29,997
    
    
    
    38,988Total
    
    $
    104,735
    
    
    $
    107,988
 NOTE 9. INTANGIBLE ASSETS, NET
  August 31, 2007
    
    
    May 31, 2007Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetExisting technology
    
    $
    373,258
    
    
    $
    (149,484
    )
    
    $
    223,774
    
    
    $
    387,233
    
    
    $
    (148,641
    )
    
    $
    238,592Trademark
    
    
    55,500
    
    
    
    
    
    
    
    55,500
    
    
    
    55,500
    
    
    
    
    
    
    
    55,500Huawei non-compete
agreement
    
    
    33,284
    
    
    
    (5,564
    )
    
    
    27,720
    
    
    
    33,000
    
    
    
    (61
    )
    
    
    32,939OEM agreement
    
    
    24,025
    
    
    
    (2,003
    )
    
    
    22,022
    
    
    
    23,800
    
    
    
    (22
    )
    
    
    23,778Maintenance contracts
    
    
    19,000
    
    
    
    (8,181
    )
    
    
    10,819
    
    
    
    19,000
    
    
    
    (7,389
    )
    
    
    11,611Other
    
    
    21,970
    
    
    
    (14,437
    )
    
    
    7,533
    
    
    
    21,924
    
    
    
    (13,055
    )
    
    
    8,869Total
    
    $
    527,037
    
    
    $
    (179,669
    )
    
    $
    347,368
    
    
    $
    540,457
    
    
    $
    (169,168
    )
    
    $
    371,289
  10




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NOTE 10. ACCRUED WARRANTY
   Three Months EndedAugust 31,2007
    
    
    2006Accrued warranty, beginning of period
    
    $
    40,596
    
    
    $
    41,791Cost of warranty claims processed during the period
    
    
    (10,937
    )
    
    
    (11,592
    )Provision for warranties related to products sold during the period
    
    
    10,244
    
    
    
    11,589Accrued warranty, end of period
    
    $
    39,903
    
    
    $
    41,788
 NOTE 11. LONG-TERM DEBT
    Tranche A
    
    Tranche B2008
    
    $
    92,000
    
    
    $
    2,0002009
    
    
    46,000
    
    
    
    2,0002010
    
    
    46,000
    
    
    
    2,0002011
    
    
    46,000
    
    
    
    2,0002012
    
    
    
    
    
    
    20,0002013
    
    
    
    
    
    
    172,000
   11




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NOTE 12. SEGMENT INFORMATION
 
  Three Months Ended August 31, 2007Tipping
    
    
    
    
    
    Eliminations/(in thousands)
    
    H3C
    
    DVBU
    
    Point
    
    Corp
    
    Other
    
    TotalRevenue
    
    $
    186,928
    
    
    $
    139,576
    
    
    $
    25,468
    
    
    
    
    
    
    $
    (32,538
    )
    a
    $
    319,434Gross profit
    
    
    94,790
    
    
    
    43,542
    
    
    
    16,626
    
    
    
    (110
    )
    b
    
    (5,912
    )
    c
    
    148,936Operating expense
    
    
    67,811
    
    
    
    48,202
    
    
    
    17,179
    
    
    
    11,521
    
    b
    
    29,910
    
    d
    
    174,623Operating income (loss)
    
    $
    26,979
    
    
    $
    (4,660
    )
    
    $
    (553
    )
    
    $
    (11,631
    )
    
    $
    (35,822
    )
    
    $
    (25,687
    )Three Months Ended August 31, 2006Tipping
    
    
    
    
    
    Eliminations/(in thousands)
    
    H3C
    
    DVBU
    
    Point
    
    Corp
    
    Other
    
    TotalRevenue
    
    $
    169,968
    
    
    $
    137,068
    
    
    $
    18,755
    
    
    
    
    
    
    $
    (25,647
    )
    a
    $
    300,144Gross profit
    
    
    80,084
    
    
    
    44,544
    
    
    
    12,210
    
    
    
    (90
    )
    b
    
    (319
    )
    c
    
    136,429Operating expense
    
    
    59,788
    
    
    
    55,620
    
    
    
    16,334
    
    
    
    10,481

    
    b
    
    15,074

    
    d
    
    157,297Operating income (loss)
    
    $
    20,296
    
    
    $
    (11,076
    )
    
    $
    (4,124
    )
    
    $
    (10,571
    )
    
    $
    (15,393
    )
    
    $
    (20,868
    )
 
 a  Represents eliminations for inter-company revenue during the respective periods.b  Represents costs not directly attributable to any operating business segment.c  Includes stock based compensation in all periods plus purchase accounting inventory related
adjustments as applicable.d  Includes stock-based compensation, amortization, and restructuring.  Three Months Ended August 31,2007
    
    
    2006Networking
    
    $
    261,976
    
    
    
    82.0
    %
    
    $
    244,033
    
    
    
    81.3
    %Security
    
    
    31,483
    
    
    
    9.9
    
    
    
    25,462
    
    
    
    8.5Voice
    
    
    16,321
    
    
    
    5.1
    
    
    
    15,949
    
    
    
    5.3Services
    
    
    9,030
    
    
    
    2.8
    
    
    
    8,351
    
    
    
    2.8Connectivity Products
    
    
    624
    
    
    
    0.2
    
    
    
    6,349
    
    
    
    2.1Total
    
    $
    319,434
    
    
    
    
    
    
    $
    300,144
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NOTE 13. GEOGRAPHIC INFORMATION
  Three Months Ended August 31,2007
    
    
    2006China
    
    $
    146,754
    
    
    $
    134,117Europe, Middle East and Africa
    
    
    69,662
    
    
    
    69,534North America
    
    
    60,018
    
    
    
    58,423Asia Pacific Rim (ex-China)
    
    
    23,382
    
    
    
    22,751Latin and South America
    
    
    19,618
    
    
    
    15,319Total
    
    $
    319,434
    
    
    $
    300,144
  NOTE 14. LITIGATION
    13




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NOTE 15. SUBSEQUENT EVENT
      14




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  BUSINESS OVERVIEW
   §
    
    Networking;§
    
    Security;§
    
    Voice;§
    
    Services; and§
    
    Legacy Connectivity Products.
  §
    
    The formation and subsequent 100% acquisition of our Chinese joint venture 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,
all manufacturing activity in our DVBU segment, significant headcount
reductions in other functions, and selling excess facilities;§
    
    significant changes to our executive leadership;§
    
    acquiring TippingPoint Technologies, Inc.; and§
    
    realigning our DVBU sales and marketing channels and expenditures.
  Significant Events
 H3C
   15




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New Products
  Business Environment and Future Trends
  §
    
    Intense competition in the market for higher end, enterprise core routing and switching products;§
    
    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;
and§
    
    The advanced nature and ready availability of merchant silicon, which allows low-end competitors
to deliver competitive products and makes it increasingly difficult for us to differentiate our
products.
     16




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##### Table of Contents



Summary of Three Months Ended August 31, 2006 Financial Performance
 §
    
    Our sales in the three months ended August 31, 2007 were $319.4 million, compared to
sales of $300.1 million in the three months ended August 31, 2006, an increase of $19.3
million, or 6.4 percent.§
    
    Our gross margin improved to 46.6 percent in the three months ended August 31, 2007 from
45.5 percent in the three months ended August 31, 2006.§
    
    Our operating expenses in the three months ended August 31, 2007 were $174.6 million,
compared to $157.3 million in the three months ended August 31, 2006, a net increase of
$17.3 million, or 11.0 percent.§
    
    Our net loss in the three months ended August 31, 2006 was $18.7 million, compared to a
net loss of $14.1 million in the three months ended August 31, 2006.§
    
    Our balance sheet contains cash and equivalents of $501.0 million as of August 31, 2007,
compared to cash and equivalents of $559.2 million at the end of fiscal 2007. The balance
sheet also includes debt of $430 million with $94 million classified as a current liability
as of both August 31, 2007 and the end of fiscal 2007.
 CRITICAL ACCOUNTING POLICIES
     17




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##### Table of Contents



RESULTS OF OPERATIONS  THREE MONTHS ENDED AUGUST 31, 2007 AND 2006
  Three Months EndedAugust 31,2007
    
    2006Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    53.4
    
    
    
    54.5Gross profit margin
    
    
    46.6
    
    
    
    45.5Operating expenses:Sales and marketing
    
    
    23.3
    
    
    
    25.7Research and development
    
    
    16.4
    
    
    
    15.9General and administrative
    
    
    6.7
    
    
    
    6.8Amortization and write-down of intangible assets
    
    
    8.1
    
    
    
    4.1Restructuring charges
    
    
    0.1
    
    
    
    0.0Total operating expenses
    
    
    54.6
    
    
    
    52.4Operating loss
    
    
    (8.0
    )
    
    
    (7.0
    )Gain on investments, net
    
    
    0.0
    
    
    
    0.8Interest expense income, net
    
    
    (1.1
    )
    
    
    3.3Other income, net
    
    
    3.8
    
    
    
    1.6Loss before income taxes and minority interest
    
    
    (5.3
    )
    
    
    (1.3
    )Income tax provision
    
    
    (0.5
    )
    
    
    (0.4
    )Minority interest in income of consolidated joint venture
    
    
    
    
    
    
    (3.0
    )Net loss
    
    
    (5.8
    )%
    
    
    (4.7
    )%
 Sales
  Three Months EndedAugust 31,2007
    
    
    2006H3C
    
    $
    186.9
    
    
    $
    170.0DVBU
    
    
    139.6
    
    
    
    137.1TippingPoint
    
    
    25.5
    
    
    
    18.8Intercompany eliminations
    
    
    (32.6
    )
    
    
    (25.8
    )Consolidated sales
    
    $
    319.4
    
    
    $
    300.1
   18




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##### Table of Contents



Three Months EndedAugust 31,2007
    
    2006Networking
    
    $
    262.0
    
    
    
    82
    %
    
    $
    244.0
    
    
    
    81
    %Security
    
    
    31.5
    
    
    
    10
    %
    
    
    25.5
    
    
    
    9
    %Voice
    
    
    16.3
    
    
    
    5
    %
    
    
    15.9
    
    
    
    5
    %Services
    
    
    9.0
    
    
    
    3
    %
    
    
    8.4
    
    
    
    3
    %Connectivity Products
    
    
    0.6
    
    
    
    0
    %
    
    
    6.3
    
    
    
    2
    %Total
    
    $
    319.4
    
    
    
    100
    %
    
    $
    300.1
    
    
    
    100
    %
      19




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##### Table of Contents



Gross Margin
  Three Months EndedAugust 31,2007
    
    2006H3C
    
    
    50.7
    %
    
    
    47.1
    %DVBU
    
    
    31.2
    %
    
    
    32.5
    %TippingPoint
    
    
    65.3
    %
    
    
    65.1
    %Intercompany eliminations and other
    
    
    18.2
    %
    
    
    1.2
    %Consolidated sales
    
    
    46.6
    %
    
    
    45.5
    %
    Operating Expenses
 Three Months EndedAugust 31,
    
    
    Change(Dollars in millions)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Sales and marketing
    
    $
    74.4
    
    
    $
    77.1
    
    
    $
    (2.7
    )
    
    
    (4
    )%Research and development
    
    
    52.3
    
    
    
    47.8
    
    
    
    4.5
    
    
    
    9
    %General and administrative
    
    
    21.5
    
    
    
    20.3
    
    
    
    1.2
    
    
    
    6
    %Amortization of intangible assets
    
    
    26.0
    
    
    
    12.2
    
    
    
    13.8
    
    
    
    113
    %Restructuring
    
    
    0.4
    
    
    
    (0.1
    )
    
    
    0.5
    
    
    
    *Total
    
    $
    174.6
    
    
    $
    157.3
    
    
    $
    17.3
    
    
    
    11
    %
 
 *
    
    - percentage calculation not meaningful. Sales and Marketing.
 Research and Development.
 eneral and Administrative.
 Amortization of Intangible Assets.
 20




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##### Table of Contents



Restructuring Charges
    Gain on Investments, Net
  Interest Expense/Income, Net
  Other Income, Net
  Income Tax Provision
   Minority Interest of Huawei in the Income of Consolidated Huawei-3Com Joint Venture
  Net Loss
  21




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Three Months EndedAugust 31,(In millions)
    
    2007
    
    
    2006Cash and equivalents, beginning of period
    
    $
    559.2
    
    
    $
    501.1Net cash (used in) provided by operating activities
    
    
    (59.0
    )
    
    
    3.3Net cash provided by (used in) investing activities
    
    
    (4.5
    )
    
    
    17.3Net cash provided by (used in) financing activities
    
    
    0.6
    
    
    
    2.7Other
    
    
    4.7
    
    
    
    0.8Cash and equivalents, end of period
    
    $
    501.0
    
    
    $
    525.2
        EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  22




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  23




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risk Related to Announced Acquisition by an entity controlled by an affiliate of Bain Capital
  
 
    
    managements and our employees attention from our day-to-day business may be diverted
because matters related to the proposed acquisition may require substantial commitments of
their time and resources;
    
    we may lose key employees;
    
    our relationships with customers and vendors may be substantially disrupted as a result
of uncertainties with regard to our business and prospects;
    
    certain costs related to the proposed acquisition, such as legal and accounting fees and
reimbursement of certain expenses, are payable by us whether or not the proposed
acquisition is completed;
    
    under certain circumstances, if the proposed acquisition is not completed we may be
required to pay a termination (break-up) fee of up to $66 million; and
    
    the market price of shares of our common stock may decline to the extent that the
current market price of those shares reflects a market assumption that the proposed
acquisition will be completed.
 24




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##### Table of Contents



Risks Related to Historical Losses, Financial Condition and Substantial Indebtedness
 We have incurred significant net losses in recent fiscal periods, including $19 million for the
quarter ended August 31, 2007 and $14 million for the quarter ended August 31, 2006, and we may not
be able to return to profitability.
  
    
    declining sales due to price competition and reduced incoming order rate;
    
    operating expenses that, as a percentage of sales, have exceeded our desired financial
model;
    
    management changes;
    
    disruptions and expenses resulting from our workforce reductions, management changes and
employee attrition;
    
    risk of increased excess and obsolete inventories; and
    
    interest expense resulting from our senior secured loan.
  We may not be able to compensate for lower sales or unexpected cash outlays with cost reductions
sufficient to generate positive net income or cash flow.
   Efforts to reduce operating expenses have involved, and could involve further, workforce
reductions, closure of offices and sales or discontinuation of businesses, leading to reduced sales
and other disruptions in our business; if these efforts are not successful, we may experience
higher expenses than we desire.
  25




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##### Table of Contents



Our substantial debt could adversely affect our financial condition; and the related debt service
obligations may adversely affect our cash flow and ability to invest in and grow our businesses.
    
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund growth, working capital, capital expenditures and
other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our
industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 The restrictions imposed by the terms of our senior secured loan facility could adversely impact
our ability to invest in and grow our H3C business.
  26




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##### Table of Contents



An adverse change in the interest rates for our borrowings could adversely affect our financial
condition.
  Rating downgrades may make it more expensive for us to refinance our debt or borrow money.
  Risks Related to H3C Segment and Dependence Thereon
 We are significantly dependent on our H3C segment; if H3C is not successful we will likely
experience a material adverse impact to our business, business prospects and operating results.
  Sales from our H3C segment, and therefore in China, constitute a material portion of our total
sales, and our business, financial condition and results of operations will to a significant degree
be subject to economic, political and social events in the PRC.
  27




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##### Table of Contents



Our H3C segment is dependent on Huawei Technologies in several material respects, including as an
important customer; should Huawei reduce its business with H3C, our business will likely be
materially adversely affected.
  We must execute on a global strategy to leverage the benefits of our H3C acquisition, including
integration activities we determine to undertake; if we are not successful in these efforts, our
business will suffer.
   Risks Related to Personnel
 Our success is dependent on continuing to hire and retain qualified managers and other personnel,
including at our H3C segment, and reducing senior management turnover in our other segments; if we
are not successful in attracting and retaining these personnel, our business will suffer.
   28




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##### Table of Contents



Risks Related to Competition
 If we do not respond effectively to increased competition caused by industry volatility and
consolidation our business could be harmed.
  
    
    industry volatility resulting from rapid product development cycles;
    
    increasing price competition due to maturation of basic networking technologies;
    
    industry consolidation resulting in competitors with greater financial, marketing, and
technical resources; and
    
    the presence of existing competitors with greater financial resources together with the
potential emergence of new competitors with lower cost structures and more competitive
offerings.
 Our competition with Huawei in the enterprise networking market could have a material adverse
effect on our sales and our results of operations; and after a contractual non-compete period
expires, Huawei can increase its level of competition, which would likely materially and adversely
affect our business.
    Risks Related to Business and Technology Strategy
 We may not be successful at identifying and responding to new and emerging market and product
opportunities, or at responding quickly enough to technologies or markets that are in decline.
  
    
    identify new market and product opportunities;
    
    predict which technologies and markets will see declining demand;
    
    develop and introduce new products and solutions in a timely manner;
    
    gain market acceptance of new products and solutions, particularly in targeted emerging
markets; and
    
    rapidly and efficiently transition our customers from older to newer enterprise
networking technologies.
 29




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##### Table of Contents




    
    there is a delay in introducing new products;
    
    we lose certain channels of distribution or key partners;
    
    our products do not satisfy customers in terms of features, functionality or quality; or
    
    our products cost more to produce than we expect.
  We expect to utilize strategic relationships and other alliances as key elements in our strategy.
If we are not successful in forming desired ventures and alliances or if such ventures and
alliances are not successful, our ability to achieve our growth and profitability goals could be
adversely affected.
   Our strategy of outsourcing functions and operations may fail to reduce cost and may disrupt our
operations.
   30




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##### Table of Contents



Our reliance on industry standards, technological change in the marketplace, and new product
initiatives may cause our sales to fluctuate or decline.
  
    
    the convergence of technologies, such as voice, data and video on single, secure
networks;
    
    the timely adoption and market acceptance of industry standards, and timely resolution
of conflicting U.S. and international industry standards; and
    
    our ability to influence the development of emerging industry standards and to introduce
new and enhanced products that are compatible with such standards.
  We focus on enterprise networking, and our results of operations may fluctuate based on factors
related entirely to conditions in this market.
  Risks Related to Operations and Distribution Channels
 A significant portion of our DVBU and TippingPoint sales are derived from a small number of
distributors. If any of these partners reduces its business with us, our business could be
seriously harmed.
  We depend on distributors who maintain inventories of our products. If the distributors reduce
their inventories of our products, our sales could be adversely affected.
  31




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##### Table of Contents



If we are unable to successfully develop relationships with system integrators, service providers,
and enterprise VARs, our sales may be negatively affected.
  We may pursue acquisitions of other companies that, if not successful, could adversely affect our
business, financial position and results of operations.
  We may be unable to manage our supply chain successfully, which would adversely impact our sales,
gross margin and profitability.
  
    
    in the past, some key components have had limited availability;
    
    as integration of networking features on a reduced number of computer chips continues,
we are increasingly facing competition from parties who are our suppliers;
    
    our ability to accurately forecast demand is diminished;
    
    our reliance on, and long-term arrangements with, third-party manufacturers places much
of the supply chain process out of our direct control and heightens the need for accurate
forecasting and reduces our ability to transition quickly to alternative supply chain
strategies; and
    
    we may experience disruptions to our logistics.
     32




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##### Table of Contents



Our strategies to outsource the majority of our manufacturing requirements to contract
manufacturers may not result in meeting our cost, quality or performance standards. The inability
of any contract manufacturer to meet our cost, quality or performance standards could adversely
affect our sales and overall results from operations.
   If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, including the management of our H3C segment, our ability to manage and grow our business
will be negatively affected.
  Risks Related to our Operations in the Peoples Republic of China
 Chinas governmental and regulatory reforms and changing economic environment may impact our
ability to do business in China.
  
    
    the promulgation of new laws and regulations and the interpretation of those laws and
regulations;
    
    enforcement and application of rules and regulations by the Chinese government;
    
    the introduction of measures to control inflation or stimulate growth; or
    
    any actions that limit our ability to develop, manufacture, import or sell our products
in China, or to finance and operate our business in China.
  33




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##### Table of Contents



Uncertainties with respect to the Chinese legal system may adversely affect us.
  If PRC tax benefits available to H3C are reduced or repealed, our business could suffer.
   H3C is subject to restrictions on paying dividends and making other payments to us.
  We are subject to risks relating to currency rate fluctuations and exchange controls and we do not
hedge this risk in China.
  34




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##### Table of Contents



Risks Related to Intellectual Property
 If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   We may need to engage in complex and costly litigation in order to protect, maintain or enforce our
intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong
as the rights we enjoy in the U.S.
   We may not be able to defend ourselves successfully against claims that we are infringing the
intellectual property rights of others.
  35




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##### Table of Contents



OSN, our new open source strategy, subjects us to additional intellectual property risks, such as
less control over development of certain technology that forms a part of this strategy and a higher
likelihood of litigation.
  Risks Related to the Trading Market
 Fluctuations in our operating results and other factors may contribute to volatility in the market
price of our stock.
  
    
    fluctuations in our quarterly results of operations and cash flow;
    
    changes in our cash and equivalents and short term investment balances;
    
    variations between our actual financial results and published analysts expectations;
and
    
    announcements by our competitors.
  36




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number
    
    
    Averageof Shares
    
    
    Price PaidPeriod
    
    Purchased
    
    
    per ShareJune 2, 2007 through June 29, 2007
    
    
    5,668
    (1)
    
    $
    4.52June 30, 2007 through July 27, 2007
    
    
    35,899
    (1)
    
    
    4.14July 28, 2007 through August 31, 2007
    
    
    2,820
    (1)
    
    
    4.00Total
    
    
    44,387
    
    
    $
    4.18
 
 (1)
    
    Represents shares returned to us to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards. 37




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##### Table of Contents



ITEM 6. EXHIBITS
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.4
    
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 2005
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    3/30/062.5
    
    
    Stock Purchase Agreement by and between
Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 2006
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/27/063.1
    
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate of
Merger
    
    10-Q
    
    002-92053
    
    
    3.4
    
    
    10/8/993.2
    
    
    Registrants Bylaws, as amended on March
23, 2005
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    3/28/053.3
    
    
    Certificate of Designation of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
    
    10-Q
    
    000-12867
    
    
    3.6
    
    
    10/11/014.1
    
    
    Third Amended and Restated Preferred Shares
Rights Agreement, dated as of November 4,
2002
    
    8-A/A
    
    000-12867
    
    
    4.1
    
    
    11/27/0210.1
    
    
    Stand Alone Stock Option Agreement dated
July 3, 2007 by and between Jay Zager and
3Com Corporation *
    
    S-8
    
    333-144322
    
    
    10.2
    
    
    7/3/0710.2
    
    
    Stand Alone Restricted Stock Agreement
dated July 3, 2007 by and between Jay Zager
and 3Com Corporation *
    
    S-8
    
    333-144322
    
    
    10.3
    
    
    7/3/0731.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 38




---



##### Table of Contents



3Com Corporation
(Registrant)Dated:      October 9, 2007
    By:
    /s/   Jay ZagerJay ZagerExecutive Vice President, Finance and

Chief Financial Officer

(Principal Financial and

Accounting Officer and a duly authorized

officer of the registrant) 39




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.4
    
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 2005
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    3/30/062.5
    
    
    Stock Purchase Agreement by and between
Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 2006
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/27/063.1
    
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate of
Merger
    
    10-Q
    
    002-92053
    
    
    3.4
    
    
    10/8/993.2
    
    

Registrants
Bylaws, as amended on March 23, 2005
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    3/28/053.3
    
    
    Certificate of Designation of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
    
    10-Q
    
    000-12867
    
    
    3.6
    
    
    10/11/014.1
    
    
    Third Amended and Restated Preferred Shares
Rights Agreement, dated as of November 4,
2002
    
    8-A/A
    
    000-12867
    
    
    4.1
    
    
    11/27/0210.1
    
    
    Stand Alone Stock Option Agreement dated
July 3, 2007 by and between Jay Zager and
3Com Corporation *
    
    S-8
    
    333-144322
    
    
    10.2
    
    
    7/3/0710.2
    
    
    Stand Alone Restricted Stock Agreement
dated July 3, 2007 by and between Jay Zager
and 3Com Corporation *
    
    S-8
    
    333-144322
    
    
    10.3
    
    
    7/3/0731.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 40