**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**Forthe Quarterly Period Ended August 29, 2003**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom              to              **

 

**Commission File No. 0-12867**

 

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**3Com Corporation**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **94-2605794**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **350 Campus Drive  Marlborough, Massachusetts**                |   | **01752**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’stelephone number, including area code:  **(508) 323-5000**

 

Formername, former address and former fiscal year, if changed since last report:   **N/A**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 
| Yes  ý |   | No  o |
|-------------|--------|-------|

 

Indicateby check mark whether the registrant is an accelerated filer (as defined byRule 12b-2 of the Exchange Act).

 
| Yes  ý |   | No  o |
|-------------|--------|-------|

 

Asof September 26, 2003, 372,999,106 shares of the registrant’s Common Stock wereoutstanding.

 

Thisreport contains a total of 42 pages of which this page is number 1.

 

 

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**3Com Corporation**

 

**Table of Contents**

 
|       |                                                                                                      | **Page** |
|------------|-----------------------------------------------------------------------------------------------------------|----------|
| PART I.    | FINANCIAL INFORMATION                                                                                     |     |
|       |                                                                                                      |     |
| *Item 1.*  | Financial Statements                                                                                      |     |
|       |                                                                                                      |     |
|       | Condensed  Consolidated Statements of Operations*Three Months Ended August 29, 2003 and  August 30, 2002* | 3        |
|       |                                                                                                      |     |
|       | Condensed Consolidated  Balance Sheets*August 29, 2003 and May 30, 2003*                                  | 4        |
|       |                                                                                                      |     |
|       | Condensed  Consolidated Statements of Cash Flows*Three Months Ended August 29, 2003 and  August 30, 2002* | 5        |
|       |                                                                                                      |     |
|       | Notes  to Condensed Consolidated Financial Statements                                                     | 6        |
|       |                                                                                                      |     |
| *Item 2.*  | Management’s Discussion and  Analysis of Financial Condition and Results of Operations               | 15       |
|       |                                                                                                      |     |
| *Item  3.* | Quantitative  and Qualitative Disclosures About Market Risk                                               | 36       |
|       |                                                                                                      |     |
| *Item 4.*  | Controls and Procedures                                                                                   | 37       |
|       |                                                                                                      |     |
|       |                                                                                                      |     |
| PART II.   | OTHER INFORMATION                                                                                         |     |
|       |                                                                                                      |     |
| *Item 1.*  | Legal  Proceedings                                                                                        | 38       |
|       |                                                                                                      |     |
| *Item  2.* | Changes  in Securities and Use of Proceeds                                                                | 38       |
|       |                                                                                                      |     |
| *Item 3.*  | Defaults Upon  Senior Securities                                                                          | 38       |
|       |                                                                                                      |     |
| *Item  4.* | Submission  of Matters to a Vote of Security Holders                                                      | 38       |
|       |                                                                                                      |     |
| *Item 5.*  | Other  Information                                                                                        | 38       |
|       |                                                                                                      |     |
| *Item 6.*  | Exhibits and  Reports on Form 8-K                                                                         | 38       |
|       |                                                                                                      |     |
|       |                                                                                                      |     |
| Signatures |                                                                                                      | 42       |

 

 

3Comis a registered trademark of 3Com Corporation or its subsidiaries.  XRN is a trademark of 3Com Corporation orits subsidiaries. CommWorks is a registered trademark of UTStarcom, Inc. Palmis a trademark of Palm, Inc.

 

2

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**PARTI.   FINANCIAL INFORMATION**

 

***Item 1.*****   Financial Statements**

 

**3Com Corporation**

**Condensed Consolidated Statements of Operations**

(Unaudited)

 
|                                                                                                         |   | **Three  Months Ended** |     |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|
| **(In thousands, except per share  data)**                                                                   |   | **August 29,****2003**  |     | **August 30,****2002** |   |
|                                                                                                         |   |                    |     |   |   |
| Sales                                                                                                        |   | $                       | 161,879  |   | $ | 269,177 |   |
|                                                                                                         |   |                    |     |   |   |
| Cost of sales                                                                                                |   | 111,935                 |     | 144,509 |   |
|                                                                                                         |   |                    |     |   |   |
| Gross margin                                                                                                 |   | 49,944                  |     | 124,668 |   |
|                                                                                                         |   |                    |     |   |   |
| Operating expenses:                                                                                          |   |                    |     |   |   |
| Sales and marketing                                                                                          |   | 62,607                  |     | 56,687 |   |
| Research and development                                                                                     |   | 26,927                  |     | 31,477 |   |
| General and administrative                                                                                   |   | 24,139                  |     | 24,711 |   |
| Amortization and write down of intangibles                                                                   |   | 3,387                   |     | 1,950 |   |
| Restructuring charges                                                                                        |   | 48,624                  |     | 19,587 |   |
| Loss on land and facilities, net                                                                             |   | —                  |     | 1,152 |   |
| Total operating expenses                                                                                     |   | 165,684                 |     | 135,564 |   |
|                                                                                                         |   |                    |     |   |   |
| Operating loss                                                                                               |   | (115,740                | )        | (10,896 | ) |
| Gains (losses) on investments, net                                                                           |   | 58                      |     | (11,465 | ) |
| Interest and other income, net                                                                               |   | 3,944                   |     | 9,597 |   |
|                                                                                                         |   |                    |     |   |   |
| Loss from continuing operations before income  taxes and cumulative effect of change in accounting principle |   | (111,738                | )        | (12,764 | ) |
| Income tax provision (benefit)                                                                               |   | (6,035                  | )        | 3,677 |   |
|                                                                                                         |   |                    |     |   |   |
| Loss from continuing operations before cumulative  effect of change in accounting principle                  |   | (105,703                | )        | (16,441 | ) |
| Discontinued operations, net of taxes                                                                        |   | (291                    | )        | (35,693 | ) |
|                                                                                                         |   |                    |     |   |   |
| Loss before cumulative effect of change in  accounting principle                                             |   | (105,994                | )        | (52,134 | ) |
| Cumulative effect of change in accounting  principle                                                         |   | —                  |     | (45,447 | ) |
|                                                                                                         |   |                    |     |   |   |
| Net loss                                                                                                     |   | $                       | (105,994 | ) | $ | (97,581 | ) |
|                                                                                                         |   |                    |     |   |   |
| Basic and diluted net loss per share:                                                                        |   |                    |     |   |   |
| Continuing operations                                                                                        |   | $                       | (0.29    | ) | $ | (0.05 | ) |
| Discontinued operations                                                                                      |   | —                  |     | (0.09 | ) |
| Cumulative effect of change in accounting  principle                                                         |   | —                  |     | (0.13 | ) |
|                                                                                                         |   | $                       | (0.29    | ) | $ | (0.27 | ) |
|                                                                                                         |   |                    |     |   |   |
| Shares used in computing net loss per share  amounts (basic and diluted):                                    |   | 367,879                 |     | 357,437 |   |

 

*See notes to condensed consolidated financial statements.*

 

3

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**3Com Corporation**

**Condensed Consolidated Balance Sheets**

(Unaudited)

 
| **(In thousands, except par value)**                                                                       |   | **August 29,  2003** |      | **May 30,  2003** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------------------|-----------|-------------------|--------|
|                                                                                                       |   |                 |      |              |   |
| ASSETS                                                                                                     |   |                 |      |              |   |
| Current assets:                                                                                            |   |                 |      |              |   |
| Cash and equivalents                                                                                       |   | $                    | 552,397   |              | $      | 515,848 |   |
| Short-term investments                                                                                     |   | 932,021              |      | 968,740           |   |
| Accounts receivable, net                                                                                   |   | 83,609               |      | 90,290            |   |
| Inventories                                                                                                |   | 26,232               |      | 27,068            |   |
| Other current assets                                                                                       |   | 49,576               |      | 51,234            |   |
| Total current assets                                                                                       |   | 1,643,835            |      | 1,653,180         |   |
|                                                                                                       |   |                 |      |              |   |
| Property and equipment, net                                                                                |   | 192,202              |      | 248,790           |   |
| Property and equipment held for sale                                                                       |   | 80,749               |      | 101,283           |   |
| Deposits and other assets                                                                                  |   | 44,676               |      | 43,962            |   |
| Deferred income taxes                                                                                      |   | 2,094                |      | 2,211             |   |
| Intangible assets, net                                                                                     |   | 8,648                |      | 12,035            |   |
| Goodwill                                                                                                   |   | 899                  |      | 899               |   |
|                                                                                                       |   |                 |      |              |   |
| Total assets                                                                                               |   | $                    | 1,973,103 |              | $      | 2,062,360 |   |
|                                                                                                       |   |                 |      |              |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                  |   |                 |      |              |   |
| Current liabilities:                                                                                       |   |                 |      |              |   |
| Accounts payable                                                                                           |   | $                    | 96,180    |              | $      | 105,583 |   |
| Accrued liabilities and other                                                                              |   | 246,364              |      | 233,239           |   |
| Current portion of debt                                                                                    |   | 173                  |      | 346               |   |
| Total current liabilities                                                                                  |   | 342,717              |      | 339,168           |   |
|                                                                                                       |   |                 |      |              |   |
| Other long-term obligations                                                                                |   | 4,902                |      | 4,595             |   |
|                                                                                                       |   |                 |      |              |   |
| Stockholders’ equity:                                                                                 |   |                 |      |              |   |
| Preferred stock, $.01 par value, 10,000 shares  authorized; none outstanding                               |   | —               |      | —            |   |
| Common stock, $.01 par value, 990,000 shares authorized; shares  issued: 370,446 and 367,796, respectively |   | 2,149,636            |      | 2,138,016         |   |
| Notes receivable from sale of warrants                                                                     |   | (4,210               | )         | (8,421            | )      |
| Unamortized stock-based compensation                                                                       |   | (3,418               | )         | (1,474            | )      |
| Retained deficit                                                                                           |   | (511,975             | )         | (405,981          | )      |
| Accumulated other comprehensive loss                                                                       |   | (4,549               | )         | (3,543            | )      |
| Total stockholders’ equity                                                                            |   | 1,625,484            |      | 1,718,597         |   |
|                                                                                                       |   |                 |      |              |   |
| Total liabilities and stockholders’ equity                                                            |   | $                    | 1,973,103 |              | $      | 2,062,360 |   |

 

*See notes to condensed consolidated financial statements.*

 

4

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**3Com Corporation**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
|                                                                                                                                                                           |   | **Three  Months Ended** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands)**                                                                                                                                                             |   | **August 29,  2003**    |       | **August 30,  2002** |   |
|                                                                                                                                                                           |   |                    | ** ** |   | ** ** |
| Cash flows from operating activities:                                                                                                                                          |   |                    |       |   |   |
| Loss from continuing operations, including  cumulative effect of change in accounting principle                                                                                |   | $                       | (105,703   | ) | $ | (61,888 | ) |
| Adjustments to reconcile loss from continuing  operations, including cumulative effect of change in accounting principle, to  cash provided by (used in) operating activities: |   |                    |       |   |   |
| Loss from discontinued operations                                                                                                                                              |   | (291                    | )          | (35,693 | ) |
| Depreciation and amortization                                                                                                                                                  |   | 26,637                  |       | 32,189 |   |
| Write down of intangibles, including cumulative  effect of change in accounting principle                                                                                      |   | 1,905                   |       | 65,601 |   |
| Loss on property and equipment                                                                                                                                                 |   | 24,291                  |       | 9,015 |   |
| (Gains) losses on investments, net                                                                                                                                             |   | (58                     | )          | 11,465 |   |
| Deferred income taxes                                                                                                                                                          |   | 310                     |       | (325 | ) |
| Stock-based expense                                                                                                                                                            |   | 298                     |       | 1,586 |   |
| Changes in current assets and liabilities:                                                                                                                                     |   |                    |       |   |   |
| Accounts receivable                                                                                                                                                            |   | 6,681                   |       | 8,908 |   |
| Inventories                                                                                                                                                                    |   | (836                    | )          | 10,955 |   |
| Other assets                                                                                                                                                                   |   | 2,002                   |       | 19,860 |   |
| Accounts payable                                                                                                                                                               |   | (9,403                  | )          | (24,027 | ) |
| Accrued liabilities and other                                                                                                                                                  |   | 17,295                  |       | (24,641 | ) |
| Income taxes payable                                                                                                                                                           |   | (4,170                  | )          | 8,917 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Net cash provided by (used in) operating  activities                                                                                                                           |   | (41,042                 | )          | 21,922 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Cash flows from investing activities:                                                                                                                                          |   |                    |       |   |   |
| Purchase of investments                                                                                                                                                        |   | (226,854                | )          | (484,595 | ) |
| Proceeds from maturities and sales of investments                                                                                                                              |   | 257,986                 |       | 220,799 |   |
| Purchase of property and equipment                                                                                                                                             |   | (4,207                  | )          | (4,862 | ) |
| Proceeds from sale of property and equipment                                                                                                                                   |   | 37,233                  |       | 18,743 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Net cash provided by (used in) investing  activities                                                                                                                           |   | 64,158                  |       | (249,915 | ) |
|                                                                                                                                                                           |   |                    |       |   |   |
| Cash flows from financing activities:                                                                                                                                          |   |                    |       |   |   |
| Issuance of common stock                                                                                                                                                       |   | 9,378                   |       | 1,562 |   |
| Collection of note receivable issued for warrants                                                                                                                              |   | 4,211                   |       | — |   |
| Repayments of long-term borrowings                                                                                                                                             |   | (173                    | )          | (15,018 | ) |
| Net repayments on line of credit                                                                                                                                               |   | —                  |       | (20,000 | ) |
| Other, net                                                                                                                                                                     |   | —                  |       | 14 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Net cash provided by (used in) financing activities                                                                                                                            |   | 13,416                  |       | (33,442 | ) |
|                                                                                                                                                                           |   |                    |       |   |   |
| Effect of currency translation                                                                                                                                                 |   | 17                      |       | 850 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Increase (decrease) in cash and equivalents                                                                                                                                    |   | 36,549                  |       | (260,585 | ) |
| Cash and equivalents, beginning of period                                                                                                                                      |   | 515,848                 |       | 679,055 |   |
|                                                                                                                                                                           |   |                    |       |   |   |
| Cash and equivalents, end of period                                                                                                                                            |   | $                       | 552,397    |   | $ | 418,470 |   |

 

*See notes to condensed consolidated financial statements.*

 

5

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**3Com Corporation**

**Notes to Condensed Consolidated Financial Statements**

(Unaudited)

 

1.             Basis of Presentation

 

Theunaudited condensed consolidated financial statements have been prepared by3Com Corporation (3Com or the Company), pursuant to the rules and regulationsof the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidatedfinancial statements include all adjustments necessary for a fair presentationof 3Com’s financial position as of August 29, 2003, and its results ofoperations and cash flows for the three months ended August 29, 2003 and August30, 2002.

 

OnMay 23, 2003, 3Com completed the sale of its CommWorks division and transferredselected assets and liabilities to UTStarcom, Inc.  Accordingly, the financial information included herein for thefirst quarter of fiscal 2003 has been restated to reflect CommWorks’ results ofoperations as a discontinued operation.

 

3Comuses a 52 or 53-week fiscal year ending on the Friday nearest to May 31. Theresults of operations for the three months ended August 29, 2003 may not beindicative of the results to be expected for the fiscal year ending May 28,2004.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and related notes thereto included in 3Com’s Annual Reporton Form 10-K for the fiscal year ended May 30, 2003.

 

*Recent Accounting Pronouncements*

 

InNovember 2002, the Emerging Issues Task Force (EITF) reached a consensus onIssue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich the vendor will perform multiple revenue generating activities. EITF00-21 will be effective for fiscal periods beginning after June 15, 2003. Theadoption of EITF 00-21 will not have a material effect on 3Com’s results ofoperations or financial position.

 

2.             Stock-Based Compensation

 

Aspermitted under Statement of Financial Accounting Standards (SFAS) 123,“Accounting for Stock-Based Compensation,” 3Com has elected to followAccounting Principles Board (APB) Opinion 25 and related Interpretations inaccounting for stock-based awards to employees.  Under APB Opinion 25, 3Com generally recognizes no compensationexpense with respect to such stock option awards.

 

Proforma information regarding net income and earnings per share is required bySFAS 123. This information is required to be determined as if 3Com hadaccounted for its stock-based awards to employees (including employee stockoptions and shares issued under the Employee Stock Purchase Plan) under thefair value method of that Statement.

 

Asof August 29, 2003, and August 30, 2002, the expected lives of options underthe Employee Stock Option Plan were estimated at approximately two years afterthe vesting date for directors and approximately one and a half years after thevesting date for non-directors. The fair value of stock options granted duringthe first quarter of fiscal 2004 and 2003 has been estimated as of the date ofgrant using the Black-Scholes option pricing model with the following assumptions:a risk-free interest rate of 2.6%, volatility of 67.0%, and a dividend yield of0.0%. The weighted average estimated fair value of employee stock optionsgranted during the first quarter of fiscal 2004 and 2003 was $2.66 and $2.32per share, respectively.

 

6

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Duringthe first quarter of both fiscal 2004 and 2003, there were no shares issuedunder the Employee Stock Purchase Plan. As of May 30, 2003, the expected lifeof awards issued under the Employee Stock Purchase Plan was estimated at sixmonths. The fair value of awards issued during fiscal 2003 has been estimatedas of the date of issuance using the Black-Scholes option pricing model withthe following assumptions: a risk-free interest rate of 1.4%, volatility of49.0%, and a dividend yield of 0.0%. The weighted average estimated fair value of awards issued during fiscal2003 was $1.66 per share.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. Because 3Com’s options have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in the opinion ofmanagement, the existing models do not necessarily provide a reliable single measureof the fair value of its options.

 

Thefollowing table illustrates the effect on net loss and net loss per share if3Com had applied the fair value recognition provisions of SFAS 123 tostock-based employee compensation. For purposes of pro forma disclosures, theestimated fair value of the options is assumed to be amortized over theapplicable vesting periods.  Pro formainformation follows (in thousands, except per share amounts):

 
|                                                                            |   | **Three  Months Ended** |     |
|---------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                            |   | **August 29,  2003**    |     | **August 30,  2002** |   |
|                                                                            |   |                    |     |   |   |
| Net loss as reported                                                            |   | $                       | (105,994 | ) | $ | (97,581 | ) |
|                                                                            |   |                    |     |   |   |
| Add stock-based compensation included in reported  net loss                     |   | 298                     |     | 1,586 |   |
| Deduct total stock-based compensation determined  under fair value-based method |   | (5,277                  | )        | (15,479 | ) |
| Pro forma net loss                                                              |   | $                       | (110,973 | ) | $ | (111,474 | ) |
|                                                                            |   |                    |     |   |   |
| Loss per share:                                                                 |   |                    |     |   |   |
| As reported—basic and diluted                                              |   | $                       | (0.29    | ) | $ | (0.27 | ) |
| Pro forma—basic and diluted                                                |   | (0.30                   | )        | (0.31 | ) |

 

3.             Restructuring Charges

 

Infiscal 2001, 3Com began the restructuring of its business to enhance the focusand cost effectiveness of its business units in serving their respectivemarkets. 3Com took several actions: it implemented a reduction in workforce andother actions aimed at reducing costs and expenses; it exited product lines; itoutsourced the manufacturing of certain high volume server, desktop and mobileconnectivity products in a contract manufacturing arrangement; and itconsolidated its real estate portfolio and made plans to sell some of itsfacilities as part of this restructuring effort. These efforts continuedthrough fiscal 2002.

 

Asa result of a continuing decline in revenues, 3Com took additional actions infiscal 2003. The Company announced the integration of the supportinfrastructure of two of its business units to leverage a common infrastructurein order to drive additional cost out of the business. Additionally, 3Comentered into an agreement to outsource certain information technology (IT)functions, and continued to consolidate its real estate portfolio.

 

Inresponse to further revenue declines and continuing net losses, 3Com tookadditional measures to reduce costs in fiscal 2004. These actions included areduction of its workforce, aimed particularly at reducing general andadministrative expenses. 3Com also decided to outsource its remaining

 

7

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manufacturingoperations, and continued its efforts to consolidate its real estate portfolio.

 

Accruedliabilities associated with restructuring charges are classified as current, as3Com intends to satisfy such liabilities in cash in the current year, and areincluded in the caption “accrued liabilities and other” in the accompanyingcondensed consolidated balance sheets.

 

*Fiscal 2004 Actions*

 

The following table provides asummary of the components of accrued restructuring charges related to therestructuring actions initiated in the first quarter of fiscal 2004, togetherwith changes in the accrued amounts during the first quarter of fiscal 2004 andthe ending balances as of August 29, 2003 (in thousands):

 
|                             |   | **Employee  Separation  Expenses** |   | **Facilities-  related  Charges** |   | **Other  Restructuring  Costs** |   | **Total** |   |
|----------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|-----------|--------|
| Balance at May 30, 2003          |   | $                                  | — |                              | $      | —                          |   | $         | — |   | $ | — |   |
| Provision                        |   | 8,266                              |   | 34,952                            |   | 5,200                           |   | 48,418    |   |
| Deductions and asset write downs |   | (4,278                             | )      | (34,952                           | )      | (10                             | )      | (39,240   | )      |
|                             |   |                               |   |                              |   |                            |   |      |   |
| Balance at August 29, 2003       |   | $                                  | 3,988  |                              | $      | —                          |   | $         | 5,190  |   | $ | 9,178 |   |

 

Employeeseparation expenses include severance pay, outplacement services, medical andother related benefits.  The reductionin workforce affected employees mainly in the general and administrative, salesand marketing, and supply chain functions. The total reduction in workforcesince the inception of this restructuring initiative through August 29, 2003includes approximately 200 employees who have been separated or were in theseparation process. There were approximately 40 additional employees who havebeen notified but have not yet worked their last day. Since the inception ofthis restructuring initiative in fiscal 2004, $4.3 million of separationpayments have been made through August 29, 2003.

 

Facilities-relatedcharges include write downs and accelerated depreciation of properties,including properties that were classified as held for sale prior to fiscal2004. In the first quarter of fiscal 2004, 3Com recorded $35.0 million infacilities-related charges, including $17.5 million for an impairment andaccelerated depreciation of its Dublin, Ireland manufacturing facility, an$11.2 million write down of a Santa Clara, California facility, $5.5 million ofaccelerated depreciation of an additional Santa Clara facility due to 3Com’splan to vacate the facility and move to a smaller Santa Clara facility alreadyowned by the Company, and a loss of $1.1 million related to the sale of itsRolling Meadows, Illinois facility in the first quarter of fiscal 2004. Thesecharges were offset by credits of $0.3 million related to fair valueadjustments of properties classified as held for sale prior to fiscal 2004.

 

Otherrestructuring costs relate mainly to estimated obligations associated with theoutsourcing of its manufacturing operations in Dublin.

 

*Fiscal 2003 Actions*

 

The following table provides asummary of the components of accrued restructuring charges related to therestructuring actions initiated in fiscal 2003, together with changes in theaccrued amounts during the first quarter of fiscal 2004 and the ending balancesas of August 29, 2003 (in thousands):

 
|                       |   | **Employee  Separation  Expenses** |   | **Facilities-  related  Charges** |   | **Total** |   |
|----------------------------|--------|------------------------------------|--------|-----------------------------------|--------|-----------|--------|
| Balance at May 30, 2003    |   | $                                  | 4,517  |                              | $      | 2,341     |   | $ | 6,858 |   |
| Provision (benefit)        |   | (803                               | )      | 170                               |   | (633      | )      |
| Deductions                 |   | (987                               | )      | (268                              | )      | (1,255    | )      |
|                       |   |                               |   |                              |   |      |   |
| Balance at August 29, 2003 |   | $                                  | 2,727  |                              | $      | 2,243     |   | $ | 4,970 |   |

 

8

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Thenet benefit recorded in the first quarter of fiscal 2004 for employeeseparation expenses related to revisions of previous estimates of employeeseparation expenses.  The reduction inworkforce affected employees in the corporate services, product development,sales, customer support and administrative functions. The total reduction inworkforce since the inception of this restructuring initiative through August29, 2003 included approximately 400 employees who had been separated. Since theinception of this restructuring initiative, $17.0 million of separationpayments have been made through August 29, 2003.

 

Facilities-relatedcharges in the first quarter of fiscal 2004 relating to restructuring actionsinitiated in fiscal 2003 were the result of revisions in estimates of leasetermination costs.

 

*Fiscal 2001 and Fiscal 2002 Actions*

 

The following table provides a summary of thecomponents of accrued restructuring charges related to the restructuringactions initiated in fiscal 2001 and fiscal 2002, together with changes in theaccrued amounts during the first quarter of fiscal 2004 and the ending balancesas of August 29, 2003 (in thousands):

 
|                       |   | **Facilities-  related  Charges** |   | **Other  Restructuring  Costs** |   | **Total** |   |
|----------------------------|--------|-----------------------------------|--------|---------------------------------|--------|-----------|--------|
| Balance at May 30, 2003    |   | $                                 | 6,380  |                            | $      | 1,231     |   | $ | 7,611 |   |
| Provision                  |   | 824                               |   | 15                              |   | 839       |   |
| Deductions                 |   | (1,365                            | )      | (676                            | )      | (2,041    | )      |
|                       |   |                              |   |                            |   |      |   |
| Balance at August 29, 2003 |   | $                                 | 5,839  |                            | $      | 570       |   | $ | 6,409 |   |

 

Additionalfacilities-related charges were the result of changes in estimates associatedwith various lease terminations. Other restructuring costs included payments tosuppliers and contract breakage fees.

 

4.             Comprehensive Loss

 

Thecomponents of comprehensive loss, net of tax, are as follows (in thousands):

 
|                                             |   | **Three  Months Ended** |     |
|--------------------------------------------------|--------|-------------------------|----------|
|                                             |   | **August 29,  2003**    |     | **August 30,  2002** |   |
|                                             |   |                    |     |   |   |
| Net loss                                         |   | $                       | (105,994 | ) | $ | (97,581 | ) |
| Other comprehensive income (loss):               |   |                    |     |   |   |
| Unrealized loss on available-for-sale securities |   | (1,023                  | )        | (388 | ) |
| Change in accumulated translation adjustments    |   | 17                      |     | 1,376 |   |
| Total comprehensive loss                         |   | $                       | (107,000 | ) | $ | (96,593 | ) |

 

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5.                                       Net Loss Per Share

 

Thefollowing table presents the calculation of basic and diluted net loss pershare (in thousands, except per share data):

 
|                                                 |   | **Three  Months Ended** |     |
|------------------------------------------------------|--------|-------------------------|----------|
|                                                 |   | **August 29,  2003**    |     | **August 30,  2002** |   |
|                                                 |   |                    |     |   |   |
| Loss from continuing operations                      |   | $                       | (105,703 | ) | $ | (16,441 | ) |
| Loss from discontinued operations                    |   | (291                    | )        | (35,693 | ) |
| Cumulative effect of change in accounting  principle |   | —                  |     | (45,447 | ) |
| Net loss                                             |   | $                       | (105,994 | ) | $ | (97,581 | ) |
|                                                 |   |                    |     |   |   |
| Weighted average shares-Basic                        |   | 367,879                 |     | 357,437 |   |
| Effect of dilutive securities:                       |   |                    |     |   |   |
| Employee stock options                               |   | —                  |     | — |   |
| Restricted stock                                     |   | —                  |     | — |   |
| Weighted average shares-Diluted                      |   | 367,879                 |     | 357,437 |   |
|                                                 |   |                    |     |   |   |
| Basic and diluted loss per share:                    |   |                    |     |   |   |
| Continuing operations                                |   | $                       | (0.29    | ) | $ | (0.05 | ) |
| Discontinued operations                              |   | —                  |     | (0.09 | ) |
| Cumulative effect of change in accounting  principle |   | —                  |     | (0.13 | ) |
| Net loss                                             |   | $                       | (0.29    | ) | $ | (0.27 | ) |

 

Commonstock equivalents, including employee stock options and restricted stock,totaling 2.6 million and 3.2 million shares were not included in the dilutedweighted average shares calculation for the three months ended August 29, 2003and August 30, 2002, respectively, because the effects of these securities wereantidilutive.

 

6.                                       Inventories

 

Inventoriesconsist of (in thousands):

 
|            |   | **August 29,  2003** |   | **May 30,  2003** |   |
|-----------------|--------|----------------------|--------|-------------------|--------|
|            |   |                 |   |              |   |
| Finished goods  |   | $                    | 17,434 |              | $      | 15,891 |   |
| Work-in-process |   | 3,085                |   | 3,228             |   |
| Raw materials   |   | 5,713                |   | 7,949             |   |
|            |   |                 |   |              |   |
| Total inventory |   | $                    | 26,232 |              | $      | 27,068 |   |

 

7.             Property and Equipment

 

InJuly 2003, 3Com completed the sale of its 511,000 square foot office andresearch and development facility in Rolling Meadows. Net proceeds from thesale were $35.8 million, resulting in a loss on the sale of $1.1 million thatwas recorded in restructuring charges in the first quarter of fiscal 2004.  As part of the terms of the transaction,3Com is leasing back approximately 43,000 square feet of space at

 

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prevailingmarket rates. This property was not classified as held for sale as of May 30,2003 due to the Company’s intention to lease back a portion of the facility.

 

Asa result of 3Com’s workforce reductions and relocation of its headquarters fromSanta Clara to Marlborough, Massachusetts during fiscal 2004, the Company hasexcess office space in several buildings it owns in Santa Clara.  During the first quarter of fiscal 2004,3Com decided to consolidate its office space and relocate from its currentlocations into a smaller, vacant facility that was classified as held for saleas of May 30, 2003, and had a carrying value of $10.1 million. Due to thisdecision, 3Com reclassified this previously held-for-sale facility as held foruse. No impairment charge was recorded as a result of this reclassificationbecause the carrying value of the facility, which reflected fair value, wasless than what the net book value would have been had depreciation continued onthe facility during the period it was classified as held for sale.

 

8.             Intangible Assets, Net

 

Intangibleassets, net, consist of (in thousands):

 
|                                 |   | **August 29,  2003** |   | **May 30,  2003** |   |
|--------------------------------------|--------|----------------------|--------|-------------------|--------|
|                                 |   |                 |   |              |   |
| Developed and core technology, gross |   | $                    | 37,138 |              | $      | 42,574 |   |
| Accumulated amortization             |   | (28,513              | )      | (30,619           | )      |
| Net developed and core technology    |   | 8,625                |   | 11,955            |   |
|                                 |   |                 |   |              |   |
| Customer relationships, gross        |   | 420                  |   | 476               |   |
| Accumulated amortization             |   | (397                 | )      | (396              | )      |
| Net customer relationships           |   | 23                   |   | 80                |   |
|                                 |   |                 |   |              |   |
| Total net intangible assets          |   | $                    | 8,648  |              | $      | 12,035 |   |

 

Inthe first quarter of fiscal 2004, 3Com recorded an impairment of intangibleassets, consisting mainly of developed and core technology, associated with itsacquisition of the Gigabit Ethernet network interface card business of AlteonWebsystems in fiscal 2001. 3Com determined the amount of the impairment bycomparing the carrying value of the intangible assets against the fair value,which was estimated as the present value of expected future net cash flowsdiscounted at a rate of ten percent per year. The impairment resulted fromreduced revenue and gross margin projections as compared to the initialprojections at the time of the acquisition, due to the earlier-than-expectedend of life of an acquisition-related product. As a result of the impairmentanalysis, 3Com recorded a write down of $1.9 million, which is included in thecaption “amortization and write down of intangibles” in the condensedconsolidated statements of operations.

 

Basedon the carrying value of 3Com’s intangible assets as of August 29, 2003,amortization expense is expected to be $3.2 million for fiscal 2004, $3.5million for fiscal 2005, and $1.9 million for fiscal 2006.

 

9.             Accrued Warranty and OtherGuarantees

 

Productsare sold with varying lengths of warranty ranging from 90 days to the lifetimeof the products.   Allowances for estimatedwarranty costs are recorded in the period of sale, based on an assessment ofthe products sold with a warranty and historical experience related to actualwarranty costs incurred. Also, on an ongoing basis, 3Com assesses the adequacyof its allowances related to warranty obligations recorded in previous periodsand may adjust the balances to reflect actual experience or changes in futureexpectations.

 

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Thefollowing table summarizes the activity in the allowance for estimated warrantycosts for the three months ended August 29, 2003 (in thousands):

 
| Accrued warranty, May 30, 2003                   |   | $      | 44,775 |   |
|--------------------------------------------------|--------|--------|--------|--------|
| Cost of warranty claims                          |   | (8,495 | )      |
| Accruals for warranties issued during the period |   | 8,881  |   |
| Adjustments to preexisting warranties            |   | 130    |   |
|                                             |   |   |   |
| Accrued warranty, August 29, 2003                |   | $      | 45,291 |   |

 

Inprior years, 3Com entered into several agreements whereby it had sold productto resellers who had, in turn, sold the product to others, and 3Com hasguaranteed the payments of the end users. If all end users under theseagreements were to default on their payments, as of August 29, 2003 3Com wouldbe required to pay approximately $7.8 million. As deferred revenue andassociated accruals related to such sales approximates the guaranteed amountsand 3Com has the right to recover such products relating to the deferred costof goods sold in the event of default, any payments resulting from end userdefaults would not have a material impact on 3Com’s results of operations.

 

Inconnection with the development of its facility in Rolling Meadows, 3Comguaranteed a municipal bond in the amount of $2.5 million for siteimprovements. 3Com’s obligation pursuant to the guarantee had been accrued asof May 30, 2003. In connection with the completion of the sale of the RollingMeadows facility in the first quarter of fiscal 2004 as discussed in Note 3,3Com repaid the $2.5 million municipal bond.

 

Additionalamounts could also be owed for obligations relating to various facilities that3Com has or is in the process of vacating. As of August 29, 2003, 3Com hadrecorded provisions totaling $12.1 million related to such liabilities.

 

10.           Business Segment Information

 

Duringfiscal 2003, 3Com reported its continuing operations in three segments. Two ofthese segments—Enterprise Networking and Connectivity—represented ongoingbusiness lines, and the third segment related to products that were exitedprior to fiscal 2003. Effective the first quarter of fiscal 2004, 3Comstreamlined its management and operating structure, and merged its previousmultiple operating segments into a single, integrated enterprise networkingbusiness. As a result, 3Com now presents financial information related to itbusiness on the basis of a single segment.

 

Presentedbelow are 3Com’s sales by geography (in thousands):

 
|                            |   | **Three  Months Ended** |    |
|---------------------------------|--------|-------------------------|---------|
|                            |   | **August 29,  2003**    |    | **August 30,  2002** |   |
|                            |   |                    |    |   |   |
| Americas                        |   | $                       | 68,603  |   | $ | 128,147 |   |
| Europe, Middle East, and Africa |   | 63,819                  |    | 97,303 |   |
| Asia Pacific Rim                |   | 29,457                  |    | 43,727 |   |
|                            |   | $                       | 161,879 |   | $ | 269,177 |   |

 

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11.           Litigation

 

3Com is a party to lawsuits in the normal course of its business.  Litigation in general, and intellectualproperty and securities litigation in particular, can be expensive anddisruptive to normal business operations. Moreover, the results of complexlegal proceedings are difficult to predict. 3Com believes that it has meritorious defenses in each of the cases setforth below in which it is named as a defendant and is vigorously contestingeach of these matters.  An unfavorableresolution of one or more of these lawsuits could adversely affect itsbusiness, results of operations, or financial condition.  3Com cannot estimate the loss or range ofloss that may be reasonably possible for any of the contingencies described andaccordingly has not recorded any associated liabilities in its condensedconsolidated balance sheets.

 

 

OnMarch 4, 2003, 3Com filed suit against PCTEL, Inc., (PCTEL) in the UnitedStates District Court for the Northern District of Illinois, Civil ActionNumber 03C 1582 alleging infringement of United States Patents Numbered5,872,836, 5,646,983, 5,724,413, 6,097,794, 6,696,660, 5,532,898 and5,777,836.  On March 5, 2003, PCTELfiled suit against 3Com in the United States District Court for the NorthernDistrict of California, Civil Action Number C 03 0982 alleging infringement ofUnited States Patent Number 4,841,561 entitled “Operating default group selectable data communication equipment”seeking damages and injunctive relief,****andfurther seeking a declaration that PCTEL does not infringe 3Com PatentsNumbered 5,872,836, 5,646,983, 5,724,413, 6,097,794, 6,696,660, 5,532,898 and5,777,836, and that such patents are void and invalid.  The action which 3Com initiated in theDistrict Court for the Northern District of Illinois was transferred to theDistrict Court for the Northern District of California on June 11, 2003 andassigned Civil Action Number C 03 2710. On August 18, 2003, that action was consolidatedfor certain purposes with the action PCTEL initiated against 3Com in theNorthern District of California.

 

OnMay 30, 2003, PCTEL filed suit against 3Com in the Superior Court of the Stateof California in and for the County of Santa Clara, CV  817522, alleging violations of Californiaunfair competition laws seeking damages and injunctive relief.  3Com removed the action to the United StatesDistrict Court for the Northern District of California on July 3, 2003 and itwas assigned Civil Action Number C 03 3124.

 

 

InNovember 2000, a shareholder derivative and class action lawsuit, captioned *Shaev v. Claflin, et al.*, No. CV794039,was filed in California Superior Court. The complaint alleges that 3Com’sdirectors and officers breached their fiduciary duties to the Company inconnection with the adjustment of employee and director stock options inconnection with the separation of 3Com and Palm. On May 13, 2003, the Courtdismissed the Second Amended Complaint. The plaintiff has appealed the Court’s decision.

 

OnApril 28, 1997, Xerox Corporation (Xerox) filed suit against U.S. RoboticsCorporation and U.S. Robotics Access Corporation in the United States DistrictCourt for the Western District of New York. The case is now captioned *XeroxCorporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. RoboticsAccess Corporation, Palm Computing, Inc., and Palm, Inc.* (CivilAction Number 97-CV-6182T).  Xeroxalleged willful infringement of United States Patent Number 5,596,656, entitled“Unistrokes for Computerized Interpretation of Handwriting.”  Xerox sought to recover damages and topermanently enjoin the defendants from infringing the patent in thefuture.  In 2000, the District Courtdismissed the case, ruling that there was no infringement.  On appeal, the Court of Appeals for theFederal Circuit affirmed-in-part, reversed-in-part and remanded the case to theDistrict Court.  On December 20, 2001,the District Court granted Xerox’s motion for summary judgment that the patentis valid, enforceable, and infringed. The defendants then filed a Notice of Appeal.  On February 22, 2002, the District Court denied Xerox’s motionfor an injunction prohibiting further alleged infringement during the appealand ordered the defendants to post a bond in the amount of $50 million.  Xerox then appealed the denial of theinjunction.  On February 20, 2003, theCourt of Appeals issued its decision affirming in part and reversing in part theorder of the trial court.  The Court ofAppeals affirmed the grant of summary judgment of infringement, reversed thegrant of summary judgment of validity and remanded the case to the trial courtto conduct a complete validity analysis. In connection with the separation of Palm from 3Com, pursuant to theterms of the Indemnification and Insurance Matters Agreement, dated February26, 2000, between 3Com and Palm, Palm agreed to indemnify and hold 

 

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3Comharmless for any damages or losses that might arise out of the Xerox litigation.

 

OnSeptember 25, 2000 Northrop Grumman Corporation (Northrop) filed suit in theUnited States District Court for the Eastern District of Texas, Civil ActionNo. 1:00CV-652, against Intel Corporation, 3Com Corporation, Xircom, Inc.,D-Link Systems, Inc. and The Linksys Group, Inc. alleging infringement ofUnited States Patent Number 4,453,229 which was issued in 1982.  Based on the trial court’s claimconstruction after a Markman Hearing on June 8, 2001, and briefing by theparties, the trial court entered a judgment of noninfringement in favor ofdefendants 3Com and Linksys Group, Inc., from which Northrop appealed.  On March 31, 2003, the United States Courtof Appeals for the Federal Circuit issued its ruling reversing the order of thetrial court and remanding the case back to the trial court for furtherproceedings. 3Com and Northrop settled this matter in the first quarter offiscal 2004.

 

12.                                 Subsequent Event

 

OnSeptember 23, 2003, 3Com’s stockholders approved the Company’s 2003 Stock Plan(the new plan), which replaced the 1983 Stock Option Plan, the 1994 StockOption Plan, the Director Plan, and the Restricted Stock Plan (the prior plans)for all stock awards granted subsequent to the approval date. In connectionwith the approval of the new plan, 3Com cancelled all shares available forissuance under the prior plans, which included approximately 128 million sharesat the time of approval; at the same time, 20 million shares were reserved forissuance under the new plan.

 

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**3Com Corporation**

 

***Item 2******.*****                           ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with the condensedconsolidated financial statements and the related notes that appear elsewherein this document.

 

Thisquarterly report on Form 10-Q contains forward-looking statements.  These forward-looking statements include,without limitation, predictions regarding the following aspects of our future:

 

•                  Financial position and results of operations,including general and administrative expense targets and effects on income fromcontinuing operations;

•                  Cash position and cash requirements,including the sufficiency of our cash requirements for the next twelve months;

•                  Sales and margins;

•                  Sources, amounts, and concentration ofrevenue;

•                  Costs and expenses;

•                  Accounting estimates, including treatment ofgoodwill and intangible assets, doubtful accounts, inventory, restructuring,and warranty, and product returns;

•                  Operations, including internationaloperations, supply chain, quality control, and manufacturing supply, capacity,and facilities, including the anticipated closing of our manufacturingoperations;

•                  Products and services (including the exitingof product lines), price of products, product lines, and product and saleschannel mix, including the declining sales of our connectivity products;

•                  Relationship with customers, suppliers andstrategic partners, including increased reliance on strategic partners;

•                  Acquisition and disposition activity;

•                  Credit facility and ability to raisefinancial capital;

•                  Real estate arrangements;

•                  Activities of 3Com Ventures, includingcapital calls by certain venture capital funds;

•                  Global economic, social, and geopoliticalconditions;

•                  Industry trends, including the trend towardincreased siliconization, and our response to these trends;

•                  Tax position and audits;

•                  Our restructuring and cost-reduction efforts,including workforce reductions and the effect on employees;

•                  Sources of competition;

# **•**                  Protection of intellectual property;

# **•**                  Outcome and effect of current and potential future litigation;

# **•**                  Joint venture with Huawei Technologies, Ltd., including the amount offunding to be provided by 3Com and its commencement of operations;

# **•**                  Research and development efforts, including our investment in newtechnologies;

# **•**                  Future lease obligations and other commitments and liabilities;

# **•**                  Outsourcing of some of our functions and operations and increasedreliance on contract manufacturing;

•                  Change in principal location of our seniorexecutive management team;

 

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•                  Our common stock, including trading price,dividends, and repurchases; and

•                  Security of computer systems.

 

Youcan identify these and other forward-looking statements by the use of wordssuch as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”“estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative ofsuch terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying orrelating to any of the foregoing statements.

 

Actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth underBusiness Environment and Industry Trends. All forward-looking statements included in this document are based onour assessment of information available to us at this time.  We undertake no obligation to update anyforward-looking statements.

 

 

**Overview**

 

Inthe fourth quarter of fiscal 2001, we undertook several broad initiatives aimedat increasing revenue and reducing costs in an attempt to return 3Com toprofitability. These initiatives included exiting certain product lines thatwere not expected to yield a satisfactory return on investment in the nearterm, and resulted in restructuring charges of $154.9 million in fiscal 2001.Excluding these exited product lines and our CommWorks business that we sold infiscal 2003, our continuing operations included two business units—BusinessConnectivity Company (BCC) and Business Networks Company (BNC). These businessunits operated throughout all of fiscal 2002. During fiscal 2002, we continuedto experience declining revenue. As a response to this decline, we undertookadditional measures to further reduce costs, including headcount reductions,long term asset retirements, and outsourcing manufacturing operations; thesemeasures led to restructuring charges of $109.0 million in fiscal 2002.

 

Inthe first quarter of fiscal 2003, as our revenue and overall financialperformance continued to decline, we undertook several additional broadinitiatives to achieve further cost savings. The first of these actionsincluded the integration of certain central functions of BCC and BNC in orderto achieve cost savings, and restructuring charges resulted from this action.This integration did not substantially change our management and operatingstructure, however, and we continued to operate on the basis to two separatebusiness units (excluding exited product lines and the CommWorks division asdiscussed above). In fiscal 2003, our business units were (1) Connectivity,which included the majority of products previously managed under BCC, and (2)Enterprise Networking, which included all of the products previously managedunder BNC as well as certain wireless and security offerings that were formerlypart of BCC. Other actions pursued in fiscal 2003 were headcount reductions,outsourcing of certain information technology (IT) functions, and continuingefforts to sell excess facilities. All of these actions generated restructuringcharges, totaling $184.9 million in fiscal 2003, but also resulted inreductions of ongoing sales and marketing, research and development, andgeneral and administrative expenses for fiscal 2003 as compared to fiscal 2002.

 

Infiscal 2004, we are taking a number of steps with the objective of restoring3Com to profitability.  To increaserevenues, we are expanding our product portfolio to include more Layer 3-plusand higher end products, a full line of modular switches and routers, and ahigher-end Voice-over-Internet Protocol (IP) offering.  We believe that such an expanded productportfolio will allow us to deliver converged voice and data networkingsolutions not only to our traditional customers but also to larger andmulti-site enterprises.  Also, in orderto drive sales of these higher end products, we are increasing our direct touchsales, service and support resources, as well as broadening our distributionchannels to include partners, such as system integrators and service providers.

 

Otherefforts are focused on reducing expenses. These efforts include creating asimplified business model. Effective for the first quarter of fiscal 2004, wehave combined the operations of our former Enterprise Networking andConnectivity business units, and now manage and report our operations as asingle, integrated business. The Connectivity products, while still part of ourproduct portfolio, are decreasing as a percentage of total revenue. Theproducts formerly associated with the Enterprise 

 

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Networkingsegment, managed from Marlborough, Massachusetts, are therefore increasing inimportance. Our decision that was announced in May 2003 to move headquartersfrom Santa Clara, California to Marlborough was, in part, due to this trend. Weexpect that this change in headquarters and relocation of certain management functionswill enable us to run the business more effectively and efficiently.

 

Weare also targeting general and administrative expenses to be in the range of$17 million to $18 million per quarter beginning in the second half of fiscal2004 as compared to $24.1 million for the most recent quarter. In June 2003, weannounced our intention to reduce our workforce, most of which will impactgeneral and administrative expenses.  Inaddition, we are relocating transaction processing to lower cost locations.

 

InSeptember 2003, we announced an additional reduction of approximately one-thirdof our workforce. The majority of the employees impacted by this reduction inworkforce are involved in manufacturing operations; we plan to discontinue suchinternal manufacturing operations and outsource them to contract manufacturersduring the third quarter of fiscal 2004. Also impacted by this reduction inworkforce are certain product development functions that will be moved tolower-cost locations by the end of fiscal 2004.

 

Wehave also been making progress regarding the launch of our joint venture withHuawei Technologies, Ltd. that was announced in March 2003, including havingobtained some of the required regulatory approvals and having completed theimplementation of IT systems. Operations of the joint venture are expected to begin in the secondquarter of fiscal 2004, pending receipt of the remaining required regulatoryapprovals in China, and we will provide $160 million in cash to the jointventure at the commencement of its operations.

 

Weexpect that some of the steps that we are taking will result in ongoingdownward pressure on income from continuing operations in the near term.  For example, we are incurring significantcharges for severance costs and write downs of excess facilities related to thereductions of workforce and the closing of our manufacturing operations. Also,general and administrative expenses will be affected due to relocation andrecruiting costs associated with the relocation of key management positions andfunctions from Santa Clara to Marlborough. However, we believe that the steps that we are taking are appropriate atthis time and fully consistent with our goals of increasing revenues andrestoring profitability over the longer term.

 

Theassumptions underlying our planned actions in fiscal 2004 could prove to beinaccurate.  If current economicconditions deteriorate to an unexpected degree, or if our planned actions arenot successful in achieving our goals, there could be additional adverseimpacts on our financial position, revenues, profitability or cash flows.  In that case, we might need to modify ourstrategic focus and restructure our business again to realign our resources andachieve additional cost and expense savings.

 

 

**Critical Accounting Policies**

 

Oursignificant accounting policies require us to make estimates and assumptionsthat affect the amounts reported by us. The following items require the mostsignificant judgment and often involve complex estimation:

 

*Revenue recognition:*  Werecognize a sale when the product has been delivered and risk of loss haspassed to the customer, collection of the resulting receivable is reasonablyassured, persuasive evidence of an arrangement exists, and the fee is fixed ordeterminable. The assessment of whether the fee is fixed or determinableconsiders whether a significant portion of the fee is due after our normalpayment terms. If we determine that the fee is not fixed or determinable, werecognize revenue at the time the fee becomes due, provided that all otherrevenue recognition criteria have been met. Also, sales arrangements maycontain customer-specific acceptance requirements for both products andservices. In 

 

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suchcases, revenue is deferred at the time of delivery of the product or serviceand is recognized upon receipt of customer acceptance.

 

Forarrangements that involve multiple elements, such as sales of products thatinclude maintenance or installation services, revenue is allocated to eachrespective element based on its relative fair value and recognized when revenuerecognition criteria for each element have been met. We use the residual methodto recognize revenue when an arrangement includes one or more elements to bedelivered at a future date and vendor-specific objective evidence of the fairvalue of all the undelivered elements exists. Under the residual method, thefair value of the undelivered elements is deferred and the remaining portion ofthe arrangement fee is recognized as revenue. If evidence of fair value of oneor more undelivered elements does not exist, revenue is deferred and recognizedwhen delivery of those elements occurs or when fair value can be established.

 

Weassess collectibility based on a number of factors, including general economicand market conditions, past transaction history with the customer, and thecredit-worthiness of the customer. We do not typically request collateral fromour customers. If we determine that collection of the fee is not reasonablyassured, then we will defer the fee and recognize revenue upon receipt ofpayment.

 

Asignificant portion of our sales is to distributors and value-added resellers.Revenue is generally recognized when title and risk of loss pass to the customer,assuming all other revenue recognition criteria have been met. Sales to thesecustomers are recorded net of appropriate allowances, including estimates forproduct returns, price protection, and excess channel inventory levels.

 

Forsales of products that contain software that is marketed separately, theprovisions of Statement of Position 97-2, as amended, are applied. Sales ofservices, including professional services, system integration, projectmanagement and training are recognized upon delivery and completion ofperformance. Other service revenue, such as that related to maintenance andsupport contracts, is recognized ratably over the contract term, provided thatall other revenue recognition criteria have been met. Royalty revenue from licensingis recognized as earned.

 

*Allowance for doubtful accounts:*We continuously monitor payments from ourcustomers and maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Whenwe evaluate the adequacy of our allowances for doubtful accounts, we take intoaccount various factors including our accounts receivable aging, customercredit-worthiness, historical bad debts, and geographic and political risk. Ifthe financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. As of August 29, 2003, our net accounts receivable balance was $83.6million.

 

*Inventory:*  Inventory is stated at thelower of standard cost, which approximates cost, or net realizable value. Costis based on a first-in, first-out basis. We review the net realizable value ofinventory, both on hand as well as for inventory that we are committed topurchase, in detail on an on-going basis, with consideration given todeterioration, obsolescence, and other factors. If actual market conditionsdiffer from those projected by management and our estimates prove to beinaccurate, additional write downs or adjustments to cost of sales may berequired. Additionally, we may realize benefits through cost of sales for saleor disposition of inventory that had been previously written off. As of August29, 2003, our inventory balance was $26.2 million.

 

*Goodwill and intangible assets:*  Wereview the value of our long-lived assets, including goodwill, in accordancewith the applicable accounting guidance for impairment whenever events orchanges in business circumstances indicate that the carrying amount of theassets may not be fully recoverable or that the useful lives of these assetsare no longer appropriate. During fiscal 2003, we recorded $3.2 million ofintangible asset write downs, as well as a $45.4 million write off of goodwillrelated to continuing operations resulting from the transitional goodwillimpairment evaluation under Statement of Financial Accounting Standards (SFAS)142. We also recorded write downs of $1.9 million of intangible assets in thefirst quarter of fiscal 2004. As of August 29, 2003, we had $8.6 million of netintangible assets and $0.9 million of goodwill remaining on the balance sheet,which we believe to be 

 

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realizablebased on the estimated future cash flows of the associated products and technology.However, it is possible that the estimates and assumptions used, such as futuresales and expense levels, in assessing the carrying value of these assets mayneed to be reevaluated in the case of continued market deterioration, whichcould result in further impairment of these assets.

 

*Restructuring charges:* Over the last several years we haveundertaken significant broad restructuring initiatives. These initiatives haverequired us to utilize significant estimates related to held for saleproperties, which resulted in both accelerated depreciation charges and writedowns of these properties. In addition, we have had to record estimatedprovisions for severance and outplacement costs, lease cancellations, long-termasset write downs, and other restructuring costs. Given the significance andthe timing of the execution of such activities, this process is complex andinvolves periodic reassessments of estimates made at the time the originaldecisions were made. The accounting for restructuring costs and assetimpairments requires us to record provisions and charges when we have takenactions and/or have the appropriate approval for taking action, and when aliability is incurred. Our policies require us to continually evaluate theadequacy of the remaining liabilities under our restructuring initiatives. Asmanagement continues to evaluate the business, there may be additional chargesfor new restructuring activities as well as changes in estimates to amountspreviously recorded.

 

*Warranty:* A limited warranty is provided on our products for periods rangingfrom 90 days to the lifetime of the product, depending upon the product, andallowances for estimated warranty costs are recorded during the period of sale.The determination of such allowances requires us to make estimates of productreturn rates and expected costs to repair or replace the products underwarranty. If actual return rates and/or repair and replacement costs differsignificantly from our estimates, adjustments to recognize additional cost of salesmay be required.

 

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**Resultsof Operations**

** **

Thefollowing table sets forth, for the periods indicated, the percentage of totalsales represented by the line items reflected in our condensed consolidatedincome statements:

 
|                                                                                                         |   | **Quarter  Ended**   |       |
|--------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                                         |   | **August 29,  2003** | ** ** | **August 30,  2002** | ** ** |
|                                                                                                         |   |                 |       |   |   |
| Sales                                                                                                        |   | 100.0                | %          | 100.0 | % |
| Cost of sales                                                                                                |   | 69.1                 |       | 53.7 |   |
| Gross margin                                                                                                 |   | 30.9                 |       | 46.3 |   |
| Operating expenses:                                                                                          |   |                 |       |   |   |
| Sales and marketing                                                                                          |   | 38.7                 |       | 21.1 |   |
| Research and development                                                                                     |   | 16.6                 |       | 11.7 |   |
| General and administrative                                                                                   |   | 14.9                 |       | 9.2 |   |
| Amortization and write down of intangibles                                                                   |   | 2.1                  |       | 0.7 |   |
| Restructuring charges                                                                                        |   | 30.1                 |       | 7.3 |   |
| Loss on land and facilities, net                                                                             |   | —               |       | 0.4 |   |
| Total operating expenses                                                                                     |   | 102.4                |       | 50.4 |   |
| Operating loss                                                                                               |   | (71.5                | )          | (4.1 | ) |
| Gains (losses) on investments, net                                                                           |   | 0.1                  |       | (4.2 | ) |
| Interest and other income, net                                                                               |   | 2.4                  |       | 3.6 |   |
|                                                                                                         |   |                 |       |   |   |
| Loss from continuing operations before income  taxes and cumulative effect of change in accounting principle |   | (69.0                | )          | (4.7 | ) |
| Income tax provision (benefit)                                                                               |   | (3.7                 | )          | 1.4 |   |
| Loss from continuing operations before cumulative  effect of change in accounting principle                  |   | (65.3                | )          | (6.1 | ) |
| Discontinued operations, net of taxes                                                                        |   | (0.2                 | )          | (13.3 | ) |
|                                                                                                         |   |                 |       |   |   |
| Loss before cumulative effect of change in accounting  principle                                             |   | (65.5                | )          | (19.4 | ) |
| Cumulative effect of change in accounting  principle                                                         |   | —               |       | (16.9 | ) |
|                                                                                                         |   |                 |       |   |   |
| Net loss                                                                                                     |   | (65.5                | )%         | (36.3 | )% |

 

Sales 

 

Salesin the first quarter of fiscal 2004 totaled $161.9 million, a decrease of$107.3 million, or 40 percent, compared to the same quarter one year ago.  Included in this decrease was a reduction insales that resulted from our concerted efforts to reduce the level of inventoryin our distribution channels. We estimate that based on current sales-outrates, the impact on revenue in the first quarter of fiscal 2004 wasapproximately $13.0 million.

 

Salesof our enterprise data product lines decreased $60.0 million as compared to thesame quarter one year ago. Excluding the channel inventory reduction, thisdecrease was driven mainly by increased price competition and a shift in mixtowards lower priced products. Sales of our desktop, mobile, and serverconnectivity products decreased $33.4 million. The decrease in sales ofconnectivity products as compared to the same period one year ago was largelydue to lower volumes, which we believe resulted from a shift in technologytowards alternative products; overall unit sales decreased approximately 44percent as compared to the same quarter one year ago. Also reflected in thisdecrease in sales were declining average selling prices. Sales of our voiceproducts decreased $6.5 million, which was mainly the result of marketcompetition. Sales also declined $5.2 million due to the prior period’srecognition of revenue related to exited products that was deferred as of theend of fiscal 2002. 

 

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Subsequentto the first quarter of fiscal 2003, there was no significant revenuerecognized associated with sales of such products. Sales of services decreased$2.2 million due to lower maintenance contract renewals.

 

*By Geography.*In the first quarter of fiscal 2004, U.S. sales decreased 49 percentand international sales decreased 34 percent compared to the same period oneyear ago. The rate of decline in our international sales was comparable acrossall regions, including the Americas, excluding the U.S., EMEA (Europe, MiddleEast, and Africa), and Asia Pacific Rim. With respect to the product linesdiscussed above, our connectivity and data products had declines that impactedall regions, but were more pronounced in our domestic market. The declines insales of our voice and exited products were primarily in the domestic market,and the decline in sales of services was across both international and domesticmarkets. U.S. sales in the first quarter of fiscal 2004 represented 34 percentof total sales, compared to 40 percent of total sales in the first quarter offiscal 2003.

 

GrossMargin

Gross margin as a percentage of saleswas 30.9 percent in the first quarter of fiscal 2004 compared to 46.3 percentin the first quarter of fiscal 2003. Gross margin decreased due to severalfactors, as follows:

 

**•**      Approximately six percentage points due tothe net effect of lower average selling prices, the predominant factor,partially offset by reductions in direct product costs;

 

•      Approximately four percentage points inaggregate due to higher manufacturing overhead costs (one percentage point),warranty costs (two percentage points) and other post-sale technical supportcosts (one percentage point) as a percentage of sales.  These effects are principally volumerelated.  Although the costs in thesecategories declined in dollar amount by approximately nine percent overall fromthe prior year level, they did not decline to the same degree as sales becausea portion of the costs are not directly variable with sales;

 

•      Approximately two percentage points due tocurrent period charges relating to impairments of manufacturing assets in ourDublin, Ireland facility as a result of our decision to outsource our remainingmanufacturing operations; and

 

•      Approximately two percentage points as aresult of benefits recorded in the first quarter of fiscal 2003 that did notrecur in the first quarter of fiscal 2004. These prior period benefits included refunds of duties and proceedsrelated to inventory that had previously been written off of $3.5 million and$2.0 million, respectively.

 

OperatingExpenses

Operatingexpenses in the first quarter of fiscal 2004 were $165.7 million, or 102.4percent of sales, compared to $135.6 million, or 50.4 percent of sales, in thefirst quarter of fiscal 2003.  Operatingexpenses in the first quarter of fiscal 2004 included amortization and writedown of intangibles of $3.4 million and restructuring charges of $48.6million.  Operating expenses in thefirst quarter of fiscal 2003 included amortization and write down ofintangibles of $2.0 million, restructuring charges of $19.6 million, and netlosses on land and facilities of $1.2 million. Excluding these items, operatingexpenses for the first quarter of fiscal 2004 were $113.7 million, a slightincrease as compared to approximately $112.9 million in the first quarter offiscal 2003. This increase in operating expenses was mainly driven by highersales and marketing expenses, partially offset by decreases in research anddevelopment and general and administrative expenses.

 

*Sales and Marketing. *Sales andmarketing expenses in the first quarter of fiscal 2004 increased $5.9 million,or ten percent, compared to the first quarter of fiscal 2003, and increased to38.7 percent of total sales for the first quarter of fiscal 2004, compared to21.1 percent of total sales for the first quarter of fiscal 2003. Theyear-over-year increase in expenses was mainly due to increased spending onmarketing initiatives to drive demand, as well as increased employee-relatedexpenses resulting from the addition of sales personnel.

 

*Research and Development. *Research anddevelopment expenses in the first quarter of fiscal 2004 decreased $4.6million, or 14 percent, compared to the first quarter of fiscal 2003, andincreased to 16.6 percent of sales in the first quarter of fiscal 2004 comparedto 11.7 percent of total sales in the first quarter of fiscal 2003. Thedecrease in research and development costs compared to the same period one yearago was due mainly to depreciation expense associated with engineering assets,as well as a 

 

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decreasein project materials used in research and development efforts.

 

G*eneral and Administrative. *General and administrative expenses in the firstquarter of fiscal 2004 decreased $0.6 million compared to the first quarter offiscal 2003, and increased to 14.9 percent of total sales in the first quarterof fiscal 2004 compared to 9.2 percent of total sales for the first quarter offiscal 2003. The two largest factors contributing to the decrease in generaland administrative expenses compared to the same period one year ago weredecreased workforce expenses due to headcount reductions and a decrease in baddebt expenses, which were largely offset by increases for professional servicesrelating to the establishment of our joint venture with Huawei and a litigationsettlement.

 

*Amortization and Write Down of Intangibles.** *Amortization and write down ofintangibles increased $1.4 million in the first quarter of fiscal 2004 ascompared to the first quarter of fiscal 2003. This increase was largely theresult of a $1.9 million impairment, consisting primarily of developed and coretechnology intangible assets related to the fiscal 2001 acquisition of theGigabit Ethernet business of Alteon Websystems. Partially offsetting thisimpairment was decreased amortization expense resulting from lower amortizableintangible asset bases.

 

*Restructuring Charges.* Restructuring charges in the first quarterof fiscal 2004 were $48.6 million, compared to $19.6 million in the firstquarter of fiscal 2003. Restructuring charges in the first quarter of fiscal2004 included $35.9 million in facilities-related charges, including $17.5million for an impairment and accelerated depreciation of our Dublinmanufacturing facility, an $11.2 million write down of a Santa Clara facility,$5.5 million of accelerated depreciation of an additional Santa Clara facility,a loss of $1.1 million related to the sale of our Rolling Meadows, Illinoisfacility, and $0.6 million of other facilities-related charges.**Restructuring charges in the firstquarter of fiscal 2004 also included $7.5 million in severance related chargesand $5.2 million related to other restructuring costs, primarily relating toother obligations associated with the outsourcing of our manufacturingoperations. These charges were primarily the result of cost reduction effortsinitiated in fiscal 2004, and future charges for facilities and severance areexpected in the second and third quarters of fiscal 2004 as we transition ourmanufacturing operations to third-party providers, relocate development andadministrative functions, and continue the accelerated depreciation on one ofour Santa Clara facilities.

 

Restructuringcharges in the first quarter of fiscal 2003 were $19.6 million and primarilyrepresented costs for severance and outplacement charges, write downs offacilities held for sale, and losses on IT equipment sold as part of our IToutsourcing project. These charges were primarily the result of cost reductionefforts initiated in fiscal 2003, including the integration of BCC into BNC.

 

*Loss on Land and Facilities, Net.* Net loss on land and facilities was $1.2million for the first quarter of fiscal 2003. This loss was due to the writedown of held for sale property in Salt Lake City, Utah. This property wasclassified as held for sale prior to the inception of our restructuringinitiatives, and therefore the net losses associated with it were not theresult of restructuring actions and were not recorded as part of restructuringcharges.

 

Gains(Losses) on Investments, Net

Netgains on investments in the first quarter of fiscal 2004 were not significant.Net losses on investments in the first quarter of fiscal 2003 were $11.5million due mainly to both the sale and market value adjustments of investmentsin venture capital funds.

 

Interest and Other Income, Net

Interestand other income, net, in the first quarter of fiscal 2004 decreased $5.7million compared to the first quarter of fiscal 2003. The decrease as comparedto the same period one year ago was due primarily to lower interest incomerelating to income tax refunds, which generated $1.4 million and $5.1 millionof interest income in the first quarters of fiscal 2004 and 2003, respectively,and lower interest rates. Lower interest expense resulting from the repaymentof debt was offset by increased foreign exchange losses.

 

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Income Tax Provision (Benefit) 

Ourincome tax benefit was $6.0 million for the first quarter of fiscal 2004,compared to a $3.7 million provision for the first quarter of fiscal 2003. Thetax benefit in the first quarter of fiscal 2004 included the benefit of aforeign net operating loss carryback of $8.5 million offset by a provision of$2.5 million for taxes in certain state and foreign jurisdictions. The tax provisionin the first quarter of fiscal 2003 was the result of providing for taxes incertain state and foreign jurisdictions.

 

DiscontinuedOperations

Discontinuedoperations relate to our CommWorks business that was sold in the fourth quarterof fiscal 2003. We recorded a loss of $0.3 million in the first quarter offiscal 2004 due to adjustments to previous estimates of liabilities related tothe sale of CommWorks. In the first quarter of fiscal 2003 the loss relating tothe operations of CommWorks was $35.7 million, and included $0.3 million of taxexpense.

 

CumulativeEffect of Change in Accounting Principle

Asa result of our adoption of SFAS 142, we conducted a transitional goodwillimpairment evaluation of the $66.5 million of goodwill recorded as of May 31,2002 and wrote off goodwill totaling $45.4 million relating to continuingoperations as a change in accounting principle effective June 1, 2002. We alsowrote off $20.2 million of goodwill relating to the CommWorks business, whichis included in discontinued operations.

 

 

**Liquidityand Capital Resources**

** **

Cashand equivalents and short-term investments at August 29, 2003 were $1,484.4million, relatively flat compared to the balance as of May 30, 2003 of $1,484.6million.

 

Netcash used in operating activities was $41.0 million in the first quarter offiscal 2004, primarily reflecting our loss from continuing operations of $105.7million. We expect that cash flows from operating activities will be negativeover the next two quarters due to continuing losses from operations, includingthe effects of charges associated with cost reduction and other restructuringactions. However, we are targeting breakeven cash flow from operatingactivities in the fourth quarter of fiscal 2004.

 

Significantcommitments that will require the use of cash in future periods includeobligations under lease, royalty and patent licensing arrangements. Totalfuture lease obligations as of August 29, 2003 were $65.4 million, of which$19.4 million will be paid over the next twelve months.  Obligations under royalty and patentlicensing arrangements as of August 29, 2003 were approximately $22.5 million,of which $10.4 million is expected to be paid over the next twelve months.Additionally, we have several agreements whereby we have sold product toresellers who, in turn, have sold the product to end users, and we haveguaranteed the payments of the end users to our customers. If all end usersunder these agreements were to default on their payments as of August 29, 2003,we would be required to pay approximately $7.8 million to our customers.However, as of August 29, 2003, our deferred revenue and associated accrualsrelated to such sales approximate the guaranteed amounts; thus, any paymentspursuant to the guarantees would not have a material impact on our results ofoperations.

 

Netcash provided by investing activities was $64.2 million for the first quarterof fiscal 2004, including approximately $31.1 million of net proceeds relatedto sales and maturities and purchases of debt and equity securities, and $33.0million of net proceeds related to sales and purchases of fixed assets.

 

Forthe first quarter of fiscal 2004, we received proceeds of $258.0 million frommaturities and sales of investments, almost all of which related to municipaland corporate bonds and government agency instruments. Offsetting theseproceeds were investments totaling $226.0 million in municipal and corporatebonds and government agency instruments, as well as investments totaling $0.9million in equity securities.

 

Theinvestments in equity securities discussed above include the activities of 3ComVentures. 3Com 

 

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Venturesselectively makes strategic investments in privately-held companies and in limitedpartnership venture capital funds, which in turn invest in privately-heldcompanies. This may include a strategic commercial or technology relationship,such as a component supply agreement or technology license arrangement, withthese privately-held companies. These investments were entered into with theintention of complementing our business strategies and research and developmentefforts. 3Com Ventures has made strategic investments of $0.9 million in thefirst quarter of fiscal 2004 and has committed to make additional capitalcontributions to certain venture capital funds totaling $12.2 million. We arecontractually obligated to provide funding upon calls for capital. Theexpiration dates for such capital calls are generally five to eight years fromthe inception of the fund, and the amounts and timing of such calls during thatperiod are entirely at the discretion of the funds’ general partners. Weestimate that we will pay approximately $4.5 million over the next twelvemonths as capital calls are made.

 

Duringthe first quarter of fiscal 2004, we made capital expenditures of $4.2 millionfor new property and equipment.  Also,we collected $37.2 million from sales of property and equipment, primarilyrelating to the sale of our Rolling Meadows facility in July 2003. As of August29, 2003, capital expenditure commitments outstanding were not material.

 

Asannounced in March 2003, we are in the process of forming a joint venture withHuawei. In addition to our operations in China and Japan and licenses to ourrelated intellectual property, our contributions to the joint venture willinclude $160.0 million in cash. We expect to make the cash contribution in thesecond quarter of fiscal 2004.

 

Netcash provided by financing activities was $13.4 million in the first quarter offiscal 2004, including collections of $4.2 million on a note receivable relatedto the sale of warrants during fiscal 2002 to Broadcom and $9.4 million ofproceeds from the issuance of common stock. As of August 29, 2003, all installmentpayments due pursuant to the note receivable had been received. We expect tocollect the remaining balance of $4.2 million in the second quarter of fiscal2004.

 

Therewere no borrowings or repayments under our revolving line of credit during thefirst quarter of fiscal 2004, and there were no amounts outstanding as ofAugust 29, 2003. Also, we did not repurchase any shares of common stock in thefirst quarter of fiscal 2004. Our current stock repurchase program permitsexpenditures of up to $100.0 million through March 2005.

 

Inthe first quarter of fiscal 2004, we collected $9.4 million from the issuanceof approximately 2.2 million shares of stock under our employee stock optionplans. Our stock option program is a broad-based, long-term retention programthat is intended to attract and retain talented employees and align stockholderand employee interests. We consider our option program critical to ouroperations and productivity; essentially all of our employees participate. Theprogram consists of three plans: one under which officers and employees may begranted options to purchase shares of our stock, one under which non-employeedirectors are granted options, and a broad-based plan under which options maybe granted to all employees other than officers and directors.

 

Asof August 29, 2003, our outstanding stock options as a percentage ofoutstanding shares were 23 percent. This potential dilution to existingstockholders is mainly the result of the effect of our distribution of Palm,Inc. common stock in the first quarter of fiscal 2001. As a result of the Palmdistribution, the number of shares subject to option grants was adjusted topreserve the intrinsic value of the stock options, resulting in an increase of134 million options, and bringing the total option shares outstanding to 169million at the time of the distribution. The potential dilution has been anarea of focus for senior management. As a result of reductions in the number ofemployees, stock option exercises, stock repurchase programs, and management ofnew grants, the number of outstanding options has been reduced approximately 50percent since the Palm distribution. In addition, as discussed below, thenumber of options available for future grant was reduced by a net 108 million sharesdue to approvals of

 

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proposalssubmitted to our stockholders at our annual stockholder meeting in September2003.

 

Stockoption activity during the first quarter of fiscal 2004 and stock option detailas of August 29, 2003, were as follows:

 
|                         |   | **Number  of shares** |   | **Weighted  average  exercise price** | ** ** |
|------------------------------|--------|-----------------------|--------|---------------------------------------|------------|
|                         |   | **(in  thousands)**   |   |                                  | ** ** |
|                         |   |                  |   |                                  |       |
| Outstanding, May 30, 2003    |   | 85,502                |   | $                                     | 7.03       |   |
|                         |   |                  |   |                                  |       |
| Granted                      |   | 7,449                 |   | 5.12                                  |       |
| Exercised                    |   | (2,230                | )      | 4.29                                  |       |
| Canceled                     |   | (6,561                | )      | 7.75                                  |       |
| Outstanding, August 29, 2003 |   | 84,160                |   | $                                     | 6.88       |   |

 
|                          |   | **Outstanding  options  as of August 29, 2003** | ** ** | **Exercisable  at August 29, 2003**   | ** ** |
|-------------------------------|--------|-------------------------------------------------|------------|---------------------------------------|------------|
| **Range of  exercise prices** |   | **Number  of shares**                           | ** ** | **Weighted  average  exercise price** | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise price** | ** ** |
|                          |   | **(in  thousands)**                             | ** ** |                                  | ** ** | **(in  thousands)** | ** ** |   | ** ** |
|                          |   |                                            |       |                                  |       |   |   |   |   |
| $ 0.13                        | -      | $ 4.29                                          |       |                                  | 9,741      |   | $ | 3.92 |   | 4,208 |   | $ | 3.48 |   |
| 4.30                          | -      | 5.10                                            |       |                                  | 14,066     |   | 4.83 |   | 10,554 |   | 4.82 |   |
| 5.11                          | -      | 5.54                                            |       |                                  | 19,098     |   | 5.37 |   | 12,449 |   | 5.45 |   |
| 5.55                          | -      | 6.09                                            |       |                                  | 14,440     |   | 5.93 |   | 13,654 |   | 5.94 |   |
| 6.10                          | -      | 10.09                                           |       |                                  | 15,004     |   | 8.32 |   | 12.403 |   | 8.28 |   |
| 10.10                         | -      | 21.57                                           |       |                                  | 11,811     |   | 13.51 |   | 9,342 |   | 13.48 |   |
| Total                         |   | 84,160                                          |       | $                                     | 6.88       |   | 62,610 |   | $ | 7.08 |   |

 

Thefollowing table summarizes our equity compensation plans as of August 29, 2003:

 
|                                                     |   | **Number of securities to  be issued upon  exercise of options** | ** ** | **Weighted average  exercise price of  outstanding options** |       | **Number of  securities  remaining available  for future issuance under****equity compensation plans  (excluding securities  reflected in 1st column)** | ** ** |
|----------------------------------------------------------|--------|------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                     |   | **(in thousands)**                                               |       |                                                         | ** ** | **(in thousands)**                                                                                                                                      | ** ** |
|                                                     |   |                                                             |       |                                                         |       |                                                                                                                                                    |       |
| Equity  compensation plans approved by stockholders      |   | 26,306                                                           |       | $                                                            | 7.59       |                                                                                                                                                    | 41,187     |   |
| Equity  compensation plans not approved by stockholders* |   | 56,459                                                           |       | 6.62                                                         |       | 92,351                                                                                                                                                  |       |
|                                                     |   |                                                             |       |                                                         |       |                                                                                                                                                    |       |
| Total                                                    |   | 82,765                                                           |       | $                                                            | 6.93       |                                                                                                                                                    | 133,538    |   |

 

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*Excludes 1.4 million outstandingoptions with an average exercise price of $3.57. These options were assumed inconnection with acquisitions and no additional options are available for futureissuance under such plans.

 

Options issued and available for futureissuance outside of the stockholder-approved plans have been issued under ourbroad based 1994 Stock Option Plan, as amended. Options granted from this planwere granted at fair value, vest over two to four years, and expire ten yearsafter the date of grant. In September 2003, our stockholders approved 3Com’s2003 Stock Plan (the new plan), which replaced the 

 

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1983 Stock Option Plan, the 1994Stock Option Plan, the Director Plan, and the Restricted Stock Plan (the priorplans) for all stock awards granted subsequent to the approval date. Inconnection with the approval of the new plan, we cancelled all shares availablefor issuance under the prior plans, which included approximately 128 million sharesas of the approval date; at the same time, 20 million shares were reserved forissuance under the new plan.

 

There are no assurances that we canreduce our net losses and negative cash flow in the foreseeable future, or thatwe can raise capital as needed to fund our operations on an ongoing basis.However, based on current business conditions and our current operating andfinancial plans, but subject to the discussion in Business Environment andIndustry Trends below, we believe that our existing cash and equivalents,short-term investments, and revolving line of credit will be sufficient tosatisfy our anticipated cash requirements for at least the next twelve months.

 

**Effects of RecentAccounting Pronouncements**

 

In November 2002, the EmergingIssues Task Force (EITF) reached a consensus on Issue No. 00-21, “RevenueArrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspectsof the accounting by a vendor for arrangements under which the vendor willperform multiple revenue generating activities. EITF 00-21 will be effectivefor fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21will not have a material impact on our results of operations or financialposition.

 

**BusinessEnvironment and Industry Trends**

 

Industry trends and specific risksmay affect our future business and results. The matters discussed below could cause our future results to differfrom past results or those described in forward-looking statements.

 

***Wehave incurred significant net losses in recent fiscal periods, including $284million, $596 million and $965 million in fiscal years 2003, 2002 and 2001,respectively, and we may not be able to return to profitability.***

 

We incurred a net loss of $106million for the first quarter of fiscal 2004, and net losses of $284 million,$596 million and $965 million in fiscal 2003, 2002 and 2001, respectively.  Although we are taking steps designed toimprove our results of operations, we cannot assure you that we will return toprofitability.  Further, if we do returnto profitability, we cannot assure you that we will be able to sustain orincrease such profitability in the future. We have faced a number of challenges that have affected our operatingresults.  Specifically, we haveexperienced, and may continue to experience, the following:

 

•                  decliningrevenue due to: (a) price competition and (b) reduced incoming order rate andcustomer backlog which we believe reflects decreased demand for our productsresulting from the overall slowdown in the networking industry as well astechnological changes and trends in the industry, such as the integration ofnetworking, communications and computer processing functions on computer chipsthat can perform the same functions as some of our products;

 

•                  increasedrisk of excess and obsolete inventories;

 

•                  excessfacilities and manufacturing capacity;

 

•                  highergeneral and administrative costs, as a percentage of revenue; and

 

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•                  disruptionsresulting from our workforce reductions and employee attrition.

 

***Wehave announced an agreement to form a joint venture in China with Huawei that,if not successful, may materially and adversely impact our business, businessprospects and operating results.***

 

In March 2003, we announced anagreement to form a joint venture in China for enterprise networking productswith a leading Chinese company, Huawei, in which we will initially have a 49percent minority interest.  The3Com-Huawei joint venture is expected to begin operations in the second quarterof fiscal 2004 after receiving required regulatory approvals.  We currently resell certain products sourcedfrom Huawei pursuant to an original equipment manufacturer (OEM) agreement.After it is formed, the joint venture will enter into an agreement with us toresell certain products of the joint venture under the 3Com® brand,and the joint venture will resell certain 3Com products under the jointventure’s brand in China and certain other countries.  The results of the joint venture will be reflected in ouroperating results to the extent of our ownership interest, and losses of thejoint venture would adversely impact our operating results.

 

The joint venture may be requiredto obtain regulatory approvals from the Chinese government for the export,import, or transfer of restricted technologies.  The joint venture may not be able to obtain those regulatoryapprovals in a timely manner or at all.

 

Operational challenges alsoconfront the joint venture.  Formationof the joint venture and integration of the business assets and operationsbeing contributed by each partner will involve complex activities that must becompleted in a short period of time. The new joint venture is likely to confront numerous challengescommencing its operations and operating successfully at its principallocations. The business of the joint venture will be subject to operationalrisks that would normally arise for a technology company with global operationspertaining to research and development, manufacturing, sales, service,marketing, and corporate functions. Competition in the enterprise networkingmarket will involve challenges from numerous, well-established companies withsubstantial resources and significant market share.

 

Our business, business prospects andoperating results are heavily dependent upon the success of the 3Com-Huaweijoint venture. In particular, our product development activities will becomeincreasingly interdependent with those of the joint venture. If the jointventure and its related agreements with us are not successful or lesssuccessful than we anticipate, we may not introduce new products needed tobroaden our high-end enterprise networks product line, which may adverselyaffect our revenues, business and business prospects. Even if the joint ventureis successful, there may be disruption to our existing distribution channelsand potential conflict with our current channel partners resulting from theestablishment of the joint venture’s operations and distribution arrangements.

 

***Ourstrategy of outsourcing functions and operations not central to our businessmay fail to reduce cost and may disrupt our operations.***

*** ***

We continue to look for ways todecrease cost and improve efficiency by contracting other companies to performfunctions or operations that do not contribute to our core technologybusiness.  Up to now, our efforts havefocused on using outside vendors to meet some of our IT and manufacturingneeds.  We have recently announced ourintention to outsource all manufacturing. To achieve more cost savings or operational benefits, we may expand ouroutsourcing of IT activities, as well as aspects of the following operations:human resources, accounting, internal audit, security, and engineeringservices.  Although we believe that outsourcingthese functions will result in lower costs and increased efficiencies, this maynot be the case.  For example,outsourcing means that we will be relying upon third parties to meet our needs.  Because these third parties may not be asresponsive to our needs as we would be ourselves, we may increase the risk ofdisruption to our operations.  Inaddition, our contracts with these third parties sometimes include substantialpenalties for terminating the contracts early or failing to maintain minimumservice levels.  Because we cannotalways predict how long we will need the services or how much of the serviceswe will use, we may have to pay these penalties.

 

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***Ourrevenues may decrease, and we may not be able to compensate for such lowerrevenues with cost reductions sufficient to generate positive net income orcash flow.***

*** ***

We believe that we must implementstrict cost and expense reductions if we are to generate positive net incomeand cash flow from operations in future quarters.  If we are not able to effectively reduce our costs and expensescommensurate with, and at the same pace as, any further deterioration in ourrevenues, we may not be able to generate positive net income or cash flow fromoperations.  If we continue toexperience negative cash flow from operations over a prolonged period of time,our ability and efforts to operate our business effectively could be adverselyaffected.  We are unable to predict theexact amount of cost reductions required for us to generate positive net incomeor cash flow from operations because we cannot accurately predict the amount ofour future revenue.  Our future revenuedepends, in part, on future economic and market conditions, which we are unableto forecast accurately. We also cannot forecast the impact of newproducts.  Although we cannot accuratelypredict the amount of our future revenue overall, we expect that revenue fromsales of desktop, mobile and server connectivity products, which representedapproximately 20% of total revenue for the first quarter of fiscal 2004, willbe essentially flat in the second quarter of fiscal 2004 and then will declineby 10 to 20 percent per quarter thereafter.

 

***Ourefforts to consolidate our real estate portfolio and sell certain real estateholdings may not generate the expected level of cash proceeds or result inreductions of operating costs.***

 

In connection with our ongoingrestructuring and cost reduction activities, we are making efforts toconsolidate our operations and dispose of our excess real estate holdings,including facilities associated with our manufacturing and other businessoperations in Santa Clara, Dublin, and Hemel Hempstead, England.  Despite our best efforts, our ability todispose of our excess real estate holdings may be impaired by adverseconditions in the commercial real estate market in the U.S. and elsewheregenerally, and in Silicon Valley in particular.  The value of commercial real estate in Silicon Valley hasdecreased substantially over the past several years as a result of the slowdownin the technology industry, and many of our real estate holdings are in SiliconValley.  Additionally, to the extentthat we continue to own excess facilities and are unable to lease thefacilities to third parties, our operating results will be adversely affectedby the continuing operating costs associated with the facilities.

 

***Ourworkforce reductions, and the high cost of living in certain locations, maymake it more difficult for us to retain and recruit the qualified employees andmanagement personnel that are critical to our success.***

 

Our success depends upon retainingand recruiting highly qualified employees and management personnel.  However, the significant downturn in ourbusiness environment has had a negative impact on our operations.  As a result, we have restructured ouroperations to reduce our workforce and implement other cost reductionactivities.  Although we believe thesevarious changes and actions will improve our organizational effectiveness andcompetitiveness, they could lead, in the short term, to disruptions in ourbusiness, reduced employee morale and productivity, problems with retainingexisting employees and recruiting future employees and increased financialcosts.  Recruiting and retaining skilledpersonnel, including engineers, sales representatives and product marketingmanagers, continues to be difficult.  Inaddition, at certain locations where we operate, the cost of living isextremely high and it may be difficult to attract and retain key employees andmanagement personnel at a reasonable cost. If we cannot successfully recruit and retain qualified employees andmanagement personnel, our product introduction schedules, customerrelationships, results of operations and financial position may be impaired andour overall ability to compete may be adversely affected.

 

***Effortsto reduce general and administrative costs could involve further workforcereductions and lead to disruptions in our business.***

 

General and administrative expensesas a percent of revenue have been higher than our desired long-term financialmodel.  We have taken, and will continueto take, actions to reduce these expenses. Future actions could include further reductions in our workforce,relocation of transaction processing

 

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activities to lower cost locations,changes or modifications in IT systems or applications and processreengineering.  As a result of theseactions, some employees with critical skills will be severed, and otheremployees will leave our company voluntarily due to the uncertaintiesassociated with our business environment and their job security.  In addition, reductions in overall staffinglevels will make it difficult for us to satisfy the demands of our preferredbusiness practices and to address legal and regulatory obligations in aneffective manner.  The failure tomaintain our preferred business practices and meet our legal and regulatoryobligations effectively could ultimately lead to missed business opportunities,higher operating costs or penalties.

 

***Iffuture business conditions present unanticipated challenges, we may need tomake further changes to our business structure or reductions to our workforce.***

 

In response to industry and marketconditions, we have restructured our business and reduced our workforce. Theassumptions underlying our restructuring efforts will be assessed on an ongoingbasis and may prove to be inaccurate. We may have to restructure our business again to achieve additional costsavings and to strategically realign our resources.  Our restructuring plan is based on certain assumptions regardingthe cost structure of our business and the nature, severity, and duration ofthe current economic downturn, which may not prove to be accurate.  While restructuring, we have assessed, andwill continue to assess, whether we should further reduce our workforce orfurther expand our outsourcing activities. We may not be able to successfullyimplement the initiatives we have undertaken in restructuring our business;even if successfully implemented, these initiatives may not be sufficient tomeet and keep pace with changing industry and market conditions and to achievepositive net income and cash flow from operations.

 

***Ifour cash flow significantly deteriorates in the future, our liquidity andability to operate our business could be adversely affected.***

 

We incurred a significant net lossand negative cash flow from operations for the first quarter of fiscal 2004.  If we continue to incur significant netlosses and negative cash flow from operations over a prolonged period of time,or if our cash flow from operations significantly deteriorates in the future,our liquidity and ability to operate our business could be adverselyaffected.  For example, our ability toraise financial capital may be hindered due to the possibility of continuingnet losses and negative cash flow in the future.  An inability to raise financial capital would limit our operatingflexibility.

 

The following items could requireunexpected future cash payments or limit our ability to generate cash:

 

•                  inabilityto dispose of real estate holdings;

 

•                  taxesdue upon the transfer of cash held in foreign locations; and

 

•                  taxesassessed by local authorities where we conduct business.

 

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***Ourdecision to move the principal location of our senior executive management teamwill result in costs for relocation, executive severance, and recruitment costs,and could result in disruptions to our business.***

 

In fiscal 2004, we are moving theprincipal location of our senior executive officers and certain functionstypically performed at corporate headquarters to our Marlborough facility,which is the primary location and base of operations for our ongoing enterprisenetworking business.  Although arelatively small percentage of our employees will be affected by the relocationof our corporate headquarters, such changes will require us to incur expensesand to make the required effort to effect the relocation.  For example, we expect to incur relocationcosts, executive severance costs (for those executives not moving toMarlborough), and recruitment costs (for replacing the individuals not movingto Marlborough).   Also, although webelieve the relocation will improve our organizational effectiveness, it couldlead, in the short term, to disruptions in our business.

 

***Wemay not respond effectively to increased competition caused by industryvolatility and consolidation.***

 

Our business could be seriouslyharmed if we do not compete effectively. We face competitive challenges that are likely to arise from a number offactors, including:

 

•                  industryvolatility resulting from rapid product development cycles;

 

•                  increasingprice competition due to maturation of basic networking technologies;

 

•                  industryconsolidation resulting in competitors with greater financial, marketing, andtechnical resources;

 

•                  thepresence of existing competitors with greater financial resources together withthe potential emergence of new competitors with lower cost structures and morecompetitive offerings; and

 

•                  greatercompetition for fewer customers as a result of consolidation in the resellerand distribution channels.

 

***Theincreased integration of networking, communications, and computer processingfunctions on a reduced number of computer chips may adversely affect our futuresales growth and operating results.***

 

The integration of networking,communications, and computer processing functions on a reduced number ofcomputer chips has become an industry trend. This trend is sometimes referred to as “siliconization.”  Many of these integrated computer chipsoffer improved features and increased performance at lower cost.  However, we are not a computer chipcompany.  Rather, we make products thatfunction with computer chips but are not contained on the chipsthemselves.  As a result, increasedsiliconization may make our products obsolete if the functions performed by ourproducts can be better and less expensively performed by these integratedcomputer chips.  If this happens, ourfuture sales growth and operating results will suffer.  For example, a significant portion of oursales of connectivity products are made to personal computer (PC) manufacturerslike Dell Computer Corp., Gateway, Hewlett-Packard Company (HP), andInternational Business Machines Corp. All of these companies are manufacturers that incorporate ourconnectivity products into their products. However, these companies also include computer chips from other vendorsthat integrate a connectivity function into their products.  As this integrated connectivity technologymatures, computer chip makers may include more and more of the featuresperformed by our connectivity products directly in the basic circuitry andcomponents of computers, leading to cheaper computer configurations.  This means that some competitors that have asignificant share of the PC computer chip market may sell chips that containintegrated connectivity at prices not significantly greater than prices for PCcomputer chips without connectivity.  Ifour PC manufacturer customers can buy chips that contain the same connectivityfeatures as our products at a

 

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lower cost than buying ourconnectivity products separately, they will be less likely to buy ourproducts.  We expect that PCmanufacturers and designers increasingly will purchase the lower-pricedintegrated connectivity products.  If wecannot lower the costs of our products or persuade customers to purchaseproducts with higher average selling prices, then our margins will be reducedand our financial results will be adversely affected.  In addition, as networking functions become more embedded in thebasic circuitry and components of computers, we face increased competition fromother companies that are also our current suppliers of products.  If we cannot compete successfully againstcurrent or future competitors, our business, results of operations or financialposition could be adversely affected.

 

***Weare investing in unproven technologies that may not produce the benefits weexpect.***

 

We are making significantinvestments in various technologies for emerging product lines.  These investments include XRNTM (eXpandableResilient Networking) technology, Gigabit Ethernet technology, IP telephony,wireless LANs, Layer 3+ switching, network security technology (such as ourembedded firewall products), and Network Jack switches.  We expect new products and solutions basedon these technologies to account for a higher percentage of our sales in thefuture.  However, the markets for someof these products and solutions are still emerging and may not develop to our expectations.  For example, industry standards for some ofthese technologies are yet to be widely adopted, and the market potentialremains unproven.  If the markets fornew products and solutions based on these technologies do not develop or growas we expect, or if we have not adopted effective sales and marketingstrategies for these new products and solutions, our financial results could beadversely affected and we might need to change our business strategy.

 

***Wemay not be successful at identifying and responding to new and emerging marketand product opportunities.***

 

The markets in which we compete arecharacterized by rapid technology transitions and short product lifecycles.  Therefore, our success dependson our ability to:  1) identify newmarket and product opportunities, 2) develop and introduce new products andsolutions in a timely manner, 3) gain market acceptance of new products andsolutions, particularly in the targeted emerging markets discussed above, and4) rapidly and efficiently transition our customers from older to newer enterprisenetworking technologies.  Our results ofoperations or financial position could suffer if we are not successful inachieving these goals.  For example, ourbusiness would suffer if there is a delay in introducing new products, if thereare fewer customers interested in our products than we expected, if ourproducts do not satisfy customers in terms of features, functionality orquality; or if the products cost more to produce than we expect.  Our business would suffer in particular ifnegative effects such as these were to occur in those product markets that wehave identified as emerging high-growth opportunities.  One factor that may cause greater difficultyfor us in quickly and effectively introducing new products with the features,functionality, quality, and costs that are optimal for the market is ourincreased reliance on relationships with strategic partners, such as originaldesign manufacturers (ODMs).  BecauseODMs manufacture the products of other companies as well as ours, the timelinessof the availability of our products depends, in part, on their productionschedules.  In addition, we are relyingon them to manufacture products that meet our specifications with regard toquality and cost. We will continue to source other products from OEMs and fromthe 3Com-Huawei joint venture. Finally, since we rely on our strategicpartners, we may not be able to independently identify current product andtechnology trends and to respond to such trends as well as if we were workingindependently.

 

***Asignificant portion of our revenue is derived from sales to a small number ofcustomers.  If any of these customersreduces its business with us, our business could be seriously harmed.***

 

We distribute many of our productsthrough two-tier distribution channels that include distributors, systemsintegrators and value-added resellers. We also sell to PC manufacturers and telecommunications serviceproviders.  A significant portion of ourrevenue is concentrated among a few distributors and OEM customers; our twolargest customers accounted for a combined 34 percent of total sales for thefirst quarter of fiscal 2004, a combined 33 percent of total sales for fiscal2003, and a combined 28 percent of total sales for both fiscal 2002 and fiscal2001.  There has been a recent trend of

 

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decreased demand for connectivityproducts from OEM customers such as Dell and HP, due to increased integrationof networking connections with semiconductor components, and also to factorsspecific to our OEM customers. Additionally, consolidation in our distribution channels and among PCmanufacturers is reducing the number of customers in our domestic andinternational markets.  In an effort tostreamline our operations, we may increase the focus of our distribution salesresources on selected distribution channel customers.

 

***Wedepend on distributors who maintain inventories of our products.  If the distributors reduce their inventoriesof our products, our revenue could be adversely affected.***

*** ***

Our distributors maintaininventories of our products.  We workclosely with our distributors to monitor channel inventory levels and ensurethat appropriate levels of products are available to resellers and end users.  We have improved certain of our supply chainprocesses so that deliveries to our channel partners can be done more rapidly,thereby enabling our channel partners to hold fewer weeks of supply of ourproducts in their inventory.  At the endof fiscal year 2003, channel inventory levels were at the upper end of ourtarget range of four to six weeks supply on hand at our distributors.  During the first quarter of fiscal 2004, wereduced channel inventory levels to approximately 4.5 weeks supply and weexpect to operate our business with no greater than 4.5 weeks of channelinventory over the next few quarters. At this level of channel inventory, someof our channel partners will hold less than the average level of inventory, andothers will be at a higher level. Partners with a below-average inventory levelmay incur stock outs that would adversely impact our revenues. If our channelpartners further reduce their levels of inventory of our products, our saleswould be negatively impacted during the period of change.

 

***Ourstrategies to outsource 3Com’s remaining internal manufacturing in Dublin, andfor contract manufacturers to ship directly to our customers, may not result insavings or meet our performance needs. The inability of any contractmanufacturer to meet our cost, quality or performance standards could adverselyaffect our results from operations.***

 

The following is a discussion ofthe factors that could determine whether our strategy to shift the productionof our products to contract manufacturing is successful.  The cost, quality, performance, andavailability of contract manufacturing operations are and will be essential tothe successful production and sale of many of our products.  The inability of any contract manufacturerto meet our cost, quality, performance, and availability standards couldadversely impact our financial condition or results of operations.  We may not be able to provide contractmanufacturers with product volumes that are high enough to achieve sufficient costsavings.  If shipments fall below forecastedlevels, we may incur increased costs or be required to take ownership of theinventory.  Also, our ability to controlthe quality of products produced by contract manufacturers may be limited andquality issues may not be resolved in a timely manner, which could adverselyimpact our financial condition or results of operations.  We have implemented a program with ourmanufacturing partners to ship products directly from regional shipping centersto customers.  Through this program, weare relying on these partners to fill customer orders in a timely manner.  This program may not yield the efficienciesthat we expect, which would negatively impact our financial performance.  Any disruptions to on-time delivery tocustomers would adversely impact our business and revenues.

 

***Wemay be unable to manage our supply chain successfully, which would adverselyimpact our revenues, gross margins, and profitability.***

 

Current business conditions andoperational challenges in managing our supply chain affect our business in anumber of ways:

 

•                  inthe past, some key components have had limited availability;

 

•                  thereare a smaller number of suppliers and we have narrowed our supplier base,including, in some cases, the sole sourcing of specific components from a singlesupplier;

 

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•                  asintegration of networking features on a reduced number of computer chipscontinues, we are increasingly facing competition from parties who havetraditionally been and are currently our suppliers;

 

•                  ourability to accurately forecast demand is diminished, especially in light ofgeneral economic weakness and uncertainty following wars and terrorist events;

 

•                  oursignificantly increased reliance on and long-term arrangements with third-partymanufacturers places much of the supply chain process out of our direct controland heightens the need for accurate forecasting and reduces our ability totransition quickly to alternative supply chain strategies;

 

•                  ourpresent manufacturing capacity exceeds our current needs; and

 

•                  wemay experience disruptions to our logistics.

 

Some of our suppliers are also ourcompetitors.  We cannot be certain thatin the future our suppliers, particularly those who are also in activecompetition with us, will be able or willing to meet our demand for componentsin a timely and cost-effective manner.

 

Increasingly, we have been sourcinga greater number of components from a smaller number of vendors.  Also, there has recently been a trend towardconsolidation of vendors of electronic components.  This greater reliance on a smaller number of suppliers and theinability to quickly switch vendors increase the risk of logistics disruptions,unfavorable price fluctuations, or disruptions in supply, particularly in asupply-constrained environment.

 

Operation of the supply chainrequires accurate forecasting of demand, which has become morechallenging.  If overall demand for ourproducts, product mix and growth of these markets is significantly differentfrom our expectations, we may face inadequate, or excess, componentsupply.  This would result in orders forproducts that could not be manufactured in a timely manner, or a buildup ofinventory that could not easily be sold. Either of these situations could adversely affect our revenues,financial results, or market share.  Ifour demand forecasts are too high or our forecasts of product mix areinaccurate, we may experience excess and obsolete inventories and excess manufacturingcapacity, which could adversely affect our results of operations or financialposition.

 

***Ourcurrent and future decisions to exit certain product lines may have unforeseennegative impacts to our business.***

 

In fiscal 2001, 2002 and 2003, weexited or sold some of our businesses and product lines.  In some cases, we continue to be responsiblepursuant to the original warranty obligations for these products. Our exitingof these business and product lines may have adversely affected ourrelationships with channel partners and end customers.  Many of these channel partners and customersperceived our remaining products as not being part of a larger integrated orcomplementary solution, or questioned our commitment to their markets.  Consequently, they chose to purchaseproducts from alternative vendors.  Wemay consider exiting other businesses or product lines that do not meet ourgoal of delivering satisfactory financial returns.  Future decisions to exit businesses or product lines could resultin deterioration of our channel partner and customer relationships, increasedemployee costs (such as severance, outplacement and other benefits), contracttermination costs, and asset impairments.

 

***Thereduced role of acquisitions in our current business strategy may negativelyimpact our growth and increase our reliance on strategic relationships.***

 

While acquisitions have been amajor part of 3Com’s strategy in the past, we have not made any acquisitionssince the third quarter of fiscal 2001. The networking business is highlycompetitive and, although we continue to evaluate possible acquisitions, ourdecision not to complete any such transactions recently could hamper ourability, relative to our competitors, to enhance existing products

 

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and introduce new products on atimely basis.  Future consolidations inthe networking industry may result in new companies with greater resources andstronger competitive positions and products than us.  Furthermore, companies may be created that are able to respondmore rapidly to market opportunities. Continued consolidation in our industry may adversely affect our resultsof operations or financial position.

 

We may increase our reliance onstrategic relationships to complement internal development of new technologiesand enhancement of existing products and to exploit perceived marketopportunities.  Strategic relationshipscan present problems since we often compete in some business areas withcompanies with which we have strategic alliances and, at the same time,cooperate with the same companies in other business areas.  If these companies fail to perform, or ifthese relationships fail to materialize as expected, we could suffer delays inproduct or market development or other operational difficulties.  Furthermore, our results of operations orfinancial condition could be adversely affected if we experience difficultiesmanaging relationships with our partners or if projects with partners areunsuccessful.  In addition, if thirdparties acquire our strategic partners or if our competitors enter intosuccessful strategic relationships, we may face increased competition.

 

***Ourreliance on industry standards, a favorable regulatory environment,technological change in the marketplace, and new product initiatives may causeour revenues to fluctuate or decline.***

*** ***

The networking industry in which wecompete is characterized by rapid changes in technology and customerrequirements, evolving industry standards, and complex governmentregulation.  As a result, our successdepends on:

 

•                  theemergence of new technology or the convergence of technologies such as voiceand data networking or IP telephony;

 

•                  ourability to develop new products to address changes in technologies and relatedcustomer requirements on a timely basis;

 

•                  thetimely adoption and market acceptance of industry standards, and timelyresolution of conflicting U.S. and international industry standards;

 

•                  ourability to influence the development of emerging industry standards and tointroduce new and enhanced products that are compatible with such standards;and

 

•                  afavorable regulatory environment.

 

Slow market acceptance of newtechnologies, products, or industry standards could adversely affect ourrevenue or overall financial performance. In addition, if our technology is not included in an industry standardon a timely basis or if we fail to achieve timely certification of complianceto industry standards for our products, our revenue from sales of such productsor our overall financial performance could be adversely affected.

 

Failure to obtain all necessaryregulatory approvals for our products or to comply with all applicablegovernment regulations could adversely impact our revenue or overall financialperformance or expose us to fines or other penalties.  In addition, new or revised government regulations couldadversely affect the basic business economics for new technologies or theirrates of acceptance or adoption by potential customers; in turn, this couldadversely impact our revenue or overall financial performance.

 

***Ourcustomer order fulfillment capabilities fluctuate and may negatively impact ouroperating results.***

 

The timing and amount of our salesdepend on a number of factors that make estimating future operating resultsdifficult.  Throughout our business, wedo not typically maintain a significant amount of backlog, and sales arepartially dependent on our ability to appropriately forecast productdemand.  In addition,

 

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our customers historically requestfulfillment of orders in a short time period, resulting in limited visibilityto sales trends and potential pricing pressures.  Consequently, our operating results depend on the volume and timingof orders and our ability to fulfill orders in a timely manner.  Historically, sales in the third month ofthe quarter have been higher than sales in each of the first two months of thequarter.  Non-linear sales patterns makebusiness planning difficult, and increase the risk that our quarterly resultswill fluctuate due to disruptions in functions such as manufacturing, ordermanagement, information systems, and shipping.

 

***Wemay not be able to defend ourselves successfully against claims that we areinfringing on the intellectual property rights of others.***

 

Many of our competitors, such astelecommunications, networking, and computer equipment manufacturers, havelarge intellectual property portfolios, including patents that may covertechnologies that are relevant to our business.  In addition, many smaller companies, universities, and individualinventors have obtained or applied for patents in areas of technology that mayrelate to our business.  The industry ismoving towards aggressive assertion, licensing, and litigation of patents andother intellectual property rights.

 

In the course of our business, wefrequently receive claims of infringement or otherwise become aware ofpotentially relevant patents or other intellectual property rights held byother parties.  We evaluate the validityand applicability of these intellectual property rights, and determine in eachcase whether we must negotiate licenses or cross-licenses to incorporate or usethe proprietary technologies, protocols, or specifications in our products.  If we are unable to obtain and maintainlicenses on favorable terms for intellectual property rights required for themanufacture, sale, and use of our products, particularly those that must complywith industry standard protocols and specifications to be commercially viable,our results of operations or financial position could be adverselyaffected.  In addition, if we are thealleged infringer, we could be required to seek licenses from others or beprevented from manufacturing or selling our products, which could causedisruptions to our operations or the markets in which we compete.

 

***Wemay need to engage in complex and costly litigation in order to protect ormaintain our intellectual property rights.***

 

In addition to disputes relating tothe validity or alleged infringement of other parties’ rights, we may becomeinvolved in disputes relating to our assertion of our intellectual propertyrights.  Whether we are defending theassertion of intellectual property rights against us, or asserting ourintellectual property rights against others, intellectual property litigationcan be complex, costly, protracted, and highly disruptive to businessoperations by diverting the attention and energies of management and keytechnical personnel.  Further,plaintiffs in intellectual property cases often seek injunctive relief and themeasures of damages in intellectual property litigation are complex and oftensubjective or uncertain.  Thus, theexistence of this type of litigation, or any adverse determinations related tosuch litigation could subject us to significant liabilities and costs.  To the extent that any of our OEM, ODM, orjoint venture partners may become involved in intellectual property disputesand may be unable to hold us harmless, then we may incur liabilities or suffertemporary disruption of our business. Also, if we are asserting ourintellectual property rights against others, we could be prevented fromstopping others from manufacturing or selling competitive products.  Any one of these factors could adversely affectour product margins, results of operations, financial position, or cash flows.

 

***Ourfuture quarterly operating results are subject to factors that can causefluctuations in our stock price.***

 

Historically, our stock price hasexperienced substantial volatility.  Weexpect that our stock price may continue to experience volatility in the futuredue to a variety of potential factors such as fluctuations in our quarterlyresults of operations and cash flow, changes in our cash balances, variationsbetween our actual financial results and the published analysts’ expectations,and announcements by our competitors. In addition, over the past several quarters, the stock market hasexperienced extreme price and volume

 

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fluctuations that have affected thestock prices of many technology companies. These factors, as well as general economic and political conditions orinvestors’ concerns regarding the credibility of corporate financial statementsand the accounting profession, may have a material adverse affect on the marketprice of our stock in the future.

 

***Wemay not be fully able to protect our computer systems, including our financialsystems, from breaches of security.***

 

We use computer systems, includingour enterprise-wide financial system, which may not include the most advancedsecurity features available.  There is arisk of unauthorized access to computer systems and proprietary information,including our financial systems, intellectual property, and trade secrets.  While management makes concerted efforts toassess risks and prevent and detect security breaches, including periodicaudits and upgrades of our systems, our business, results of operations orfinancial position could be affected if any unauthorized access were to occurand not be detected through our normal internal control procedures.

 

***Infiscal 2004 we are operating in a single business segment focused primarily onenterprise networking, and our results of operations may fluctuate based onfactors related entirely to conditions in this market.***

 

Starting in fiscal 2004, we areoperating in a single business segment focused primarily on enterprisenetworking.  This single enterprisenetworking business reflects a streamlined management and operating structureencompassing all of our operations, including our connectivity business whichwe previously operated and reported as a separate segment and which we expectwill continue to diminish as a result of natural market forces.  Our focus on enterprise networking may causeincreased risk or volatility associated with decreased diversification of ourbusiness.  There will be increasedsensitivity to the business risks associated specifically with the enterprisenetworking market and our ability to execute successfully on our strategies toprovide superior solutions for larger and multi-site enterpriseenvironments.  To be successful in theenterprise networking market, we will need to overcome negative perceptions ofour company held by certain chief information officers of large enterprises,who may be skeptical of our long-term commitment to the high-end networkingbusiness as a result of our withdrawal from that business in 2000. Also,expansion of sales to large enterprises may be disruptive in a variety of ways,such as adding larger systems integrators that may raise channel conflictissues with existing distributors, or a perception of any diminished focus onthe small and medium enterprise market.

 

***War,terrorist attacks or other threats beyond our control could negatively impactconsumer confidence, which could harm our operating results.***

 

War, terrorist attacks or otherthreats beyond our control, including both actual and potential incidents,could have an adverse effect on the United States and world economies ingeneral and consumer confidence and spending in particular, which could harmour revenue and results of operations. In addition, war and geopolitical uncertainties, together with theresulting economic uncertainties, make it more difficult for 3Com, ourcustomers and our vendors to accurately forecast and plan future businessactivities.  This reduced predictabilitychallenges our ability to increase revenue or generate positive net income.  In particular, it is more difficult to developand implement strategies to create sustainable business models and efficientoperations, and to effectively manage outsourced relationships for servicessuch as contract manufacturing and information technology.

 

***Item3.  *****Quantitative and Qualitative Disclosures About Market Risk**

 

3Com holds marketable equity tradedsecurities that have a brief trading history and are highly subject to marketprice volatility.  Equity security pricefluctuations of plus or minus 50 percent would not have a material impact onthe value of these securities as of the end of the first quarter of fiscal2004.

 

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For interest rate sensitivity andforeign currency exchange risk, reference is made to Part II, Item 7A,Quantitative and Qualitative Disclosures About Market Risk, in our AnnualReport on Form 10-K for the year ended May 30, 2003.

 

***Item 4.  *****Controlsand Procedures**

 

a.               Wecarried out an evaluation, under the supervision and with the participation ofour management, including our President and Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of our first fiscalquarter pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation,our President and Chief Executive Officer and our Chief Financial Officerconcluded that our disclosure controls and procedures are effective in ensuringthat information required to be disclosed by us in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms.

 

Our review of our internal controlswas made within the context of the relevant professional auditing standardsdefining “internal controls,” “reportable conditions,” and “materialweaknesses.” “Internal controls” are processes designed to provide reasonableassurance that our transactions are properly authorized, our assets are safeguardedagainst unauthorized or improper use, and our transactions are properlyrecorded and reported, all to permit the preparation of our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States. “Significant deficiencies” are referred to as“reportable conditions,” or control issues that could have a significantadverse effect on our ability to properly authorize transactions, safeguard ourassets, or record, process, summarize or report financial data in theconsolidated financial statements. A “material weakness” is a particularlyserious reportable condition where the internal control does not reduce to arelatively low level the risk that misstatements caused by error or fraud mayoccur in amounts that would be material in relation to the consolidatedfinancial statements and not be detected within a timely period by employees inthe normal course of performing their assigned functions. As part of ourinternal controls procedures, we also address other, less significant controlmatters that we identify, and we determine what revision or improvement tomake, if any, in accordance with our on-going procedures.

 

b.              Therehave been no changes in our internal control over financial reportingidentified in connection with our evaluation as of the end of the first fiscalquarter that occurred during such quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.****   OTHER INFORMATION**

 

 

***Item1.*****                                 ****LegalProceedings**

 

The information set forth in Note11 of Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

 

***Item 2.*****                                 ****Changes in Securities and Use of Proceeds**

 

None.

 

***Item 3.*****                                 ****Defaults Upon Senior Securities**

 

None.

 

***Item 4.*****                                 ****Submission of Matters to a Vote of Security Holders**

 

None.

 

***Item5.*****                                 ****OtherInformation**

 

None.

 

***Item 6.*****                                 ****Exhibits and Reports on Form 8-K**

 
| (a)  Exhibits   |
|----------------------|
|                 |   |   |
|                 |   |   |   |
| **Exhibit   Number** |   | **Description** |
|                 |   |   |   |
|                 | 2.1 |   | Master Separation and  Distribution Agreement between the Registrant and Palm, Inc. effective as of  December 13, 1999, as amended (6) |
|                 | 2.2 |   | General Assignment and Assumption  Agreement between the Registrant and Palm, Inc., as amended (6) |
|                 | 2.3 |   | Master Technology Ownership and  License Agreement between the Registrant and Palm, Inc. (6) |
|                 | 2.4 |   | Master Patent Ownership and  License Agreement between the Registrant and Palm, Inc. (6) |
|                 | 2.5 |   | Master Trademark Ownership and  License Agreement between the Registrant and Palm, Inc. (6) |
|                 | 2.6 |   | Employee Matters Agreement  between the Registrant and Palm, Inc. (6) |
|                 | 2.7 |   | Tax Sharing Agreement between the  Registrant and Palm, Inc. (6) |
|                 | 2.8 |   | Master Transitional Services  Agreement between the Registrant and Palm, Inc. (6) |
|                 | 2.9 |   | Real Estate Matters Agreement  between the Registrant and Palm, Inc. (6) |
|                 | 2.10 |   | Master Confidential Disclosure  Agreement between the Registrant and Palm, Inc. (6) |
|                 | 2.11 |   | Indemnification and Insurance  Matters Agreement between the Registrant and Palm, Inc. (6) |
|                 | 3.1 |   | Certificate of Incorporation (4) |
|                 | 3.2 |   | Certificate of Correction filed  to Correct a Certain Error in the Certificate of Incorporation (4) |
|                 | 3.3 |   | Certificate of Merger (4) |
|                 | 3.4 |   | Corrected Certificate of Merger  filed to correct an error in the Certificate |
|                      |  |  |  |  |  |  |  |

 

38

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|   |   |   | of Merger (5)                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 3.5    |   | Registrant’s Bylaws, as amended  on August 7, 2001 (11)                                                                                                                                                                                                                                                                                     |
|   | 3.6    |   | Certificate of Designation of  Rights, Preferences and Privileges of Series A Participating Preferred Stock  (9)                                                                                                                                                                                                                                 |
|   | 4.1    |   | Amended and Restated Rights  Agreement dated December 31, 1994 (2)                                                                                                                                                                                                                                                                               |
|   | 4.2    |   | Third Amended and Restated  Preferred Shares Rights Agreement, dated as of November 4, 2002 (12)                                                                                                                                                                                                                                                 |
|   | 10.1   |   | 3Com Corporation 1983 Stock  Option Plan, as amended and restated effective September 30, 2001 (10)*                                                                                                                                                                                                                                             |
|   | 10.2   |   | Amended and Restated Incentive  Stock Option Plan (1)*                                                                                                                                                                                                                                                                                           |
|   | 10.3   |   | 3Com Corporation 1984 Employee  Stock Purchase Plan, as amended and restated as of July 15, 2003 (16) *                                                                                                                                                                                                                                          |
|   | 10.4   |   | 3Com Corporation Director Stock  Option Plan, as amended, filed herewith*                                                                                                                                                                                                                                                                        |
|   | 10.5   |   | 3Com Corporation Restricted Stock  Plan, as amended July 1, 2001 (11) *                                                                                                                                                                                                                                                                          |
|   | 10.6   |   | 3Com Corporation 1994 Stock  Option Plan, as amended and restated effective April 30, 2002 (11)*                                                                                                                                                                                                                                                 |
|   | 10.7   |   | Amended and Restated Agreement  and Plan of Merger by and among the Registrant, TR Acquisitions Corporation,  3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of  February 26, 1997 and amended as of March 14, 1997 (3)                                                                                                    |
|   | 10.8   |   | Employment Agreement with Bruce  Claflin, effective as of January 1, 2001 (7)*                                                                                                                                                                                                                                                                   |
|   | 10.9   |   | Summary of Severance Plan for  Section 16b Officers (8)*                                                                                                                                                                                                                                                                                         |
|   | 10.10  |   | Credit Agreement dated as of  November 28, 2001 between the Registrant, Bank of America, N.A., as  Administrative Agent, Bank of America Securities, LLC, as Lead Arranger and  Sole Book Manager, Foothill Capital Corporation, as Syndication Agent, and  the Financial Institutions Named Herein, as Lenders (10)                             |
|   | 10.11  |   | Credit Agreement dated as of  November 28, 2001 between 3Com Technologies and 3Com Europe Limited, Bank of  America, N.A., as Administrative Agent, Bank of America Securities, LLC, as  Lead Arranger and Sole Book Manager, Foothill Capital Corporation, as  Syndication Agent, and the Financial Institutions Named Herein, as Lenders  (10) |
|   | 10.12  |   | Security Agreement dated as of  November 28, 2001, between the Registrant and Bank of America, N.A., in its  capacity as Agent for Lenders (10)                                                                                                                                                                                                  |
|   | 10.13  |   | Continuing Guaranty dated as of  November 28, 2001, made by the Registrant in favor of the Lenders and Bank of  America, N.A.**,** as Agent for the  Lenders (10)                                                                                                                                                                                |
|   | 10.14  |   | Intercompany Subordination  Agreement dated as of November 28, 2001, made among the Registrant and Bank  of America, N.A., as Agent for itself and the Lenders (10)                                                                                                                                                                              |
|   | 10.15  |   | Amendment Number One to Security  Agreement dated July 25, 2002, between the Registrant and Bank of America,  N.A., as Administrative Agent (13)                                                                                                                                                                                                 |
|   | 10.16  |   | Warrant to Purchase Common Stock,  dated December 4, 2000, between the Registrant and Broadcom Corporation (13)                                                                                                                                                                                                                                  |
|   | 10.17  |   | Amendment Number One to Warrant,  dated November 1, 2002, between the Registrant and Broadcom Corporation (13)                                                                                                                                                                                                                                   |
|   | 10.18  |   | Form of Indemnity Agreement  between the Registrant and its officers and directors (14)                                                                                                                                                                                                                                                          |
|   | 10.19  |   | 3Com Europe Limited Debt  Forgiveness and Bonus Agreement dated April 12, 1999 between 3Com Europe  Limited and John McClelland (14)*                                                                                                                                                                                                            |
|   | 10.20  |   | 3Com Europe Limited Promissory  Note dated April 12, 1999 executed by John McClelland in favor of 3Com Europe  Limited (14)*                                                                                                                                                                                                                     |

 

39

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|   | 10.21 |   | Form of Management Retention  Agreement, effective as of December 16, 2002, for Bruce Claflin (15)*                                                                                             |
|--------|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.22 |   | Form of Management Retention  Agreement, effective as of December 16, 2002, for Dennis Connors (15)*                                                                                            |
|   | 10.23 |   | Form of Management Retention  Agreement, effective as of December 16, 2002, for Mark Slaven (15)*                                                                                               |
|   | 10.24 |   | Schedule of Additional Management  Retention Agreements, effective as of December 16, 2002, for attached list of  parties (15)*                                                                 |
|   | 31.1  |   | Certification of Principal Executive  Officer, filed herewith                                                                                                                                   |
|   | 31.2  |   | Certification of Principal  Financial Officer, filed herewith                                                                                                                                   |
|   | 32.1  |   | Certification of Chief Executive  Officer and Chief Finanical Officer pursuant to 18 U.S.C Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith |

 

----

|   | *      |   | Indicates a management contract  or compensatory plan.                                                                                                                                        |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                          |
|   | (1)    |   | Incorporated by reference to the  corresponding exhibit to Registrant’s Registration Statement on Form S-4  filed on August 31, 1987 (File No. 33-16850)                                 |
|   | (2)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on January 17, 1995 (File No. 000-12867)                         |
|   | (3)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s  Registration Statement on Form S-4 filed on March 17, 1997 (File No.  333-23465) |
|   | (4)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on October 14, 1997 (File No. 000-12867)                         |
|   | (5)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on October 8, 1999 (File No. 002-92053)                          |
|   | (6)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on April 4, 2000 (File No. 002-92053)                            |
|   | (7)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on January 16, 2001 (File No. 333-34726)                         |
|   | (8)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-K filed on August 8, 2001 (File No. 000-12867)                           |
|   | (9)    |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on October 11, 2001 (File No. 000-12867)                         |
|   | (10)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on January 11, 2002 (File No. 000-12867)                         |
|   | (11)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-K filed on August 2, 2002 (File No. 000-12867)                           |
|   | (12)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  8-A/A filed on November 27, 2002 (File No. 000-12867)                       |
|   | (13)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on January 7, 2003 (File No. 000-12867)                          |
|   | (14)   |   | Incorporated by reference to the  corresponding exhibit to Registrant’s                                                                                                                  |

 

40

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|   |   |   | Registration Statement on Form  S-3/A filed on April 9, 2003 (File No. 333-102591)                                                                                  |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (15)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-Q filed on April 10, 2003 (File No. 000-12867) |
|   | (16)   |   | Incorporated by reference to the  corresponding exhibit previously filed as an exhibit to Registrant’s Form  10-K filed on August 1, 2003 (File No. 000-12867) |

 

(b)  Reports on Form 8-K

 
| **Date**      |   | **Item Number** |   | **Description**                                                                                                             |
|---------------|--------|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------|
|          |   |            |   |                                                                                                                        |
| June 9, 2003  |   | Item 2          |   | 3Com announced the completion of  the sale of selected assets and liabilities of its CommWorks division to  UTStarcom, Inc. |
|          |   |            |   |                                                                                                                        |
| June 25, 2003 |   | Item 7          |   | 3Com announced its financial  results for the fourth quarter of fiscal 2003 and included the press release  thereto.        |
|          |   |            |   |                                                                                                                        |
| July 30, 2003 |   | Item 5          |   | 3Com announced the completion of  the sale of its facility in Rolling Meadows, Illinois.                                    |

 

41

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**Signatures**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |              |   |   | 3Com  Corporation                                                                                              |                              |
|--------|-------------------|--------|--------|----------------------------------------------------------------------------------------------------------------|-----------------------------------|
|   |              |   |   | (Registrant)                                                                                                   |                              |
|   |              |   |   |                                                                                                           |                              |
|   |              |   |   |                                                                                                           |                              |
| Dated: | October  10, 2003 |   | By:    |                                                                                                           | /s/   Mark  Slaven |   |
|   |              |   |   | Mark  Slaven                                                                                                   |                              |
|   |              |   |   | Executive Vice President, Finance  and  Chief Financial Officer  (Principal Financial and  Accounting Officer) |
|        |                   |        |        |                                                                                                                |                                   |  |

 

42

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