**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| ** **                                                                                                                                                                                                                                                                             | **ý****        QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| **THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                   |
| **For the  quarterly period ended February 25, 2005**                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                             | **o****        TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF**     |
| **THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                   |
| **For the  transition period  from                    to                    ** |

 

**CommissionFile No. 0-12867**

 

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**3Com Corporation**

(Exact name ofregistrant 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’s telephonenumber, including area code:   **(508) 323-5000**

 

Former name, formeraddress and former fiscal year, if changed since last report:   **N/A**

 

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

 

**Yes    ****ý                     No    ****o**

 

**Indicate by check mark whetherthe registrant is an accelerated filer (as defined by Rule 12b-2 ofthe Exchange Act).**

 

**Yes    ****ý                     No    ****o**

 

**As of March 25, 2005, 383,668,086shares of the registrant’s Common Stock were outstanding.**

 

 

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**3ComCorporation**

 

**Table ofContents**

 
| PART I.  | FINANCIAL INFORMATION                                                                       |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
|          |                                                                                        |   |
| *Item 1.*     | Financial Statements                                                                        |   |
|          |                                                                                        |   |
|          | Condensed  Consolidated Statements of Operations                                            |   |
|          | *Three  and Nine Months Ended February 25, 2005 and February 27, 2004*            | 3      |
|          |                                                                                        |   |
|          | Condensed  Consolidated Balance Sheets                                                      |   |
|          | *February 25,  2005 and May 28, 2004*                                             | 4      |
|          |                                                                                        |   |
|          | Condensed  Consolidated Statements of Cash Flows                                            |   |
|          | *Nine  Months Ended February 25, 2005 and February 27, 2004*                      | 5      |
|          |                                                                                        |   |
|          | Notes  to Condensed Consolidated Financial Statements                                       | 6      |
|          |                                                                                        |   |
| *Item  2.*    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 20     |
|          |                                                                                        |   |
| *Item  3.*    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 41     |
|          |                                                                                        |   |
| *Item 4.*     | Controls and Procedures                                                                     | 41     |
|          |                                                                                        |   |
| PART II. | OTHER INFORMATION                                                                           |   |
|          |                                                                                        |   |
| *Item 1.*     | Legal Proceedings                                                                           | 42     |
|          |                                                                                        |   |
| *Item  2.*    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 42     |
|          |                                                                                        |   |
| *Item 3.*     | Defaults Upon  Senior Securities                                                            | 43     |
|          |                                                                                        |   |
| *Item  4.*    | Submission  of Matters to a Vote of Security Holders                                        | 43     |
|          |                                                                                        |   |
| *Item 5.*     | Other Information                                                                           | 43     |
|          |                                                                                        |   |
| *Item 6.*     | Exhibits                                                                                    | 43     |
|          |                                                                                        |   |
| Signatures    |                                                                                        |   |

 

3Com is a registeredtrademark and Exercise Choice is a trademark of 3Com Corporation or itssubsidiaries. CommWorks is a registered trademark of UTStarcom, Inc.  Huawei is a registered trademark of HuaweiTechnologies Co. Ltd.  Palm is aregistered trademark of Palm Trademark Holding Company LLC.  Other product and brand names may betrademarks or registered trademarks of their respective owners.

 

----

 

**PART I.  FINANCIAL INFORMATION**

 

***Item 1.*****   FinancialStatements**

 

**3ComCorporation**

**Condensed Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                                                                                        | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(In  thousands, except per share data)**                                                                        | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
| ** **                                                                                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                                                                                             |       | $                           | 161,185    |                        | $          | 171,769 |   | $ | 474,602 |   | $ | 515,539 |   |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Cost  of sales                                                                                                    |       | 103,825                     |       | 111,500                     |       | 302,456 |   | 348,376 |   |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Gross  margin                                                                                                     |       | 57,360                      |       | 60,269                      |       | 172,146 |   | 167,163 |   |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Operating  expenses:                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Sales  and marketing                                                                                              |       | 59,358                      |       | 61,846                      |       | 173,851 |   | 190,090 |   |
| Research  and development                                                                                         |       | 24,445                      |       | 23,776                      |       | 67,369 |   | 75,124 |   |
| General  and administrative                                                                                       |       | 13,959                      |       | 17,599                      |       | 44,016 |   | 63,522 |   |
| Amortization  and write down of intangibles                                                                       |       | 1,716                       |       | 1,071                       |       | 4,905 |   | 5,553 |   |
| In-process  research and development                                                                              |       | 5,100                       |       | —                      |       | 6,775 |   | — |   |
| Restructuring  charges                                                                                            |       | 9,093                       |       | 39,534                      |       | 16,374 |   | 147,050 |   |
| Total  operating expenses                                                                                         |       | 113,671                     |       | 143,826                     |       | 313,290 |   | 481,339 |   |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Operating  loss                                                                                                   |       | (56,311                     | )          | (83,557                     | )          | (141,144 | ) | (314,176 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Gain  (loss) on investments, net                                                                                  |       | 1,661                       |       | 880                         |       | 1,743 |   | (11,314 | ) |
| Interest  and other income, net                                                                                   |       | 4,853                       |       | 3,612                       |       | 10,667 |   | 11,364 |   |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Loss  from continuing operations before income taxes and equity interest in loss of  unconsolidated joint venture |       | (49,797                     | )          | (79,065                     | )          | (128,734 | ) | (314,126 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Income  tax benefit (provision)                                                                                   |       | (959                        | )          | (1,626                      | )          | (1,502 | ) | 2,909 |   |
| Equity  interest in loss of unconsolidated joint venture                                                          |       | (2,249                      | )          | (4,196                      | )          | (7,125 | ) | (16,789 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Loss  from continuing operations                                                                                  |       | (53,005                     | )          | (84,887                     | )          | (137,361 | ) | (328,006 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Discontinued  operations, net of taxes                                                                            |       | —                      |       | (685                        | )          | — |   | (2,541 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Net  loss                                                                                                         |       | $                           | (53,005    | )                           | $          | (85,572 | ) | $ | (137,361 | ) | $ | (330,547 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Basic  and diluted loss per share:                                                                                |       |                        |       |                        |       |   |   |   |   |
| Continuing  operations                                                                                            |       | $                           | (0.14      | )                           | $          | (0.22 | ) | $ | (0.36 | ) | $ | (0.87 | ) |
| Discontinued  operations, net of taxes                                                                            |       | —                      |       | —                      |       | — |   | (0.01 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Net  loss                                                                                                         |       | $                           | (0.14      | )                           | $          | (0.22 | ) | $ | (0.36 | ) | $ | (0.88 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Shares  used in computing per share amounts:                                                                      |       |                        |       |                        |       |   |   |   |   |
| Basic  and diluted                                                                                                |       | 379,946                     |       | 385,019                     |       | 382,075 |   | 376,077 |   |

 

*See notes to condensedconsolidated financial statements.*

 

3

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**3ComCorporation**

**Condensed Consolidated BalanceSheets**

(Unaudited)

 
| **(In  thousands, except par value)**                                                                       | ** ** | **February 25,  2005** | ** ** | **May 28,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
|                                                                                                        |       |                        |       |                   |       |
| ASSETS                                                                                                      |       |                        |       |                   |       |
| Current  assets:                                                                                            |       |                        |       |                   |       |
| Cash  and equivalents                                                                                       |       | $                           | 226,979    |                   | $          | 476,274 |   |
| Short-term  investments                                                                                     |       | 655,802                     |       | 907,082                |       |
| Accounts  receivable, less allowance for doubtful accounts ($15,181 and $16,276,  respectively)             |       | 74,018                      |       | 66,372                 |       |
| Inventories                                                                                                 |       | 24,263                      |       | 27,679                 |       |
| Other  current assets                                                                                       |       | 33,335                      |       | 42,270                 |       |
| Total  current assets                                                                                       |       | 1,014,397                   |       | 1,519,677              |       |
|                                                                                                        |       |                        |       |                   |       |
| Investment  in Huawei-3Com joint venture                                                                    |       | 135,766                     |       | 142,891                |       |
| Property  and equipment, net                                                                                |       | 71,346                      |       | 72,452                 |       |
| Property  and equipment held for sale                                                                       |       | —                      |       | 42,147                 |       |
| Deposits  and other assets                                                                                  |       | 43,983                      |       | 34,806                 |       |
| Deferred  income taxes                                                                                      |       | 3,053                       |       | 2,937                  |       |
| Intangible  assets, net                                                                                     |       | 69,966                      |       | 5,009                  |       |
| Goodwill                                                                                                    |       | 310,367                     |       | 899                    |       |
|                                                                                                        |       |                        |       |                   |       |
| Total  assets                                                                                               |       | $                           | 1,648,878  |                   | $          | 1,820,818 |   |
|                                                                                                        |       |                        |       |                   |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                  |       |                        |       |                   |       |
| Current  liabilities:                                                                                       |       |                        |       |                   |       |
| Accounts  payable                                                                                           |       | $                           | 77,725     |                   | $          | 80,408 |   |
| Accrued  liabilities and other                                                                              |       | 232,992                     |       | 226,161                |       |
|                                                                                                        |       |                        |       |                   |       |
| Total  current liabilities                                                                                  |       | 310,717                     |       | 306,569                |       |
|                                                                                                        |       |                        |       |                   |       |
| Deferred  revenue and long-term obligations                                                                 |       | 9,149                       |       | 15,135                 |       |
|                                                                                                        |       |                        |       |                   |       |
| Stockholders’  equity:                                                                                 |       |                        |       |                   |       |
| Preferred  stock, $.01 par value, 10,000 shares authorized; none outstanding                                |       | —                      |       | —                 |       |
| Common  stock, $.01 par value, 990,000 shares authorized; shares issued: 383,286 and  392,738, respectively |       | 2,302,372                   |       | 2,262,223              |       |
| Treasury  stock, at cost, 10,127  and 0 shares, respectively                                                |       | (49,577                     | )          | —                 |       |
| Unamortized  stock-based compensation                                                                       |       | (13,279                     | )          | (2,577                 | )          |
| Retained  deficit                                                                                           |       | (905,702                    | )          | (755,244               | )          |
| Accumulated  other comprehensive loss                                                                       |       | (4,802                      | )          | (5,288                 | )          |
| Total  stockholders’ equity                                                                            |       | 1,329,012                   |       | 1,499,114              |       |
|                                                                                                        |       |                        |       |                   |       |
| Total  liabilities and stockholders’ equity                                                            |       | $                           | 1,648,878  |                   | $          | 1,820,818 |   |

 

*See notes to condensedconsolidated financial statements.*

 

4

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**3ComCorporation**

**Condensed Consolidated Statementsof Cash Flows**

(Unaudited)

 
| ** **                                                                                        | ** ** | **Nine Months Ended**       | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(In  thousands)**                                                                               | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                                                                              |       |                        |       |   |   |
| Cash  flows from operating activities:                                                            |       |                        |       |   |   |
| Loss  from continuing operations                                                                  |       | $                           | (137,361   | ) | $ | (328,006 | ) |
| Adjustments to reconcile loss from continuing  operations to cash (used in) operating activities: |       |                        |       |   |   |
| Loss  from discontinued operations                                                                |       | —                      |       | (2,541 | ) |
| Depreciation  and amortization                                                                    |       | 36,797                      |       | 96,789 |   |
| Write  down of intangibles                                                                        |       | 1,242                       |       | 1,905 |   |
| (Gain)  loss on property and equipment                                                            |       | (5,445                      | )          | 41,111 |   |
| (Gain)  loss on investments, net                                                                  |       | (1,769                      | )          | 11,314 |   |
| Equity  interest in loss of unconsolidated joint venture                                          |       | 7,125                       |       | 16,789 |   |
| Deferred  income taxes                                                                            |       | (118                        | )          | (207 | ) |
| Purchased  in-process research and development                                                    |       | 6,775                       |       | — |   |
| Stock-based  compensation expense                                                                 |       | 1,778                       |       | 2,206 |   |
| Changes  in assets and liabilities:                                                               |       |                        |       |   |   |
| Accounts  receivable                                                                              |       | (7,646                      | )          | 3,319 |   |
| Inventories                                                                                       |       | (4,581                      | )          | (2,090 | ) |
| Other  assets                                                                                     |       | (5,884                      | )          | (8,611 | ) |
| Accounts  payable                                                                                 |       | (2,682                      | )          | (8,746 | ) |
| Accrued  liabilities and other                                                                    |       | 2,074                       |       | 27,831 |   |
|                                                                                              |       |                        |       |   |   |
| Net  cash (used in) operating activities                                                          |       | (109,695                    | )          | (148,937 | ) |
|                                                                                              |       |                        |       |   |   |
| Cash  flows from investing activities:                                                            |       |                        |       |   |   |
| Investment  in Huawei-3Com joint venture                                                          |       | —                      |       | (160,000 | ) |
| Purchases  of investments                                                                         |       | (466,330                    | )          | (662,734 | ) |
| Proceeds  from maturities and sales of investments                                                |       | 706,071                     |       | 782,310 |   |
| Purchases  of property and equipment                                                              |       | (13,704                     | )          | (12,552 | ) |
| Businesses  acquired in purchase transactions, net of cash acquired                               |       | (355,686                    | )          | — |   |
| Proceeds  from sale of property and equipment                                                     |       | 50,946                      |       | 100,240 |   |
|                                                                                              |       |                        |       |   |   |
| Net  cash provided by (used in) investing activities                                              |       | (78,703                     | )          | 47,264 |   |
|                                                                                              |       |                        |       |   |   |
| Cash  flows from financing activities:                                                            |       |                        |       |   |   |
| Issuances  of common stock                                                                        |       | 11,779                      |       | 106,521 |   |
| Repurchases  of common stock                                                                      |       | (73,365                     | )          | — |   |
| Collection  of note receivable issued for warrants                                                |       | —                      |       | 8,421 |   |
| Repayments  of borrowings                                                                         |       | (1,308                      | )          | (346 | ) |
|                                                                                              |       |                        |       |   |   |
| Net  cash provided by (used in) financing activities                                              |       | (62,894                     | )          | 114,596 |   |
|                                                                                              |       |                        |       |   |   |
| Effect  of exchange rate changes on cash and equivalents                                          |       | 1,997                       |       | 1,222 |   |
|                                                                                              |       |                        |       |   |   |
| Increase  (decrease) in cash and equivalents during period                                        |       | (249,295                    | )          | 14,145 |   |
|                                                                                              |       |                        |       |   |   |
| Cash  and equivalents, beginning of period                                                        |       | 476,274                     |       | 415,798 |   |
|                                                                                              |       |                        |       |   |   |
| Cash  and equivalents, end of period                                                              |       | $                           | 226,979    |   | $ | 429,943 |   |

 

*See notes to condensedconsolidated financial statements.*

 

5

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**3ComCorporation**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

 

**Note 1.****           Basisof Presentation**

 

The unaudited condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  In the opinion of management, these unauditedcondensed consolidated financial statements include all adjustments necessaryfor a fair presentation of our financial position as of February 25, 2005and May 28, 2004, and our results of operations and cash flows for thethree and nine months ended February 25, 2005 and February 27, 2004.

 

Certain amounts fromprior periods have been reclassified to conform to the current periodpresentation.  In connection with thepreparation of this report, we concluded that it was appropriate to classifyauction rate securities, which are securities with longer stated maturities,but have interest rates that reset similar to short-term securities, asshort-term investments.  Previously, suchinvestments had been classified as cash and equivalents.  We made corresponding adjustments to ourCondensed Consolidated Statement of Cash Flows and to our CondensedConsolidated Balance Sheet.  Thesereclassifications had no impact on working capital, our results of operationsor our cash flows from operating activities.

 

We use a 52 or 53-weekfiscal year ending on the Friday nearest to May 31.  The results of operations for the three andnine months ended February 25, 2005 may not be indicative of the resultsto be expected for the fiscal year ending June 3, 2005.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes thereto included in our Annual Report on Form 10-Kfor the fiscal year ended May 28, 2004.

 

*Recent Accounting Pronouncements*

 

In March 2004, the Emerging Issues Task Force (EITF) of the FASB issuedEITF Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”EITF 03-1 includes new guidance for evaluating and recording impairmentlosses on debt and equity investments, as well as new disclosure requirementsfor investments that are deemed to be temporarily impaired. In September 2004,the FASB issued Staff Position EITF 03-1-1, which delays theeffective date until additional guidance is issued for the application of therecognition and measurement provisions of EITF 03-1 to investments insecurities that are impaired. We do not believe that adoption of EITF 03-1will have a material impact on our financial position or results of operations.

 

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement No. 123R,“Share-Based Payment” (SFAS 123R), which requires companies to measure andrecognize compensation expense for all stock-based payments at fair value. SFAS123R is effective for all interim periods beginning after June 15, 2005and, thus, will be effective for us beginning with the second quarter of fiscal2006. Retroactive application of the provisions of SFAS 123R to the beginningof the fiscal year that includes the effective date is permitted, but notrequired. We are currently evaluating the impact of SFAS 123R on our financialposition and results of operations.  SeeNote 3 for information related to the pro forma effects on our reported netloss and net loss per share of applying the fair value recognition provisionsof the previous Statement of Financial Accounting Standards (SFAS) 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation.

 

**Note 2.****           DiscontinuedOperations**

 

On March 4, 2003, weentered into an agreement (Asset Purchase Agreement) to sell selected assetsand liabilities of our CommWorks division to UTStarcom, Inc. in exchangefor $100 million in cash, subject to certain closing adjustments.  On May 23, 2003, we completed the salepursuant to the terms of the Asset Purchase Agreement.  As a result, we reported the CommWorksdivision as a

 

6

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discontinued operationbeginning in the fourth quarter of fiscal 2003 and restated all prior periods presented on a comparativebasis.  The loss from discontinuedoperations for the three months and nine months ended February 27, 2004resulted from adjustments to previous estimates of liabilities related to thesale of the CommWorks division.

 

**Note 3.****           Stock-BasedCompensation**

 

We have stock option plans under which employees and directors may begranted options to purchase common stock. Options generally are granted with exercise prices at not less than thefair market value at the date of the grant, vest annually over two to fouryears, and expire seven to ten years after the grant date.

 

Restricted stock represents shares of common stock that are issued atno cost to key employees and that generally vest over a one to four-yearperiod.  Such shares are subject to ourright to reacquire those shares upon such person’s termination of employment tothe extent that such right has not lapsed. We also grant time accelerated restricted stock awards whereby shareswith a specified time-based vesting period may be accelerated if specificperformance milestones are achieved.

 

Additionally,we have an employee stock purchase plan (ESPP) under which eligible employeesmay authorize payroll deductions of up to ten percent of their compensation, asdefined, to purchase common stock at a price of 85 percent of the lower of thefair market value as of the beginning or end of the six-month offering period.

 

As permitted under Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,” we follow Accounting PrinciplesBoard (APB) Opinion 25 and related Interpretations in accounting forstock-based awards to employees.  UnderAPB Opinion 25, compensation expense associated with employee stock awards ismeasured as the difference, if any, between the price to be paid by an employeeand the fair value of the underlying common stock on the grant date, whichusually is the measurement date for accounting purposes.  Generally, we recognize no compensationexpense with respect to stock-based option awards and stock issued under theESPP.  However, to the extent that wemodify an employee’s stock options subsequent to the grant date (for example,by extending the period of time permitted for exercising a stock optionfollowing an employee’s involuntary termination), we record compensationexpense attributable to the modifications. Also, we record compensation expense related to restricted stock overthe applicable vesting period; such compensation expense is measured as thefair market value of the restricted stock at the date of the grant.

 

SFAS 123 requiresdisclosure of the pro forma effects on our reported net loss and net loss pershare of applying the fair value recognition provisions of SFAS 123 tostock-based employee compensation.  Thefollowing table illustrates such pro forma effects:

 
| ** **                                                                                                        | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in  thousands, except per share amounts)**                                                                     | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
| ** **                                                                                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  loss as reported                                                                                             |       | $                           | (53,005    | )                           | $          | (85,572 | ) | $ | (137,361 | ) | $ | (330,547 | ) |
| Add:  Stock-based compensation included in reported net loss                                                      |       | 913                         |       | 955                         |       | 1,778 |   | 2,206 |   |
| Deduct:  Total stock-based compensation determined under the fair value-based method,  net of related tax effects |       | (5,163                      | )          | (4,229                      | )          | (12,898 | ) | (14,918 | ) |
| Pro forma net loss                                                                                                |       | $                           | (57,255    | )                           | $          | (88,846 | ) | $ | (148,481 | ) | $ | (343,259 | ) |
|                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Net  loss per share-basic and diluted:                                                                            |       |                        |       |                        |       |   |   |   |   |
| As  reported                                                                                                      |       | $                           | (0.14      | )                           | $          | (0.22 | ) | $ | (0.36 | ) | $ | (0.88 | ) |
| Pro  forma                                                                                                        |       | (0.15                       | )          | (0.23                       | )          | (0.39 | ) | (0.91 | ) |

 

7

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For purposes of this proforma disclosure, the estimated fair values of employee stock options (ESOs)are assumed to be amortized over the applicable vesting periods, and theestimated fair values of ESPP shares are assumed to be amortized over theapplicable subscription periods.

 

As of February 25,2005, and February 27, 2004, the expected average life of ESOs wasestimated at approximately one and a half years after the vesting date.Although there were no purchase rights granted under the ESPP for the threemonths ended February 25, 2005 and February 27, 2004, the expectedaverage life of purchase rights granted under the ESPP in prior periods wasestimated at six months from the subscription date.  The fair values of ESOs and ESPP sharesgranted during the third quarter of fiscal 2005 and fiscal 2004 and the firstnine months of fiscal 2005 and 2004 have been estimated as of the date of grantusing the Black-Scholes option pricing model. The assumptions used in preparing the estimates and the resulting fairvalues are shown below:

 
| ** **                                                  | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                                        |       |                        |       |                        |       |   |   |   |   |
| Volatility-ESO                                              |       | 51.0                        | %          | 64.0                        | %          | 55.2 | % | 67.0 | % |
| Volatility-ESPP                                             |       | —                      |       | —                      |       | 40.0 | % | 45.0 | % |
| Risk-free  interest rate-ESO                                |       | 3.6                         | %          | 2.7                         | %          | 3.4 | % | 2.6 | % |
| Risk-free  interest rate-ESPP                               |       | —                      |       | —                      |       | 2.2 | % | 1.0 | % |
| Dividend  yield-ESO and ESPP                                |       | 0.0                         | %          | 0.0                         | %          | 0.0 | % | 0.0 | % |
| Per-share  fair value of options granted under ESO          |       | $                           | 1.59       |                        | $          | 4.08 |   | $ | 2.06 |   | $ | 2.86 |   |
| Per-share  fair value of purchase rights granted under ESPP |       | —                      |       | —                      |       | $ | 1.13 |   | $ | 1.79 |   |
|                                                             |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

The Black-Scholes optionpricing model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions, including the expected stock pricevolatility.

 

On January 31, 2005,we completed our acquisition of TippingPoint Technologies, Inc.(TippingPoint).  Pursuant to the mergeragreement, at the effective time of the merger, outstanding options to purchaseshares of TippingPoint common stock were converted into options to purchaseapproximately 13.9 million shares of our common stock.  The fair value of each option grant wasestimated on the date of acquisition using the Black-Scholes option pricingmodel with input assumptions similar to those used for our stock optionsgranted during the three months ended February 25, 2005.  Deferred compensation of $9.4 million relatedto the intrinsic value of unvested stock options was recorded as part of theacquisition and will be amortized to expense over the remaining service period.

 

**Note 4.****           Acquisition**

 

On January 31, 2005,we completed our acquisition of TippingPoint for consideration of $430.0million, subject to adjustment.  Thisamount excludes the cost of integration, as well as other costs related to thetransaction.  TippingPoint is a providerof networked-based intrusion prevention systems (IPS).  The acquisition enabled us to expand ourportfolio of secure, converged voice and data networking solutions.

 

The TippingPoint acquisitionwas accounted for as a purchase, and accordingly, the assets purchased andliabilities assumed are included in the consolidated balance sheet as of February 25,2005.  The operating results ofTippingPoint are included in the consolidated financial statements since thedate of acquisition.

 

8

----

 

The preliminary purchaseprice is shown below (in millions):

 
| Cash  paid for common stock                      |   | $    | 389.5  |   |
|--------------------------------------------------|--------|------|--------|--------|
| Fair  value of outstanding stock options assumed |   | 36.1 |   |
| Acquisition  direct costs                        |   | 4.4  |   |
| Total  purchase price                            |   | $    | 430.0  |   |

 

In accordance with SFAS No. 141,*Business Combinations*, weallocated the purchase price to the tangible and intangible assets acquired andliabilities assumed, including in-process research and development, based ontheir estimated fair values, and deferred stock compensation. The excesspurchase price over those fair values is recorded as goodwill. The fair valuesassigned to tangible and intangible assets acquired and liabilities assumed arebased on estimates and assumptions provided by management, and otherinformation compiled by management, including valuations that utilizeestablished valuation techniques appropriate for the high technologyindustry.  Goodwill recorded as a resultof this acquisition is not expected to be deductible for tax purposes.  In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*,goodwill is not amortized but will be reviewed at least annually forimpairment. Purchased intangibles with finite lives will be amortized on astraight-line basis over their respective estimated useful lives. The totalpreliminary purchase price has been allocated as follows (in millions):

 
| Net  tangible assets (liabilities) assumed       |   | $      | 36.1   |   |
|--------------------------------------------------|--------|--------|--------|--------|
| Amortizable  intangible assets:                  |   |   |   |
| Existing  technology                             |   | 39.1   |   |
| Maintenance  agreements                          |   | 19.0   |   |
| Other                                            |   | 11.8   |   |
| Total  amortizable intangible assets             |   | 69.9   |   |
|                                             |   |   |   |
| In-process  research and development             |   | 5.1    |   |
| Deferred  compensation on unvested stock options |   | 9.4    |   |
| Goodwill                                         |   | 309.5  |   |
| Total  purchase price allocation                 |   | $      | 430.0  |   |

 

The purchase price andrelated allocation are preliminary and may be revised as a result ofadjustments made to the purchase price, additional information regardingliabilities assumed, including contingent liabilities, and revisions ofpreliminary estimates of fair values made at the date of purchase.

 

Intangible assets includeamounts recognized for the fair value of existing technology, maintenanceagreements, trade name and trademarks, and non-competition agreements.  These intangible assets have a weightedaverage useful life of approximately five years.

 

The following pro formafinancial information presents the combined results of operations of 3ComCorporation and TippingPoint as if the acquisition had occurred as of thebeginning of the periods presented. Adjustments, which reflect the amortization of purchased intangibleassets and deferred stock compensation, charges to cost of sales for inventorywrite-ups, and in-process research and development, have been made to thecombined results of operations for the three and nine months ended February 25,2005 and February 27, 2004, respectively. The unaudited pro forma financial information is not intended torepresent or be indicative of our consolidated results of operations orfinancial condition that would have been reported had the acquisition beencompleted as of the dates presented, and should not be taken as representativeof our future consolidated results of operations or financial condition.

 
| ** **                                   | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in  millions, except per share amounts)** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
| ** **                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                   |       | $                           | 171.6      |                        | $          | 173.7 |   | $ | 499.1 |   | $ | 518.3 |   |
| Net  loss                                    |       | (67.8                       | )          | (104.5                      | )          | (169.9 | ) | (369.5 | ) |
| Basic  and diluted loss per share            |       | (0.18                       | )          | (0.27                       | )          | (0.44 | ) | (0.98 | ) |
|                                              |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

9

----

 

**Note 5.****           RestructuringCharges**

 

In recent fiscal years,we have undertaken several initiatives involving significant changes in our businessstrategy and cost structure.  In fiscal2001, we began a broad restructuring of our business to enhance the focus andcost effectiveness of our business units in serving their respective markets.  These efforts continued through fiscal2002.  We took the following specificactions in fiscal 2001 and 2002 (the “Fiscal 2001 and 2002 Actions”):  we organized aroundindependent businesses that utilized shared central services; we exited productlines; we outsourced the manufacturing of certain high volume server, desktopand mobile connectivity products in a contract manufacturing arrangement; weimplemented a reduction in workforce; and we consolidated our real estatefacilities and made plans to sell excess facilities.

 

As a result of furthersales declines and net losses, we took additional restructuring actions infiscal 2003 (the “Fiscal 2003 Actions”). We announced the integration of the support infrastructure of two of ourbusiness units to leverage a common infrastructure in order to reduce costs.  Additionally, we entered into agreements tooutsource certain information technology (IT) functions, reduced our workforce,and continued to consolidate and dispose of excess facilities.

 

In response to continuingsales declines and net losses, we took additional measures to reduce costsduring fiscal 2004 (the “Fiscal 2004 Actions”) and fiscal 2005 (the “Fiscal2005 Actions”).  These actions includedreductions of our workforce, outsourcing of our remaining manufacturingoperations, and continuing efforts to consolidate and dispose of excessfacilities.

 

Restructuring chargesrelated to these various initiatives in the third quarters of fiscal 2005 andfiscal 2004 were $9.1 million and $39.5 million, respectively.  Such charges were net of reversals of priorcharges of $0.2 million and $5.8 million, respectively, related primarily torevisions of previous estimates of employee separation expenses, leaseobligation costs, and values of held for sale properties.  Restructuring charges related to these variousinitiatives in the first three quarters of fiscal 2005 and fiscal 2004 were$16.4 million and $147.1 million, respectively. Such charges were net of reversals of prior charges of $6.1 million and$7.3 million, respectively, related primarily to revisions of previousestimates of employee separation expenses, lease obligation costs, and valuesof held for sale properties.

 

Accrued liabilitiesassociated with restructuring charges are classified as current, since weintend to satisfy such liabilities in cash within the next twelve months, andare included in the caption “Accrued liabilities and other” in the accompanyingcondensed consolidated balance sheets.

 

*Fiscal 2005 Actions*

 

The following tableprovides a summary of the components of restructuring charges recorded in thefirst three quarters of fiscal 2005 with respect to the Fiscal 2005 Actions,together with changes in the accrued amounts and the ending balances as of February 25,2005 (in thousands):

 
| ** **                         | ** ** | **Employee  Separation  Expenses** | ** ** | **Facilities-  related  Charges** | ** ** | **Other  Restructuring  Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------|------------|
| Balance  at May 28, 2004      |       | $                                  | —     |                              | $          | —                          |       | $         | —     |   | $ | — |   |
| Provision                          |       | 5,439                              |       | 59                                |       | 333                             |       | 5,831     |       |
| Payments  and non-cash charges     |       | (2,192                             | )          | (59                               | )          | (333                            | )          | (2,584    | )          |
| Balance  at August 27, 2004   |       | 3,247                              |       | —                            |       | —                          |       | 3,247     |       |
| Provision                          |       | 1,788                              |       | 5                                 |       | 87                              |       | 1,880     |       |
| Payments  and non-cash charges     |       | (3,188                             | )          | (5                                | )          | (87                             | )          | (3,280    | )          |
| Balance  at November 26, 2004 |       | 1,847                              |       | —                            |       | —                          |       | 1,847     |       |
| Provision                          |       | 8,572                              |       | 4                                 |       | 438                             |       | 9,014     |       |
| Payments  and non-cash charges     |       | (4,727                             | )          | (4                                | )          | (438                            | )          | (5,169    | )          |
| Balance  at February 25, 2005 |       | $                                  | 5,692      |                              | $          | —                          |       | $         | —     |   | $ | 5,692 |   |

 

10

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Employee separationexpenses include severance pay, outplacement services, and medical and otherrelated benefits.  The reduction inworkforce affected employees in the research and development, productmanagement, customer service, supply chain, sales and marketing, and generaland administrative functions.  The totalreduction in workforce associated with actions initiated during the first threequarters of fiscal 2005 includes approximately 350 employees.  Separation payments associated with actionsinitiated during the first three quarters of fiscal 2005 totaled $9.7 millionthrough February 25, 2005.

 

Facilities-relatedcharges include costs associated with vacating leased offices in fiscal2005.  Other restructuring costs relatemainly to payments to suppliers for restructuring-related services.

 

*Fiscal 2004 Actions*

 

The following tableprovides a summary of the components of accrued restructuring charges relatedto the Fiscal 2004 Actions, together with changes in the accrued amounts duringthe first three quarters of fiscal 2005 and the ending balances of theassociated accrued liabilities as of February 25, 2005 (in thousands):

 
| ** **                         | ** ** | **Employee  Separation  Expenses** | ** ** | **Facilities-  related  Charges** | ** ** | **Other  Restructuring  Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------|------------|
| Balance  at May 28, 2004      |       | $                                  | 5,529      |                              | $          | 530                             |       | $         | —     |   | $ | 6,059 |   |
| Provision  (benefit)               |       | (2,208                             | )          | (2,455                            | )          | 192                             |       | (4,471    | )          |
| Payments  and non-cash changes     |       | (2,596                             | )          | 2,600                             |       | (192                            | )          | (188      | )          |
| Balance  at August 27, 2004   |       | 725                                |       | 675                               |       | —                          |       | 1,400     |       |
| Provision                          |       | —                             |       | 389                               |       | 98                              |       | 487       |       |
| Payments  and non-cash changes     |       | (91                                | )          | 78                                |       | (98                             | )          | (111      | )          |
| Balance  at November 26, 2004 |       | 634                                |       | $                                 | 1,142      |                            | —     |      | 1,776      |   |
| Provision                          |       | —                             |       | 30                                |       | —                          |       | 30        |       |
| Payments  and non-cash charges     |       | (14                                | )          | (150                              | )          | —                          |       | (164      | )          |
| Balance  at February 25, 2005 |       | $                                  | 620        |                              | $          | 1,022                           |       | $         | —     |   | $ | 1,642 |   |

 

Employee separationexpenses include severance pay, outplacement services, medical and otherrelated benefits.  The reduction inworkforce mainly affected employees involved with the Dublin, Irelandmanufacturing operations, and also affected employees in sales and marketing,research and development, and general and administrative functions.

 

Facilities-relatedcharges in the first three quarters of fiscal 2005 relating to restructuringactions initiated in fiscal 2004 were the result of revisions in estimates oflease obligation costs.

 

Other restructuring costsprimarily reflected payments to suppliers for restructuring-related services.

 

*Fiscal2003 Actions*

 

The following tableprovides a summary of the components of accrued restructuring charges relatedto the Fiscal 2003 Actions, together with changes in the accrued amounts duringthe first three quarters of fiscal 2005 and the ending balances as of February 25,2005 (in thousands):

 
| ** **                         | ** ** | **Facilities-  related  Charges** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| Balance  at May 28, 2004      |       | $                                 | 2,566      |   |
| Provision                          |       | 221                               |       |
| Payments  and non-cash charges     |       | (360                              | )          |
| Balance  at August 27, 2004   |       | 2,427                             |       |
| Provision                          |       | 1,442                             |       |
| Payments  and non-cash charges     |       | (360                              | )          |
| Balance  at November 26, 2004 |       | 3,509                             |       |
| Provision                          |       | 6                                 |       |
| Payments  and non-cash charges     |       | (447                              | )          |
| Balance  at February 25, 2005 |       | $                                 | 3,068      |   |

 

11

----

 

Additionalfacilities-related charges were the result of revisions in estimates of leaseobligation costs.

 

*Fiscal 2001 and Fiscal 2002Actions*

 

The following tableprovides a summary of the components of accrued restructuring charges relatedto the Fiscal 2001 and Fiscal 2002 Actions, together with changes in theaccrued amounts during the first three quarters of fiscal 2005 and the endingbalances as of February 25, 2005 (in thousands):

 
| ** **                         | ** ** | **Facilities-  related  Charges** | ** ** | **Other  Restructuring  Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------|------------|
| Balance  at May 28, 2004      |       | $                                 | 6,723      |                            | $          | 82        |       | $ | 6,805 |   |
| Provision                          |       | 1,203                             |       | —                          |       | 1,203     |       |
| Payments  and non-cash charges     |       | (1,320                            | )          | (31                             | )          | (1,351    | )          |
| Balance  at August 27, 2004   |       | 6,606                             |       | 51                              |       | 6,657     |       |
| Provision                          |       | 688                               |       | —                          |       | 688       |       |
| Payments  and non-cash charges     |       | (461                              | )          | (17                             | )          | (478      | )          |
| Balance  at November 26, 2004 |       | 6,833                             |       | 34                              |       | 6,867     |       |
| Provision                          |       | 43                                |       | —                          |       | 43        |       |
| Payments  and non-cash charges     |       | (518                              | )          | (15                             | )          | (533      | )          |
| Balance  at February 25, 2005 |       | $                                 | 6,358      |                            | $          | 19        |       | $ | 6,377 |   |

 

Additionalfacilities-related charges were the result of changes in estimates associatedwith various lease obligations.  Activityrelated to other restructuring costs primarily reflected payments to suppliersfor restructuring-related services.

 

**Note 6.****           Investmentin Unconsolidated Joint Venture**

 

On November 17, 2003, we formed the Huawei-3ComJoint Venture (H-3C) with a subsidiary of Huawei Technologies, Ltd.(Huawei).  H-3C is domiciled inHong Kong, and has its principal operating centers in Hangzhouand Beijing, China.

 

At the time of formation, we contributed cash,assets related to our operations in China and Japan, and licenses related tocertain intellectual property in exchange for a 49 percent ownershipinterest.  We recorded our initialinvestment in H-3C at $160.1 million, reflecting the carrying value ofthe assets contributed.  Huaweicontributed its enterprise networking business assets – including Local AreaNetwork (LAN) switches and routers; engineering, sales, and marketing resourcesand personnel; and licenses to its related intellectual property – in exchangefor a 51 percent ownership interest.  Twoyears after formation of H-3C, we have the one-time option to purchase anadditional two percent ownership interest from Huawei for an amount not toexceed $28 million.  Three years afterformation of H-3C, we and Huawei each have the right to purchase all ofthe other partner’s ownership interest through a bid process.

 

Weaccount for our investment in H-3C by the equity method.  Under this method, we record ourproportionate share of H-3C’s net income or loss based on the mostrecently available financial statements. Since H-3C follows a calendar year basis of reporting, we reportour equity in H-3C’s net income or loss based on H-3C’s financialstatements for the most recent calendar quarter, two months in

 

12

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arrears.  In determining our share of H-3C’s netincome or loss, we make certain adjustments to H-3C’s reportedresults.  Such adjustments are madeprimarily to recognize the value and related amortization expense associatedwith Huawei’s contributed assets, as well as to defer H-3C’s sales andgross profit on sales of products sold to us that remained in our inventory atthe end of the accounting period.

 

Summarized condensed unaudited financial information for H-3C,adjusted as described above, is as follows (in thousands):

 

Balance Sheet:

 
| ** **               | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                     |       |                        |       |                     |       |
| Current  assets          |       | $                           | 264,489    |                     | $          | 242,904 |   |
| Non-current  assets      |       | 147,906                     |       | 208,471                  |       |
| Current  liabilities     |       | 117,062                     |       | 86,825                   |       |
| Non-current  liabilities |       | 8,866                       |       | 8,866                    |       |
|                          |            |                             |            |                          |            |  |  |

 

Statements ofOperations:

 
| ** **            | ** ** | **Three  Months-Ended  December 31,  2004** | ** ** | **Nine  Months-Ended  December 31,  2004** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
|                  |       |                                             |       |                                            |       |
| Sales                 |       | $                                                | 87,116     |                                            | $          | 215,696 |   |
| Gross  margin         |       | 33,717                                           |       | 84,485                                          |       |
| Loss  from operations |       | 5,536                                            |       | 16,663                                          |       |
| Net  loss             |       | 4,589                                            |       | 14,540                                          |       |
|                       |            |                                                  |            |                                                 |            |  |  |

 

Weand H-3C are parties to agreements providing for the sale of certainproducts between the two companies. During the third quarter of fiscal 2005, we made sales of products to H-3Cof $3.2 million and made purchases of products from H-3C of $6.0 million.During the first nine months of fiscal 2005, we made sales of products to H-3Cof $10.3 million and made purchases of products from H-3C of $12.9million.  As of February 25, 2005,our accounts receivable and accounts payable included $1.3 million and $2.8million, respectively, related to transactions with H-3C.  Also, as of February 25, 2005, we haddeferred approximately $0.1 million related to sales of products to H-3Cthat had not yet been shipped to H-3C’s end customers.

 

**Note 7.****           ComprehensiveLoss**

 

The components of comprehensive loss, net of tax, areas follows (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                            |       |                        |       |                        |       |   |   |   |   |
| Net  loss                                       |       | $                           | (53,005    | )                           | $          | (85,572 | ) | $ | (137,361 | ) | $ | (330,547 | ) |
|                                            |       |                        |       |                        |       |   |   |   |   |
| Other  comprehensive income (loss):             |       |                        |       |                        |       |   |   |   |   |
| Net  unrealized gain (loss) on investments      |       | (196                        | )          | 1,075                       |       | (1,583 | ) | (258 | ) |
| Net  unrealized gain (loss) on cash flow hedges |       | 817                         |       | (713                        | )          | (81 | ) | (713 | ) |
| Change  in accumulated translation adjustments  |       | (208                        | )          | 556                         |       | 2,150 |   | 1,214 |   |
|                                            |       |                        |       |                        |       |   |   |   |   |
| Total  comprehensive loss                       |       | $                           | (52,592    | )                           | $          | (84,654 | ) | $ | (136,875 | ) | $ | (330,304 | ) |

 

13

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**Note 8.****           NetLoss per Share**

 

The following table presents the calculation of basicand diluted net loss per share (in thousands, except per share data):

 
| ** **                             | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                   |       |                        |       |                        |       |   |   |   |   |
| Loss  from continuing operations       |       | $                           | (53,005    | )                           | $          | (84,887 | ) | $ | (137,361 | ) | $ | (328,006 | ) |
| Loss  from discontinued operations     |       | —                      |       | (685                        | )          | — |   | (2,541 | ) |
| Net  loss                              |       | $                           | (53,005    | )                           | $          | (85,572 | ) | $ | (137,361 | ) | $ | (330,547 | ) |
|                                   |       |                        |       |                        |       |   |   |   |   |
| Weighted  average shares-basic         |       | 379,946                     |       | 385,019                     |       | 382,075 |   | 376,077 |   |
| Effect  of dilutive securities:        |       |                        |       |                        |       |   |   |   |   |
| Employee  stock options                |       | —                      |       | —                      |       | — |   | — |   |
| Restricted  stock                      |       | —                      |       | —                      |       | — |   | — |   |
| Weighted  average shares-diluted       |       | 379,946                     |       | 385,019                     |       | 382,075 |   | 376,077 |   |
|                                   |       |                        |       |                        |       |   |   |   |   |
| Net  loss per share-basic and diluted: |       |                        |       |                        |       |   |   |   |   |
| Continuing  operations                 |       | $                           | (0.14      | )                           | $          | (0.22 | ) | $ | (0.36 | ) | $ | (0.87 | ) |
| Discontinued  operations               |       | —                      |       | —                      |       | — |   | (0.01 | ) |
| Net  loss                              |       | $                           | (0.14      | )                           | $          | (0.22 | ) | $ | (0.36 | ) | $ | (0.88 | ) |

 

Employee stock options and restricted stock totaling9.8 million shares and 11.0 million shares for the three months ended February 25,2005 and February 27, 2004, respectively, and 4.9 million shares and 7.5million shares for the nine months ended February 25, 2005 and February 27,2004, respectively, were not included in the diluted weighted average sharescalculation as the effects of these securities were anti-dilutive.

 

**Note 9.****           Inventories**

 

Inventories consist of thefollowing (in thousands):

 
| ** **      | ** ** | **February 25,  2005** | ** ** | **May 28,  2004** | ** ** |
|-----------------|------------|-----------------------------|------------|------------------------|------------|
|            |       |                        |       |                   |       |
| Finished  goods |       | $                           | 22,710     |                   | $          | 25,869 |   |
| Work-in-process |       | 617                         |       | 485                    |       |
| Raw  materials  |       | 936                         |       | 1,325                  |       |
|            |       |                        |       |                   |       |
| Total           |       | $                           | 24,263     |                   | $          | 27,679 |   |

 

**Note 10.****         Propertyand Equipment**

 

Property and equipment,net, consist of the following (in thousands):

 
| ** **                                 | ** ** | **February 25,  2005** | ** ** | **May 28,  2004** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
|                                       |       |                        |       |                   |       |
| Land                                       |       | $                           | 6,999      |                   | $          | 8,724 |   |
| Building  and improvements                 |       | 38,286                      |       | 38,325                 |       |
| Machinery  and equipment                   |       | 175,788                     |       | 206,099                |       |
| Software                                   |       | 98,343                      |       | 105,943                |       |
| Furniture  and fixtures                    |       | 25,756                      |       | 26,880                 |       |
| Leasehold  improvements                    |       | 12,281                      |       | 10,274                 |       |
| Construction  in progress                  |       | 2,187                       |       | 1,664                  |       |
| Total,  gross                              |       | 359,640                     |       | 397,909                |       |
|                                       |       |                        |       |                   |       |
| Accumulated  depreciation and amortization |       | (288,294                    | )          | (325,457               | )          |
|                                       |       |                        |       |                   |       |
| Total,  net                                |       | $                           | 71,346     |                   | $          | 72,452 |   |
|                                            |            |                             |            |                        |            |  |  |  |

 

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In February 2005, we completed the sale of certainproperties in Hemel Hempstead, U.K. that was classified as held for sale.  This property, consisting of approximately111,000 square feet of office and research and development space, previouslyhad been used in our administrative and research and developmentactivities.  Net proceeds from the saleresulted in a gain on the sale of $0.1 million that was recorded inrestructuring charges in the third quarter of fiscal 2005.

 

In November 2004, we completed the sale of ourproperty in Dublin that was classified as held for sale.  This property, consisting of approximately468,000 square feet of office and manufacturing space, previously had been usedin our manufacturing, research and development, and administrative activities.  Net proceeds from the sale resulted in a gainon the sale of $0.5 million that was recorded in restructuring charges in thesecond quarter of fiscal 2005.

 

In November 2003, we completed the sale ofcertain properties in Santa Clara, California that were classified as held forsale.  These properties, consisting ofapproximately 876,000 square feet of office and manufacturing space and relatedfurniture and fixtures, previously had been used in our administrative, manufacturing,research and development, and customer service activities.  Net proceeds from the sale resulted in a losson the sale of $1.4 million that was recorded in restructuring charges in thesecond quarter of fiscal 2004.

 

In July 2003, wecompleted the sale of our 511,000 square foot office and research and developmentfacility in Rolling Meadows, Illinois. Net proceeds from the sale resulted in a loss on the sale of $1.1million that was recorded in restructuring charges in the first quarter offiscal 2004.  As part of the terms of thetransaction, we entered into an agreement to lease back approximately 43,000square feet of space at then prevailing market rates.

 

The property and equipment held for sale of $42.1million as of May 28, 2004 was sold as of February 25, 2005.

 

**Note 11.****         IntangibleAssets, Net**

 

The following table details our purchased intangible assets (inmillions):

 
| **As of  February 25, 2005** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-----------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
| Existing technology               |       | $         | 74.6       |                          | $          | (34.7   | )          | $ | 39.9 |   |
| Maintenance contracts             |       | 19.0      |       | (0.3                          | )          | 18.7    |       |
| Other                             |       | 12.2      |       | (0.8                          | )          | 11.4    |       |
|                              |       |      |       |                          |       |    |       |
| Total                             |       | $         | 105.8      |                          | $          | (35.8   | )          | $ | 70.0 |   |

 

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| **As of  May 28, 2004** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
| Existing Technology          |       | $         | 36.7       |                          | $          | (31.7   | )          | $ | 5.0 |   |
| Other                        |       | 0.4       |       | (0.4                          | )          | —  |       |
|                         |       |      |       |                          |       |    |       |
| Total                        |       | $         | 37.1       |                          | $          | (32.1   | )          | $ | 5.0 |   |

 

Amortizationexpense of purchased intangible assets of $1.7 million and $1.0 were in thecaption “Amortization and write down of intangibles” in the accompanyingcondensed consolidated statements of operations for the three months ended February 25,2005 and February 27, 2004, respectively. Amortization expense ofpurchased intangible assets of $4.9 million and $5.6 million were in thecaption “Amortization and write down of intangibles” in the accompanyingcondensed consolidated statements of operations for the nine months ended February 25,2005 and February 27, 2004, respectively.

 

Theestimated future amortization expense of purchased intangible assets for thenext five years is as follows (in millions):

 
| **As of  February 25, 2005** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005  (remaining three months)    |       | $          | 3.9        |   |
| 2006                              |       | 15.3       |       |
| 2007                              |       | 13.6       |       |
| 2008                              |       | 11.3       |       |
| 2009                              |       | 9.7        |       |
| Thereafter                        |       | 16.2       |       |
|                              |       |       |       |
| Total                             |       | $          | 70.0       |   |

 

**Note 12.****         AccruedLiabilities and Other**

 

Accrued liabilities andother consist of the following (in thousands):

 
| ** **                            | ** ** | **February 25,  2005** | ** ** | **May 28,  2004** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|------------------------|------------|
|                                  |       |                        |       |                   |       |
| Accrued  payroll and related expenses |       | $                           | 41,274     |                   | $          | 37,995 |   |
| Accrued  product warranty             |       | 40,073                      |       | 43,825                 |       |
| Accrued  rebates                      |       | 27,216                      |       | 29,536                 |       |
| Income  and other taxes payable       |       | 47,055                      |       | 34,184                 |       |
| Deferred  revenue                     |       | 19,635                      |       | 25,942                 |       |
| Other                                 |       | 57,739                      |       | 54,679                 |       |
|                                  |       |                        |       |                   |       |
| Total                                 |       | $                           | 232,992    |                   | $          | 226,161 |   |

 

**Note 13.****         AccruedWarranty and Other Guarantees**

 

Productsare sold with varying lengths of warranty ranging from 90 days to the lifetimeof the products.  Allowances forestimated warranty costs are recorded in the period of sale, based onhistorical experience related to product failure rates and actual warrantycosts incurred during the applicable warranty period.  Also, on an ongoing basis, we assess theadequacy of our allowances related to warranty obligations recorded in previousperiods and may adjust the balances to reflect actual experience or changes infuture expectations.

 

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Thefollowing table summarizes the activity in the allowance for estimated warrantycosts for the nine months ended February 25, 2005 and February 27,2004 (in thousands):

 
| ** **                                                           | ** ** | **First nine  months of  fiscal 2005** | ** ** | **First nine  months of  fiscal 2004** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
|                                                                 |       |                                   |       |                                   |       |
| Accrued  warranty, beginning of period                               |       | $                                      | 43,825     |                                   | $          | 44,775 |   |
| Cost  of warranty claims processed during the period                 |       | (24,728                                | )          | (26,340                                | )          |
| Provision  for warranties related to products sold during the period |       | 20,976                                 |       | 25,590                                 |       |
| Adjustments  to preexisting warranties                               |       | —                                 |       | (23                                    | )          |
|                                                                 |       |                                   |       |                                   |       |
| Accrued  warranty, end of period                                     |       | $                                      | 40,073     |                                   | $          | 44,002 |   |

 

In prior years, weentered into several agreements whereby we sold products to resellers who, inturn, sold the products to others, and we guaranteed the payments of the endusers.  However, since deferred revenueand other associated accruals related to such sales approximate the guaranteedamounts, any payments resulting from end user defaults would not have amaterial impact on our results of operations.

 

**Note 14.****         Stockholders’Equity**

 

In the first quarter offiscal 2005, we repurchased approximately 15.0 million shares of our commonstock at a total cost of $73.4 million. These repurchases were made pursuant to the stock repurchase programthat was approved by our Board of Directors in March 2003, and thatauthorizes expenditures of up to $100.0 million during a two-year periodthrough March 2005.  We did notrepurchase any shares during the second and third quarters of fiscal 2005. At February 25,2005, approximately $26.6 million of the authorization remained available forfuture repurchases.  As discussed in Note17, this authorization was superseded on March 23, 2005.

 

**Note 15.****         BusinessSegment Information**

 

Effective forfiscal 2004, we streamlined our management and operating structure and merged ourprevious multiple operating segments into a single, integrated enterprisenetworking business.  As a result,effective for fiscal 2004, we present financial information related to ourbusiness on the basis of a single segment.

 

Sales bygeographic region is reported based on the customer’s designated delivery pointand are as follows (in thousands):

 
| ** **                              | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Americas                                |       | $                           | 63,712     |                        | $          | 56,889 |   | $ | 195,521 |   | $ | 186,416 |   |
| Europe,  Middle East, & Africa |       | 76,393                      |       | 86,451                      |       | 216,719 |   | 238,249 |   |
| Asia  Pacific Rim                       |       | 21,080                      |       | 28,429                      |       | 62,362 |   | 90,874 |   |
|                                    |       | $                           | 161,185    |                        | $          | 171,769 |   | $ | 474,602 |   | $ | 515,539 |   |

 

**Note 16.****         Litigation**

 

We are a party to lawsuits in the normal course of ourbusiness.  Litigation can be expensiveand disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult topredict.  We believe that we havemeritorious defenses in each of the cases set forth below in

 

17

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which we are named as a defendant and we arevigorously contesting each of these matters. An unfavorable resolution of one or more of these lawsuits couldadversely affect our business, financial position, or results ofoperations.  We cannot estimate the lossor range of loss that may be reasonably possible for any of the contingenciesdescribed and, accordingly, we have not recorded any associated liabilities inour consolidated balance sheets.

 

On April 28, 1997, Xerox Corporation (Xerox)filed suit against U.S. Robotics Corporation and U.S. Robotics AccessCorporation in the United States District Court for the Western District of NewYork.  3Com completed its acquisition of thesedefendant companies on June 12, 1997. The case is now captioned *XeroxCorporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. RoboticsAccess Corporation, Palm Computing, Inc., and Palm, Inc.*(Civil Action Number 97-CV-6182T). Xerox alleged willful infringement of one of its United Statespatents.  Xerox sought to recover damagesand to permanently 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 for further action.  On December 20,2001, the District Court granted Xerox’s motion for summary judgment rulingthat the patent is valid, enforceable, and infringed.  The defendants filed a Notice of Appeal.  On February 22, 2002, the District Courtdenied Xerox’s motion for an injunction seeking to prohibit further allegedinfringement during the appeal and ordered the defendants to post a bond in theamount of $50 million.  Xerox appealedthe denial of the injunction.  On February 20,2003, the Court of Appeals issued its decision affirming-in-part andreversing-in-part the order of the trial court. The Court of Appeals affirmed the grant of summary judgment ofinfringement, reversed the grant of summary judgment of validity and remandedthe case to the trial court to conduct a complete validity analysis.  In connection with the separation of Palmfrom 3Com, pursuant to the terms of the Indemnification and Insurance MattersAgreement dated February 26, 2000 between 3Com and Palm, Palm (sincerenamed palmOne) agreed to indemnify and hold 3Com harmless for any damages orlosses that might arise out of the Xerox litigation.  On May 21, 2004, the District Courtawarded summary judgment to the defendants, holding that Xerox’s patent wasinvalid, and dismissed the remaining claims. On February 16, 2005, the District Court denied Xerox’s motion forreconsideration.

 

On December 5, 2001, TippingPoint and two of itscurrent and former officers and directors, as well as the managing underwritersin TippingPoint’s initial public offering were named as defendants in apurported class action lawsuit filed in the United States District Court forthe Southern District of New York. The lawsuit, which is part of a consolidatedaction that includes over 300 similar actions, is captioned In re InitialPublic Offering Securities Litigation, Brian Levey vs. TippingPointTechnologies, Inc., et al., No. 01 CV 10976. The principal allegationin the lawsuit is that the defendants participated in a scheme to manipulatethe initial public offering and subsequent market price of TippingPoint’s stockby knowingly assisting the underwriters’ requirement that certain of theircustomers had to purchase stock in a specific initial public offering as acondition to being allocated shares in the initial public offerings of othercompanies. The purported plaintiff class for the lawsuit is comprised of allpersons who purchased TippingPoint stock from March 17, 2000 through December 6,2000. The suit seeks rescission of the purchase prices paid by purchasers ofshares of TippingPoint common stock. On September 10, 2002, TippingPoint’scounsel and counsel for plaintiffs entered into an agreement pursuant to whichthe plaintiffs dismissed, without prejudice, TippingPoint’s former and currentofficers and directors from the lawsuit. In May 2003, a memorandum ofunderstanding was executed by counsel for plaintiffs, issuer-defendants andtheir insurers setting forth terms of a settlement that would result in thetermination of all claims brought by plaintiffs against the issuer-defendantsand individual defendants named in the lawsuit. In August 2003,TippingPoint’s Board of Directors approved the settlement terms described inthe memorandum of understanding. In May 2004, TippingPoint signed asettlement agreement on behalf of itself and its current and former directorsand officers with the plaintiffs. This settlement agreement formalizes thepreviously approved terms of the memorandum of understanding and, subject tocertain conditions, provides for the complete dismissal, with prejudice, of allclaims against TippingPoint and its current and former directors and officers.Any direct financial impact of the settlement is expected to be borne byTippingPoint’s insurers. The settlement is subject to numerous conditions,including final approval by the court. There can be no assurance that suchconditions will be met or that the court will approve the terms of thesettlement agreement. If the court

 

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rejects the settlement agreement, in whole or in part,or the settlement does not occur for any other reason and the litigationagainst TippingPoint continues, we intend to defend this action vigorously, andto the extent necessary, to seek indemnification and/or contribution from theunderwriters in TippingPoint’s initial public offering pursuant to itsunderwriting agreement with the underwriters. However, there can be noassurance that indemnification or contribution will be available toTippingPoint or enforceable against the underwriters.

 

**Note 17.****         SubsequentEvent**

 

Atits meeting on March 23, 2005, our Board of Directors approved a new stockrepurchase program providing for expenditures of up to $100.0 million through March 31,2007.  Under the new stock repurchaseprogram, we may repurchase shares of our common stock having an aggregatepurchase price of up to $100.0 million in the open market, in privatelynegotiated transactions with shareholders or using derivate transactions;provided, however, that all repurchases must be pre-approved by the Audit andFinance Committee of the Board of Directors. This new stock repurchase program superseded the stock repurchaseprogram that was approved in March 2003 and expired in March 2005.  There is no requirement that we repurchaseshares under the program and the program may be discontinued at any time.

 

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**3ComCorporation**

 

***Item2.*****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The followingdiscussion should be read in conjunction with the condensed consolidatedfinancial statements and the related notes that appear elsewhere in thisdocument.

 

This quarterly report on Form 10-Qcontains forward-looking statements. These forward-looking statements include, without limitation,predictions regarding the following aspects of our future:

 
| **•** |   | Our prospects and opportunities for future growth;                                                                                   |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| **•** |   | Sales  through our largest distributors;                                                                                             |
| **•** |   | Our  joint venture with Huawei Technologies, Ltd.                                                                                    |
| **•** |   | Expected  benefits from our acquisition of TippingPoint Technologies, Inc.                                                      |
| **•** |   | The  environment for enterprise networking equipment;                                                                                |
| **•** |   | Our  goals for sales growth, gross margin expansion and profitability;                                                               |
| **•** |   | The competitive pricing  environment;                                                                                                |
| **•** |   | The advanced nature and  ready availability of merchant silicon, which allows low-end competitors to  deliver feature rich products; |
| **•** |   | Our projections for  sales and gross margin for the fourth quarter of fiscal 2005;                                                   |
| **•** |   | Our projections for a  net loss and negative cash flow for the fourth quarter of fiscal 2005;                                        |
| **•** |   | Execution  of our business plan to grow sales;                                                                                       |
| **•** |   | The  dependence of our future success on sales of our enterprise networking  products;                                               |
| **•** |   | Expansion of our  product lines targeting mid- to large-sized enterprise customers, our largest  growth opportunities;               |
| **•** |   | Our focus on our  customer facing capabilities;                                                                                      |
| **•** |   | Our objective of being  a leading provider of secure, converged network solutions for small, medium  and large enterprises;          |
| **•** |   | Future restructurings  of our business;                                                                                              |
| **•** |   | The decline in sales of  our desktop, mobile and server connectivity products;                                                       |
| **•** |   | Cash flow from  operating activities and our ability to satisfy anticipated cash requirements  for the next twelve months;           |
| **•** |   | Improvements  in our net cash flow from operations resulting from our restructuring  actions;                                        |
| **•** |   | Our future contractual  commitments;                                                                                                 |
| **•** |   | Strategic investments,  including capital call payments to certain venture capital funds;                                            |
| **•** |   | Sources  of competition, including Huawei Technologies, Ltd.;                                                                        |
| **•** |   | Our restructuring and  cost-reduction efforts, including workforce reductions and the effect on  employees;                          |
| **•** |   | Acquisitions of  companies or technologies;                                                                                          |
| **•** |   | Our reliance on  strategic relationships, including our joint venture with Huawei  Technologies, Ltd.;                               |
| **•** |   | Outsourcing of some of  our functions and dependence on contract manufacturing;                                                      |
| **•** |   | Industry trends and our  response to those trends;                                                                                   |
| **•** |   | Outcome and effect of  current and potential and future litigation;                                                                  |
| **•** |   | Protection  and enforcement of intellectual property rights; and                                                                     |

 

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| **•** |   | Our  common stock, including trading price, dividends, and repurchases. |
|------------|--------|-------------------------------------------------------------------------|

 

You can identifythese and other forward-looking statements by the use of words such as “may,” “can,”“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“intends,” “continue,” or the negative of such terms, or other comparableterminology.  Forward-looking statementsalso include the assumptions underlying or relating to any of the foregoingstatements.

 

Actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of various factors, including those set forth under BusinessEnvironment and Industry Trends.  Allforward-looking statements included in this document are based on ourassessment of information available to us at the time this report isfiled.  We undertake no obligation toupdate any forward-looking statements.

 

**BASISOF PRESENTATION**

 

The following information relates to the continuingoperations of 3Com Corporation and our consolidated subsidiaries (3Com).

 

OnMay 23, 2003, we completed the sale of the CommWorks division andtransferred certain assets and liabilities to UTStarcom, Inc. pursuant tothe terms of the Asset Purchase Agreement. As a result of the sale, we reported the CommWorks division as adiscontinued operation beginning in the fourth quarter of fiscal 2003.  Accordingly, the condensed consolidatedfinancial statements and the related notes that appear elsewhere in thisdocument reflect the CommWorks division as a discontinued operation for allperiods presented.  Unless otherwiseindicated, the following discussion relates to our continuing operations.

 

**BUSINESSOVERVIEW**

 

Weprovide secure, conversed data and voice networking solutions with integrated networkmanagement capabilities and global services for enterprises of all sizes andpublic sector organizations.  We are acompany with a global presence, strong brand identity, large intellectualproperty portfolio and strong balance sheet. We believe that our relationships with strategic partners, broad productportfolio and significant distribution channels provide us with a strongfoundation for future growth.

 

Wegenerally sell our products through a two-tier distribution channel comprisedof distributors and resellers. Distributors are the first tier of the channel providing globaldistribution, logistics, market development and other services.  Distributors generally sell to the secondtier of the channel, comprising value added resellers (VARs) and other channelpartners targeting enterprises of all sizes. Although a majority of our sales are made through our two-tierdistribution channel, we also work closely with systems integrators, majortelecommunications service providers, and direct marketing resellers.  We also maintain a field sales organization thatworks alongside our channel partners to assist them in achieving their salesgoals.

 

Asubstantial portion of our sales is derived from a limited number ofdistributors, the largest of which are Ingram Micro Inc. and Tech DataCorporation.  We expect that thesedistributors will continue to represent a significant percentage of our salesfor the foreseeable future.  The tablebelow sets forth the percentage of sales derived from these major distributorsduring the third quarter and first nine months of fiscal 2005 and 2004.

 
| ** **              | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                    |       |                        |       |                        |       |   |   |   |   |
| Ingram Micro, Inc. |       | 19                          | %          | 21                          | %          | 21 | % | 21 | % |
| Tech  Data Corporation  |       | 12                          |       | 15                          |       | 14 |   | 13 |   |
| Total                   |       | 31                          | %          | 36                          | %          | 35 | % | 34 | % |

 

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Wehave undergone significant changes in recent years, including:

 

**•**      exiting product lines that were not expectedto yield a satisfactory return on investment;

**•**      significant headcount reductions;

**•**      outsourcing of certain information technology(IT) and other functions;

**•**      significant changes to our executiveleadership;

**•**      outsourcing of all manufacturing activity;

**•**      selling excess facilities;

**•**      forming the Huawei-3Com Joint Venture(H-3C);

**•**      acquiring TippingPoint Technologies, Inc.;

**•**      introducing new product lines targeted atmid- to large-sized enterprises; and

**•**      realigning our sales and marketing channelsand expenditures.

 

Webelieve an overview of some of these significant changes is helpful tounderstanding our operating results.

 

*SignificantEvents*

 

OnNovember 17, 2003, we formed our joint venture, Huawei-3Com (H-3C),which is domiciled in Hong Kong and has its principal operating centers inHangzhou and Beijing,China.  We contributed $160 million incash, assets related to our operations in China and Japan, and licenses tointellectual property related to those operations in exchange for a 49 percentownership interest of the joint venture. In the first quarter of fiscal 2005, we expanded the joint venture’smarket to include Hong Kong in addition to China and Japan.  We expect this venture to provide three keybenefits to us – an expanded product line, access to low cost and highlyeffective engineering talent, and a significant presence in the China, Japanand Hong Kong markets.

 

Duringthe first nine months of fiscal 2005, we undertook several additional actionsthat we believe will enhance our competitiveness, execution and profitabilityover the longer term.  We areimplementing a strategy to compete in all sizes of the enterprise networkingmarket, through the following:

 

**•**      continued advances in products;

**•**      increased focus on our “customer facing”capabilities in the areas of sales and marketing; and

**•**      service platform improvements.

 

Wehave introduced multiple new products targeted at the large enterprise market,including modular switches and routers sourced from H-3C, as well asVoice over Internet Protocol (VoIP), security and wireless solutions. We alsocontinue to develop solutions for the small to medium enterprise market,including VoIP, smart switches, and Power Over Ethernet (POE) technology.

 

Wehave also increased our focus on sales and marketing activities.  Current initiatives include developing anexpanded set of enterprise class channels to support effective sales into thelarge enterprise market, and implementing marketing programs that we believewill improve our effectiveness and productivity in our existing channels,particularly those that target small and mid-sized businesses.  In the second quarter of fiscal 2005,we entered an agreement with Siemens Business Services to provide expandedservice offerings on a global basis for enterprise customers.

 

On January 31, 2005, weacquired TippingPoint Technologies, Inc., a provider in network-based intrusionprevention systems (IPS).  We expect toderive a number of benefits from the acquisition of TippingPoint.  We believe IPS is one of the fastest growing segments of the network securitymarket. Also, both 3Com and TippingPoint have begun to cross sell into eachother’s customer base. We believe TippingPoint’s technologies are uniquelyqualified to sell into a converged voice and data environment, allowing us todesign reliable VOIP and security solution for enterprise customers.

 

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*Summaryof Financial Performance for the Third Quarter of Fiscal 2005*

 

**•**      Our sales for the third quarter of fiscal2005 were $161.2 million, a decrease of $10.6 million, or 6 percent compared tosales for the third quarter of fiscal 2004 of $171.8 million.

 

**•**      Our gross margin increased to 35.6% for thethird quarter of fiscal 2005 from 35.1% for the third quarter of fiscal 2004.

 

**•**      Our operating expenses for the third quarterof fiscal 2005 were $113.7 million, compared to $143.8 million for the thirdquarter of fiscal 2004, a net decrease of $30.2 million or 21.0 percent.  Operating expenses for the third quarter offiscal 2005 and fiscal 2004 included restructuring charges of $9.1 million and$39.5 million, respectively.

 

**•**      Our net loss for the third quarter of fiscal2005 was $53.0 million compared to a net loss for the third quarter of fiscal2004 of $85.6 million, an improvement of $32.6 million.

 

**•**      Our balance sheet remains strong with cashand equivalents and short-term investment balances at the end of the thirdquarter of fiscal 2005 of $882.8 million, compared to cash and equivalents andshort-term investment balances of $1,273.9 million at the end of the secondquarter of fiscal 2005.

 

*BusinessEnvironment and Future Trends*

 

Networkingindustry analysts and participants differ widely in their assessmentsconcerning the prospects for near-term industry growth.  Industry factors and trends also presentsignificant challenges in the medium term with respect to our goals for salesgrowth, gross margin maintenance and profitability.  Such factors and trends include:

 

**•**      Intense competition in the market for higherend, enterprise core routing and switching products;

 

**•**      Aggressive product pricing by competitorstargeted at gaining share in market segments where we have had a strongposition historically, such as the small to medium-sized enterprise market; and

 

**•**      The advanced nature and ready availability ofmerchant silicon, which allows low-end competitors to deliver feature richproducts and makes it increasingly difficult for us to differentiate ourproducts.

 

Basedon our current projections for the fourth quarter of fiscal 2005 – sales growthto be in the mid- to high single digits on a sequential percentage basis andgross margins to be approximately 35 percent – we expect that we will incur anet loss and negative cash flow from operations for the quarter.  Although there are signs of progress with ourenterprise networking strategy, we must accelerate the pace ofimprovement.  Our key focus for theremainder of fiscal 2005 is on execution of our business plan to enhance ourgo-to market capabilities and grow sales. Our future success is highly dependent on increased sales of ourenterprise networking products, and our largest growth opportunities continueto be linked to the expansion of our product lines targeting mid- tolarge-sized enterprise customers.  Asour portfolio of products and solutions has filled in, our focus increasingly turnsto our “customer facing” capabilities—sales, marketing and service.

 

Weare committed to our objective of being a leading provider of secure,converged network solutions for small, medium and large enterprises.  Webelieve that our recent initiatives and our business strategy are consistentwith our goals of growth and profitability over the longer term.  However, in light of our results ofoperations and cash flows for the first nine months of fiscal 2005, we may needto continue to restructure our business or realign our resources to promotegrowth in sales and achieve additional cost and expense savings.

 

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**Critical Accounting Policies**

 

Ourcritical accounting policies are described in our Annual Report on Form 10-Kfor the fiscal year ended May 28, 2004.

 

**Effects of Recent AccountingPronouncements**

 

In March 2004, the Emerging Issues Task Force (EITF) of the FASB issuedEITF Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” EITF 03-1 includes new guidance for evaluating andrecording impairment losses on debt and equity investments, as well as newdisclosure requirements for investments that are deemed to be temporarilyimpaired. In September 2004, the FASB issued Staff Position EITF 03-1-1,which delays the effective date until additional guidance is issued for theapplication of the recognition and measurement provisions of EITF 03-1 toinvestments in securities that are impaired. We do not believe that adoption of EITF 03-1 will have a materialimpact on our financial position or results of operations.

 

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement No. 123R,“Share-Based Payment” (SFAS 123R), which requires companies to measure andrecognize compensation expense for all stock-based payments at fair value. SFAS123R is effective for all interim periods beginning after June 15, 2005and, thus, will be effective for us beginning with the second quarter of fiscal2006. Retroactive application of the provisions of SFAS 123R to the beginningof the fiscal year that includes the effective date is permitted, but notrequired. We are currently evaluating the impact of SFAS 123R on our financialposition and results of operations.  SeeNote 3 of notes to condensed consolidated financial statements included in Part I,Item 1 of this report for information related to the pro forma effects on ourreported net loss and net loss per share of applying the fair value recognitionprovisions of the previous Statement of Financial Accounting Standards (SFAS)123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation.

 

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**Results ofOperations**

** **

The following table setsforth, for the periods indicated, the percentage of total sales represented bythe line items reflected in our condensed consolidated income statements:

 
| ** **                                                                                                         | ** ** | **Three months ended**      | ** ** | **Nine months ended**       | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                         | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** | **February 25,  2005** | ** ** | **February 27,  2004** | ** ** |
|                                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Sales                                                                                                              |       | 100.0                       | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                                                                                                     |       | 64.4                        |       | 64.9                        |       | 63.7 |   | 67.6 |   |
| Gross  margin                                                                                                      |       | 35.6                        |       | 35.1                        |       | 36.3 |   | 32.4 |   |
| Operating  expenses:                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Sales  and marketing                                                                                               |       | 36.8                        |       | 36.0                        |       | 36.6 |   | 36.9 |   |
| Research  and development                                                                                          |       | 15.2                        |       | 13.8                        |       | 14.2 |   | 14.5 |   |
| General  and administrative                                                                                        |       | 8.7                         |       | 10.3                        |       | 9.3 |   | 12.3 |   |
| Amortization  and write down of intangibles                                                                        |       | 1.1                         |       | 0.6                         |       | 1.0 |   | 1.1 |   |
| In-process  research and development                                                                               |       | 3.1                         |       | 0.0                         |       | 1.4 |   | 0.0 |   |
| Restructuring  charges                                                                                             |       | 5.6                         |       | 23.0                        |       | 3.5 |   | 28.5 |   |
| Total  operating expenses                                                                                          |       | 70.5                        |       | 83.7                        |       | 66.0 |   | 93.3 |   |
| Operating  loss                                                                                                    |       | (35.0                       | )          | (48.6                       | )          | (29.7 | ) | (60.9 | ) |
| Gain  (loss) on investments, net                                                                                   |       | 1.0                         |       | 0.5                         |       | 0.4 |   | (2.2 | ) |
| Interest  and other income, net                                                                                    |       | 3.0                         |       | 2.1                         |       | 2.2 |   | 2.2 |   |
| Loss  from continuing operations before  income taxes and equity interest in loss  of unconsolidated joint venture |       | (30.9                       | )          | (46.0                       | )          | (27.1 | ) | (60.9 | ) |
| Income  tax benefit (provision)                                                                                    |       | (0.6                        | )          | (1.0                        | )          | (0.3 | ) | 0.6 |   |
| Equity  interest in loss of unconsolidated  joint venture                                                          |       | (1.4                        | )          | (2.4                        | )          | (1.5 | ) | (3.3 | ) |
| Loss  from continuing operations                                                                                   |       | (32.9                       | )          | (49.4                       | )          | (28.9 | ) | (63.6 | ) |
| Discontinued  operations, net of taxes                                                                             |       | —                      |       | (0.4                        | )          | — |   | (0.5 | ) |
| Net  loss                                                                                                          |       | (32.9                       | )%         | (49.8                       | )%         | (28.9 | )% | (64.1 | )% |

 

Sales

 

Salesin the third quarter of fiscal 2005 totaled $161.2 million, a decrease of $10.6million, or 6 percent, compared to the same quarter one year ago.  Sales in the first nine months of fiscal 2005totaled $474.6 million, a decrease of $40.9 million, or 8 percent, compared tothe same period one year ago. The decrease in sales for both periods was primarily driven by theongoing decline in sales of our desktop, mobile, and server connectivityproducts.

 

Sales of our desktop, mobile, and server connectivityproducts in the third quarter and first nine months of fiscal 2005 decreased$10.0 million and $39.7 million, respectively, compared to the same periods oneyear ago.  The decrease in both periodswas the result of lower unit demand, reflecting the continued shift intechnology towards PC chipsets with embedded networking technology. Thesedecreases were slightly offset by the receipt of $2.7 million related to arevenue sharing arrangement that was entered into in 1999 for the sale ofcertain intellectual property rights. Desktop, mobile, and server connectivityproducts represented 8 percent of total sales in the third quarter of fiscal2005 compared to 13 percent in the same quarter one year ago.  We anticipate that sales of our desktop, mobile, and serverconnectivity products will decline sequentially by approximately $5 million inthe fourth quarter of fiscal 2005 due to reduced demand for our productofferings, continued pricing pressures and the expected non-recurrence of therevenue sharing payment.

 

Sales of our enterprisenetworking products in the third quarter and first nine months of fiscal 2005decreased $0.9 million and $1.3 million, respectively, compared to the sameperiods one year ago.  The decrease inboth periods was the result of decreases in the sales of our 10/100 products asthe result of increased competitive pressures. Partially offsetting this decrease was an increase in our Gigabit

 

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products, reflecting a shiftin technology within the industry from 10/100 switching solutions towardsGigabit switching solutions. Additionally, sales of our voice products increased in both the thirdquarter and first nine months of fiscal 2005, reflecting the continuedacceptance of our voice solutions and the trend towards convergence in themarket. Enterprise networking products represented 92 percent of totalsales in the third quarter of fiscal 2005 compared to 87 percent in the samequarter one year ago.

 

*By Geography*:  Internationalsales in the third quarter and the first nine months of fiscal 2005 decreased14 percent and 13 percent, respectively, when compared to the same periods oneyear ago. The decreases in both periods were attributable to the decline insales of our desktop, mobile, and server connectivity and 10/100 products. The decreases in the first nine months of fiscal 2005 were partiallyoffset by increased sales of Gigabit and voice products.  The decreases in the third quarter of fiscal2005 were also partially offset by increased sales of switches and routers sourcedfrom the Huawei-3Com joint venture.

 

U.S. sales in the third quarter and the first ninemonths of fiscal 2005 increased 20 percent and 4 percent, respectively, whencompared to the same periods one year ago. For the third quarter and the first nine months of 2005, the increase insales was the result of increased sales of voice, Gigabit, security, andmodular core products, partially offset by decreases in our 10/100 and desktop,mobile, and server connectivity products. U.S. sales in the third quarter offiscal 2005 represented approximately 31 percent of total sales compared toapproximately 24 percent of total sales in the same period one year ago. U.S.sales in the first nine months of fiscal 2005 represented approximately 32percent of total sales compared to approximately 28 percent of total sales inthe same period one year ago.

 

Gross Margin

Grossmargin as a percentage of sales improved 0.5 percentage points from 35.1percent in the third quarter of fiscal 2004 to 35.6 percent in the third quarterof fiscal 2005.  Gross margin as apercentage of sales improved 3.9 percentage points from 32.4 percent in thefirst nine months of fiscal 2004 to 36.3 percent of sales in the first ninemonths of fiscal 2005.  Significantcomponents of the improvement in gross margins were as follows:

 
| ** **                                     | ** ** | **Third Quarter** | ** ** | **First Nine Months** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Outsourced  manufacturing and facility closure |       | 4.1               | %          | 3.5                   | %          |
| IT  and facilities-related expenses            |       | 1.5               |       | 1.3                   |       |
| Standard-related  margin                       |       | (2.5              | )          | 1.0                   |       |
| Volume-related  impacts                        |       | (1.5              | )          | (2.6                  | )          |
| Customer  service agreement                    |       | (1.0              | )          | (0.7                  | )          |
| Other                                          |       | (0.1              | )          | 1.4                   |       |
| Total                                          |       | 0.5               | %          | 3.9                   | %          |

 

**•**      Grossmargin benefited compared to the prior year periods due to effects associatedwith our decision to outsource our remaining manufacturing operations in Dublin,Ireland during fiscal 2004.  Such effectsinclude lower operating costs and the absence of impairment and transitioncosts incurred in the prior year periods.

 

**•**      Weallocate and report both IT and facilities-related expenses as a component ofcost of sales and operating expenses. The portion of such expenses allocated to cost of sales decreased in thethird quarter and the first nine months of fiscal 2005.

 

**•**      Standard-relatedmargin is a measure of product selling prices less direct manufacturing costs.  The decline in standard-related margin ascompared to the same quarter one year ago was primarily the result of loweraverage selling prices.  The increase instandard-related margin as compared to the first nine months of fiscal 2004 wasprimarily related to product cost reductions.

 

**•**      Volume-relatedimpacts include higher post-sale technical support costs, manufacturingoverhead costs, and royalty fees as a percentage of sales.  These costs did not decline at the same rateas sales since a portion of these costs is not directly variable with sales.

 

26

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**•**      Inthe second quarter of fiscal 2005 we entered into an agreement with Siemens Business Services to contract withSiemens Business Services and enhance our customer service offerings. Thisagreement resulted in transition costs that were not incurred in previousquarters.

 

Operating Expenses

Totaloperating expenses in the third quarter of fiscal 2005 were $113.7 millioncompared to $143.8 million in the third quarter of fiscal 2004, a net decreaseof $30.1 million.  In aggregate, salesand marketing, research and development and general and administrative expensesdecreased by $5.5 million. Restructuring charges decreased by $30.4million.  Partially offsetting thesedecreases was an increase in amortization and write down of intangibles in thethird quarter of fiscal 2005 of $0.6 million compared to the prior yearquarter.  Additionally, we recorded acharge of $5.1 million in the third quarter of fiscal 2005 related to ouracquisition of TippingPoint representing the value attributed to in-processresearch and development that had not reached technological feasibility and hadno alternative future use.

 

As apercent of sales, total operating expenses in the third quarter of fiscal 2005were 70.5 percent, compared to 83.7 percent in the third quarter of fiscal2004.  In aggregate, sales and marketing,research and development and general and administrative expenses were 60.7percent of sales in the third quarter of fiscal 2005, compared to 60.1 percentin the third quarter of fiscal 2004.  Toa significant degree, these expenses are controllable and discretionary overtime, but they are not directly variable with sales levels within a particularperiod.  Amortization and write down ofintangibles, in-process research and development and restructuring costs were1.1 percent, 3.1 percent and 5.6 percent of sales, respectively, in the thirdquarter of fiscal 2005, compared to 0.6 percent, 0 percent and 23.0 percent,respectively, in the third quarter of fiscal 2004.

 

Totaloperating expenses in the first nine months of fiscal 2005 were $313.3 millioncompared to $481.3 million in the first nine months of fiscal 2004, a netdecrease of $168.0 million.  Inaggregate, sales and marketing, research and development and general andadministrative expenses decreased by $43.5 million from the first nine months ofthe prior fiscal year.  Amortization andwrite down of intangibles and restructuring charges in the first nine months offiscal 2005 decreased by $0.6 million and $130.7 million, respectively, fromthe first nine months of fiscal 2004. Additionally, we recorded a charge of $6.8 million in the first ninemonths of fiscal 2005 representing the value attributed to in-process researchand development that had not reached technological feasibility and had noalternative future use.

 

As apercent of sales, total operating expenses in the first nine months of fiscal2005 were 66.0 percent, compared to 93.3 percent in the first nine months offiscal 2004.  In aggregate, sales andmarketing, research and development and general and administrative expenseswere 60.1 percent of sales in the first nine months of fiscal 2005, compared to63.7 percent in the first nine months of fiscal 2004.  To a significant degree, these expenses arecontrollable and discretionary over time, but they are not directly variablewith sales levels within a particular period. Amortization and write down of intangibles, in-process research anddevelopment and restructuring costs were 1.0 percent, 1.4 percent and 3.5percent of sales, respectively, in the first nine months of fiscal 2005,compared to 1.1 percent, 0 percent and 28.5 percent, respectively, in the firstnine months of fiscal 2004.

 

Operatingexpenses for the third quarter and first nine months of fiscal 2005 include theresults of TippingPoint beginning on January 31, 2005.  Our fourth fiscal quarter, ending on June 3,2005, will include a full quarter of results for the combined company.

 

Weallocate and report IT-related and facilities-related expenses as a componentof cost of sales and operating expenses. On an overall basis, total operating expenses for the third quarter andfirst nine months of 2005 reflected a decrease in IT and facilities-relatedexpenses, as compared to the same three and nine month periods one year ago,largely as a result of workforce reductions and other costs associated with ourIT outsourcing initiatives.

 

27

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A moredetailed discussion of the factors affecting each major component of totaloperating expenses is provided below.

 

*Sales andMarketing. *Sales andmarketing expenses in the third quarter of fiscal 2005 decreased $2.5 millionas compared to the third quarter of fiscal 2004, primarily due to reducedworkforce-related expenses, reflecting the reduction of direct-touch salesrepresentatives.  Additionally, reducedIT and facilities-related expenses contributed to the decreased sales andmarketing expenses.  Sales and marketingexpenses in the first nine months of fiscal 2005 decreased $16.2 million ascompared to the comparable period of fiscal 2004, primarily due to reduced ITand facilities-related expenses and reduced workforce related expenses asdiscussed above.

 

*Researchand Development. *Researchand development expenses in the third quarter of fiscal 2005 increased $0.7million as compared to the third quarter of fiscal 2004 due primarily to thecurrent period costs of TippingPoint research and development activities.  Research and development expenses in thefirst nine months of fiscal 2005 decreased $7.8 million as compared to thefirst nine months of fiscal 2004 due to reduced IT and facilities-relatedexpenses, as well as lower employee related expenses.  These decreases were offset to some degree bythe current period costs of TippingPoint research and development activities.

 

G*eneral and Administrative. *Generaland administrative expenses in the third quarter and first nine months offiscal 2005 decreased $3.6 million and $19.5 million, respectively, from thecomparable prior periods of fiscal 2004. Factors contributing to the decreases included reduced IT and facilities-relatedexpenses, reduced workforce-related expenses resulting from lower headcount,reduced fees for professional services related to completing the establishmentof the H-3C joint venture, and reduced legal expenses.

 

*Amortizationand Write Down of Intangibles.** *Amortization and write down ofintangibles increased $0.6 million in the third quarter of fiscal 2005 ascompared to the third quarter of fiscal 2004. This increase was due to $69.9 million of purchased intangibles acquiredin the TippingPoint acquisition that are being amortized on a straight-linebasis over their estimated useful lives of between two and six years.  Amortization and write down of intangiblesdecreased $0.7 million in the first nine months of fiscal 2005 as compared tothe first nine months of fiscal 2004 due to reduced impairment charges as wellas reduced amortization expenses reflecting a lower base of intangible assetsfor most of the nine month period.  Inthe first nine months of fiscal 2004, there was an impairment charge of $1.9million related to developed and core technology associated with the acquisitionof assets from Alteon Websystems in fiscal 2001.

 

*In-processresearch and development.** *$5.1 million of the total purchaseprice of TippingPoint has been allocated to in-process research and developmentand was expensed in the third quarter of fiscal 2005.  Projects that qualify as in-process researchand development represent those that have not yet reached technologicalfeasibility and which have no alternative future use.  At the time of acquisition, TippingPoint hadmultiple in-process research and development efforts under way for certaincurrent and future product lines.  Weutilized the discounted cash flow method to value the in-process research anddevelopment.  We used a 20% discount ratederived from a weighted-average cost of capital analysis.  At the time of acquisition, it was estimatedthat these development efforts would be completed over the next twelve monthsat an estimated cost of approximately $10 million.  Additionally, we incurred $1.7 million ofin-process research and development expenses related to technology assetspurchased during the first quarter of fiscal 2005.

 

*RestructuringCharges.*Restructuring charges in the third quarter and first nine months of fiscal 2005were $9.1 million and $16.4 million, respectively.  Restructuring charges in the thirdquarter of fiscal 2005 included charges of $8.6 million for severance andoutplacement costs, $0.4 million for other restructuring costs, primarily costsassociated with the termination of service agreements and $0.1 million forfacilities related costs.  Restructuringcharges in the first nine months of fiscal 2005 included $1.6 million forfacilities-related costs, reflecting additional charges of $4.9 million relatedto revisions in estimates of lease obligation costs offset by a $3.3 millionbenefit related to fair value adjustments of properties classified as held forsale.  Restructuring charges in the firstnine months of fiscal 2005

 

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includedcharges of $13.6 million for severance and outplacement costs and $1.1 millionfor other restructuring costs, primarily costs associated with the terminationof service agreements.  Additionalrestructuring charges are expected to be recorded in the fourth quarter offiscal 2005 and through the second quarter of fiscal 2006.

 

Restructuring charges in the third quarter andfirst nine months of fiscal 2004 were $39.5 million and $147.1 million,respectively. Restructuring charges in the third quarter of fiscal 2004included $25.9 million in facilities-related charges, including $26.0million of accelerated depreciation and impairments related to the Dublin andSanta Clara, California facilities. These restructuring charges were offset bya credit of $0.1 million for revised estimates related to leaseterminations.  Restructuring charges in the third quarter of fiscal 2004 also included$17.2 million for severance-related costs and $1.1 million for otherrestructuring costs, primarily relating to long-term asset write downs. Theserestructuring charges were offset by a net credit of $4.7 million, which mainlyresulted from a settlement of the outsourcing-related obligations in Dublin atamounts less than originally estimated. Restructuring charges in the first nine months of fiscal 2004 included $94.8million in facilities-related charges, including $75.6 million of accelerateddepreciation and impairments related to the Hemel Hempstead, Dublin and SantaClara facilities, $13.7 million in charges for the write down and sale ofcertain properties in Santa Clara and Rolling Meadows, Illinois, and $5.5million of other facilities-related charges.**Restructuring charges in the first ninemonths of fiscal 2004 also included $48.2 million in severance-related chargesand $4.1 million related to other restructuring costs. These chargeswere primarily the result of cost reduction efforts initiated in fiscal 2004.

 

Gain(Loss) on Investments, Net

 

Netgain on investments of $1.7 million in the third quarter and first nine monthsof fiscal 2005 was mainly the result of a gain recognized upon the sale of aninvestment in a privately-held company, partially offset by write downs of longterm equity investments.  Net gain oninvestments of $0.9 million in the third quarter of fiscal 2004 was mainly theresult of a $4.3 million gain recognized upon the sale of an investment in aprivately-held company, partially offset by write downs of $3.8 million of longterm equity investments. Net loss on investments of $11.3 million in the firstnine months of fiscal 2004 was mainly the result of a $4.3 million gainrecognized upon the sale of an investment in a privately-held company mentionedabove, offset by write downs of $16.0 million of long term equity investments.

 

Interest and Other Income, Net

 

Interestand other income, net, of $4.9 million in the third quarter of fiscal 2005increased $1.2 million compared to the third quarter of fiscal 2004.  The increase was primarily driven by anincrease in interest income that resulted from higher market interest rates.

 

Interestand other income, net, in the first nine months of fiscal 2005 decreased $0.7million as compared to the first nine months of fiscal 2004. The reductionreflected a provision of $2.4 million for unrecoverable value added tax forprior years that was recorded in the first nine months of fiscal 2005 as aresult of an unfavorable tax authority ruling, partially offset by a reductionin interest expense and an increase in interest income that resulted fromhigher market interest rates.

 

Income Tax Benefit (Provision)

 

Ourtax provision in the third quarter of fiscal 2005 and fiscal 2004 was theresult of providing for taxes in certain state and foreign jurisdictions.  Our income tax provision for the first ninemonths of fiscal 2005 was the result of providing for taxes in certain stateand foreign jurisdictions, partially offset by the favorable resolution of anincome tax audit in a foreign jurisdiction. Our income tax benefit for the first nine months of fiscal 2004 includedthe benefit of a foreign net operating loss carryback of $8.5 million,partially offset by a provision of $5.6 million for taxes in certain state andforeign jurisdictions.

 

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Equity Interest in Loss of Unconsolidated Joint Venture

 

As discussedabove, we account for our investment in H-3C under the equitymethod.  Under this method, we record ourproportionate share of H-3C’s net income or loss based on the mostrecently available financial statements. Since H-3C follows a calendar year basis of reporting, we reportour equity in H-3C’s net income or loss based on H-3C’s financialstatements for the most recent calendar quarter, two months in arrears.

 

During the thirdquarter of fiscal 2005, we recorded a charge of $2.2 million representing ourownership share of the net loss from operations incurred by H-3C for thequarter ended December 31, 2004. During the first nine months of fiscal 2005, we recorded a charge of$7.1 million representing our ownership share of the net loss from operationsincurred by H-3C for the nine months ended December 31, 2004.

 

H-3C wasformed during our second quarter of fiscal 2004.  At that time, we recorded a charge of $12.6million representing our ownership share of the value attributed to in-processtechnology contributed to H-3C by Huawei that had not yet reachedtechnological feasibility and had no alternative future use.  In the third quarter of fiscal 2004, werecorded a charge of $4.2 million representing our share of the net lossincurred by H-3C during the quarter ended December 31, 2003.  From inception through our third quarter offiscal 2004, we recorded a charge of $16.8 million representing our ownershipshare of the net loss from operations incurred by H-3C from the date offormation through December 31, 2003.

 

DiscontinuedOperations

 

Discontinuedoperations relate to our CommWorks business unit that was sold in the fourthquarter of fiscal 2003.  We recorded aloss of $0.7 million and $2.5 million in the third quarter and first nine monthsof fiscal 2004, respectively, due to adjustments to previous estimates ofliabilities related to the sale of CommWorks.

 

**Liquidity andCapital Resources**

** **

Cash and equivalents andshort-term investments at February 25, 2005 were $882.8 million, a decreaseof approximately $500.6 million compared to the balance as of May 28, 2004of $1,383.4 million.  The decrease wasprimarily the result of $354.0 million used in the acquisition of TippingPoint.

 

Net cash used inoperating activities was $109.7 million in the first nine months of fiscal2005, primarily reflecting our loss from continuing operations of $137.4million.  We expect that cash flows fromoperating activities will be negative during fourth quarter of fiscal 2005, andprobably longer, due to projected continuing net losses.  There are no assurances that we can reduceour net losses and negative cash flow in the foreseeable future, or that we canraise additional capital if needed to fund our operations on an ongoingbasis.  However, based on currentbusiness conditions and our current operating and financial plans, but subjectto the discussion in Business Environment and Industry Trends below, we believethat our existing cash and equivalents and short-term investments will besufficient to satisfy our anticipated cash requirements for at least the nexttwelve months.  As a result of theaforementioned fiscal 2005 restructuring actions and related charges, and basedon our current projections for sales, costs and expenses, which are subject tosignificant uncertainty, we expect net cash flow from operations to be improvedby approximately $5 million per quarter from the level reported for the thirdquarter of fiscal 2005.  This improvementexcludes the impact of cash disbursements to be made in settlement ofliabilities accrued as of February 25, 2005 and is not expected to befully realized until the third quarter of fiscal 2006.

 

Significant commitmentsthat will require the use of cash in future periods include obligations underlease, contract manufacturing, royalty and patent licensing arrangements, IToutsourcing agreements, and customer service agreements.  Total future lease obligations as of February 25,2005 were $44.8 million, of which $20.6 million will be paid over the nexttwelve months.  Obligations under royaltyand patent licensing arrangements as of February 25, 2005 wereapproximately $12.0 million, all of which are expected to be paid over the nexttwelve months.  Under our IT outsourcingagreements, we are subject

 

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to minimum annualpayments that vary depending on the service level we choose.  Based upon current service levels, we wouldowe approximately $36.8 million through December 2013, of which $4.7million will be paid over the next twelve months.  Termination of such agreements prior to December 2013would result in early termination penalties that decline over time.  If we were to terminate the agreements at thebeginning of the fourth quarter of fiscal 2005, such penalties are estimated tobe approximately $2.5 million.  Under ourcustomer service agreements, we are subject to minimum annual payments thatvary depending on the volume of service provided.  Based upon our estimated service volumes, wewould owe approximately $130.1 million through the next seven years, of which$20.2 million is expected to be paid over the next twelve months.  Termination of such agreements prior to thisdate would result in early termination fees.

 

Net cash used ininvesting activities was $78.7 million for the first nine months of fiscal2005, including approximately $354.0 million for the acquisition ofTippingPoint and $13.7 million of outflows related to the purchase of propertyand equipment.  These outflows wereoffset by $50.9 million of net proceeds from the sale of property andequipment, primarily our Dublin and Hemel Hempstead facilities, and $239.7million of net proceeds related to purchases, sales and maturities of debt andequity securities.  As of February 25,2005, capital expenditure commitments outstanding were not material.

 

We selectively makestrategic investments in privately-held companies and in limited partnershipventure capital funds, which in turn invest in privately-held companies.  These investment activities may include astrategic commercial or technology relationship, such as a component supplyagreement or technology license arrangement, and are entered into with theintention of complementing our business strategies and research and developmentefforts.  We made additional investmentsof $2.3 million in the first nine months of fiscal 2005 with respect toinvestments initially made in prior periods; also, at February 25, 2005,we were contractually obligated to make additional capital contributionstotaling $6.7 million to certain venture capital funds.  The expiration dates for such capital callsare generally five to eight years from the inception of the fund, and theamounts and timing of such calls during that period are made at the discretionof the funds’ general partners.  Weestimate that we will pay approximately $3.1 million over the next twelvemonths as capital calls are made.

 

Net cash used in financing activities was $62.9million in the first nine months of fiscal 2005.  In the first quarter of fiscal 2005, werepurchased approximately 15.0 million shares of our common stock at a totalcost of $73.4 million.  These repurchaseswere made pursuant to the stock repurchase program that was approved by ourBoard of Directors in March 2003, and that authorized expenditures of upto $100.0 million during a two-year period through March 2005.  There were no repurchases during the secondand third quarters of fiscal 2005. At February 25, 2005, approximately$26.6 million of the authorization remained available for futurerepurchases.  This authorization expiredin March 2005.  On March 23, 2005, our Board of Directorsapproved a new stock repurchase program providing for expenditures of up to$100.0 million through March 31, 2007. Under the new stock repurchase program, we may repurchase shares of ourcommon stock having an aggregate purchase price of up to $100.0 million in theopen market, in privately negotiated transactions with shareholders or usingderivate transactions; provided, however, that all repurchases must bepre-approved by the Audit and Finance Committee of the Board of Directors.  There is no requirement that we repurchaseshares under the program and the program may be discontinued at any time.

 

There were no borrowings under our revolving line ofcredit during the first nine months of fiscal 2005.  During November 2004, our revolving line of credit agreementexpired according to its terms.  Duringthe third fiscal quarter, we entered a new agreement facilitating the issuanceof standby letters of credit and bank guarantees required in the normal courseof business.  Additionally, during thethird fiscal quarter we repaid the total borrowings of $1.3 million that weassumed in connection with the acquisition of TippingPoint.

 

In the first ninemonths of fiscal 2005, we issued 5.5 million shares of stock under our employeestock plans and collected $11.8 million related to such issuances.

 

As of February 25,2005, our outstanding stock options as a percentage of outstanding shares were17

 

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percent.  Stock option activity during the first ninemonths of fiscal 2005 and stock option detail as of February 25, 2005,were as follows:

 
| ** **                           | ** ** | **Number  of shares** | ** ** | **Weighted average  exercise price** | ** ** |
|--------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **(in thousands)**    | ** ** | ** **                           | ** ** |
|                                 |       |                  |       |                                 |       |
| Outstanding,  May 28, 2004      |       | 56,885                |       | $                                    | 7.18       |   |
| Granted  and assumed                 |       | 21,530                |       | 2.43                                 |       |
| Exercised                            |       | (3,984                | )          | 2.08                                 |       |
| Canceled                             |       | (9,970                | )          | 7.17                                 |       |
| Outstanding,  February 25, 2005 |       | 64,461                |       | $                                    | 5.91       |   |

 
| ** **                                       | ** ** | **Outstanding options  as of February 25, 2005** | ** ** | **Exercisable at February 25, 2005** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **Range  of  exercise prices**                   | ** ** | **Number  of shares**                                 | ** ** | **Weighted average  exercise price**      | ** ** | **Number  of shares** | ** ** | **Weighted average  exercise price** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                                    | ** ** | ** **                                | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                                             |       |                                                  |       |                                      |       |   |   |   |   |
| $ 0.13 - $ 4.00                        |       | 12,731                                                |       | $                                         | 1.70       |   | 1,720 |   | $ | 1.35 |   |
|    4.01  -    5.00 |       | 14,844                                                |       | 4.60                                      |       | 6,693 |   | 4.63 |   |
|    5.01  -    6.00 |       | 16,577                                                |       | 5.57                                      |       | 13,132 |   | 5.64 |   |
|    6.01  -    7.00 |       | 3,769                                                 |       | 6.23                                      |       | 2,905 |   | 6.20 |   |
|    7.01  -    8.00 |       | 3,681                                                 |       | 7.52                                      |       | 3,118 |   | 7.51 |   |
|    8.01  -  21.57            |       | 12,859                                                |       | 11.47                                     |       | 12,706 |   | 11.51 |   |
| Total                                            |       | 64,461                                                |       | $                                         | 5.91       |   | 40,274 |   | $ | 7.32 |   |

 

The following tablesummarizes our equity compensation plans as of February 25, 2005:

 
| ** **                                               | ** ** | **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 1****st****column)** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **(in  thousands)**                                               | ** ** | ** **                                                    | ** ** | **(in  thousands)**                                                                                                                                          | ** ** |
|                                                     |       |                                                              |       |                                                          |       |                                                                                                                                                         |       |
| Equity compensation plans  approved by stockholders      |       | 27,150                                                            |       | $                                                             | 6.94       |                                                                                                                                                         | 18,065     |   |
| Equity compensation plans not  approved by stockholders* |       | 26,165                                                            |       | 6.72                                                          |       | —                                                                                                                                                       |       |
|                                                     |       |                                                              |       |                                                          |       |                                                                                                                                                         |       |
| Total                                                    |       | 53,315                                                            |       | $                                                             | 6.83       |                                                                                                                                                         | 18,065     |   |

 

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*Excludes 11.1 million outstanding options with an averageexercise price of $1.50.  These optionswere assumed in connection with acquisitions and no additional options areavailable for future issuance under such plans.

 

Optionsissued outside of the stockholder-approved plans were issued under ourbroad-based 1994 Stock Option Plan, as amended. Options granted from this plan were granted at fair value, vest over twoto four years, and expire ten years after the date of grant.  Effective September 2003, the 2003 StockPlan was approved by stockholders and has replaced the 1994 Stock Option Planfor all grants subsequent to the approval date. Also, in September 2003,stockholders approved a five million share increase in the number of sharesavailable for issuance under the Employee Stock Purchase Plan.

 

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**BusinessEnvironment and Industry Trends**

** **

Industrytrends and specific risks may affect our future business and results.  Thematters discussed below could cause our future results to differ from pastresults or those described in forward-looking statements and could have amaterial adverse effect on our business, financial condition, results ofoperations and stock price.

 

***We have incurred significant net losses inrecent fiscal periods, including $137 million for the first three quarters offiscal 2005, and $349 million, $284 million and $596 million forfiscal years 2004, 2003 and 2002, respectively, and we may not be able toreturn to profitability.***

 

Weincurred a net loss of $137 million for the first three quarters of fiscal2005, and net losses of $349 million, $284 million and$596 million for fiscal 2004, 2003 and 2002, respectively.  Althoughwe are taking steps designed to improve our results of operations, we cannotassure you that we will return to profitability.

 

Wehave faced a number of challenges that have affected our operating resultsduring the current and past several fiscal years.  Specifically, we haveexperienced, and may continue to experience, the following:

 

**•**              declining sales due to price competition andreduced incoming order rate;

 

**•**              increased risk of excess and obsoleteinventories;

 

**•**              excess facilities;

 

**•**              operating expenses that, as a percentage ofsales, have exceeded our desired financial model; and

 

**•**              disruptions resulting from our workforcereductions and employee attrition.

 

***We focus primarily on enterprisenetworking, and our results of operations may fluctuate based on factorsrelated entirely to conditions in this market.***

 

Infiscal 2004, we began focusing primarily on enterprise networking.  Thisfocus reflects a streamlined management and operating structure encompassingall of our operations.  Our focus on enterprise networking may causeincreased risk or volatility associated with decreased diversification of ourbusiness.  There will be increased sensitivity to the business risksassociated specifically with the enterprise networking market and our abilityto execute successfully on our strategies to provide superior solutions forlarger and multi-site enterprise environments.  To be successful in theenterprise networking market, we will need to overcome negative perceptions ofour company held by decision making officers of large enterprises, who may beskeptical of our long-term commitment to the high-end networking business as aresult of our withdrawal from that business in fiscal 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 diminished focus on thesmall and medium enterprise market.

 

***We may not respond effectively to increasedcompetition caused by industry volatility and consolidation.***

 

Ourbusiness could be seriously harmed if we do not compete effectively.  Weface competitive challenges that are likely to arise from a number of factors,including the following:

 

**•**              industry volatility resulting from rapidproduct development cycles;

 

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**•**              increasing price competition due tomaturation of basic networking technologies;

 

**•**              industry consolidation resulting incompetitors with greater financial, marketing, and technical resources; and

 

**•**              the presence of existing competitors withgreater financial resources together with the potential emergence of newcompetitors with lower cost structures and more competitive offerings.

 

***We may not be able to compensate for lowersales or unexpected cash outlays with cost reductions sufficient to generatepositive net income or cash flow.***

 

Althoughwe have implemented cost and expense reductions, if we are unable to achieveour growth objectives, we will need to further reduce costs which may in turnreduce our sales.  If we are not able to effectively reduce our costs andexpenses, we may not be able to generate positive net income or cash flow fromoperations.  If we continue to experience negative cash flow fromoperations over a prolonged period of time or if we suffer unexpected cashoutflows, our liquidity and ability to operate our business effectively couldbe adversely affected.  For example, our ability to raise financialcapital may be hindered due to the possibility of continuing net losses andnegative cash flow in the future.  An inability to raise financial capitalwould limit our operating flexibility.

 

Weare unable to predict the exact amount of cost reductions required for us togenerate positive net income or cash flow from operations because it isdifficult to predict the amount of our future sales and gross margins. The amount of our future sales depends, in part, on future economic and marketconditions, which are difficult to forecast accurately.

 

***Efforts to reduce operating expenses couldinvolve further workforce reductions and lead to reduced sales and otherdisruptions in our business.***

 

Ouroperating expenses as a percent of sales continue to be higher than our desiredlong-term financial model.  We have taken, and will continue to take,actions to reduce these expenses.  Such future actions could includefurther reductions in our workforce, relocation of functions and activities tolower cost locations, changes or modifications in IT systems or applications,or process reengineering.  As a result of these actions, the employment ofsome employees with critical skills might be terminated, and other employeesmight leave our company voluntarily due to the uncertainties associated withour business environment and their job security.  In addition, reductionsin overall staffing levels might make it more difficult for us to achieve ourgrowth objectives, to adhere to our preferred business practices and to addressall of our legal and regulatory obligations in an effective manner, whichcould, in turn, ultimately lead to missed business opportunities, higheroperating costs or penalties.

 

***If we fail to adequately evolve ourfinancial and managerial control and reporting systems and processes, ourability to manage and grow our business will be negatively affected.***

 

Ourability to successfully offer our products and implement our business plan in arapidly evolving market depends upon an effective planning and managementprocess.  We will need to continue toimprove our financial and managerial control and our reporting systems andprocedures in order to manage our business effectively in the future.  If we fail to continue to implement improvedsystems and processes, our ability to manage our business and results ofoperation could be adversely affected.

 

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***We entered into a joint venture in Chinawith Huawei that, if not successful, could materially and adversely impact ourbusiness, business prospects and operating results.***

 

InNovember 2003, we formed a joint venture for enterprise networkingproducts with Huawei, a leading Chinese company.  3Com currently has a49 percent minority interest in H-3C, which is domiciled in HongKong and has its principal operations in Hangzhou and Beijing, China. Pursuant to the joint venture agreements, as amended and supplemented in thefirst quarter of fiscal 2005, we have the right to market and support the H-3Cproducts under the 3Com® brand in all countries except China and Japan. The joint venture sells products sourced internally as well as from 3Com andHuawei under H-3C’s brand as well as the 3Com brand and the Huawei branddirectly in China, Japan and Hong Kong.

 

Thebusiness of H-3C is subject to all of the operational risks that normallyarise for a technology company with global operations pertaining to researchand development, manufacturing, sales, service, marketing, and corporatefunctions.  In addition, there could be disagreements between 3Com andHuawei with respect to important strategic and operational decisions.  Akey factor in the success of H-3C is that products sourced from it remaincompetitive over time particularly with respect to features, performance,quality and cost.  Another factor that could affect cost competitivenessis future adverse exchange rate movements between H-3C’s local currencyof operations and the U.S. Dollar.

 

Ourbusiness, business prospects and operating results have dependencies upon thesuccess of H-3C.  In particular, our product development activitieswill become increasingly interdependent with those of H-3C.  If H-3Cand our transactions with it are not successful, we may not introduce newproducts needed to broaden our high-end enterprise networking product line,which may adversely affect our sales and overall results of operations. Also, if H-3C enters into original equipment manufacturer (OEM)agreements with companies who compete with us, we could face increasedcompetition in the markets in which we operate.

 

***We may pursue acquisitions of othercompanies that, if not successful, could adversely affect our business,financial position and results of operations.***

 

Thenetworking business is highly competitive.  As a result, our success isdependent, in part, on our ability to meet the needs of customers and marketsby enhancing the functional capabilities of our existing products andsolutions, and introducing new products and solutions, on a timely basis. Our efforts to enhance existing offerings and develop new offerings include thefollowing:

 

**•**              internal research and development activities;

 

**•**              the H-3C joint venture and otherstrategic relationships; and

 

**•**              acquisitions.

 

OnJanuary 31, 2005 we completed our acquisition of TippingPoint. In thefuture, we may pursue additional acquisitions of other companies withestablished market access and position or promising technology and products toenhance our existing capabilities.

 

Acquisitionsinvolve numerous risks, including the following:

 

**•**              potential difficulties related to integratingthe technologies, products and operations of the acquired company;

 

**•**              failure to operate as a combined organizationutilizing common information and communication systems, operating procedures,financial controls and human resources practices;

 

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**•**              diverting management’s attention from thenormal daily operations of the business;

 

**•**              potential difficulties in completing projectsassociated with purchased in-process research and development;

 

**•**              entering markets in which we have no orlimited direct prior experience and where competitors in such markets havestronger market positions;

 

**•**              potential loss of key employees of theacquired company; and

 

**•**              an uncertain sales and earnings stream fromthe acquired company, which may result in unexpected dilution to our earnings.

 

Therecan be no assurances that our acquisition of TippingPoint or other acquisitionsthat we might pursue will be successful.  If we pursue an acquisitionbut are not successful in completing it, or if we complete an acquisition butare not successful in integrating the acquired company’s technology, productsor operations successfully, our business, financial position or results ofoperations could be adversely affected.

 

***We expect to utilize strategicrelationships and other alliances as key elements in our strategy.  If weare not successful in forming desired ventures and alliances or if suchventures and alliances are not successful, our ability to achieve our growthand profitability goals could be adversely affected.***

 

InNovember 2003, we formed a joint venture in China for enterprisenetworking products.  In addition, we have announced alliances with thirdparties, such as Aspect Communications Corporation, Crossbeam Systems, Inc.,Electronic Data Systems Corporation, Trapeze Networks and Siemens BusinessServices.  At the present time, these relationships are in the earlystages of development and have not yet produced the benefits that we hope toultimately achieve.  In the future, we expect to evaluate other possiblestrategic relationships, including joint ventures and other types of alliances,and we may increase our reliance on such strategic relationships to broaden oursales channels, complement internal development of new technologies andenhancement of existing products, and exploit perceived market opportunities.

 

Strategicrelationships can present a number of challenges. For example, we compete inbusiness areas with companies with which we, at the same time, have strategicalliances in other business areas.  Also, if we fail to form the numberand quality of strategic relationships that we desire, or if such strategicrelationships are not successful, we could suffer missed market opportunities,channel conflicts, delays in product development or delivery, or otheroperational difficulties.  Further, if third parties acquire our strategicpartners or if our competitors enter into successful strategic relationships,we may face increased competition.  Any of these difficulties could havean adverse effect on our future sales and results of operations.

 

***Our strategy of outsourcing functions andoperations may fail to reduce cost and may disrupt our operations.***

 

Wecontinue to look for ways to decrease cost and improve efficiency bycontracting with other companies to perform functions or operations that, inthe past, we have performed ourselves.  During fiscal 2004, we completedthe outsourcing of all manufacturing of our products.  We now rely onoutside vendors to meet all of our manufacturing needs as well as a significantportion of our IT needs.  Additionally, in the second quarter of fiscal2005, we announced an initiative to expand our service offerings with SiemensBusiness Services.  To achieve future cost savings or operationalbenefits, we may expand our outsourcing activities to cover additional serviceswhich we believe a third party may be able to provide in a more efficient oreffective manner than we could do internally ourselves.

 

Althoughwe believe that outsourcing will result in lower costs and increasedefficiencies, this may not be the

 

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case. Because these third parties may not be as responsive to our needs as we wouldbe ourselves, outsourcing increases the risk of disruption to ouroperations.  In addition, our agreements with these third partiessometimes include substantial penalties for terminating such agreements earlyor failing to maintain minimum service levels.  Because we cannot alwayspredict how long we will need the services or how much of the services we willuse, we may have to pay these penalties or incur costs if our businessconditions change.

 

***We may not be successful at identifying andresponding to new and emerging market and product opportunities, or atresponding quickly enough to technologies or markets that are in decline.***

 

Themarkets in which we compete are characterized by rapid technology transitionsand short product life cycles.  Therefore, our success depends on ourability to do the following:

 

**•**              identify new market and productopportunities;

 

**•**              predict which technologies and markets willsee declining demand;

 

**•**              develop and introduce new products andsolutions in a timely manner;

 

**•**              gain market acceptance of new products andsolutions, particularly in targeted emerging markets; and

 

**•**              rapidly and efficiently transition ourcustomers from older to newer enterprise networking technologies.

 

Ourfinancial position or results of operations could suffer if we are notsuccessful in achieving these goals.  For example, our business wouldsuffer if any of the following occurs:

 

**•**              there is a delay in introducing new products;

 

**•**              our products do not satisfy customers interms of features, functionality or quality; or

 

**•**              our products cost more to produce than weexpect.

 

Ourbusiness would suffer if negative effects such as these were to occur. One factor that may cause greater difficulty for us in quickly and effectivelyintroducing new products with the features, functionality, quality, and coststhat are optimal for the market is our reliance on relationships with strategicpartners, such as original design manufacturers (ODMs).  Because ODMsmanufacture the products of other companies as well as ours, the timeliness ofthe availability of our products depends, in part, on their productionschedules.  In addition, we are relying on ODMs to manufacture productsthat meet our specifications with regard to quality and cost.  We willcontinue to source other products from OEMs and from H-3C.  Finally,since we rely on our strategic partners, we may not be able to independentlyidentify current product and technology trends or to respond to such trends aswell as if we were working independently.

 

***Our reliance on industry standards,technological change in the marketplace, and new product initiatives may causeour sales to fluctuate or decline.***

 

Theenterprise networking industry in which we compete is characterized by rapidchanges in technology and customer requirements and evolving industrystandards.  As a result, our success depends on:

 

**•**              the timely adoption and market acceptance ofindustry standards, and timely resolution of conflicting U.S. and internationalindustry standards; and

 

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**•**              our ability to influence the development ofemerging industry standards and to introduce new and enhanced products that arecompatible with such standards.

 

Slowmarket acceptance of new technologies, products, or industry standards couldadversely affect our sales or overall results of operations.  In addition,if our technology is not included in an industry standard on a timely basis orif we fail to achieve timely certification of compliance to industry standardsfor our products, our sales of such products or our overall results ofoperations could be adversely affected.

 

***A significant portion of our sales isderived from a small number of resellers.  If any of these partnersreduces its business with us, our business could be seriously harmed.***

 

Wedistribute many of our products through two-tier distribution channels thatinclude distributors, systems integrators and VARs.  A significant portionof our sales is concentrated among a few distributors; our two largestdistributors accounted for a combined 35 percent of total sales for the firstthree quarters of fiscal 2005, a combined 33 percent of total sales forboth fiscal 2004 and fiscal 2003 and a combined 28 percent of total salesfor fiscal 2002.  If either of these distributors reduces its businesswith us, our sales and overall results of operations could be adverselyaffected.

 

***We depend on distributors who maintaininventories of our products.  If the distributors reduce their inventoriesof our products, our sales could be adversely affected.***

 

Ourdistributors maintain inventories of our products.  We work closely withour distributors to monitor channel inventory levels and ensure thatappropriate levels of products are available to resellers and end users. We have improved certain elements of our supply chain processes so thatdeliveries to our channel partners can be done more rapidly, thereby enablingour channel partners to hold fewer weeks of supply of our products in theirinventory.  Our target range for channel inventory levels is between fourand five weeks of supply on hand at our distributors.  Channel inventorylevels were within our target range at the end of February 2005,and we expect to operate our business within that range for the remainderof fiscal 2005.  Partners with a below-average inventory level may incur “stockouts” that would adversely impact our sales.  If our channel partnersfurther reduce their levels of inventory of our products, our sales would benegatively impacted during the period of change.

 

***If we are unable to successfully developrelationships with******system integrators, service providers, and enterprise VARs******, oursales may be negatively affected***

 

Aspart of our sales strategy, we are targeting system integrators (SIs), serviceproviders (SPs), and enterprise VARs (eVARs).  These resellers typicallyhave expertise in network design and implementation, which is important whendeploying end-to-end networking infrastructure solutions in largerenterprises.  In addition to specialized technical expertise, SIs, SPs andeVARs typically offer sophisticated services capabilities that are frequentlydesired by larger enterprise customers.  In order to expand ourdistribution channel to include resellers with such capabilities, we must beable to provide effective support to these resellers.  If our sales,marketing or services capabilities are not sufficiently robust to provideeffective support to such SIs, SPs, and eVARs, we may not be successful inexpanding our distribution model and current SI, SP, and eVAR partners mayterminate their relationships with us, which would adversely impact our salesand overall results of operations.

 

***Our competition with Huawei in theenterprise networking market could have a material adverse effect on our salesand our results of operations.***

 

AsHuawei expands its international operations, there will be increasing instanceswhere we compete directly with Huawei in the enterprise networkingmarket.  We expect to be able to compete effectively with Huawei in thismarket as a result of our strengths in a number of areas including our brandidentity, breadth of products and solutions offerings, and professional servicescapabilities.  We also are free to engineer derivative models of

 

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productssourced from H-3C that would not be available to Huawei or other H-3Ccustomers.  However, as a co-owner and OEM customer of H-3C, Huaweiwill have access to many of H-3C’s products just as we do, therebyenhancing Huawei’s current ability to compete directly with us in marketsoutside of China, Hong Kong and Japan.  If this occurs, we could lose acompetitive advantage in those markets, which could have a material adverseeffect on our sales and overall results of operations.

 

***We may be unable to manage our supply chainsuccessfully, which would adversely impact our sales, gross margin, andprofitability.***

 

Currentbusiness conditions and operational challenges in managing our supply chainaffect our business in a number of ways:

 

**•**              in the past, some key components have hadlimited availability;

 

**•**              there are a smaller number of suppliers andwe have narrowed our supplier base, including, in some cases, the sole sourcingof specific components from a single supplier;

 

**•**              as integration of networking features on areduced number of computer chips continues, we are increasingly facingcompetition from parties who are our suppliers;

 

**•**              our ability to accurately forecast demand isdiminished, especially in light of general economic weakness and uncertaintyfollowing wars and terrorist events;

 

**•**              our reliance on, and long-term arrangementswith, third-party manufacturers places much of the supply chain process out ofour direct control and heightens the need for accurate forecasting and reducesour ability to transition quickly to alternative supply chain strategies; and

 

**•**              we may experience disruptions to ourlogistics.

 

Someof our suppliers are also our competitors.  We cannot be certain that inthe future our suppliers, particularly those who are also in active competitionwith us, will be able or willing to meet our demand for components in a timelyand cost-effective manner.

 

Therehas been a trend toward consolidation of vendors of electroniccomponents.  Our reliance on a smaller number of vendors and the inabilityto quickly switch vendors increase the risk of logistics disruptions,unfavorable price fluctuations, or disruptions in supply, particularly in asupply-constrained environment.

 

Morerecently, supplies of certain key components, such as memory, have becometighter as industry demand for such components has increased.  Also, theprices of some components have increased as the underlying prices of rawmaterials needed to manufacture such components have increased.  This isputting upward pressure on our costs as well as increasing the time necessaryto obtain these components.  If this persists, we may experience an adverseimpact to gross margin as costs either increase or do not decline as fast asthey had in the past.

 

Operationof the supply chain requires accurate forecasting of demand.  If overalldemand for our products or the mix of demand for our products is significantly differentfrom our expectations, we may face inadequate or excess component supply orinadequate or excess manufacturing capacity.  This would result in ordersfor products that could not be manufactured in a timely manner, or a buildup ofinventory that could not easily be sold.  Either of these situations couldadversely affect our market share, sales, results of operations or financialposition.

 

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***Our strategies to outsource all of ourmanufacturing requirements to contract manufacturers may not result in meetingour cost, quality or performance standards.  The inability of any contractmanufacturer to meet our cost, quality or performance standards could adverselyaffect our sales and overall results from operations.***

 

Thecost, quality, performance, and availability of contract manufacturingoperations are and will be essential to the successful production and sale ofmany of our products.  The inability of any contract manufacturer to meetour cost, quality, performance, and availability standards could adverselyimpact our sales and overall results of operations.  We may not be able toprovide contract manufacturers with product volumes that are high enough toachieve sufficient cost savings.  If shipments fall below forecastedlevels, we may incur increased costs or be required to take ownership ofinventory.  In addition, a significant component of maintaining costcompetitiveness is the ability of our contract manufacturers to adjust theirown costs and manufacturing infrastructure to compensate for possible adverseexchange rate movements.  To the extent that the contract manufacturersare unable to do so, and we are unable to procure alternative product supplies,then our own competitiveness and results of operations could be adverselyimpacted.

 

Also,our ability to control the quality of products produced by contractmanufacturers may be limited and quality issues may not be resolved in a timelymanner, which could adversely impact our sales and overall results ofoperations.  We have implemented a program with our manufacturing partnersto ship products directly from regional shipping centers to customers. Through this program, we are relying on these partners to fill customer ordersin a timely manner.  This program may not yield the efficiencies that weexpect, which would negatively impact our results of operations.  Anydisruptions to on-time delivery to customers would adversely impact our salesand overall results of operations.

 

***Adverse outcomes resulting from examinationof our income or other tax returns could adversely affect our results.***

 

We are subject to theperiodic examination of our income tax returns by the U.S. Internal RevenueService and other tax authorities.  Weregularly assess the likelihood of adverse outcomes resulting from theseexaminations to determine the adequacy of our provision for income taxes. Theoutcome of these examinations cannot be predicted with certainty and, shouldunfavorable rulings be made, assessments against us could be significant, andcould result in substantial payments by us to the tax authorities.

 

***We may need to engage in complex and costlylitigation in order to protect, maintain or enforce our intellectual propertyrights.***

 

Inaddition to disputes relating to the validity or alleged infringement of otherparties’ rights, we may become involved in disputes relating to our assertionof our intellectual property rights.  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 casesoften seek injunctive relief and the measures of damages in intellectualproperty litigation are complex and often subjective or uncertain.  Thus,the existence of this type of litigation, or any adverse determinations relatedto such litigation, could subject us to significant liabilities andcosts.  If any of our OEM, ODM, or joint venture partners become involvedin intellectual property disputes and are unable to hold us harmless, then wemay incur liabilities or suffer disruption of our business.  Any one ofthese factors could adversely affect our sales, gross margin, overall resultsof operations, cash flow or financial position.

 

***We may not be able to defend ourselvessuccessfully against claims that we are infringing the intellectual propertyrights of others.***

 

Manyof our competitors, such as telecommunications, networking, and computerequipment manufacturers, have large intellectual

 

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propertyportfolios, including patents that may cover technologies that are relevant toour business.  In addition, many smaller companies, universities, andindividual inventors have obtained or applied for patents in areas oftechnology that may relate to our business.  The industry continues to beaggressive in assertion, licensing, and litigation of patents and otherintellectual property rights.

 

Inthe course of our business, we receive claims of infringement or otherwisebecome aware of potentially relevant patents or other intellectual propertyrights held by other parties.  We evaluate the validity and applicabilityof these intellectual property rights, and determine in each case whether wemust negotiate licenses or cross-licenses to incorporate or use the proprietarytechnologies, protocols, or specifications in our products.  If we areunable to obtain and maintain licenses on favorable terms for intellectualproperty rights required for the manufacture, sale, and use of our products,particularly those that must comply with industry standard protocols andspecifications to be commercially viable, our financial position or results ofoperations could be adversely affected.  In addition, if we are alleged toinfringe the intellectual property rights of others, we could be required toseek licenses from others or be prevented from manufacturing or selling ourproducts, which could cause disruptions to our operations or the markets inwhich we compete.

 

***Fluctuations in our operating results andother factors may contribute to volatility in the market price of our stock.***

 

Historically,our stock price has experienced volatility.  We expect that our stockprice may continue to experience volatility in the future due to a variety ofpotential factors such as:

 

**•**              fluctuations in our quarterly results ofoperations and cash flow;

 

**•**              changes in our cash and equivalents and shortterm investment balances;

 

**•**              variations between our actual financialresults and published analysts’ expectations; and

 

**•**              announcements by our competitors.

 

Inaddition, over the past several years, the stock market has experiencedsignificant price and volume fluctuations that have affected the stock pricesof many technology companies.  These factors, as well as general economicand political conditions or investors’ concerns regarding the credibility ofcorporate financial statements and the accounting profession, may have amaterial adverse affect on the market price of our stock in the future.

 

***Item3.******          *Quantitativeand Qualitative Disclosures About Market Risk**

 

We hold marketable equitytraded securities that have a brief trading history and are highly subject tomarket price volatility.  Equity securityprice fluctuations of plus or minus 50 percent would not have a material impacton the value of these securities as of the end of the third quarter of fiscal2005.

 

Information related tointerest rate sensitivity and foreign currency exchange risk is contained in Part II,Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in ourAnnual Report on Form 10-K for the year ended May 28, 2004.

 

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

 

a.     We carried out anevaluation, under the supervision and with the participation of our management,including our President and Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of our third fiscal quarter pursuant to Rule 13a-15(b) underthe Securities Exchange Act of 1934.

 

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Based upon that evaluation, except as setforth below, our President and Chief Executive Officer and our Chief FinancialOfficer concluded that our disclosure controls and procedures are effective inensuring that information required to be disclosed by us in reports that wefile or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  During our second fiscal quarter, two filingson Form 8-K, to report the execution of severance agreements withformer executive officers of 3Com, were filed after the four business dayrequirement.  We have taken steps toensure that the execution or amendment of material contracts in the future isreported in a timely manner on Form 8-K, including increasedcommunications of the rules governing our disclosure obligations andtighter integration of our reporting requirements with operations of thebusiness.

 

Our review of ourinternal controls was made within the context of the relevant professionalauditing standards defining “internal controls,” “reportable conditions,” and “materialweaknesses.” “Internal controls” are processes designed to provide reasonableassurance that our transactions are properly authorized, our assets aresafeguarded against unauthorized or improper use, and our transactions areproperly recorded and reported, all to permit the preparation of ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States. “Significant deficiencies” are control issues that could have asignificant adverse effect on our ability to properly authorize transactions,safeguard our assets, or record, process, summarize or report financial data inthe consolidated financial statements.  A“material weakness” is a particularly serious deficiency where the systems ofinternal control do not reduce to a relatively low level the risk thatmisstatements caused by error or fraud may occur in amounts that would bematerial in relation to the consolidated financial statements and not bedetected within a timely period by employees in the normal course of performingtheir 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 reporting that occurred during our third fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**PART II.   OTHER INFORMATION**

 

***Item 1.*****           LegalProceedings**

 

The informationset forth in Note 16 of Part I, Item 1 of this Form 10-Q isincorporated herein by reference.

 

***Item2.*****           UnregisteredSales of Equity Securities and Use of Proceeds**

 

Duringthe fourth quarter of fiscal 2003, our Board of Directors approved a stockrepurchase program that authorized expenditures of up to $100.0 million and waseffective for a two-year period through March 2005.  We did not repurchase shares of our commonstock pursuant to this authorization in fiscal 2003 or 2004.  We repurchased shares of our common stockpursuant to this authorization in the first quarter of fiscal 2005.  However, we did not repurchase any sharespursuant to this authorization in the second or third quarter of fiscal 2005.  This authorization expired in March 2005.  On March 23, 2005, our Board ofDirectors approved a new stock repurchase program providing for expenditures ofup to $100.0 million through March 31, 2007.  We may use cash to repurchase shares pursuantto the new authorization in future periods. In addition, upon vesting of restricted stock awards, employees arepermitted to return to us a portion of the newly vested shares to satisfy thetax withholding obligations that arise in connection with such vesting.

 

Thefollowing table summarizes repurchases of our stock, including shares returnedto satisfy tax

 

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withholdingobligations, in the quarter ended February 25, 2005:

 
| **Period**                                             | ** ** | **Total  Number of  Shares  Purchased (1)** | ** ** | **Average  Price Paid per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced  Plans or Programs (2)** | ** ** | **Approximate  Dollar Value of Shares  that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
|                                                   |       |                                        |       |                               |       |                                                                                                        |       |                                                                                                  |       |
| November 27,  2004 through December 26, 2004 |       | 7,937                                       |       | $                                  | 3.78       |                                                                                                        | —     |                                                                                                  | $          | 26,635,406 |   |
| December 27,  2004 through January 26, 2005  |       | 12,303                                      |       | 4.17                               |       | —                                                                                                      |       | 26,635,406                                                                                            |       |
| January 27,  2005 through February 25, 2005  |       | —                                      |       | —                             |       | —                                                                                                      |       | 26,635,406                                                                                            |       |
| Total                                                  |       | 20,240                                      |       | $                                  | 4.02       |                                                                                                        | —     |                                                                                                  |       |   |
|                                                        |            |                                             |            |                                    |            |                                                                                                             |            |                                                                                                       |            |  |  |

 

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(1)   20,240 shares were returned to us fromemployees to satisfy tax withholding obligations that arose upon the vesting ofa restricted stock award.

 

(2)   Our prior stock repurchase program wasannounced on March 19, 2003 and permitted expenditures of up to $100.0million through March 2005.  On March 23,2005, our Board of Directors approved a new stock repurchase program providingfor expenditures of up to $100.0 million through March 31, 2007; providedthat all repurchases are pre-approved by the Audit and Finance Committee of theBoard of Directors.

 

***Item3.*****           DefaultsUpon Senior Securities**

 

None.

 

***Item4.*****           Submissionof Matters to a Vote of Security Holders**

 

None.

 

***Item 5.*****           OtherInformation**

 

None.

 

***Item 6.*****           Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                          | ** ** | **Incorporated by Reference** | ** ** | **Filed**    | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------|------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                        | ** ** | **Form**                      | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** | ** ** |
| 2.1         |       | Master Separation and  Distribution Agreement between the Registrant and Palm, Inc. effective  as of December 13, 1999                                    |       | 10-Q                          |       | 0-12867      |       | 2.1 |   | 04/04/00 |   |   |   |
| 2.2         |       | Tax Sharing Agreement  between the Registrant and Palm, Inc.                                                                                                   |       | 10-Q                          |       | 0-12867      |       | 2.7 |   | 04/04/00 |   |   |   |
| 2.3         |       | Indemnification and  Insurance Matters Agreement between the Registrant and Palm, Inc.                                                                         |       | 10-Q                          |       | 0-12867      |       | 2.11 |   | 04/04/00 |   |   |   |
| 2.4         |       | Agreement and Plan of  Merger, dated December 13, 2004, by and among 3Com Corporation, Topaz Acquisition  Corporation and TippingPoint Technologies, Inc. |       | 8-K                           |       | 0-12867      |       | 2.1 |   | 12/16/04 |   |   |   |
| 3.1         |       | Corrected Certificate  of Merger filed to correct an error in the Certificate of Merger                                                                             |       | 10-Q                          |       | 0-12867      |       | 3.4 |   | 10/08/99 |   |   |   |
| 3.2         |       | Registrant’s Bylaws, as  amended on March                                                                                                                      |       | 8-K                           |       | 0-12867      |       | 3.1 |   | 03/28/05 |   |   |   |

 

43

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                | ** ** | **Incorporated by Reference** | ** ** | **Filed**    | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------|------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                              | ** ** | **Form**                      | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** | ** ** |
|        |       | 23, 2005                                                                                                                                                                                  |       |                          |       |         |       |   |   |   |   |   |   |
| 3.3         |       | Certificate of  Designation of Rights, Preferences and Privileges of Series A  Participating Preferred Stock                                                                         |       | 10-Q                          |       | 0-12867      |       | 3.6 |   | 10/11/01 |   |   |   |
| 4.1         |       | Third Amended and  Restated Preferred Shares Rights Agreement, dated as of November 4, 2002                                                                                          |       | 8-A/A                         |       | 0-12867      |       | 4.2 |   | 11/27/02 |   |   |   |
| 10.1        |       | Addendum II, dated January 5,  2005, to Severance Agreement and General Release by and between 3Com  Corporation and Dennis Connors dated as of September 16, 2004.*            |       |                          |       |         |       |   |   |   |   | X |   |
| 10.2        |       | Second Amendment to  Lease, dated as of February 16, 2005 by and between 3Com Corporation and  Marlborough Campus Limited Partnership                                                |       |                          |       |         |       |   |   |   |   | X |   |
| 31.1        |       | Certification of  Principal Executive Officer                                                                                                                                             |       |                          |       |         |       |   |   |   |   | X |   |
| 31.2        |       | Certification of  Principal Financial Officer                                                                                                                                             |       |                          |       |         |       |   |   |   |   | X |   |
| 32.1        |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       |                          |       |         |       |   |   |   |   | X |   |

 

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*  Indicates a management contract orcompensatory plan.

 

44

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |                |   | 3Com Corporation                       |
|--------|---------------------|--------|----------------------------------------|
|   |                |   | (Registrant)                           |
|   |                |   |                                   |
|   |                |   |                                   |
| Dated: | April 5,  2005 |   | By:                                    | /s/  Donald M. Halsted, III |   |
|   |                |   | Donald  M. Halsted, III           |
|   |                |   | Executive Vice  President, Finance and |
|   |                |   | Chief Financial Officer                |
|   |                |   | (Principal Financial  and              |
|   |                |   | Accounting Officer)                    |
|        |                     |        |                                        |  |  |  |

 

45

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**Exhibit Index**

 
| ** **  | ** ** | ** **                                                                                                                                                                                | ** ** | ** **                    | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                                                                                | ** ** | **Incorporated by Reference** | ** ** | **Filed** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                              | ** ** | **Form**                      | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** | ** ** |
| 2.1         |       | Master Separation and  Distribution Agreement between the Registrant and Palm, Inc. effective  as of December 13, 1999                                                          |       | 10-Q                          |       | 0-12867 |   | 2.1 |   | 04/04/00 |   |   |   |
| 2.2         |       | Tax Sharing Agreement  between the Registrant and Palm, Inc.                                                                                                                         |       | 10-Q                          |       | 0-12867 |   | 2.7 |   | 04/04/00 |   |   |   |
| 2.3         |       | Indemnification and  Insurance Matters Agreement between the Registrant and Palm, Inc.                                                                                               |       | 10-Q                          |       | 0-12867 |   | 2.11 |   | 04/04/00 |   |   |   |
| 2.4         |       | Agreement and Plan of  Merger, dated December 13, 2004, by and among 3Com Corporation, Topaz  Acquisition Corporation and TippingPoint Technologies, Inc.                       |       | 8-K                           |       | 0-12867 |   | 2.1 |   | 12/16/04 |   |   |   |
| 3.1         |       | Corrected Certificate  of Merger filed to correct an error in the Certificate of Merger                                                                                                   |       | 10-Q                          |       | 0-12867 |   | 3.4 |   | 10/08/99 |   |   |   |
| 3.2         |       | Registrant’s Bylaws, as  amended on March 23, 2005                                                                                                                              |       | 8-K                           |       | 0-12867 |   | 3.1 |   | 03/28/05 |   |   |   |
| 3.3         |       | Certificate of  Designation of Rights, Preferences and Privileges of Series A  Participating Preferred Stock                                                                         |       | 10-Q                          |       | 0-12867 |   | 3.6 |   | 10/11/01 |   |   |   |
| 4.1         |       | Third Amended and  Restated Preferred Shares Rights Agreement, dated as of November 4, 2002                                                                                          |       | 8-A/A                         |       | 0-12867 |   | 4.2 |   | 11/27/02 |   |   |   |
| 10.1        |       | Addendum II, dated January 5,  2005, to Severance Agreement and General Release by and between 3Com  Corporation and Dennis Connors dated as of September 16, 2004.*            |       |                          |       |   |   |   |   |   |   | X |   |
| 10.2        |       | Second Amendment to  Lease, dated as of February 16, 2005 by and between 3Com Corporation and  Marlborough Campus Limited Partnership                                                |       |                          |       |   |   |   |   |   |   | X |   |
| 31.1        |       | Certification of  Principal Executive Officer                                                                                                                                             |       |                          |       |   |   |   |   |   |   | X |   |
| 31.2        |       | Certification of  Principal Financial Officer                                                                                                                                             |       |                          |       |   |   |   |   |   |   | X |   |
| 32.1        |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       |                          |       |   |   |   |   |   |   | X |   |

 

----

*  Indicates a management contract orcompensatory plan.

 

46

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