##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 2, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File No. 0-12867
 
 3COM CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2605794(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)350 Campus DriveMarlborough, Massachusetts
    
    01752(Address of principal executive offices)
    
    (Zip Code)
 (508) 323-1000
 N/A
 þ o
  þ o o
 o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 2, 2007
TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Condensed Consolidated Statements of Operations
Three and Nine Months Ended February 28, 2007 and 2006
    
    
    1Condensed Consolidated Balance Sheets
February 28, 2007, and May 31, 2006
    
    
    2Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II.
    
    OTHER INFORMATION
    
    
    30Item 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    42Item 6.
    
    Exhibits
    
    
    42SIGNATURES
    
    
    
    
    44EXHIBITS
    
    
    
    
    45EX-10.1 Commitment Letter, dated as of December 20, 2006EX-31.1 Section 302 Certification of P.E.O.EX-31.2 Section 302 Certification of P.F.O.EX-32.1 Section 906 Certification of C.E.O. & C.F.O.




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    323,441
    
    
    $
    177,563
    
    
    $
    956,561
    
    
    $
    539,531Cost of sales (including stock-based compensation
expense of $418 and $47 for the three months ended
February 28, 2007 and 2006, respectively, and $1,119 and
$121 for the nine months ended February 28, 2007 and
2006, respectively)
    
    
    170,004
    
    
    
    105,157
    
    
    
    516,544
    
    
    
    322,744Gross profit
    
    
    153,437
    
    
    
    72,406
    
    
    
    440,017
    
    
    
    216,787Operating expenses:Sales and marketing (including stock-based
compensation expense of $1,553 and $457 for the three
months ended February 28, 2007 and 2006,
respectively, and $4,358 and $1,740 for the nine
months ended February 28, 2007 and 2006,
respectively)
    
    
    77,338
    
    
    
    67,073
    
    
    
    230,648
    
    
    
    204,885Research and development (including stock-based
compensation expense of $1,060 and $864 for the three
months ended February 28, 2007 and 2006,
respectively, and $3,774 and $3,034 for the nine
months ended February 28, 2007 and 2006,
respectively)
    
    
    48,419
    
    
    
    25,075
    
    
    
    144,363
    
    
    
    69,497General and administrative (including stock-based
compensation expense of $1,865 and $1,060 for the
three months ended February 28, 2007 and 2006,
respectively, and $5,882 and $3,265 for the nine
months ended February 28, 2007 and 2006,
respectively)
    
    
    22,466
    
    
    
    19,520
    
    
    
    65,083
    
    
    
    56,025Amortization and write-down of intangible assets
    
    
    10,228
    
    
    
    3,862
    
    
    
    34,630
    
    
    
    11,586In-process research and development
    
    
    1,700
    
    
    
    
    
    
    
    1,700
    
    
    
    Restructuring charges
    
    
    2,221
    
    
    
    4,148
    
    
    
    2,776
    
    
    
    10,977Total operating expenses
    
    
    162,372
    
    
    
    119,678
    
    
    
    479,200
    
    
    
    352,970Operating loss
    
    
    (8,935
    )
    
    
    (47,272
    )
    
    
    (39,183
    )
    
    
    (136,183
    )(Loss) gain on investments, net
    
    
    (582
    )
    
    
    173
    
    
    
    799
    
    
    
    3,270Interest income, net
    
    
    11,265
    
    
    
    7,167
    
    
    
    32,802
    
    
    
    20,137Other income (expense), net
    
    
    9,637
    
    
    
    (574
    )
    
    
    26,971
    
    
    
    (438
    )Income (loss) before income taxes, equity interest in
loss of unconsolidated joint venture and minority
interest
    
    
    11,385
    
    
    
    (40,506
    )
    
    
    21,389
    
    
    
    (113,214
    )Income tax (provision) benefit
    
    
    (1,374
    )
    
    
    (1,030
    )
    
    
    (5,047
    )
    
    
    19,948Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    8,776
    
    
    
    
    
    
    
    7,765Minority interest in income of consolidated joint venture
    
    
    (14,790
    )
    
    
    
    
    
    
    (38,705
    )
    
    
    Net loss
    
    $
    (4,779
    )
    
    $
    (32,760
    )
    
    $
    (22,363
    )
    
    $
    (85,501
    )Basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.22
    )Shares used in computing per share amounts:Basic and diluted
    
    
    394,351
    
    
    
    387,754
    
    
    
    393,196
    
    
    
    385,652
  1




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  February 28,
    
    
    May 31,(In thousands, except per share data)
    
    2007
    
    
    2006ASSETSCurrent assets:Cash and equivalents
    
    $
    842,761
    
    
    $
    501,097Short-term investments
    
    
    113,386
    
    
    
    363,250Notes receivable
    
    
    35,671
    
    
    
    63,224Accounts receivable, less allowance for
doubtful accounts of $23,435 and $16,422,
respectively
    
    
    144,345
    
    
    
    115,120Inventories
    
    
    124,459
    
    
    
    148,819Other current assets
    
    
    51,214
    
    
    
    57,835Total current assets
    
    
    1,311,836
    
    
    
    1,249,345Property and equipment, less accumulated
depreciation and amortization of $232,414 and
$232,944, respectively
    
    
    80,564
    
    
    
    89,109Goodwill
    
    
    357,430
    
    
    
    354,259Intangible assets, net
    
    
    80,166
    
    
    
    111,845Deposits and other assets
    
    
    27,662
    
    
    
    56,803Total assets
    
    $
    1,857,658
    
    
    $
    1,861,361LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    128,916
    
    
    $
    153,245Accrued liabilities and other
    
    
    342,239
    
    
    
    318,036Total current liabilities
    
    
    471,155
    
    
    
    471,281Deferred revenue and long-term obligations
    
    
    2,354
    
    
    
    13,788Minority interest
    
    
    171,853
    
    
    
    173,930Stockholders equity:Preferred stock, $0.01 par value, 10,000
shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 990,000
shares authorized; shares issued: 397,509
and 393,442, respectively
    
    
    2,316,571
    
    
    
    2,300,396Unamortized stock-based compensation
    
    
    
    
    
    
    (7,565
    )Retained deficit
    
    
    (1,110,183
    )
    
    
    (1,087,512
    )Accumulated other comprehensive income (loss)
    
    
    5,908
    
    
    
    (2,957
    )Total stockholders equity
    
    
    1,212,296
    
    
    
    1,202,362Total liabilities and stockholders equity
    
    $
    1,857,658
    
    
    $
    1,861,361
  2




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3COM CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedFebruary 28,(In thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (22,363
    )
    
    $
    (85,501
    )Adjustments to reconcile net loss to cash used in
operating activities:Depreciation and amortization
    
    
    58,255
    
    
    
    29,406Stock-based compensation charges
    
    
    15,133
    
    
    
    8,160Gain on property and equipment disposals
    
    
    (10,898
    )
    
    
    (341
    )In-process research and development
    
    
    1,700
    
    
    
    (Gain) loss on investments, net
    
    
    (1,476
    )
    
    
    385Minority interest in income of consolidated joint venture
    
    
    38,705
    
    
    
    Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    (7,765
    )Deferred income taxes
    
    
    (8,836
    )
    
    
    (223
    )Changes in assets and liabilities:Accounts receivable
    
    
    (12,392
    )
    
    
    (28,235
    )Inventories
    
    
    23,754
    
    
    
    (6,881
    )Other assets
    
    
    31,689
    
    
    
    13,773Accounts payable
    
    
    (28,098
    )
    
    
    (7,332
    )Other liabilities
    
    
    9,682
    
    
    
    (16,519
    )Net cash provided by (used in) operating activities
    
    
    94,855
    
    
    
    (101,073
    )Cash flows from investing activities:Purchases of investments
    
    
    (225,005
    )
    
    
    (387,145
    )Proceeds from maturities and sales of investments
    
    
    495,941
    
    
    
    483,534Purchases of property and equipment
    
    
    (24,152
    )
    
    
    (11,185
    )Businesses acquired in purchase transactions, net of
cash acquired
    
    
    (7,830
    )
    
    
    (28,000
    )Proceeds from sale of property and equipment
    
    
    33,111
    
    
    
    Net cash provided by investing activities
    
    
    272,065
    
    
    
    57,204Cash flows from financing activities:Issuances of common stock
    
    
    13,088
    
    
    
    12,440Repurchases of common stock
    
    
    (4,788
    )
    
    
    (5,494
    )Dividend paid to minority interest shareholder
    
    
    (40,785
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (32,485
    )
    
    
    6,946Effect of exchange rate changes on cash and equivalents
    
    
    7,229
    
    
    
    233Net change in cash and equivalents during period
    
    
    341,664
    
    
    
    (36,690
    )Cash and equivalents, beginning of period
    
    
    501,097
    
    
    
    268,535Cash and equivalents, end of period
    
    $
    842,761
    
    
    $
    231,845
  3




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3COM CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1. BASIS OF PRESENTATION
   Recently issued accounting pronouncements
    4




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NOTE 2. STOCK-BASED COMPENSATION
       Three Months Ended
    
    
    Nine Months Ended(In thousands, except per share data)
    
    February 28, 2007
    
    
    February 28, 2007Cost of sales
    
    $
    301
    
    
    $
    883Sales and marketing
    
    
    948
    
    
    
    2,929Research and development
    
    
    524
    
    
    
    1,637General and administrative
    
    
    1,241
    
    
    
    3,217Incremental share-based compensation
effect of SFAS No. 123R on net loss
    
    $
    3,014
    
    
    $
    8,666Incremental share-based compensation
effect of SFAS No. 123R on basic
and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  5




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Three Months Ended
    
    
    Nine Months Ended(In thousands, except per share amounts)
    
    February 28, 2006
    
    
    February 28, 2006Net loss as reported
    
    $
    (32,760
    )
    
    $
    (85,501
    )Add: Stock-based compensation included in
reported net loss
    
    
    2,433
    
    
    
    8,160Deduct: Total stock-based compensation
determined under the fair value-based
method, net of related tax effects
    
    
    (5,282
    )
    
    
    (19,346
    )Adjusted net loss
    
    $
    (35,609
    )
    
    $
    (96,687
    )Net loss per share-basic and diluted:As reported
    
    $
    (0.08
    )
    
    $
    (0.22
    )Adjusted
    
    $
    (0.09
    )
    
    $
    (0.25
    )
   Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2007
    
    20061
    
    2007
    
    20061Employee stock options:Volatility
    
    
    41.8
    %
    
    
    40.3
    %
    
    
    41.8
    %
    
    
    42.1
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.4
    %
    
    
    4.7
    %
    
    
    4.3
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0Fair value per option
    
    $
    1.59
    
    
    $
    1.52
    
    
    $
    1.67
    
    
    $
    1.48Employee Stock Purchase Plan:Volatility
    
    
    
    
    
    
    
    
    
    
    49.2
    %
    
    
    35.2
    %Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    5.1
    %
    
    
    4.1
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5Fair value per option
    
    
    
    
    
    
    
    
    
    $
    1.27
    
    
    $
    1.05
 1  Assumptions used in the calculation of fair value according to the provisions of SFAS No.
123.
 6




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Number of
    
    
    Weighted averageShares
    
    
    Exercise PriceOutstanding June 1, 2006
    
    
    61,421
    
    
    $
    5.71Granted
    
    
    23,607
    
    
    
    4.73Exercised
    
    
    (2,134
    )
    
    
    3.12Cancelled
    
    
    (28,201
    )
    
    
    6.02Outstanding February 28, 2007
    
    
    54,693
    
    
    $
    5.22Exercisable
    
    
    22,346
    
    
    $
    6.29Weighted average grant-date fair value
of options granted
    
    
    
    
    
    $
    1.67
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber of
    
    Option
    
    Contractual
    
    Intrinsic ValueShares
    
    Price
    
    Life (in years)
    
    (in thousands)Vested and expected to vest at February 28, 2007
    
    
    39,985,355
    
    
    $
    5.45
    
    
    
    4.83
    
    
    $
    10,532
  Number of
    
    
    Weighted averageShares
    
    
    Grant-Date Fair(unvested)
    
    
    ValueOutstanding June 1, 2006
    
    
    2,117
    
    
    $
    4.07Granted
    
    
    2,370
    
    
    
    4.45Vested
    
    
    (595
    )
    
    
    3.90Forfeited
    
    
    (917
    )
    
    
    4.32Outstanding February 28, 2007
    
    
    2,975
    
    
    $
    4.33
   WeightedAverage
    
    
    AggregateNumber of
    
    
    Weighted
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Average
    
    
    Contractual
    
    
    Value (in(unvested)
    
    
    Purchase Price
    
    
    Term (Years)
    
    
    thousands)Outstanding June 1, 2006
    
    
    
    
    
    $
    
    
    
    
    Granted
    
    
    3,731
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (172
    )
    
    
    
    
    
    
    Outstanding February 28, 2007
    
    
    3,559
    
    
    $
    
    
    
    
    1.14
    
    
    $
    13,382
  7




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##### Table of Contents



NOTE 3. ACQUISITIONS
 Huawei-Com Joint Venture and Acquisition
      Three Months Ended
    Nine Months Ended(In millions, except per share amounts)
    
    February 28, 2006
    February 28, 2006Net sales
    
    $
    304.9
    
    
    $
    847.0Net loss
    
    
    (32.8
    )
    
    
    (86.5
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.22
    )
 8




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##### Table of Contents



Roving Planet Acquisition
     As of February 28,
    
    
    Useful Life for Purchased2007
    
    
    Intangible AssetsIn-process research
and development
    
    $
    1,700
    
    
    
    Purchased core technology
    
    
    3,100
    
    
    3 yearsGoodwill (tax deductible)
    
    
    3,429
    
    
    
    Total acquisition value
    
    $
    8,229
    
    
    
    
  NOTE 4. RESTRUCTURING CHARGES
    
    
    further reductions in workforce; and
    
    continued efforts to consolidate and dispose of excess facilities.
   9




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Fiscal 2007 Actions
  Employee
    
    
    
    
    
    
    OtherSeparation
    
    
    Facilities-
    
    
    RestructuringExpense
    
    
    related Sales
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Provisions (benefits)
    
    
    11,388
    
    
    
    (7,509
    )
    
    
    231
    
    
    
    4,110Payments and non-cash charges
(benefits)
    
    
    (9,053
    )
    
    
    7,791
    
    
    
    (231
    )
    
    
    (1,493
    )Balance as of February 28, 2007
    
    $
    2,335
    
    
    $
    282
    
    
    $
    
    
    
    $
    2,617
    Fiscal 2006 Actions
  Employee
    
    
    Facilities-Separation
    
    
    relatedExpense
    
    
    Charges
    
    
    TotalBalance as of June 1, 2006
    
    $
    4,877
    
    
    $
    891
    
    
    $
    5,768Provisions (benefits)
    
    
    (697
    )
    
    
    (44
    )
    
    
    (741
    )Payments and non-cash charges
    
    
    (3,865
    )
    
    
    (509
    )
    
    
    (4,374
    )Balance as of February 28, 2007
    
    $
    315
    
    
    $
    338
    
    
    $
    653
    Fiscal 2005 Actions
  Employee
    
    
    Long-term
    
    
    Facilities-
    
    
    OtherSeparation
    
    
    Asset
    
    
    related
    
    
    RestructuringExpense
    
    
    Write-downs
    
    
    Charges
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    1,843
    
    
    $
    255
    
    
    $
    
    
    
    $
    13
    
    
    $
    2,111Provisions (benefits)
    
    
    (1,400
    )
    
    
    (255
    )
    
    
    22
    
    
    
    (13
    )
    
    
    (1,646
    )Payments and non-cash charges
    
    
    (145
    )
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    (167
    )Balance as of February 28, 2007
    
    $
    298
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    298
   10




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##### Table of Contents



Fiscal 2001, 2002, 2003 and 2004 Actions
  Facilities-
    
    
    Otherrelated
    
    
    RestructuringCharges
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    5,641
    
    
    $
    5
    
    
    $
    5,646Provisions
    
    
    1,046
    
    
    
    7
    
    
    
    1,053Payments and non-cash charges
    
    
    (5,052
    )
    
    
    (12
    )
    
    
    (5,064
    )Balance as of February 28, 2007
    
    $
    1,635
    
    
    $
    
    
    
    $
    1,635
   NOTE 5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
    Three Months Ended
    
    Nine Months Ended(in thousands):
    
    December 31, 2005
    
    December 31, 2005Statement of Operations:Sales
    
    $
    144,973
    
    
    $
    351,922Gross profit
    
    
    69,544
    
    
    
    157,181Net income
    
    
    17,910
    
    
    
    15,847
 11




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##### Table of Contents



NOTE 6. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (4,779
    )
    
    $
    (32,760
    )
    
    $
    (22,363
    )
    
    $
    (85,501
    )Other comprehensive income:Net unrealized gain on investments
    
    
    248
    
    
    
    418
    
    
    
    2,252
    
    
    
    77Change in accumulated translation
adjustments
    
    
    2,947
    
    
    
    711
    
    
    
    6,614
    
    
    
    215Total comprehensive loss
    
    $
    (1,584
    )
    
    $
    (31,631
    )
    
    $
    (13,497
    )
    
    $
    (85,209
    )
 NOTE 7. NET LOSS PER SHARE
  NOTE 8. INVENTORIES
  February 28,
    
    
    May 31,2007
    
    
    2006Finished goods
    
    $
    73,668
    
    
    $
    69,386Work-in-process
    
    
    7,619
    
    
    
    12,777Raw materials
    
    
    43,172
    
    
    
    66,656Total
    
    $
    124,459
    
    
    $
    148,819
 12




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##### Table of Contents



NOTE 9. INTANGIBLE ASSETS, NET
  February 28, 2007
    
    
    May 31, 2006Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetExisting technology
    
    $
    207,047
    
    
    $
    (142,847
    )
    
    $
    64,200
    
    
    $
    203,946
    
    
    $
    (114,235
    )
    
    $
    89,711Maintenance contracts
    
    
    19,000
    
    
    
    (6,598
    )
    
    
    12,402
    
    
    
    19,000
    
    
    
    (4,222
    )
    
    
    14,778Other
    
    
    15,301
    
    
    
    (11,737
    )
    
    
    3,564
    
    
    
    15,301
    
    
    
    (7,945
    )
    
    
    7,356Total
    
    $
    241,348
    
    
    $
    (161,182
    )
    
    $
    80,166
    
    
    $
    238,247
    
    
    $
    (126,402
    )
    
    $
    111,845
 NOTE 10. ACCRUED WARRANTY
   Nine Months EndedFebruary 28,2007
    
    
    2006Accrued warranty, beginning of period
    
    $
    41,791
    
    
    $
    41,782Cost of warranty claims processed during the period
    
    
    (37,851
    )
    
    
    (22,691
    )Provision for warranties related to products sold during the period
    
    
    35,817
    
    
    
    20,373Accrued warranty, end of period
    
    $
    39,757
    
    
    $
    39,464
 NOTE 11. SEGMENT INFORMATION
     13




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##### Table of Contents



Three Months Ended February 28, 2007(in thousands)
    
    SCN
    
    H3C
    
    Eliminations1
    
    TotalRevenue
    
    $
    157,385
    
    
    $
    195,144
    
    
    $
    (29,088
    )
    
    $
    323,441Gross profit
    
    
    63,797
    
    
    
    89,640
    
    
    
    
    
    
    
    153,437Sales and marketing,
research and
development, and
general and
administrative
    
    
    84,157
    
    
    
    64,066
    
    
    
    
    
    
    
    148,223Restructuring,
amortization, and
in-process
research and
development
    
    
    7,579
    
    
    
    6,570
    
    
    
    
    
    
    
    14,149Operating income (loss)
    
    
    (27,939
    )
    
    
    19,004
    
    
    
    
    
    
    
    (8,935
    )Net income (loss)
    
    $
    (20,174
    )
    
    $
    30,185
    
    
    $
    (14,790
    )
    
    $
    (4,779
    )Assets
    
    $
    1,408,977
    
    
    $
    477,029
    
    
    $
    (28,348
    )
    
    $
    1,857,658
 
 1
    
     Represents eliminations for inter-company sales as well as the recording of minority
interest related to Huaweis 49 percent ownership in the joint venture. Nine months ended February 28, 2007(in thousands)
    
    SCN
    
    H3C
    
    Eliminations1
    
    TotalRevenue
    
    $
    479,733
    
    
    $
    555,403
    
    
    $
    (78,575
    )
    
    $
    956,561Gross profit
    
    
    179,578
    
    
    
    260,439
    
    
    
    
    
    
    
    440,017Sales and marketing,
research and
development, and
general and
administrative
    
    
    255,189
    
    
    
    184,905
    
    
    
    
    
    
    
    440,094Restructuring,
amortization, and
in-process
research and
development
    
    
    15,316
    
    
    
    23,790
    
    
    
    
    
    
    
    39,106Operating income (loss)
    
    
    (90,927
    )
    
    
    51,744
    
    
    
    
    
    
    
    (39,183
    )Net income (loss)
    
    $
    (62,652
    )
    
    $
    78,994
    
    
    $
    (38,705
    )
    
    $
    (22,363
    )Assets
    
    $
    1,408,977
    
    
    $
    477,029
    
    
    $
    (28,348
    )
    
    $
    1,857,658
 
 1
    
     Represents eliminations for inter-company sales as well as the recording of minority
interest related to Huaweis 49 percent ownership in the joint venture.  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Networking
    
    $
    259,196
    
    
    
    80
    %
    
    $
    119,473
    
    
    
    67
    %
    
    $
    776,081
    
    
    
    81
    %
    
    $
    378,209
    
    
    
    70
    %Security
    
    
    30,647
    
    
    
    9
    %
    
    
    25,542
    
    
    
    14
    %
    
    
    87,691
    
    
    
    9
    %
    
    
    63,340
    
    
    
    12
    %Voice
    
    
    18,700
    
    
    
    6
    %
    
    
    12,503
    
    
    
    7
    %
    
    
    51,198
    
    
    
    5
    %
    
    
    42,113
    
    
    
    8
    %Services
    
    
    9,805
    
    
    
    3
    %
    
    
    7,958
    
    
    
    5
    %
    
    
    26,724
    
    
    
    3
    %
    
    
    24,547
    
    
    
    4
    %Connectivity products
    
    
    5,093
    
    
    
    2
    %
    
    
    12,087
    
    
    
    7
    %
    
    
    14,867
    
    
    
    2
    %
    
    
    31,322
    
    
    
    6
    %Total
    
    $
    323,441
    
    
    
    
    
    
    $
    177,563
    
    
    
    
    
    
    $
    956,561
    
    
    
    
    
    
    $
    539,531
  14




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NOTE 12. GEOGRAPHIC INFORMATION
  Three Months Ended February 28,
    
    
    Nine Months Ended February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006North America
    
    $
    58,538
    
    
    $
    60,875
    
    
    $
    172,120
    
    
    $
    191,020Latin and South America
    
    
    17,970
    
    
    
    19,781
    
    
    
    53,585
    
    
    
    53,385Europe, Middle East, and Africa
    
    
    65,736
    
    
    
    74,956
    
    
    
    206,203
    
    
    
    231,060Asia Pacific (except China)
    
    
    26,906
    
    
    
    21,951
    
    
    
    79,577
    
    
    
    64,066China
    
    
    154,291
    
    
    
    
    
    
    
    445,076
    
    
    
    Total
    
    $
    323,441
    
    
    $
    177,563
    
    
    $
    956,561
    
    
    $
    539,531
  NOTE 13. LITIGATION
  In re Initial Public Offering Securities Litigation, Brian Levey vs.
TippingPoint Technologies, Inc., et al.
 15




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NOTE 14. SUBSEQUENT EVENT
      Amortization
    
    AmortizationDate
    
    Percentage
    
    AmountSeptember 28, 2007
    
    
    7.5
    %
    
    $
    32,250September 28, 2008
    
    
    15.0
    %
    
    
    64,500September 28, 2009
    
    
    15.0
    %
    
    
    64,500September 28, 2010
    
    
    20.0
    %
    
    
    86,000September 28, 2011
    
    
    20.0
    %
    
    
    86,000September 28, 2012
    
    
    22.5
    %
    
    
    96,750
 16




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  BUSINESS OVERVIEW
   §
    
    Networking;§
    
    Security;§
    
    Voice;
 17




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##### Table of Contents



§
    
    Services; and§
    
    Legacy Connectivity Products.
  §
    
    forming the Huawei-3Com joint venture or H3C;§
    
    acquisition of majority ownership of H3C and purchasing Huaweis
remaining 49% ownership interest in H3C;§
    
    Financing a portion of the purchase price for the acquisition of
Huaweis 49%s ownership in H3C by entering into a $430 million senior
secured credit agreement§
    
    restructuring activities which included outsourcing of information
technology, all manufacturing activity in our SCN segment, and
significant headcount reductions in other functions, and selling
excess facilities;§
    
    significant changes to our executive leadership;§
    
    acquiring TippingPoint Technologies, Inc.; and§
    
    realigning our SCN sales and marketing channels and expenditures.
  Significant Events
      Summary of Three Months Ended February 28, 2007 Financial Performance
 §
    
    Our sales in the three months ended February 28, 2007 were $323.4 million, compared to
sales of $177.6 million in the three months ended February 28, 2006, an increase of $145.8
million, or 82.1 percent.§
    
    Our gross margin improved to 47.4 percent in the three months ended February 28, 2007
from 40.8 percent in the three months ended February 28, 2006.
 18




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##### Table of Contents



§
    
    Our operating expenses in the three months ended February 28, 2007 were $162.4 million,
compared to $119.7 million in the three months ended February 28, 2006, a net increase of
$42.7 million, or 35.7 percent.§
    
    Our net loss in the three months ended February 28, 2007 was $4.8 million, compared to a
net loss of $32.8 million in the three months ended February 28, 2006. In the three months
ended February 28, 2007, net loss in our SCN segment was $20.2 million and net income was
$30.2 million in our H3C segment before reflecting the minority interest to Huawei of $14.8
million.§
    
    Our balance sheet remained strong with cash and equivalents and short-term investment
balances of $956.1 million as of February 28, 2007, compared to cash and equivalents and
short-term investment balances of $864.3 million at the end of fiscal 2006.
 Summary of Nine Months Ended February 28, 2007 Financial Performance
 §
    
    Our sales for the first nine months ended February 28, 2007 were $956.6 million,
compared to sales of $539.5 million in the same period in fiscal 2006, an increase of
$417.1 million, or 77.3 percent.§
    
    Our gross margin improved to 46.0 percent in the first nine months of fiscal 2007 from
40.2 percent in the same period in fiscal 2006.§
    
    Our operating expenses for the nine months ended February 28, 2007 were $479.2 million,
compared to $353.0 million in the nine months ended February 28, 2006, a net increase of
$126.2 million, or 35.8 percent.§
    
    Our net loss for the nine months ended February 28, 2007 was $22.4 million, compared to
a net loss of $85.5 million in the nine months ended February 28, 2006. For the nine
months ended February 28, 2007, net loss in our SCN segment was $62.7 million and net
income was $79.0 million in our H3C segment before reflecting the minority interest to
Huawei of $38.7 million.
 Business Environment and Future Trends
  19




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##### Table of Contents



§
    
    Intense competition in the market for higher end, enterprise core routing and switching products;§
    
    Aggressive product pricing by competitors targeted at gaining share in market segments where we
have had a strong position historically, such as the small to medium-sized enterprise market;
and§
    
    The advanced nature and ready availability of merchant silicon, which allows low-end competitors
to deliver competitive products and makes it increasingly difficult for us to differentiate our
products.
   §
    
    Integrating our Asia Pacific Region sales models for Data Networking sales, especially in the
medium-enterprise market; and§
    
    Integrating certain Information Technology (IT) functions to enable seamless go-to-market models.
  20




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##### Table of Contents



§
    
    Increased amortization charges on intangible asset valuations; and§
    
    The recording of charges associated with employee retention programs
which are more fully discussed in the liquidity and capital
resources section below;§
    
    Reduced gross margins in our H3C operating segment for 49 percent of
the mark-up to fair-market value of all finished goods inventory on
hand at the Acquisition closing date, or March 29, 2007, which will
continue until such finished goods are sold;§
    
    Reduced gross margins in our H3C operating segment for 49 percent of
the mark-down to fair-market value of all deferred revenue at the
Acquisition closing date;§
    
    Recording of an in-process research and development, or IPR&D charge
   CRITICAL ACCOUNTING POLICIES
  Stock-based Compensation
    21




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RESULTS OF OPERATIONS  THREE AND NINE MONTHS ENDED FEBRUARY 28, 2007 AND 2006
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2007
    
    2006
    
    2007
    
    2006Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    52.6
    
    
    
    59.2
    
    
    
    54.0
    
    
    
    59.8Gross profit margin
    
    
    47.4
    
    
    
    40.8
    
    
    
    46.0
    
    
    
    40.2Operating expenses:Sales and marketing
    
    
    23.9
    
    
    
    37.8
    
    
    
    24.1
    
    
    
    38.0Research and development
    
    
    15.0
    
    
    
    14.1
    
    
    
    15.1
    
    
    
    12.9General and administrative
    
    
    6.9
    
    
    
    11.0
    
    
    
    6.8
    
    
    
    10.4Amortization and write-down of intangible assets
    
    
    3.2
    
    
    
    2.2
    
    
    
    3.6
    
    
    
    2.1In-process research and development
    
    
    0.5
    
    
    
    
    
    
    
    0.2
    
    
    
    Restructuring charges
    
    
    0.7
    
    
    
    2.3
    
    
    
    0.3
    
    
    
    2.0Total operating expenses
    
    
    50.2
    
    
    
    67.4
    
    
    
    50.1
    
    
    
    65.4Operating loss
    
    
    (2.8
    )
    
    
    (26.6
    )
    
    
    (4.1
    )
    
    
    (25.2
    )(Loss) gain on investments, net
    
    
    (0.2
    )
    
    
    
    
    
    
    0.1
    
    
    
    0.6Interest income, net
    
    
    3.5
    
    
    
    4.1
    
    
    
    3.4
    
    
    
    3.7Other income (expense), net
    
    
    3.0
    
    
    
    (0.3
    )
    
    
    2.8
    
    
    
    (0.1
    )Income (loss) before income taxes and equity interest
    
    
    3.5
    
    
    
    (22.8
    )
    
    
    2.2
    
    
    
    (21.0
    )Income tax (provision) benefit
    
    
    (0.4
    )
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    3.8Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    1.4Minority interest in income of consolidated joint venture
    
    
    (4.6
    )
    
    
    
    
    
    
    (4.0
    )
    
    
    Net loss
    
    
    (1.5
    )%
    
    
    (18.4
    )%
    
    
    (2.3
    )%
    
    
    (15.8
    )%
 Sales
   Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2007
    
    2006
    
    2007
    
    2006Networking
    
    $
    259.2
    
    
    
    80
    %
    
    $
    119.5
    
    
    
    67
    %
    
    $
    776.1
    
    
    
    81
    %
    
    $
    378.2
    
    
    
    70
    %Security
    
    
    30.6
    
    
    
    9
    %
    
    
    25.5
    
    
    
    14
    %
    
    
    87.7
    
    
    
    9
    %
    
    
    63.3
    
    
    
    12
    %Voice
    
    
    18.7
    
    
    
    6
    %
    
    
    12.5
    
    
    
    7
    %
    
    
    51.2
    
    
    
    5
    %
    
    
    42.1
    
    
    
    8
    %Services
    
    
    9.8
    
    
    
    3
    %
    
    
    8.0
    
    
    
    5
    %
    
    
    26.7
    
    
    
    3
    %
    
    
    24.6
    
    
    
    4
    %Connectivity Products
    
    
    5.1
    
    
    
    2
    %
    
    
    12.1
    
    
    
    7
    %
    
    
    14.9
    
    
    
    2
    %
    
    
    31.3
    
    
    
    6
    %Total
    
    $
    323.4
    
    
    
    100
    %
    
    $
    177.6
    
    
    
    100
    %
    
    $
    956.6
    
    
    
    100
    %
    
    $
    539.5
    
    
    
    100
    %
  22




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Gross Margin
  Three Months Ended
    
    Nine Months EndedFebruary 28, 2007
    
    February 28, 20071) Consolidation of H3C
    
    
    6.9
    %
    
    
    8.5
    %2) SCN cost improvements
    
    
    4.9
    %
    
    
    3.9
    %3) SCN product mix and
selling price reductions
    
    
    (3.2
    %)
    
    
    (4.9
    %)4) SCN volume impact
    
    
    (2.0
    %)
    
    
    (1.7
    %)Total
    
    
    6.6
    %
    
    
    5.8
    %
 
 1)
    
    The increase is due to the consolidation of H3C results in the current period. The H3C
segment generally has higher gross margins.2)
    
    The increase in the SCN margin was the result of lower product material and delivery costs.3)
    
    The decrease in the SCN margin was the result of lower average selling prices and an
unfavorable shift in product mix.4)
    
    The decrease in the SCN margin was the result of lower revenue on the portion of our costs
that are fixed in nature. 23




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##### Table of Contents



Operating Expenses
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedFebruary 28,
    
    
    Change
    
    
    February 28,
    
    
    Change(Dollars in millions)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Sales and marketing
    
    $
    77.4
    
    
    $
    67.1
    
    
    $
    10.3
    
    
    
    15
    %
    
    $
    230.6
    
    
    $
    204.9
    
    
    $
    25.7
    
    
    
    13
    %Research and development
    
    
    48.4
    
    
    
    25.1
    
    
    
    23.3
    
    
    
    93
    %
    
    
    144.4
    
    
    
    69.5
    
    
    
    74.9
    
    
    
    108
    %General and administrative
    
    
    22.5
    
    
    
    19.5
    
    
    
    3.0
    
    
    
    15
    %
    
    
    65.1
    
    
    
    56.0
    
    
    
    9.1
    
    
    
    16
    %Amortization of intangible assets
    
    
    10.2
    
    
    
    3.9
    
    
    
    6.3
    
    
    
    162
    %
    
    
    34.6
    
    
    
    11.6
    
    
    
    23.0
    
    
    
    198
    %In-process research and development
    
    
    1.7
    
    
    
    
    
    
    
    1.7
    
    
    
    N/A
    
    
    
    1.7
    
    
    
    
    
    
    
    1.7
    
    
    
    N/ARestructuring
    
    
    2.2
    
    
    
    4.1
    
    
    
    (1.9
    )
    
    
    (46
    %)
    
    
    2.8
    
    
    
    11.0
    
    
    
    (8.2
    )
    
    
    (75
    %)Total
    
    $
    162.4
    
    
    $
    119.7
    
    
    $
    42.7
    
    
    
    36
    %
    
    $
    479.2
    
    
    $
    353.0
    
    
    $
    126.2
    
    
    
    36
    %
 Sales and Marketing.
 Research and Development.
 eneral and Administrative.
 Amortization of Intangible Assets.
 Restructuring Charges.
  Gain (loss) on Investments, Net
  24




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##### Table of Contents



Interest Income, Net
  Other Income (expense), Net
  Income Tax (Provision) Benefit
  Equity Interest in Loss of Unconsolidated Joint Venture
  Minority Interest of Huawei in the Income of Consolidated Huawei-3Com Joint Venture
  Net Loss
  25




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##### Table of Contents



Seasonality
  LIQUIDITY AND CAPITAL RESOURCES
  Nine Months EndedFebruary 28,(In millions)
    
    2007
    
    
    2006Cash and equivalents, beginning of period
    
    $
    501.1
    
    
    $
    268.5Net cash provided by (used in) operating activities
    
    
    94.9
    
    
    
    (101.1
    )Net cash provided by investing activities
    
    
    272.1
    
    
    
    57.2Net cash (used in) provided by financing activities
    
    
    (32.5
    )
    
    
    7.0Other
    
    
    7.2
    
    
    
    0.2Cash and equivalents, end of period
    
    $
    842.8
    
    
    $
    231.8
     26




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##### Table of Contents



Amortization
    
    AmortizationDate
    
    Percentage
    
    AmountSeptember 28, 2007
    
    
    7.5
    %
    
    $
    32,250September 28, 2008
    
    
    15.0
    %
    
    
    64,500September 28, 2009
    
    
    15.0
    %
    
    
    64,500September 28, 2010
    
    
    20.0
    %
    
    
    86,000September 28, 2011
    
    
    20.0
    %
    
    
    86,000September 28, 2012
    
    
    22.5
    %
    
    
    96,750
   27




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##### Table of Contents



EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  28




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
     29




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
    
    implementation of additional processes to review sales contracts for revenue
recognition;
    
    implementation of additional automated controls for confirming elements of our revenue
recognition policy such as shipment terms;
    
    additional implementation and/or testing of entity level controls such as code of
ethics, whistleblower hotline and complaint procedures and delegation of authority policy;
and
    
    strengthening of information technology general controls for access control, security
control, network control and change management
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 The risks discussed below also include forward-looking statements
and our actual results may differ substantially from those discussed in these forward-looking
statements.
 Risks Related to Historical Losses, Financial Condition and Substantial Indebtedness
 We have incurred significant net losses in recent fiscal periods, including $4.8 million for the
three months ended February 28, 2007, $101 million for the year ended May 31, 2006, and $196
million for year ended May 31, 2005, and we may not be able to return to profitability.
  
    
    declining sales due to price competition and reduced incoming order rate;
    
    risk of increased excess and obsolete inventories;
    
    excess facilities;
    
    management changes;
    
    operating expenses that, as a percentage of sales, have exceeded our desired financial model; and
    
    disruptions resulting from our workforce reductions and employee attrition.
  We may not be able to compensate for lower sales or unexpected cash outlays with cost reductions
sufficient to generate positive net income or cash flow.
   30




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Efforts to reduce operating expenses have involved, and could involve further, workforce
reductions, closure of offices and sales or discontinuation of businesses, leading to reduced sales
and other disruptions in our business; if these efforts are not successful, we may experience
higher expenses than we desire.
  Our substantial debt could adversely affect our financial condition; and the related debt service
obligations may adversely affect our cash flow and ability to invest in and grow our businesses.
    
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund growth, working capital, capital expenditures and
other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
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The restrictions imposed by the terms of our senior secured loan facility could adversely impact
our ability to invest in and grow our H3C business.
  An adverse change in the interest rates for our borrowings could adversely affect our financial
condition.
  Because the terms of our senior secured loan, including the interest rate, are subject to change
based on market conditions during continued syndication, we may amend our loan, or be required to
amend it, in ways that could adversely affect our cash flow or operations.
  Risks Related to H3C Segment and Dependence Thereon
 We are significantly dependent on our H3C segment; if H3C is not successful we will likely
experience a material adverse impact to our business, business prospects and operating results.
   32




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Sales from our H3C segment, and therefore in China, constitute a material portion of our total
sales, and our business, financial condition and results of operations will to a significant degree
be subject to economic, political and social events in the PRC.
  Our H3C segment is dependent on Huawei Technologies in several material respects, including as an
important customer; should Huawei reduce its business with or operational assistance to H3C, our
business could be materially affected.
  Our recent acquisition of Huaweis 49% equity interest in H3C requires us to transition to full
ownership and execute on a global strategy to leverage the benefits of this acquisition, including
integration activities we determine to undertake; if we are not successful in these efforts, our
business will suffer.
   Risks Related to Personnel
 Our success is dependent on continuing to hire and retain qualified managers and other personnel,
including at our H3C segment; if we are not successful in attracting and retaining these personnel,
our business will suffer.
   33




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##### Table of Contents



Risks Related to Competition
 If we do not respond effectively to increased competition caused by industry volatility and
consolidation our business could be harmed.
  
    
    industry volatility resulting from rapid product development cycles;
    
    increasing price competition due to maturation of basic networking technologies;
    
    industry consolidation resulting in competitors with greater financial, marketing, and technical resources; and
    
    the presence of existing competitors with greater financial resources together with the
potential emergence of new competitors with lower cost structures and more competitive
offerings.
 Our competition with Huawei in the enterprise networking market could have a material adverse
effect on our sales and our results of operations; and after a contractual non-compete period
expires, Huawei can increase its level of competition, which would likely materially and adversely
affect our business.
  Risks Related to Business and Technology Strategy
 We may not be successful at identifying and responding to new and emerging market and product
opportunities, or at responding quickly enough to technologies or markets that are in decline.
  
    
    identify new market and product opportunities;
    
    predict which technologies and markets will see declining demand;
    
    develop and introduce new products and solutions in a timely manner;
    
    gain market acceptance of new products and solutions, particularly in targeted emerging markets; and
    
    rapidly and efficiently transition our customers from older to newer enterprise networking technologies.
  
    
    there is a delay in introducing new products;
    
    we lose certain channels of distribution or key partners;
    
    our products do not satisfy customers in terms of features, functionality or quality; or
    
    our products cost more to produce than we expect.
  34




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We expect to utilize strategic relationships and other alliances as key elements in our strategy.
If we are not successful in forming desired ventures and alliances or if such ventures and
alliances are not successful, our ability to achieve our growth and profitability goals could be
adversely affected.
   Our strategy of outsourcing functions and operations may fail to reduce cost and may disrupt our
operations.
   Our reliance on industry standards, technological change in the marketplace, and new product
initiatives may cause our sales to fluctuate or decline.
  
    
    the convergence of technologies, such as voice, data and video on single, secure
networks;
    
    the timely adoption and market acceptance of industry standards, and timely resolution
of conflicting U.S. and international industry standards; and
    
    our ability to influence the development of emerging industry standards and to introduce
new and enhanced products that are compatible with such standards.
  We focus on enterprise networking, and our results of operations may fluctuate based on factors
related entirely to conditions in this market.
  35




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##### Table of Contents



Risks Related to Operations and Distribution Channels
 A significant portion of our SCN sales is derived from a small number of distributors. If any of
these partners reduces its business with us, our business could be seriously harmed.
  We depend on distributors who maintain inventories of our products. If the distributors reduce
their inventories of our products, our sales could be adversely affected.
  If we are unable to successfully develop relationships with system integrators, service providers,
and enterprise VARs, our sales may be negatively affected.
  We may pursue acquisitions of other companies that, if not successful, could adversely affect our
business, financial position and results of operations.
  We may be unable to manage our supply chain successfully, which would adversely impact our sales,
gross margin and profitability.
  
    
    in the past, some key components have had limited availability;
    
    as integration of networking features on a reduced number of computer chips continues,
we are increasingly facing competition from parties who are our suppliers;
    
    our ability to accurately forecast demand is diminished;
    
    our reliance on, and long-term arrangements with, third-party manufacturers places much
of the supply chain process out of our direct control and heightens the need for accurate
forecasting and reduces our ability to transition quickly to alternative supply chain
strategies; and
    
    we may experience disruptions to our logistics.
 36




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##### Table of Contents



Our strategies to outsource the majority of our manufacturing requirements to contract
manufacturers may not result in meeting our cost, quality or performance standards. The inability
of any contract manufacturer to meet our cost, quality or performance standards could adversely
affect our sales and overall results from operations.
   If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, including the management of our H3C segment, our ability to manage and grow our business
will be negatively affected.
  If we fail to maintain an effective system of internal control over financial reporting that
includes H3C, we may not be able to accurately report our financial results or prevent fraud.
  37




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##### Table of Contents



Risks Related to the Peoples Republic of China
 Chinas governmental and regulatory reforms and changing economic environment may impact our
ability to do business in China.
  
    
    the promulgation of new laws and regulations and the interpretation of those laws and regulations;
    
    enforcement and application of rules and regulations by the Chinese government;
    
    the introduction of measures to control inflation or stimulate growth; or
    
    any actions that limit our ability to develop, manufacture, import or sell our products
in China, or to finance and operate our business in China.
  Uncertainties with respect to the Chinese legal system may adversely affect us.
  If PRC tax benefits available to H3C are reduced or repealed, our business could suffer.
  38




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##### Table of Contents



H3C is subject to restrictions on paying dividends and making other payments to us.
  We are subject to risks relating to currency rate fluctuations and exchange controls and we do not
hedge this risk in China.
  Risks Related to Intellectual Property
 If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   We may need to engage in complex and costly litigation in order to protect, maintain or enforce our
intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong
as the rights we enjoy in the U.S.
  39




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##### Table of Contents



We may not be able to defend ourselves successfully against claims that we are infringing the
intellectual property rights of others.
   OSN, our new open source strategy, subjects us to additional intellectual property risks, such as
less control over
development of certain technology that forms a part of this strategy and a higher likelihood of
litigation.
  40




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##### Table of Contents



Risks Related to the Trading Market
 Fluctuations in our operating results and other factors may contribute to volatility in the market
price of our stock.
  
    
    fluctuations in our quarterly results of operations and cash flow;
    
    changes in our cash and equivalents and short term investment balances;
    
    variations between our actual financial results and published analysts expectations; and
    
    announcements by our competitors.
  Risks Related to Anti-takeover Mechanisms
 We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate
our stockholders ability to sell their shares for a premium in a change of control transaction.
  
    
    no cumulative voting for directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
    
    control by our board of directors of the size of our board of directors and our classified board of directors;
    
    prohibition on the ability of stockholders to call special meetings of stockholders;
    
    the ability of our board of directors to alter our bylaws without stockholder approval;
    
    prohibition on the ability of stockholders to take actions by written consent;
    
    advance notice requirements for nominations of candidates for election to our board of
directors or for proposingmatters that can be acted upon by our stockholders at stockholder meetings;
    
    certain amendments to our certificate of incorporation and bylaws require the approval
of holders of at least 66 2/3 percent of the voting power of all outstanding stock; and
    
    the ability of our board of directors to issue, without stockholder approval, preferred
stock with rights that are senior to those of our common stock.
  41




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    DollarShares Purchased as
    
    
    that May Yet BeTotal Number
    
    
    Average
    
    
    Part of Publicly
    
    
    Value of Sharesof Shares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    Programs(1)
    
    
    Plans or ProgramsDecember 2, 2006 through December 29, 2006
    
    
    1,983
    (2)
    
    $
    4.14
    
    
    
    
    
    
    $
    0December 30, 2006 through January 26, 2007
    
    
    3,245
    (2)
    
    
    4.14
    
    
    
    
    
    
    $
    0January 27, 2007 through March 2, 2007
    
    
    14,546
    (2)
    
    
    3.99
    
    
    
    
    
    
    $
    0Total
    
    
    19,774
    
    
    $
    4.03
    
    
    
    
    
    
    $
    0
 
 (1)
    
    On March 23, 2005, our Board of Directors approved a new stock repurchase program providing
for expenditures of up to $100.0 million through March 31, 2007, provided that all repurchases
are pre-approved by the Audit and Finance Committee of the Board of Directors. We did not
repurchase shares of our common stock pursuant to this authorization. As this authorization
expired on March 31, 2007, this program has terminated. Our last open market purchase was
made in August 2004 for 10,700,041 shares.(2)
    
    Represents shares returned to us to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 N/A
 
 ITEM 6. EXHIBITS
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    Filing
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Date
    
    Herewith2.1
    
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    
    Asset Purchase Agreement by and between the
Registrant and UTStarcom, Inc. dated March
4, 2003
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    6/9/032.4
    
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.5
    
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 2005
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    3/30/062.6
    
    

Stock Purchase Agreement by and between Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 2006
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/27/06
 42




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##### Table of Contents



Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    Filing
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Date
    
    Herewith3.1
    
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate of
Merger
    
    10-Q
    
    002-92053
    
    
    3.4
    
    
    10/8/993.2
    
    
    Registrants Bylaws, as amended on March 
23, 2005
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    3/28/053.3
    
    
    Certificate of Designation of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
    
    10-Q
    
    000-12867
    
    
    3.6
    
    
    10/11/014.1
    
    
    Third Amended and Restated Preferred Shares
Rights Agreement, dated as of November 4,
2002
    
    8-A/A
    
    000-12867
    
    
    4.1
    
    
    11/27/0210.1
    
    
    Commitment Letter, dated as of December 20,
2006, by and between 3Com Technologies and
Goldman Sachs Credit Partners L.P.
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 43




---



##### Table of Contents



3Com Corporation
(Registrant)Dated:  April 9, 2007
    By:
    /s/  DONALD M. HALSTED, IIIDonald M. Halsted, IIIExecutive Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer and a duly authorized
officer of the registrant) 44




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    Filing
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Date
    
    Herewith2.1
    
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    
    Asset Purchase Agreement by and between the
Registrant and UTStarcom, Inc. dated March
4, 2003
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    6/9/032.4
    
    
    Agreement and Plan of Merger, dated
December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.
    
    8-K
    
    000-12867
    
    
    2.1
    
    
    12/16/042.5
    
    
    Securities Purchase Agreement by and among
3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 2005
    
    8-K/A
    
    000-12867
    
    
    2.1
    
    
    3/30/062.6
    
    
    Stock Purchase Agreement by and between
Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 2006
    
    8-K
    
    000-12867
    
    
    10.1
    
    
    12/27/063.1
    
    
    Corrected Certificate of Merger filed to
correct an error in the Certificate of
Merger
    
    10-Q
    
    002-92053
    
    
    3.4
    
    
    10/8/993.2
    
    
    Registrants Bylaws, as amended on March 
23, 2005
    
    8-K
    
    000-12867
    
    
    3.1
    
    
    3/28/053.3
    
    
    Certificate of Designation of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
    
    10-Q
    
    000-12867
    
    
    3.6
    
    
    10/11/014.1
    
    
    Third Amended and Restated Preferred Shares
Rights Agreement, dated as of November 4,
2002
    
    8-A/A
    
    000-12867
    
    
    4.1
    
    
    11/27/0210.1
    
    
    Commitment Letter, dated as of December 20,
2006, by and between 3Com Technologies and
Goldman Sachs Credit Partners L.P.
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    Indicates a management contract or compensatory plan 45