##### 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 December 1, 2006
 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 Drive 
Marlborough, 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 DECEMBER 1, 2006
TABLE OF CONTENTS
  
 PagePART I.
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Condensed
Consolidated Statements of Operations Three and Six Months Ended November 30, 2006 and 2005
    
    
    1Condensed
Consolidated Balance Sheets November 30, and May 31, 2006
    
    
    2Condensed
Consolidated Statements of Cash Flows Six Months Ended November 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    26PART II.
    
    OTHER INFORMATION
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 4.
    
    Submission of
Matters to a Vote of Security Holders
    
    
    37Item 6.
    
    Exhibits
    
    
    38SIGNATURES
    
    
    39EXHIBITS
    
    
    40Ex-10.1 Fourth Amendment to Lease dated as of December 12, 2005Ex-10.2 Fifth Amendment to Lease dated as of October 27, 2006Ex-10.3 3Com Corporation Section 16 Officer Severance PlanEx-31.1 Certification of Principal Executive OfficerEx-31.2 Certification of Principal Financial OfficerEx-32.1 Certification of Chief Executive Officer and Chief Financial Officer




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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
    
    
    Six Months EndedNovember 30,
    
    
    November 30,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    332,976
    
    
    $
    184,332
    
    
    $
    633,120
    
    
    $
    361,968Cost of sales (including stock-based compensation
expense of $382 and $65 for the three months ended
November 30, 2006 and 2005, respectively, and $701 and
$74 for the six months ended November 30, 2006 and 2005,
respectively)
    
    
    182,825
    
    
    
    110,017
    
    
    
    346,540
    
    
    
    217,587Gross profit
    
    
    150,151
    
    
    
    74,315
    
    
    
    286,580
    
    
    
    144,381Operating expenses:Sales and marketing (including stock-based
compensation expense of $1,567 and $1,217 for the
three months ended November 30, 2006 and 2005,
respectively, and $2,805 and $1,283 for the six
months ended November 30, 2006 and 2005,
respectively)
    
    
    76,188
    
    
    
    67,694
    
    
    
    153,310
    
    
    
    137,812Research and development (including stock-based
compensation expense of $1,546 and $2,140 for the
three months ended November 30, 2006 and 2005,
respectively, and $2,714 and $2,170 for the six
months ended November 30, 2006 and 2005,
respectively)
    
    
    48,151
    
    
    
    23,225
    
    
    
    95,944
    
    
    
    44,422General and administrative (including stock-based
compensation expense of $3,454 and $1,675 for the
three months ended November 30, 2006 and 2005,
respectively, and $4,017 and $2,205 for the six
months ended November 30, 2006 and 2005,
respectively)
    
    
    22,341
    
    
    
    18,292
    
    
    
    42,617
    
    
    
    36,505Amortization and write-down of intangible assets
    
    
    12,221
    
    
    
    3,862
    
    
    
    24,402
    
    
    
    7,724Restructuring charges
    
    
    630
    
    
    
    3,468
    
    
    
    555
    
    
    
    6,829Total operating expenses
    
    
    159,531
    
    
    
    116,541
    
    
    
    316,828
    
    
    
    233,292Operating loss
    
    
    (9,380
    )
    
    
    (42,226
    )
    
    
    (30,248
    )
    
    
    (88,911
    )(Loss) Gain on investments, net
    
    
    (911
    )
    
    
    3,511
    
    
    
    1,381
    
    
    
    3,097Interest income, net
    
    
    11,447
    
    
    
    6,630
    
    
    
    21,537
    
    
    
    12,466Other income, net
    
    
    12,616
    
    
    
    487
    
    
    
    17,334
    
    
    
    640Income (loss) before income taxes, equity interest in
loss of unconsolidated joint venture and minority
interest
    
    
    13,772
    
    
    
    (31,598
    )
    
    
    10,004
    
    
    
    (72,708
    )Income tax (provisions) benefit
    
    
    (2,315
    )
    
    
    21,893
    
    
    
    (3,673
    )
    
    
    20,978Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    (995
    )
    
    
    
    
    
    
    (1,011
    )Minority interest in income of consolidated joint venture
    
    
    (14,973
    )
    
    
    
    
    
    
    (23,915
    )
    
    
    Net loss
    
    $
    (3,516
    )
    
    $
    (10,700
    )
    
    $
    (17,584
    )
    
    $
    (52,741
    )Basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    (0.14
    )Shares used in computing per share amounts:Basic and diluted
    
    
    393,352
    
    
    
    385,442
    
    
    
    392,619
    
    
    
    384,601
  1




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##### Table of Contents



3COM CORPORATION  CONDENSED CONSOLIDATED BALANCE SHEETS
 November 30,
    
    
    May 31,(In thousands, except per share data)
    
    2006
    
    
    2006ASSETSCurrent assets:Cash and equivalents
    
    $
    529,180
    
    
    $
    501,097Short-term investments
    
    
    339,358
    
    
    
    363,250Notes receivable
    
    
    62,359
    
    
    
    63,224Accounts receivable, less allowance for
doubtful accounts of $22,424 and $16,422,
respectively
    
    
    155,181
    
    
    
    115,120Inventories
    
    
    142,671
    
    
    
    148,819Other current assets
    
    
    57,715
    
    
    
    57,835Total current assets
    
    
    1,286,464
    
    
    
    1,249,345Property and equipment, less accumulated
depreciation and amortization of $221,051 and
$232,944, respectively
    
    
    78,868
    
    
    
    89,109Goodwill
    
    
    354,259
    
    
    
    354,259Intangible assets, net
    
    
    87,344
    
    
    
    111,845Deposits and other assets
    
    
    24,877
    
    
    
    56,803Total assets
    
    $
    1,831,812
    
    
    $
    1,861,361LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    122,166
    
    
    $
    153,245Accrued liabilities and other
    
    
    341,287
    
    
    
    318,036Total current liabilities
    
    
    463,453
    
    
    
    471,281Deferred revenue and long-term obligations
    
    
    2,685
    
    
    
    13,788Minority interest
    
    
    157,061
    
    
    
    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: 397,302
and 393,442, respectively
    
    
    2,311,303
    
    
    
    2,300,396Unamortized stock-based compensation
    
    
    
    
    
    
    (7,565
    )Retained deficit
    
    
    (1,105,402
    )
    
    
    (1,087,512
    )Accumulated other comprehensive income (loss)
    
    
    2,712
    
    
    
    (2,957
    )Total stockholders equity
    
    
    1,208,613
    
    
    
    1,202,362Total liabilities and stockholders equity
    
    $
    1,831,812
    
    
    $
    1,861,361
  2




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##### Table of Contents



3COM CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedNovember 30,(In thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (17,584
    )
    
    $
    (52,741
    )Adjustments to reconcile net loss to cash used in
operating activities:Depreciation and amortization
    
    
    39,789
    
    
    
    21,642Stock-based compensation charges
    
    
    10,237
    
    
    
    5,732Gain on property and equipment disposals
    
    
    (10,920
    )
    
    
    (252
    )(Gain) loss on investments, net
    
    
    (1,801
    )
    
    
    540Minority interest in income of consolidated joint venture
    
    
    23,915
    
    
    
    Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    1,011Deferred income taxes
    
    
    (5,907
    )
    
    
    (214
    )Changes in assets and liabilities:Accounts receivable
    
    
    (53,149
    )
    
    
    (31,366
    )Inventories
    
    
    3,349
    
    
    
    (6,846
    )Other assets
    
    
    19,925
    
    
    
    3,962Accounts payable
    
    
    (30,897
    )
    
    
    (2,103
    )Other liabilities
    
    
    18,035
    
    
    
    (22,057
    )Net cash used in operating activities
    
    
    (5,008
    )
    
    
    (82,692
    )Cash flows from investing activities:Purchases of investments
    
    
    (224,999
    )
    
    
    (250,458
    )Proceeds from maturities and sales of investments
    
    
    269,932
    
    
    
    319,724Purchases of property and equipment
    
    
    (16,118
    )
    
    
    (7,960
    )Proceeds from sale of property and equipment
    
    
    33,108
    
    
    
    Net cash provided by investing activities
    
    
    61,923
    
    
    
    61,306Cash flows from financing activities:Issuances of common stock
    
    
    12,635
    
    
    
    6,930Repurchases of common stock
    
    
    (4,708
    )
    
    
    (1,267
    )Dividend paid to minority interest shareholder
    
    
    (40,785
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (32,858
    )
    
    
    5,663Effect of exchange rate changes on cash and equivalents
    
    
    4,026
    
    
    
    (478
    )Net change in cash and equivalents during period
    
    
    28,083
    
    
    
    (16,201
    )Cash and equivalents, beginning of period
    
    
    501,097
    
    
    
    268,535Cash and equivalents, end of period
    
    $
    529,180
    
    
    $
    252,334
  3




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##### Table of Contents



3COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    BASIS OF PRESENTATION
   Recently issued accounting pronouncements
   NOTE 2.
    
    STOCK-BASED COMPENSATION
  4




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended(In thousands, except per share data)
    
    November 30, 2006
    
    
    November 30, 2006Cost of sales
    
    $
    269
    
    
    $
    582Sales and marketing
    
    
    942
    
    
    
    1,981Research and development
    
    
    529
    
    
    
    1,113General and administrative
    
    
    1,292
    
    
    
    1,976Incremental share-based compensation
effect of SFAS No. 123R on net loss
    
    $
    3,032
    
    
    $
    5,652Incremental share-based compensation
effect of SFAS No. 123R on basic
and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    5




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended(In thousands, except per share amounts)
    
    November 30, 2005
    
    
    November 30, 2005Net loss as reported
    
    $
    (10,700
    )
    
    $
    (52,741
    )Add: Stock-based compensation included in
reported net loss
    
    
    5,097
    
    
    
    5,732Deduct: Total stock-based compensation
determined under the fair value-based
method, net of related tax effects
    
    
    (4,688
    )
    
    
    (8,332
    )Adjusted net loss
    
    $
    (10,291
    )
    
    $
    (55,341
    )Net loss per share-basic and diluted:As reported
    
    $
    (0.03
    )
    
    $
    (0.14
    )Adjusted
    
    $
    (0.03
    )
    
    $
    (0.14
    )
   Three Months Ended
    
    Six Month EndedNovember 30,
    
    November 30,2006
    
    20051
    
    2006
    
    20051Employee stock options:Volatility
    
    
    42.7
    %
    
    
    43.0
    %
    
    
    42.7
    %
    
    
    44.9
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.2
    %
    
    
    4.7
    %
    
    
    4.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0Fair value per share
    
    $
    1.67
    
    
    $
    1.47
    
    
    $
    1.67
    
    
    $
    1.43Employee Stock Purchase Plan:Volatility
    
    
    49.2
    %
    
    
    35.2
    %
    
    
    49.2
    %
    
    
    35.2
    %Risk-free interest rate
    
    
    5.1
    %
    
    
    4.1
    %
    
    
    5.1
    %
    
    
    4.1
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Fair value per share
    
    $
    1.27
    
    
    $
    1.05
    
    
    $
    1.27
    
    
    $
    1.05
 
 1  Assumptions used in the calculation of fair value according to the provisions of SFAS No.123.  Number of
    
    
    Weighted averageShares
    
    
    Exercise PriceOutstanding June 1, 2006
    
    
    61,421
    
    
    $
    5.71Granted
    
    
    22,864
    
    
    
    4.75Exercised
    
    
    (1,877
    )
    
    
    3.31Cancelled
    
    
    (18,229
    )
    
    
    5.43Outstanding November 30, 2006
    
    
    64,179
    
    
    $
    5.51Exercisable
    
    
    30,547
    
    
    $
    6.73Weighted average grant-date
fair value of options granted
    
    
    
    
    
    $
    1.67
 6




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##### Table of Contents



Weighted AverageWeighted Average
    
    Remaining
    
    Aggregate IntrinsicNumber of
    
    Grant-Date Fair
    
    Contractual Life
    
    Value (inShares
    
    Value
    
    (in years)
    
    thousands)Vested and expected to vest at November 30, 2006
    
    
    49,957,548
    
    
    $
    5.79
    
    
    
    4.85
    
    
    $
    13,406
  Number of
    
    
    Weighted averageShares (unvested)
    
    
    Grant-Date Fair ValueOutstanding June 1, 2006
    
    
    2,117
    
    
    $
    4.07Granted
    
    
    2,370
    
    
    
    4.45Vested
    
    
    (520
    )
    
    
    3.93Forfeited
    
    
    (887
    )
    
    
    4.34Outstanding November 30, 2006
    
    
    3,080
    
    
    $
    4.31
   Weighted AverageWeighted Average
    
    
    Remaining
    
    
    Aggregate IntrinsicNumber of
    
    
    Grant Date Fair
    
    
    Contractual Term
    
    
    Value (inShares (unvested)
    
    
    Value
    
    
    (Years)
    
    
    thousands)Outstanding June 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    3,533
    
    
    
    4.45Vested
    
    
    
    
    
    
    Forfeited
    
    
    (48
    )
    
    
    4.45Outstanding November 30, 2006
    
    
    3,485
    
    
    $
    4.45
    
    
    $
    1.37
    
    
    $
    14,184
  NOTE 3.
    
    ACQUISITIONS
  7




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##### Table of Contents



Three Months Ended
    
    Six Months Ended(in millions, except per share amounts)
    
    November 30, 2005
    
    November 30, 2005Net sales
    
    $
    282.5
    
    
    $
    542.1Net loss
    
    
    (11.3
    )
    
    
    (53.9
    )Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.14
    )
 NOTE 4.
    
    RESTRUCTURING CHARGES
   8




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##### Table of Contents




    
    further reductions in workforce; and
    
    continued efforts to consolidate and dispose of excess facilities.
   Fiscal 2007 Actions
  Employee
    
    
    Facilities-related
    
    
    Other RestructuringSeparation Expense
    
    
    Sales
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Provisions (benefits)
    
    
    9,195
    
    
    
    (7,594
    )
    
    
    195
    
    
    
    1,796Payments and non-cash charges
    
    
    (6,402
    )
    
    
    7,809
    
    
    
    (195
    )
    
    
    1,212Balance as of November 30, 2006
    
    $
    2,793
    
    
    $
    215
    
    
    $
    
    
    
    $
    3,008
    Fiscal 2006 Actions
  Employee
    
    
    Facilities-relatedSeparation Expense
    
    
    Charges
    
    
    TotalBalance as of June 1, 2006
    
    $
    4,877
    
    
    $
    891
    
    
    $
    5,768Provisions (benefits)
    
    
    (863
    )
    
    
    (37
    )
    
    
    (900
    )Payments and non-cash charges
    
    
    (3,157
    )
    
    
    (394
    )
    
    
    (3,551
    )Balance as of November 30, 2006
    
    $
    857
    
    
    $
    460
    
    
    $
    1,317
 9




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##### Table of Contents



Fiscal 2005 Actions
  Employee
    
    
    Long-term Asset
    
    
    Facilities-related
    
    
    Other RestructuringSeparation Expense
    
    
    Write-downs
    
    
    Charges
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    1,843
    
    
    $
    255
    
    
    $
    
    
    
    $
    13
    
    
    $
    2,111Provisions (benefits)
    
    
    (1,426
    )
    
    
    (255
    )
    
    
    21
    
    
    
    (13
    )
    
    
    (1,673
    )Payments and non-cash charges
    
    
    (145
    )
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (166
    )Balance as of November 30, 2006
    
    $
    272
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    272
   Fiscal 2001, 2002, 2003 and 2004 Actions
  Facilities-related
    
    
    Other RestructuringCharges
    
    
    Costs
    
    
    TotalBalance as of June 1, 2006
    
    $
    5,641
    
    
    $
    5
    
    
    $
    5,646Provisions
    
    
    1,066
    
    
    
    
    
    
    
    1,066Payments and non-cash charges
    
    
    (1,784
    )
    
    
    (5
    )
    
    
    (1,789
    )Balance as of November 30, 2006
    
    $
    4,923
    
    
    $
    
    
    
    $
    4,923
  NOTE 5.
    
    INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
   10




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##### Table of Contents



Three Months ended
    
    Six Months Ended(in thousands):
    
    September 30, 2005
    
    September 30, 2005Statement of Operations:Sales
    
    $
    111,177
    
    
    $
    206,949Gross profit
    
    
    47,187
    
    
    
    87,637Net loss
    
    
    (2,030
    )
    
    
    (2,063
    )
   NOTE 6.
    
    COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (3,516
    )
    
    $
    (10,700
    )
    
    $
    (17,584
    )
    
    $
    (52,741
    )Other comprehensive income:Net unrealized gain (loss) on investments
    
    
    965
    
    
    
    (760
    )
    
    
    2,004
    
    
    
    (341
    )Change in accumulated translation
adjustments
    
    
    2,985
    
    
    
    (932
    )
    
    
    3,667
    
    
    
    (496
    )Total comprehensive income (loss)
    
    $
    434
    
    
    $
    (12,392
    )
    
    $
    (11,913
    )
    
    $
    (53,578
    )
 NOTE 7.
    
    NET LOSS PER SHARE
  NOTE 8.
    
    INVENTORIES
  November 30,
    
    
    May 31,2006
    
    
    2006Finished goods
    
    $
    69,591
    
    
    $
    69,386Work-in-process
    
    
    10,571
    
    
    
    12,777Raw materials
    
    
    62,509
    
    
    
    66,656Total
    
    $
    142,671
    
    
    $
    148,819
 11




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##### Table of Contents



NOTE 9.
    
    INTANGIBLE ASSETS, NET
  November 30, 2006
    
    
    May 31, 2006Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetExisting technology
    
    $
    203,946
    
    
    $
    (134,496
    )
    
    $
    69,450
    
    
    $
    203,946
    
    
    $
    (114,235
    )
    
    $
    89,711Maintenance contracts
    
    
    19,000
    
    
    
    (5,806
    )
    
    
    13,194
    
    
    
    19,000
    
    
    
    (4,222
    )
    
    
    14,778Other
    
    
    15,301
    
    
    
    (10,601
    )
    
    
    4,700
    
    
    
    15,301
    
    
    
    (7,945
    )
    
    
    7,356Total
    
    $
    238,247
    
    
    $
    (150,903
    )
    
    $
    87,344
    
    
    $
    238,247
    
    
    $
    (126,402
    )
    
    $
    111,845
 NOTE 10.
    
    ACCRUED WARRANTY
   Six Months EndedNovember 30,2006
    
    
    2005Accrued warranty, beginning of period
    
    $
    41,791
    
    
    $
    41,782Cost of warranty claims processed during the period
    
    
    (26,481
    )
    
    
    (15,368
    )Provision for warranties related to products sold during the period
    
    
    23,671
    
    
    
    14,733Accrued warranty, end of period
    
    $
    38,981
    
    
    $
    41,147
 NOTE 11.
    
    SEGMENT INFORMATION
     12




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##### Table of Contents



Three Months Ended November 30, 2006(in thousands)
    
    SCN
    
    H3C
    
    Eliminations1
    
    TotalRevenue
    
    $
    166,525
    
    
    $
    190,291
    
    
    $
    (23,840
    )
    
    $
    332,976Gross profit
    
    
    59,436
    
    
    
    90,715
    
    
    
    
    
    
    
    150,151Sales and marketing,
research and
development, and
general and
administrative
    
    
    85,629
    
    
    
    61,051
    
    
    
    
    
    
    
    146,680Restructuring,
amortization, and
in-process
research and
development
    
    
    4,221
    
    
    
    8,630
    
    
    
    
    
    
    
    12,851Operating income (loss)
    
    
    (30,414
    )
    
    
    21,034
    
    
    
    
    
    
    
    (9,380
    )Net income (loss)
    
    $
    (19,103
    )
    
    $
    30,560
    
    
    $
    (14,973
    )
    
    $
    (3,516
    )Assets
    
    $
    1,442,737
    
    
    $
    424,316
    
    
    $
    (35,241
    )
    
    $
    1,831,812
 
 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. Six Months Ended November 30, 2006(in thousands)
    
    SCN
    
    H3C
    
    Eliminations1
    
    TotalRevenue
    
    $
    322,348
    
    
    $
    360,259
    
    
    $
    (49,487
    )
    
    $
    633,120Gross profit
    
    
    115,781
    
    
    
    170,799
    
    
    
    
    
    
    
    286,580Sales and marketing,
research and
development, and
general and
administrative
    
    
    171,032
    
    
    
    120,839
    
    
    
    
    
    
    
    291,871Restructuring,
amortization, and
in-process
research and
development
    
    
    7,737
    
    
    
    17,220
    
    
    
    
    
    
    
    24,957Operating income (loss)
    
    
    (62,988
    )
    
    
    32,740
    
    
    
    
    
    
    
    (30,248
    )Net income (loss)
    
    $
    (42,478
    )
    
    $
    48,809
    
    
    $
    (23,915
    )
    
    $
    (17,584
    )Assets
    
    $
    1,442,737
    
    
    $
    424,316
    
    
    $
    (35,241
    )
    
    $
    1,831,812
 
 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 November 30,
    
    
    Six Months Ended November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Networking
    
    $
    272,852
    
    
    
    82
    %
    
    $
    131,682
    
    
    
    71
    %
    
    $
    516,885
    
    
    
    82
    %
    
    $
    258,736
    
    
    
    72
    %Security
    
    
    31,582
    
    
    
    9
    %
    
    
    20,922
    
    
    
    11
    %
    
    
    57,044
    
    
    
    9
    %
    
    
    37,798
    
    
    
    10
    %Voice
    
    
    16,549
    
    
    
    5
    %
    
    
    14,202
    
    
    
    8
    %
    
    
    32,498
    
    
    
    5
    %
    
    
    29,610
    
    
    
    8
    %Services
    
    
    8,568
    
    
    
    3
    %
    
    
    8,754
    
    
    
    5
    %
    
    
    16,919
    
    
    
    3
    %
    
    
    16,589
    
    
    
    5
    %Connectivity Products
    
    
    3,425
    
    
    
    1
    %
    
    
    8,772
    
    
    
    5
    %
    
    
    9,774
    
    
    
    1
    %
    
    
    19,235
    
    
    
    5
    %Total
    
    $
    332,976
    
    
    
    
    
    
    $
    184,332
    
    
    
    
    
    
    $
    633,120
    
    
    
    
    
    
    $
    361,968
  13




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NOTE 12.
    
    GEOGRAPHIC INFORMATION
  Three Months Ended November 30,
    
    
    Six Months Ended November 30,2006
    
    
    2005
    
    
    2006
    
    
    2005North America
    
    $
    55,159
    
    
    $
    61,521
    
    
    $
    113,582
    
    
    $
    130,145Latin and South America
    
    
    20,296
    
    
    
    19,487
    
    
    
    35,615
    
    
    
    33,604Europe, Middle East, and Africa
    
    
    70,933
    
    
    
    81,196
    
    
    
    140,467
    
    
    
    156,104Asia Pacific (except China)
    
    
    28,312
    
    
    
    22,128
    
    
    
    52,671
    
    
    
    42,115China
    
    
    158,276
    
    
    
    
    
    
    
    290,785
    
    
    
    Total
    
    $
    332,976
    
    
    $
    184,332
    
    
    $
    633,120
    
    
    $
    361,968
  NOTE 13.
    
    LITIGATION
  In re Initial Public Offering Securities Litigation, Brian Levey vs.
TippingPoint Technologies, Inc., et al.
 14




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##### Table of Contents



NOTE 14.
    
    SUBSEQUENT EVENT
     15




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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;
    
    Services; and
    
    Legacy Connectivity Products.
  
    
    forming the Huawei-3Com joint venture or H3C;
    
    acquisition of majority ownership of H3C and agreeing to purchase
Huaweis remaining 49% ownership interest in H3C;
    
    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
   16




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##### Table of Contents



Summary of Three Months Ended November 30, 2006 Financial Performance
 
    
    Our sales in the three months ended November 30, 2006 were $333.0 million, compared to
sales of $184.3 million in the three months ended November 30, 2005, an increase of $148.7
million, or 80.7 percent.
    
    Our gross margin improved to 45.1 percent in the three months ended November 30, 2006
from 40.3 percent in the three months ended November 30, 2005.
    
    Our operating expenses in the three months ended November 30, 2006 were $159.5 million,
compared to $116.5 million in the three months ended November 30, 2005, a net increase of
$43.0 million, or 36.9 percent.
    
    Our net loss in the three months ended November 30, 2006 was $3.5 million, compared to a
net loss of $10.7 million in the three months ended November 30, 2005. In the three months
ended November 30, 2006 net loss in our SCN segment was $19.1 million and net income was
$30.6 million in our H3C segment before reflecting the minority interest to Huawei of $15.0
million.
    
    Our balance sheet remained strong with cash and equivalents and short-term investment
balances of $868.5 million as of November 30, 2006, compared to cash and equivalents and
short-term investment balances of $864.3 million at the end of fiscal 2006.
 Summary of Six Months Ended November 30, 2006 Financial Performance
 
    
    Our sales for the first six months ended November 30, 2006 were $633.1 million, compared
to sales of $362.0 million in the same period in fiscal 2006, an increase of $271.1
million, or 74.9 percent.
    
    Our gross margin improved to 45.3 percent in the first six months of fiscal 2007 from
39.9 percent in the same period in fiscal 2006.
    
    Our operating expenses for the six months ended November 30, 2006 were $316.8 million,
compared to $233.3 million in the six months ended November 30, 2005, a net increase of
$83.5 million, or 35.8 percent.
    
    Our net loss for the six months ended November 30, 2006 was $17.6 million, compared to a
net loss of $52.7 million in the six months ended November 30, 2005. For the six months
ended November 30, 2006, net loss in our SCN segment was $42.5 million and net income was
$48.8 million in our H3C segment before reflecting the minority interest to Huawei of $23.9
million.
 Business Environment and Future Trends
  17




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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;
    
    Leveraging the best-of-breed characteristics from each segment in services, supply-chain, and
support models; and
    
    Integrating certain Information Technology (IT) functions to enable seamless go-to-market models.
  18




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##### Table of Contents




    
    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 time that the acquisition closes, which will continue
until such finished goods are sold;
    
    Reduced gross margins in our H3C operating segment for 49 percent of
the mark-up to fair-market value of all deferred revenue at the time
that the acquisition closes;
    
    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.
   CRITICAL ACCOUNTING POLICIES
  Stock-based Compensation
    19




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##### Table of Contents



RESULTS OF OPERATIONS  THREE AND SIX MONTHS ENDED NOVEMBER 30, 2006 AND 2005
  Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302006
    
    2005
    
    2006
    
    2005Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    54.9
    
    
    
    59.7
    
    
    
    54.7
    
    
    
    60.1Gross profit margin
    
    
    45.1
    
    
    
    40.3
    
    
    
    45.3
    
    
    
    39.9Operating expenses:Sales and marketing
    
    
    22.9
    
    
    
    36.7
    
    
    
    24.2
    
    
    
    38.1Research and development
    
    
    14.4
    
    
    
    12.6
    
    
    
    15.2
    
    
    
    12.3General and administrative
    
    
    6.7
    
    
    
    9.9
    
    
    
    6.7
    
    
    
    10.1Amortization and write-down of intangible assets
    
    
    3.7
    
    
    
    2.1
    
    
    
    3.9
    
    
    
    2.1Restructuring charges
    
    
    0.2
    
    
    
    1.9
    
    
    
    0.1
    
    
    
    1.9Total operating expenses
    
    
    47.9
    
    
    
    63.2
    
    
    
    50.1
    
    
    
    64.5Operating loss
    
    
    (2.8
    )
    
    
    (22.9
    )
    
    
    (4.7
    )
    
    
    (24.6
    )Gain (loss) on investments, net
    
    
    (0.3
    )
    
    
    1.9
    
    
    
    0.2
    
    
    
    0.9Interest income, net
    
    
    3.4
    
    
    
    3.6
    
    
    
    3.4
    
    
    
    3.4Other income, net
    
    
    3.8
    
    
    
    0.3
    
    
    
    2.7
    
    
    
    0.2Income (Loss) before income taxes and equity interest
    
    
    4.1
    
    
    
    (17.1
    )
    
    
    1.5
    
    
    
    (20.1
    )Income tax provision
    
    
    (0.7
    )
    
    
    11.9
    
    
    
    (0.6
    )
    
    
    5.8Equity interest in loss of unconsolidated joint venture
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.3
    )Minority interest in income of consolidated joint venture
    
    
    (4.5
    )
    
    
    
    
    
    
    (3.8
    )
    
    
    Net loss
    
    
    (1.1
    )%
    
    
    (5.7
    )%
    
    
    (2.9
    )%
    
    
    (14.6
    )%
 Sales
   Three Months Ended
    
    Six Months EndedNovember 30
    
    November 302006
    
    2005
    
    2006
    
    2005Networking
    
    $
    272.9
    
    
    
    82
    %
    
    $
    131.7
    
    
    
    71
    %
    
    $
    516.9
    
    
    
    82
    %
    
    $
    258.7
    
    
    
    72
    %Security
    
    
    31.6
    
    
    
    9
    %
    
    
    20.9
    
    
    
    11
    %
    
    
    57.0
    
    
    
    9
    %
    
    
    37.8
    
    
    
    10
    %Voice
    
    
    16.5
    
    
    
    5
    %
    
    
    14.2
    
    
    
    8
    %
    
    
    32.5
    
    
    
    5
    %
    
    
    29.6
    
    
    
    8
    %Services
    
    
    8.6
    
    
    
    3
    %
    
    
    8.7
    
    
    
    5
    %
    
    
    16.9
    
    
    
    3
    %
    
    
    16.6
    
    
    
    5
    %Connectivity Products
    
    
    3.4
    
    
    
    1
    %
    
    
    8.8
    
    
    
    5
    %
    
    
    9.8
    
    
    
    1
    %
    
    
    19.3
    
    
    
    5
    %Total
    
    $
    333.0
    
    
    
    100
    %
    
    $
    184.3
    
    
    
    100
    %
    
    $
    633.1
    
    
    
    100
    %
    
    $
    362.0
    
    
    
    100
    %
 ®
 20




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##### Table of Contents



®
   Gross Margin
  Three MonthsEnded
    
    Six Months EndedNovember 30, 2006
    
    November 30, 20061) Consolidation of H3C
    
    
    9.4
    
    
    
    9.32) SCN cost improvements
    
    
    1.8
    
    
    
    3.33) SCN product mix and
selling price reductions
    
    
    (5.0
    )
    
    
    (5.7
    )4) SCN volume impact
    
    
    (1.4
    )
    
    
    (1.5
    )Total
    
    
    4.8
    %
    
    
    5.4
    %
 
 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. 21




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##### Table of Contents



Operating Expenses
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedNovember 30,
    
    
    Change
    
    
    November 30,
    
    
    Change(Dollars in millions)
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %Sales and marketing
    
    $
    76.2
    
    
    $
    67.7
    
    
    $
    8.5
    
    
    
    13
    %
    
    $
    153.3
    
    
    $
    137.8
    
    
    $
    15.5
    
    
    
    11
    %Research and development
    
    
    48.2
    
    
    
    23.2
    
    
    
    25.0
    
    
    
    108
    %
    
    
    96.0
    
    
    
    44.4
    
    
    
    51.6
    
    
    
    116
    %General and administrative
    
    
    22.3
    
    
    
    18.3
    
    
    
    4.0
    
    
    
    22
    %
    
    
    42..6
    
    
    
    36.6
    
    
    
    6.0
    
    
    
    16
    %Amortization of intangible assets
    
    
    12.2
    
    
    
    3.9
    
    
    
    8.3
    
    
    
    213
    %
    
    
    24.4
    
    
    
    7.7
    
    
    
    16.7
    
    
    
    217
    %Restructuring
    
    
    0.6
    
    
    
    3.4
    
    
    
    (2.8
    )
    
    
    (82
    )%
    
    
    0.5
    
    
    
    6.8
    
    
    
    (6.3
    )
    
    
    (93
    )%Total
    
    $
    159.5
    
    
    $
    116.5
    
    
    $
    43.0
    
    
    
    37
    %
    
    $
    316.8
    
    
    $
    233.3
    
    
    $
    83.5
    
    
    
    36
    %
 Sales and Marketing.
 Research and Development.
 General and Administrative.
 Amortization of Intangible Assets.
 Restructuring Charges.
  Gain (loss) on Investments, Net
  22




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##### Table of Contents



Interest Income, Net
  Other Income, 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
   23




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Six Months EndedNovember
30,(In millions)
    

2006
    
    

2005Cash and equivalents, beginning of period
    
    $
    501.1
    
    
    $
    268.5Net cash used in operating activities
    
    
    (5.0
    )
    
    
    (82.7
    )Net cash provided by investing activities
    
    
    61.9
    
    
    
    61.3Net cash provided by (used in) financing activities
    
    
    (32.8
    )
    
    
    5.7Other
    
    
    4.0
    
    
    
    (0.5
    )Cash and equivalents, end of period
    
    $
    529.2
    
    
    $
    252.3
      24




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25




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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
   
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   26




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##### Table of Contents



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.
 We have incurred significant net losses in recent fiscal periods, including $3 million for the
three months ended November 30, 2006, $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;
    
    operating expenses that, as a percentage of sales, have exceeded our desired financial model; and
    
    disruptions resulting from our workforce reductions and employee attrition.
 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.
 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.
   27




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##### Table of Contents



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.
  We are significantly dependent on our H3C joint venture from China; if H3C is not successful we
will likely experience a material and adverse impact to our business, business prospects and
operating results.
   Sales from our H3C joint venture, 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 China.
  H3C, our Chinese joint venture, is dependent on Huawei, our co-owner in this venture, 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.
  28




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Our success is dependent on continuing to hire and retain qualified managers and other personnel,
including at our H3C joint venture; if we are not successful in attracting and retaining these
personnel, our business will suffer.
    If we consummate the acquisition of Huaweis 49% equity interest in H3C, we will need to undertake
significant transition efforts; additionally, we will need to transition to full ownership and
execute on a global strategy to leverage the benefits of this acquisition; if we are not successful
in these efforts, our business will suffer.
   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.
  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.
  29




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##### Table of Contents



We may not be able to consummate our announced transaction with Huawei to purchase the remaining
equity interest in our joint venture, H3C, and we may not be able to close our committed bank
financing if the conditions to funding are not met; if we cannot complete a transaction our
business may suffer and the terms of any financing we undertake will likely impact our business
substantially.
  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.
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##### Table of Contents



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.
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##### Table of Contents



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.
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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.
   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.
  33




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##### Table of Contents



If tax benefits available to our China joint venture, H3C, are reduced or repealed, our business
could suffer.
  H3C is subject to restrictions on paying dividends and making other payments to us.
  If we fail to maintain an effective system of internal control over financial reporting that
includes our China joint venture, H3C, we may not be able to accurately report our financial
results or prevent fraud.
  We are subject to risks relating to currency rate fluctuations and exchange controls and we do not
hedge this risk in China.
  34




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##### Table of Contents



The members of the board of our China joint venture designated by our co-owner, Huawei, have
protective rights over the approval of certain matters; accordingly if Huawei does not agree with
us on these matters, these rights could harm our business by preventing us from taking desired
actions.
  If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   We may need to engage in complex and costly litigation in order to protect, maintain or enforce our
intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong
as the rights we enjoy in the U.S.
   We may not be able to defend ourselves successfully against claims that we are infringing the
intellectual property rights of others.
   35




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##### Table of Contents



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.
  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 proposing matters 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.
  36




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    DollarShares Purchased as
    
    
    Value of SharesTotal Number
    
    
    Average
    
    
    Part of Publicly
    
    
    that May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    Programs(1)
    
    
    Plans or ProgramsSeptember 2, 2006 through September
29, 2006
    
    
    4,936
    (2)
    
    $
    4.36
    
    
    
    
    
    
    $
    100,000,000September 30, 2006 through October 27, 2006
    
    
    6,291
    (2)
    
    
    4.98
    
    
    
    
    
    
    $
    100,000,000October 28, 2006 through December 1, 2006
    
    
    111,442
    (2)
    
    
    4.60
    
    
    
    
    
    
    $
    100,000,000Total
    
    
    122,669
    
    
    $
    4.61
    
    
    
    
    
    
    $
    100,000,000
 
 (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 in the three months ended
November 30, 2006. However, we may use cash to repurchase shares in future periods. 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
 (a)
    
    The Annual Meeting of Shareholders was held on September 20, 2006.(b)
    
    Each of the persons named in the Proxy Statement as a nominee for
director was elected and the proposals listed below were approved. The
following are the voting results of the proposals:
 Proposal I
    
    For
    
    Withheld
    
    Broker Non-VotesElection of Directors:Eric A. Benhamou
    
    
    351,474,951
    
    
    
    11,977,856
    
    
    
    0Gary T. DiCamillo
    
    
    336,924,163
    
    
    
    26,528,644
    
    
    
    0James R. Long
    
    
    353,873,152
    
    
    
    9,579,655
    
    
    
    0Raj Reddy
    
    
    353,413,260
    
    
    
    10,039,547
    
    
    
    0
 Other Directors whose term of office as a director continued after the meeting were
Julie St. John and Paul G. Yovovich. David C. Wajsgras was a director whose term
of office did not continue after the meeting. Edgar Masri is a director who was
appointed immediately after the meeting.
 Proposal II
    
    For
    
    Against
    
    Abstain
    
    Broker Non-VotesTo ratify the
appointment of
Deloitte & Touche
LLP as our
registered
independent public
accounting firm for
the fiscal year
ending June 1,
2007:
    
    
    361,242,932
    
    
    
    1,686,570
    
    
    
    523,304
    
    
    
    0
 37




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##### Table of Contents



ITEM 6.
    
    EXHIBITS
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    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
    
    Fourth Amendment to Lease dated as of
December 12, 2005 by and between
Marlborough Campus Limited Partnership and
3Com Corporation
    
    
    
    
    
    
    
    
    
    
    
    X10.2
    
    Fifth Amendment to Lease dated as of
October 27, 2006 by and between Bel
Marlborough I LLC and 3Com Corporation
    
    
    
    
    
    
    
    
    
    
    
    X10.3
    
    3Com Corporation Section 16 Officer
Severance Plan, amended and restated
effective September 11, 2006*
    
    
    
    
    
    
    
    
    
    
    
    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 38




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##### Table of Contents



3Com Corporation
(Registrant)Dated: January 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) 39




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    File No.
    
    Exhibit
    
    Filing Date
    
    Herewith2.1
    
    Master Separation and Distribution
Agreement between the Registrant and Palm,
Inc. effective as of December 13, 1999
    
    10-Q
    
    002-92053
    
    
    2.1
    
    
    4/4/002.2
    
    Indemnification and Insurance Matters
Agreement between the Registrant and Palm,
Inc.
    
    10-Q
    
    002-92053
    
    
    2.11
    
    
    4/4/002.3
    
    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
    
    Fourth Amendment to Lease dated as of
December 12, 2005 by and between
Marlborough Campus Limited Partnership and
3Com Corporation
    
    
    
    
    
    
    
    
    
    
    
    X10.2
    
    Fifth Amendment to Lease dated as of
October 27, 2006 by and between Bel
Marlborough I LLC and 3Com Corporation
    
    
    
    
    
    
    
    
    
    
    
    X10.3
    
    3Com Corporation Section 16 Officer
Severance Plan, amended and restated
effective September 11, 2006*
    
    
    
    
    
    
    
    
    
    
    
    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 40