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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 1, 2001               Commission File No. 0-12867

                                       OR

[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

       For the transition period from ________________ to ________________

                                3Com Corporation
             (Exact name of registrant as specified in its charter)

                   Delaware                               94-2605794
       (State or other jurisdiction of                 (I.R.S. Employer
        incorporation or organization)                Identification No.)

              5400 Bayfront Plaza
            Santa Clara, California                           95052
     (Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code  (408) 326-5000

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $0.01 par value
                         Preferred Stock Purchase Rights

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate   market  value  of  the   Registrant's   Common  Stock  held  by
non-affiliates,  based upon the closing  price of the Common  Stock on August 1,
2001,   as  reported  by  the  Nasdaq   National   Market,   was   approximately
$1,718,622,845.  Shares of  Common  Stock  held by each  executive  officer  and
director and by each person who owns 5% or more of the outstanding Common Stock,
based on Schedule  13G  filings,  have been  excluded  since such persons may be
deemed  affiliates.  This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of August 1, 2001,  345,640,449 shares of the Registrant's  Common Stock were
outstanding.

The   Registrant's   definitive  Proxy  Statement  for  the  Annual  Meeting  of
Stockholders  to be held on September 20, 2001 is  incorporated  by reference in
Part III of this Form 10-K to the extent stated herein.

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<PAGE>

                                3Com Corporation
                                    Form 10-K
                     For the Fiscal Year Ended June 1, 2001
                                Table of Contents

Part I                                                                      Page

   Item 1.   Business.........................................................1
   Item 2.   Properties.......................................................11
   Item 3.   Legal Proceedings................................................13
   Item 4.   Submission of Matters to a Vote of Security Holders..............14
             Executive Officers of 3Com Corporation ..........................14

Part II

   Item 5.   Market for 3Com Corporation's Common Stock and Related
                Stockholder Matters...........................................17
   Item 6.   Selected Financial Data..........................................17
   Item 7.   Management's Discussion and Analysis of Financial Condition
                and Results of Operations.....................................18
   Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.......45
   Item 8.   Financial Statements and Supplementary Data......................47
   Item 9.   Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure......................................89

Part III

   Item 10.  Directors and Executive Officers of 3Com Corporation.............89
   Item 11.  Executive Compensation...........................................89
   Item 12.  Security Ownership of Certain Beneficial Owners and Management...89
   Item 13.  Certain Relationships and Related Transactions...................89

Part IV

   Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form 8-K..

             Exhibit Index....................................................91
             Signatures.......................................................95
             Financial Statement Schedule.....................................96



3Com, CommWorks,  Megahertz, NBX, OfficeConnect,  Parallel Tasking,  SuperStack,
Total Control and XJACK are  registered  trademarks of 3Com  Corporation  or its
subsidiaries.  Kerbango is a trademark of 3Com Corporation or its  subsidiaries.
Graffiti is a registered  trademark  and Palm is a trademark of Palm,  Inc. U.S.
Robotics is a registered  trademark of U.S. Robotics  Corporation.  Courier is a
trademark of U.S.  Robotics  Corporation.  Other  product and brand names may be
trademarks or registered trademarks of their respective owners.


<PAGE>


This annual report,  including the following sections,  contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995,  particularly  statements  regarding our expectations on capital spending,
our products and services gross margins  expectations  for fiscal year 2002, our
expectations regarding the competitiveness of our product and service offerings,
our  expectations  relating to our future  investments and expenses  relating to
research  and  development,  statements  regarding  our  liquidity  and  capital
resources,  our  expectation  that we will  incur  more  charges  related to our
restructuring   efforts  during  fiscal  2002,  our  expectation  that  we  will
substantially  complete our restructuring  activities related to the global cost
reduction  to  improve  operational  efficiencies,  our  expectation  that gross
margins will improve in future periods as a result of our restructuring efforts,
our intention to reduce operating expenses in future periods, our plan to reduce
fixed costs by completing  our reduction in force plans,  our  expectation  that
emerging product lines will account for a higher  percentage of our future sales
over time, our expectation that our Total Control 2000 product will be available
before the end of the calendar year,  our plans to invest a significant  portion
of financial resources in developing  products for emerging growth markets,  our
intention  to  consolidate  our real  estate  portfolio  and  liquidate  certain
facilities  associated  with our  manufacturing  facilities in fiscal 2002,  our
intention to  transition  our Singapore  facility  into a regional  distribution
center and sales and  support  office,  our  intention  to enter into a contract
manufacturing  relationship  with Flextronics and outsource the manufacturing of
our high  volume  server,  desktop  and mobile  products,  our plans to exit the
consumer  broadband  cable  and DSL  modem  business,  our  belief  that we have
sufficient  flexibility  in the  monetization  of surplus  real estate and other
financial  resources  to  retire  certain  leases,  our  expectations  that  our
acquisitions  of  businesses  or product  lines will  decrease in  comparison to
historical levels,  our expectation that international  markets will continue to
account for a significant percentage of our sales, our plans to make investments
through 3Com Ventures and expectations related to payments that may be made over
the next twelve  months with  respect to capital  calls,  our  expectation  that
emerging  product  lines  will  grow at a  significantly  higher  rate  than the
networking  industry  average,  our expectation that emerging product lines will
account for a higher percentage of our sales over time, our belief that our cash
and equivalents, short term investments, and cash generated from operations will
be sufficient to satisfy our anticipated cash requirements for at least the next
12 months,  our expectation that adoption of SFAS 133 and SFAS 141 will not have
a material  effect on our  results of  operations  or  financial  position,  our
intention to hold our fixed income investments until maturity,  our expectations
regarding  the number of  positions  that will be affected by the  reduction  in
force  undertaken  as  part  of  our  current  restructuring  initiatives,   our
expectation  that  employee  separations  related to our  current  restructuring
activities  will  be  substantially  complete  by  May  2002,  our  expectations
regarding future expenses associated with our current restructuring  activities,
our expectation that we will not reach minimum purchase  commitments  associated
with a supply  agreement as a result of our intended exit from consumer  product
lines,  our belief that audits being  conducted by certain  domestic and foreign
taxing  jurisdictions of our income tax returns will not have a material adverse
effect on our consolidated  financial condition or results of operations and our
expectations  regarding  the  continuing  volatility  of our stock price.  These
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual  results and events to differ  materially.  For a detailed  discussion of
these  risks and  uncertainties,  see the  "Business  Environment  and  Industry
Trends"  section of this Form 10-K.  3Com  undertakes  no  obligation  to update
forward-looking  statements to reflect events or  circumstances  occurring after
the date of this Form 10-K.

PRESENTATION OF DISCONTINUED OPERATIONS--PALM, INC.

The  following   information  relates  to  the  continuing  operations  of  3Com
Corporation  and our  consolidated  subsidiaries  (3Com).  Palm,  Inc. (Palm) is
accounted  for as a  discontinued  operation,  as a result  of our  decision  to
distribute the Palm common stock we owned to 3Com  shareholders in the form of a
stock dividend.  Subsequent to the  distribution to our shareholders on July 27,
2000,  Palm's  operations  ceased  to be part  of our  operations  and  reported
results.

PART I

ITEM 1. Business

GENERAL

3Com  Corporation  was  founded  on June 4,  1979.  A  pioneer  in the  computer
networking  industry,  our heritage is in providing robust networking  solutions
that are functionally  rich,  cost-effective  and simple to use. Our competitive
advantages  include  our  industry-leading   intellectual   property  portfolio,
distributor and customer relationships,  and brand identity.  During fiscal year
2001, we won market share in emerging-growth product categories, established new
levels of  innovation,  drove  changes to benefit  customers  and  delivered new
products  that  validated  our brand  promise to our  business  customers - rich
connectivity and radical simplicity.

We target sectors of the enterprise and service provider  markets.  Beginning in
fiscal year 2002, we have structured our operations around three businesses that
are   leveraging   our  core   strengths  and  focusing  upon  specific   market
opportunities that offer long-term, profitable growth. These businesses are:

     o    Business Networks Company (BNC), which provides network infrastructure
          solutions for the enterprise and small business markets;

     o    Business  Connectivity  Company (BCC),  which  provides  products that
          enable computing devices to access computer networks; and

     o    CommWorks  Corporation  (CommWorks),  which provides Internet Protocol
          (IP)-based access and  infrastructure  and services  platforms for the
          telecommunications service provider market.

Each of these  businesses has a unique  business model tuned for the dynamics of
its target market.  This  simplified  structure  allows  greater  focus,  faster
responsiveness, and increased accountability.

In fiscal 2001, we operated in two segments, 1) Commercial and Consumer Networks
Business (CCB) and 2) Carrier Networks Business (CNB). CCB comprised the BNC and
BCC businesses  described above and the consumer product lines which were exited
during  fiscal  2001,  as  discussed  further in  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."


                                       1
<PAGE>

INDUSTRY SEGMENTS

Business Networks Company

Our Business  Networks Company  develops  technologies and products to build and
manage networks supporting local area network (LAN) switching, web technologies,
networked  telephony and wireless LANs. BNC's solutions are feature rich so they
can support the increasingly complex and demanding  application  environments in
today's  businesses  but they are also easy to install,  use and operate and are
very  affordable to own.  BNC's network  solutions help IT and business teams to
run their  businesses  rather than spend time focusing on getting the technology
to work.

Building upon our historical  success in the networking  infrastructure  market,
BNC continues to be a leader in key  technologies  that represent  future growth
opportunities.  BNC achieves this leadership  position through design innovation
that makes  feature-rich  network  technology simple to use. Recent  innovations
include modular, application-aware (Layer 3+) and Gigabit-over-copper networking
switches; new  application-specific  integrated circuit (ASIC) designs that make
our products more affordable;  LAN telephony products that reliably handle voice
traffic;  and  wireless  LANs that offer robust  security,  ease of use and easy
integration.

Markets and Customers

BNC  provides  network  infrastructures  to  enterprises  and small  businesses,
targeting in particular enterprises who value innovative,  feature-rich networks
that  are easy to use and  affordable  to own.  BNC  distributes  its  solutions
primarily  through  its  worldwide  channel  of  value-added  resellers,  system
integrators  and more recently,  telecommunications  service  providers.  BNC is
fully  committed to its Focus Partner Program and sees its resellers and channel
partners as a vital extension of its sales force. It works  extensively with its
resellers  and channel  partners to ensure they are able to meet their  business
goals.

Competition

Principal  competitors in the enterprise  networking market include Avaya, Inc.,
Cisco  Systems,  Inc.,  Enterasys  (Cabletron  System,  Inc.),  Hewlett  Packard
Company, Lucent Technologies, Inc., and Nortel Networks, Corp.

Current Product Offerings

BNC  delivers  network  infrastructure   solutions  for  enterprises  and  small
businesses  worldwide.  BNC  develops  three  categories  of  products,  1)  LAN
infrastructure,  composed of hubs,  switches  and web  solutions,  2)  networked
telephony  systems for voice over existing  network  connections and 3) wireless
access points and adapters based on Wi-Fi technology.

LAN Infrastructure solutions:

     o    Stackable  SuperStack(R)  3 and Modular  Switch 4000 Series  family of
          Ethernet,  Fast  Ethernet  and  Gigabit  Ethernet  switches  is a  new
          generation of essential networking components that form the foundation
          of any business network.

     o    The  SuperStack  3 Web  solutions,  including  firewall,  Webcache and
          server load balancer,  allow customers to access the Web faster,  more
          securely and at a lower cost, as well as ensure network availability.

     o    An  affordable   family  of  hubs  and  switches  for   cost-sensitive
          networking  users that require  reliable and  powerful  stackable  LAN
          solutions.


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<PAGE>

     o    OfficeConnect (R) family of switches,  hubs and firewalls are designed
          specially  for small  businesses  to obtain all the  benefits  of rich
          networking  and  the  Internet  while  enjoying  all  the  ease of the
          plug-and-play  products.  Also  available  is  3Com's  800  Series  of
          OfficeConnect  digital  subscriber  line (DSL) routers for  high-speed
          Internet access for businesses.

Networked Telephony solutions:

     o    SuperStack 3 NBX(R) and NBX 100 networked  telephony  solutions  offer
          enterprise and small  business  customers  significant  telephony cost
          savings,  flexibility  and  voice/data  application  integration  over
          existing wiring.

     o    NBX 25 networked  telephony  solution  gives small offices of up to 20
          users  a  cost-effective  voice  product  that  can be  deployed  over
          existing LAN infrastructure.

Wireless LAN solutions:

     o    Reliable,  easy-to-use  wireless  solutions  are based on the industry
          standard Wi-Fi (802.11b).  The range of these wireless LANs allow them
          to be used effectively in small businesses, large enterprises and even
          public access areas such as airports and hotels.

New Products in Fiscal Year 2001

On June 26,  2000,  we  announced  new  solutions  that  enable  small  business
customers to reap the benefits of networked  telephony  with the NBX 25 business
telephone  system,  and to advance network  security to improve  Internet access
with our  OfficeConnect  access  products.  We also announced our Ethernet power
source  to  create  a  single,  continuous  source  of power  for our  networked
telephony and wireless systems.

On July 17, 2000, we announced a new version of Network Supervisor,  our network
management  solution  that enables  businesses  to easily  manage their 3Com LAN
networks. This version offered new automation built into the software,  removing
the  complexity  for the user,  yet  offering  sophisticated  features,  such as
proactive alarm systems to avoid network downtime.

On August 1, 2000,  we  announced  new  easy-to-use  10/100  Megabits per second
(Mbps) LAN switches at an aggressive price, leveraging product cost reductions.

On October 23, 2000,  we announced  new  OfficeConnect  products that help small
business   customers  do  business  on  the  web  while  keeping   secure  their
business-critical information.

On November 6, 2000,  we announced a new series of products  designed to address
the new  fundamental  needs of  modern  business:  how to make the  network  run
faster, keep people constantly  connected and do it all more securely and at the
best possible  price.  This  announcement  was a  significant  commitment to the
enterprise  and small  business  market.  This  announcement  addressed four key
areas:  Gigabit  Ethernet with SuperStack 3,  Web-enablement,  wireless LANs and
networked telephony.

On  February  12,  2001,  we  announced  the newest  addition  to our  networked
telephony product family, the SuperStack 3 NBX Networked Telephony Solution. The
SuperStack 3 NBX was an expansion of our existing  networked  telephony  product
family  (NBX 25, NBX 100,  Ethernet  Power  Source) and became  available  in 45
countries worldwide in April 2001. Our IP private branch exchange (PBX) solution
gives customers more capacity, increased reliability, enhanced functionality and
10/100-infrastructure support. The product enhancements and integration with the
SuperStack  product  family  positioned  us to further  advance our lead in this
market by winning larger enterprise installations.


                                       3
<PAGE>

On March 6, 2001,  we announced  NBX Call Center,  which is a software  solution
that gives  businesses  advanced call center  capabilities,  such as intelligent
call routing,  graphical alarms, drag and drop queuing, real-time monitoring and
reporting.

On March 14, 2001, we announced new modules for the  award-winning  SuperStack 3
Switch 4900 family.  We  established  ourselves as the only vendor able to offer
both  network  interface  cards  (NICs) and  switches in an  end-to-end  Gigabit
Ethernet  solution.  According to Cahners In-Stat first quarter 2001 report,  we
increased  our  leadership  position  in the Gigabit Ethernet-over-Copper switch
market by almost 8 percentage points and now hold a 35.7 percent market share.

On March 20, 2001, we announced the 3Com 11 Mbps Wireless LAN solution. This new
Wi-Fi-certified  offering comes with unique features that make set-up,  use, and
configuration  simple without  compromising the rich functionality,  reliability
and security that small business networks require.

On May 8,  2001,  we  announced  new  OfficeConnect  Dual  Speed  Switches  that
eliminate  cabling  issues and offer network  traffic  prioritization  for small
business  customers.  This announcement  reinforced our commitment to delivering
best-in-breed  Ethernet switches that are easier to own, install, and manage for
small businesses.

On  June  11,  2001  we  announced   the   SuperStack(R)   3  Switch  4400,   an
application-aware,   stackable,  wirespeed  10/100  Fast  Ethernet  switch;  the
SuperStack 3 Switch 4300, a 48-port high-density 10/100 Ethernet switch and; the
3Com(R) Switch 4005, a 10/100/1000  Ethernet modular Layer 3 switch.  Our latest
version of network management software adds an extra level of management support
for all new switches that enable intuitive setup and operation.

Business Connectivity Company

Our  Business   Connectivity   Company  is  a  leading   provider  of  reliable,
high-performance access products for the enterprise market. In today's networked
world,  it is important for people to stay connected while on the move. In order
for people to realize the full  potential  of  networked  computing,  secure and
reliable network access must become simple.

BCC is  advancing  the  concept of  Universal  Connectivity  for the  enterprise
market.  The  ability  to  deliver  Universal   Connectivity   hinges  on  three
capabilities:   Anytime,   Anywhere  Access,  Reliable  Performance  and  Secure
Connections.  BCC focuses on  solutions  delivering  this  promise of  Universal
Connectivity for users in networked  environments - furthering our long-standing
vision of pervasive networking.

Anytime, Anywhere Access

BCC delivers the breadth of technology  forms and types for people to connect to
information  and each other  anytime,  anywhere.  These forms  include  personal
computer (PC) Card Type II and Type III,  Mini-PCI,  Modem  Daughter Card (MDC),
Compact Flash,  Internal and External  universal serial bus (USB), PCI and PCI-X
NIC and  LAN-on-Motherboard  (LOM). Its wide range of connectivity  technologies
include Ethernet,  Fast Ethernet,  Gigabit Ethernet,  Analog Modem, Wireless LAN
and Bluetooth.  Innovative software such as Mobile Connection Manager,  Wireless
Connection   Manager  and  GSM  Connection   manager  deliver   one-step  mobile
configurations and connectivity for multiple LAN and WAN locations.

Reliable Performance

BCC's  products  have  a  long-standing  reputation  for  reliable  performance.
Technologies  and  features  such as Gigabit,  Link  Aggregation,  Self  Healing
Drivers,  Traffic  Prioritization,  Failover,  Exclusive Line Probing,  Parallel
Tasking(R)   and  Digital  line  guard   insure  a  reliable,   high-performance
connection. Our reputation for reliability is evidenced by our partnerships with
PC  original  equipment  manufacturers  (OEMs) and our large  installed  base in
corporate enterprises.


                                       4
<PAGE>

Secure Connections

Network  technologies  and mobile  computing have made global  partnerships  and
e-business initiatives  achievable for many companies.  With advances in network
technologies  increasing  the  ability  for  users to  access  networks  anytime
anywhere,  the risks to network  security have also increased.  3Com secure NICs
and  embedded  firewall  protect  enterprise  networks  from attacks and provide
tamper-resistant data protection.  Furthermore,  with IPSec encryption offloads,
IT managers can secure the LAN without sacrificing performance.

Markets and Customers

BCC solutions are targeted for worldwide  distribution  to enterprise  and small
business  customers  via PC OEMs,  such as Dell  Computer  Corp.,  Gateway Inc.,
Hewlett-Packard   Company,  and  International   Business  Machines  Corp.,  and
resellers and systems integrators.  Increasingly,  BCC is selling directly to PC
manufacturers,  who  integrate  our  connectivity  products  into their  product
offerings.  BCC's  branded  products  are sold  primarily  through our  two-tier
distribution  channel,  which  leverages the  capabilities  of our resellers and
channel partners.

Competition

BCC's principal competitor is Intel Corp. Recently, Taiwanese manufacturers have
entered the  low-end  market,  which is  particularly  price-competitive.  These
companies  include Accton Technology  Corp.,  D-Link Systems,  Inc., and NetGear
Inc.

Current Product Offerings

BCC offers a  comprehensive  product  portfolio  that allows users to connect to
computer networks easily and reliably. BCC products include:

o    3Com 10,  10/100 and 100 Mbps Ethernet  desktop NICs for  businesses of all
     sizes

o    3Com 10/100,  10/100/1000 and 1000 Mbps Ethernet server NICs for businesses
     of all sizes

o    3Com 10,  10/100,  and  10/100LAN+56K  Modem PC cards for businesses of all
     sizes

o    3Com 10 Mbps LAN CompactFlash Cards for Windows CE environments

o    3Com Bluetooth PC Cards

o    3Com Management Software and Embedded Firewall

New Products in Fiscal Year 2001

On   September   28,   2000,   we   announced   our  entry   into  the   Gigabit
Ethernet-over-copper  NIC market with new network  connections  designed for the
high-performance,  reliability and  manageability  required in mission  critical
server applications. The new 3Com 10/100/1000 PCI-X Server NIC gives customers a
feature-rich  yet simple way to broaden  their  bandwidth  and increase  network
performance  - by as much as 100 times - over existing  unshielded  twisted pair
(UTP) Category 5 copper wiring.

On November 28, 2000, we announced we would be teaming with Symantec Corporation
of Cupertino,  Calif., to develop a `best-in-breed'  software solution for quick
workstation  deployment within a Wired for Management framework.  Via integrated
components  from  Symantec,  our boot services with  Symantec  Ghost  Enterprise
software is the  industry's  premier tool for PC rollout,  software and hardware
migration, and disaster recovery.


                                       5
<PAGE>

On  December 4, 2000,  we  announced  Dual Port  server NICs to deliver  network
availability  in  space-constrained  servers.  The  new  dual  port  card  gives
customers  instant  scalability  from a single NIC upgrade using one PCI slot to
support two network connections.

On December 11, 2000, we announced  the  formation of a strategic  alliance with
Broadcom  Corporation  relating to  deployment  of Gigabit  Ethernet NIC and LOM
solutions.  Broadcom  is a leading  provider  of  integrated  circuits  enabling
broadband communications.

On May 29, 2001, we announced our Wireless Bluetooth PC Card as one of the first
network PC  adapters  based on the newly  ratified  1.1  industry  standard  for
Bluetooth.  We are  one of  nine  organizations  actively  participating  in the
Bluetooth Special Interest Group (SIG) which helps to drive the  standardization
and adoption of this important wireless  technology designed for quick bursts of
low-bandwidth  information in a cable replacement application  environment.  Our
Bluetooth PC Card with 3Com Connection  Manager for Bluetooth  software  package
and innovative XJACK (R) antenna design connects with Bluetooth-enabled personal
devices including notebooks, desktop PCs, cell phones and hand-helds.

CommWorks

CommWorks Corporation,  a wholly owned subsidiary of 3Com Corporation,  designs,
develops and deploys IP-based access  infrastructures  and service platforms for
many  of  the  largest   telecommunications  service  providers  in  the  world.
CommWorks'  products  allow  telecommunications  service  providers to offer new
services with the same high  availability as the traditional  telecommunications
network  at  a  much  lower  cost.   CommWorks  combines  expertise  in  network
integration with experience in custom  development to deliver highly specialized
solutions  that  address  the  specific  challenges  telecommunications  service
providers face, such as:

     o    cutting operating costs,

     o    developing new revenue-generating services,

     o    attracting additional network traffic,

     o    differentiating product offerings, and

     o    improving communications for end-users.

CommWorks builds networks that deliver greater  functionality,  at significantly
reduced  cost and with the  ability  to offer  multiple  services  over a single
platform. A CommWorks IP network features the following characteristics:

     o    Scalability.  Carriers  need the  ability to start  small and grow the
          network as demand  increases.  CommWorks gives carriers the ability to
          take their  existing  network and add new  applications  without major
          additions of hardware;

     o    Reliability. The benchmark for network reliability is still the public
          switched  telephone network (PSTN).  CommWorks networks deployed today
          by some of the world's largest  telecommunications  service  providers
          are  delivering  quality  and  reliability  on a par with - and  often
          better than - the traditional PSTN;

     o    Multiple services,  common hardware.  We offer carriers an IP platform
          based  on  common  hardware  that  allows  them  to  deliver  multiple
          services.   Regardless  of  the  transport  medium  (wired,  wireless,
          broadband) or the type of traffic  (voice,  data, fax, video) we allow
          the carrier to turn the traffic into revenue-generating services; and

     o    Open   architecture.   Our  networks  feature  open,   standards-based
          interfaces   for    multi-vendor    connectivity.    This   encourages
          telecommunications   service   providers   to   deploy   best-of-breed
          components and allows them to introduce new services in less time than
          for a traditional network infrastructure.  Commitment to standards and
          open  interfaces  allows   telecommunications   service  providers  to
          customize  solutions  independently at each tier to address individual
          customer needs.


                                       6
<PAGE>

Markets and Customers

CommWorks' exclusive focus is on the telecommunications service provider market.
Of the world's 20 largest telecommunications service providers - representing 71
percent  of the  world's  public  telecommunications  service  revenue  - 16 are
CommWorks customers.

CommWorks customers in the carrier market include:

     o    Incumbent local exchange carriers (ILECs);

     o    Interexchange carriers (IXCs);

     o    Post, telephone, and telegraph administrations (PTTs);

     o    Competitive Local Exchange Carriers (CLECs); and

     o    Internet Service Providers (ISPs).

Top accounts worldwide include:

     o    North America: AT&T, AT&T Canada, Bell Mobility, Quest,  MCI/Worldcom,
          Motorola, SaskTel, Sprint, Sprint PCS, Telus Mobility, Verizon, SBC;

     o    Asia: Bharti, China Telecom,  China Unicom,  Clearcom,  Communications
          Authority of Thailand,  Commverge,  CTI (Hong Kong),  Gosun,  Hitachi,
          Japan Telecom,  KDDI, Korea Telecom,  New C&C, NTT,  Orange,  Samsung,
          Satyam,  Siemens (Taiwan),  SingTel, SK Telecom,  Telecom New Zealand,
          Telstra, VSNL;

     o    Europe:  Airtel,  Austria Telekom,  Blixer,  Carrier 1, Cegetel,  KPN,
          Marconi Communications,  MediaWays, Portugal Telecom, Prodigios / AOL,
          Telefonica, Telia;

     o    Latin America:  Avantel / MCI,  Embratel / MCI,  Iusacell,  Telefonica
          (Peru), Vesper, VTR (Chile); and

     o    Middle East: Bezeq, Internet Gold, Turk Telecom

Competition

Principal competitors in the telecommunications  service provider market include
Cisco Systems,  Ericsson,  Lucent  Technologies,  Nortel  Networks,  Siemens and
Sonus.

Current Product Offerings

CommWorks is able to migrate  telecommunications  service  providers to IP, with
network solutions based on the CommWorks(R)  architecture.  Introduced more than
two years ago,  this  three-tier,  carrier-class  solution  architecture  allows
telecommunications  service  providers  to  scale  their  infrastructure  and to
rapidly deploy next-generation, enhanced services. The architecture includes:

     o    media processing;

     o    softswitch; and

     o    service creation layers.


                                       7
<PAGE>

The first layer,  featuring  the Total  Control(R)  1000 and Total  Control 2000
platforms,  performs media gateway functions to integrate multiple traffic types
and  accommodate  disparate  networks.  Layer Two,  the  control and network and
service management layer,  features the CommWorks Softswitch to bridge different
signaling and call control  protocols,  enabling  multimedia traffic to traverse
disparate  networks.  Layer Three is the service  creation layer, an environment
that  leverages  open   interfaces  and  strategic   partners  to  enable  rapid
application and service deployment.

The softswitch is an integral component of the CommWorks architecture.  It works
with  multi-service  access  platforms  at  layer  one  to  provide  end-to-end,
carrier-grade IP-based  communications.  At layer two, it provides media control
and management,  session control functions and multi-protocol PSTN/IP signaling.
At layer three,  the softswitch is responsible  for critical  network  services,
including  accounting,  authentication  and rating,  billing support,  directory
mapping, and Web provisioning. The back-end services component of the softswitch
includes modules that provide network-centric services. The CommWorks softswitch
framework also includes feature servers to deliver IP Centrex, Interactive Voice
Response, prepaid calling card, and presence management applications in addition
to offerings in the area of unified messaging and fax-over-IP.

New Products in Fiscal Year 2001

In June 2000, we unveiled our next-generation Total Control(R) 2000 multiservice
access   platform.   The  Total  Control  2000  platform  is  a   carrier-class,
high-density  multiservice platform that will support both wireline and wireless
solutions.  The platform  will address the  requirements  of  telecommunications
service   providers   for  a   high-density   platform   as  they   evolve  from
circuit-switched  networks to more intelligent and efficient  IP-based networks.
Customer  trials of the platform  began in mid-2001,  with product  availability
anticipated before the end of the calendar year.

Also in June 2000,  we  announced  the  availability  of the  CommWorks(R)  8210
unified  messaging  system,  which  bridges the  circuit and packet  networks to
deliver a robust set of features. The CommWorks 8210 unified messaging system is
a network-independent  open service platform that gives end-users the freedom to
communicate the way they choose with the communication device they prefer. Users
can  access  all  their  e-mail,  voice  mail and fax  messages  from the  PSTN,
Internet,  broadband  or  wireless  network  using an array of  client  devices,
including  telephones,  personal  and  laptop  computers,  e-mail  clients,  Web
browsers, wireless handsets, and personal digital assistants.

In  November  2000,  the new Total  Control(R)  1000  Enhanced  Data  System was
introduced. This system delivers higher port densities, enhanced performance and
expanded  service  capabilities on CommWorks'  Total Control 1000  multi-service
access platform. Two new carrier-class  solutions for delivering virtual private
network (VPN) services were also unveiled.  These VPN solutions are media access
independent and can be delivered via cable,  DSL, Code Division  Multiple Access
(CDMA) wireless or remote access networks.

Also in November  2000, we  introduced  an end-to-end  solution that enables DSL
providers to  cost-effectively  deliver secure VPNs over DSL. The  carrier-class
VPN over DSL solution  integrates  the advanced IP service  intelligence  of the
Total  Control(R) 500 192-port DSL  concentrator  with the VPN  tunnel-switching
capabilities of the Total Control 1000 multi-service access platform.

In December  2000,  we announced  the  availability  of an  intelligent  service
provisioning solution for our carrier-class VPN services.  The CommWorks(R) 5020
Intelligent  Activation System is an end-to-end service activation solution that
offers timely and accurate  provisioning for numerous service  opportunities and
networking  options;  from  inexpensive  public  Internet  services  to managed,
secure,  high-speed  private network services.  This integration  eliminates the
need for  time-consuming,  on-site,  manual  configuration  of multiple  network
elements,  enabling  telecommunications  service providers to drastically reduce
the time  between the  customer's  request  for  service and the actual  service
activation.


                                       8
<PAGE>

In March 2001, we demonstrated an IP Centrex solution  delivered via the Session
Initiation  Protocol  (SIP).  IP Centrex  delivers  the same basic  services  as
traditional Centrex - such as call hold, call transfer,  last number look-up and
redial, call forward, and three-way calling - via a packet-based, or IP network.
At the same time,  IP  Centrex  enables a wide range of  creative  new  IP-based
services.  IP Centrex  brings the  creativity  of the Internet to the  telephony
system, allowing rapid service creation, customization and personalization.

On  April  4,  2001,  we  announced  we would  be  developing  "universal  port"
technology  that will allow  telecommunications  service  providers to terminate
voice,   data  and  fax   calls   using  a   "universal"   dial   access   port.
Telecommunications  service providers using the Total Control 1000 Enhanced Data
System from CommWorks can upgrade their systems to universal port status through
a software  upgrade.  The  CommWorks  Universal  Port System will merge  current
remote  access  functionality  with  specific  voice-over-IP  (VoIP)  offerings.
Applications  supported in the initial product release will include typical dial
access;  phone-to-phone  voice  support;  real time and  store-and-forward  fax;
support for SIP for call  control;  and various  back-end  servers for  critical
functions  like  directory  mapping  and  billing.  Early  field  trials  of the
CommWorks   Universal  Port  System  began  in  mid-year   2001,   with  general
availability of the product expected before the end of the calendar year.

Also on April 4, 2001,  we announced  that our Total  Control 1000 Enhanced Data
System will  support  V.92,  the latest  industry  standard  for  dial-up  modem
technology.  CommWorks  will  support  the V.92  standard  in its next  software
upgrade for the Total Control 1000 Enhanced Data System, scheduled for the third
quarter of calendar year 2001. For current  customers,  the V.92 features may be
added through a simple software upgrade;  no hardware changes are required.  For
end users, the V.92 modem specification offers a significantly improved Internet
connection  experience  with  the  ability  to  switch  between  voice  and data
sessions.  Telecommunications  service  providers  who upgrade to V.92 can offer
their  subscribers  more features for their dial-up  connection,  thus enhancing
opportunities to retain and grow their customer base.

On April 9, 2001,  we announced  with TCSI  Corporation,  a leading  provider of
innovative network solutions for the telecommunications  industry, the launch of
a product that offers  carrier-class  network and service  management  solutions
designed  to  reduce  network  operating  costs for  telecommunications  service
providers  while allowing them to generate more revenue by offering new enhanced
services.   The  CommWorks  5000  Network  and  Service   Management  System,  a
Web-enabled  product,  is  a  key  component  in  the  CommWorks'   three-tiered
architecture for IP-based service creation and delivery.

On April 30, 2001,  we announced  the CommWorks  5025 Unified  Messaging  System
Provisioning  Manager  which  combines  the  functionality  of several  software
modules to provide a comprehensive  solution for the activation and provisioning
of new unified messaging services.

On May 21, 2001, we announced the availability of enhanced  routing,  accounting
and reporting features on the Total Control 1000 transaction  gateway. The Total
Control  1000  transaction  gateway is our solution  for  providing  transaction
processing  services.  The gateway is designed to handle hundreds of millions of
quick, secure transactions  involving the transfer of small amounts of data in a
single  dial   access   session.   These   transactions   include   credit  card
authorizations,  debit  card  fund  transfers,  health  benefit  authorizations,
electronic  fund  transfers,  and other  transactions.  The Total  Control  1000
transaction gateway is used by many of the largest  transaction  carriers in the
United States, and many other telecommunications service providers, enterprises,
health care networks, and financial institutions around the world.

On May 30, 2001, we announced we would be adding  support for Internet  Protocol
Version 6 (IPv6) to our Total Control 100 enhanced  gigabit  routers.  The Total
Control 100 enhanced  gigabit  routers will support native IPv6 over a 2.4Gbit/s
(OC-48c)  line  interface,  the fastest  interface  available on any IPv6 router
product.


                                       9
<PAGE>

PRODUCT DEVELOPMENT

Our research and development  expenditures in fiscal years 2001,  2000, and 1999
were $535.7 million,  $597.8  million,  and $586.1  million,  respectively.  Our
research  and  development  expenditures  span  efforts  to create  new types of
products  and  classes of service as well as to expand and  improve  our current
product lines.

We are  now  focusing  a  higher  percentage  of our  research  and  development
investments in several high-growth or emerging areas. In fiscal 2002, we plan to
invest a significant  amount of our total  research and  development  in Gigabit
Ethernet-Over-Copper  technology,  Voice  over IP and  Wireless  CDMA  services,
wireless networking products,  Layer 3+ switching and IP telephony  technologies
to accelerate the introduction of new products to market.

Historically,  we have  incorporated  proprietary  ASICs  into our  products  to
provide key functions,  cost  efficiency,  and the capacity for future upgrades.
Customers can benefit from new  technologies and enhanced  capabilities  through
inexpensive, simple software upgrades rather than expensive, disruptive hardware
replacements.  In addition, ASICs facilitate higher density  platforms--critical
in certain  applications,  such as high-speed  Layer 3  switching--and  are less
costly to manufacture. We incorporate ASIC technology into many of our products,
including NICs, switches, hubs, and remote access equipment.

SIGNIFICANT CUSTOMERS

For the  fiscal  year  ended June 1, 2001,  Ingram  Micro  Inc.  (Ingram  Micro)
accounted  for 15 percent of our total sales.  For the fiscal year ended June 2,
2000,  Ingram  Micro and Tech Data  Corporation  (Tech  Data)  accounted  for 15
percent  and 13 percent of our total  sales,  respectively.  For the fiscal year
ended May 28, 1999,  Ingram Micro and Tech Data  accounted for 16 percent and 12
percent of our total sales, respectively.

INTERNATIONAL OPERATIONS

We market our products globally, primarily through subsidiaries,  sales offices,
and  relationships  with  OEMs  and  distributors  with  local  presence  in all
significant global markets.  Outside the U.S., we have significant  research and
development groups in the UK and Ireland.  We have  manufacturing  facilities in
Ireland and Singapore.  We will continue manufacturing products in our Singapore
facility  until  September  30,  2001,  after  which time the  facility  will be
utilized as a  distribution  center.  We maintain  sales offices in 49 countries
outside the U.S.

BACKLOG

In many cases we  manufacture  our products in advance of receiving firm product
orders from our customers based upon our forecasts of worldwide customer demand.
Generally,  orders are placed by the customer on an  as-needed  basis and may be
canceled  or  rescheduled   by  the  customer   without   significant   penalty.
Accordingly,  backlog as of any particular  date is not indicative of our future
sales.  As of June 1, 2001, we do not have backlog  orders that cannot be filled
within the next fiscal year.

MANUFACTURING

We  use  a  combination  of  in-house  manufacturing  and  independent  contract
manufacturers to produce our products.  We operate  manufacturing  facilities in
Santa Clara, California; Mount Prospect, Illinois; Blanchardstown,  Ireland; and
Changi, Republic of Singapore.  Purchasing,  assembly,  burn-in,  testing, final
assembly,  and  quality  assurance  functions  are  performed  at all  of  these
facilities.  On June 19, 2001, we announced a contract manufacturing arrangement
with Flextronics International (Flextronics) for our high volume server, desktop
and  mobile  products,   and  our  intention  to  liquidate  certain  facilities
associated with  manufacturing  operations in fiscal 2002.  Those facilities are
located in  Marlborough,  Massachusetts;  Mount  Prospect,  Illinois;  and Santa
Clara,  California.  In addition,  the  Singapore  manufacturing  facility  will
transition  to become  3Com's  Asia-Pacific  regional  distribution  center  and
regional sales and support office.


                                       10
<PAGE>

INTELLECTUAL PROPERTY AND RELATED MATTERS

The quality of our innovation is reflected in a substantial portfolio of patents
covering a wide  variety of  networking  technologies.  This  ownership  of core
networking  technologies  creates  opportunities  to  leverage  our  engineering
investments and develop more  integrated,  powerful,  and innovative  networking
solutions for customers.

We rely on U.S. and foreign patents,  copyrights,  trademarks, and trade secrets
to establish and maintain proprietary rights in our technology and products.  We
have an active program to file  applications  for and obtain patents in the U.S.
and in selected  foreign  countries  where a potential  market for our  products
exists.  Our  general  policy  has  been to seek  patent  protection  for  those
inventions and improvements likely to be incorporated in our products or that we
otherwise  expect to be valuable.  As of June 1, 2001,  we had 578 U.S.  patents
(including 557 utility patents and 21 design  patents) and 103 foreign  patents.
During fiscal 2001, we filed 349 patent applications in the U.S. Numerous patent
applications  are currently  pending in the U.S. and other countries that relate
to our research and  development.  We also have patent cross license  agreements
with other companies.

We have  registered 95 trademarks in the U.S. and have registered 101 trademarks
in one or more of 72 foreign countries.  Numerous  applications for registration
of domestic and foreign trademarks are currently pending.

EMPLOYEES

As of June 1,  2001,  we had  8,165  full time  employees,  of whom  1,994  were
employed in engineering,  2,648 in sales, marketing, and customer service, 1,698
in manufacturing, and 1,825 in finance and administration. Our employees are not
represented by a labor  organization,  and we consider our employee relations to
be satisfactory.

PALM SEPARATION

On September 13, 1999, we announced a plan to conduct an initial public offering
(IPO) of our Palm subsidiary.  On March 2, 2000, we sold 4.7% of Palm's stock to
the  public in an IPO and sold 1.0% of Palm's  stock in private  placements.  On
July  27,  2000,  we  completed  the  Palm  spin-off  by   distributing  to  our
shareholders  all  of the  remaining  Palm  common  stock  that  we  owned.  The
distribution  ratio was 1.4832 shares of Palm for each outstanding share of 3Com
common stock.

RESTRUCTURING CHARGES

During fiscal 2001 and fiscal 2000, we undertook  several  initiatives  aimed at
both changing business strategy as well as improving  operational  efficiencies.
Restructuring  charges in fiscal  2001 were  $163.7  million  and related to the
realignment of our business strategy and reduction in force and cost containment
efforts.  Restructuring charges in fiscal 2000 were $68.9 million, of which $9.9
million related to the separation of Palm from 3Com and $59.0 million related to
implementing our change in strategic focus.  These charges are discussed further
in "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations."

ITEM 2. Properties

We operate in a number of locations  worldwide.  In fiscal 2001,  we had several
significant real estate activities.


                                       11
<PAGE>

During  the third  quarter of fiscal  2001,  we leased a new  building  totaling
78,000 square feet in West Valley City, Utah. The lease will expire in 2007. The
facility will be used  primarily  for office space and research and  development
activities.

During the third quarter of fiscal 2001, we sold a vacated  296,000  square foot
manufacturing and office facility in Morton Grove, Illinois.

We completed an expansion project at the existing Dublin,  Ireland manufacturing
facility.  The construction was completed and fully operational in October 2000.
This expansion added 177,000 square feet to the existing 307,000 square feet.

In the  first  quarter  of  fiscal  2001,  we sold  approximately  39  acres  of
undeveloped land in the San Francisco Bay Area.

We lease and sublease to third-party tenants  approximately  317,000 square feet
of office and research  and  development  space on our Santa  Clara,  California
headquarters site and  approximately  15,000 square feet at our Winnersh site in
the UK. The terms of these agreements  expire in 2002 and 2003. We also sublease
approximately 404,000 square feet of owned manufacturing and office space in the
Chicago area,  137,000 square feet of leased office and research and development
space in the Boston area, and approximately 132,000 square feet of leased office
space in the San Francisco Bay area to third-party  tenants.  The terms of these
agreements expire in 2003, 2002 and 2006, respectively. These locations, as well
as other subleased locations, are included in the table below.

Our primary locations include the following:

<TABLE>
<CAPTION>
     Location                  Sq. Ft.           Owned/Leased         Primary Use
     --------                  -------           ------------         -----------
<S>                          <C>                    <C>               <C>
     United States -         1,374,000              Leased            Corporate headquarters, office, customer service,
     San Francisco                                                    research and development, manufacturing,
     Bay Area                                                         distribution, and computer center

                               120,000               Owned            Office, research and development leased to third-party
                                                                      tenant

     United States -         1,149,000               Owned            Office, research and development, customer service,
     Chicago Area                                                     and manufacturing

     United States -           566,000              Leased            Office, research and development, customer service
     Boston Area

     United States -           185,000               Owned            Property vacant; held for sale
     Salt Lake City Area
                                78,000              Leased            Office, research and development

     Asia Pacific -            333,000               Owned            Office, manufacturing, and distribution
     Singapore

     Europe -                  484,000               Owned            Office, research and development, and manufacturing
     Ireland

     Europe -                  283,000           Owned/Leased         Office, research and development, and customer
     UK                                                               service
</TABLE>


                                       12
<PAGE>

As part of our initiatives to maximize the efficiency of our facilities, we will
be  consolidating  and  liquidating  excess  real  estate in  several  locations
globally  over  the  next  12 to 18  months.  We  intend  to  liquidate  certain
facilities associated with research and development and manufacturing operations
located in  Marlborough,  Massachusetts;  Mount  Prospect,  Illinois;  and Santa
Clara,  California.  In addition,  the  Singapore  manufacturing  facility  will
transition  to become  3Com's  Asia-Pacific  regional  distribution  center  and
regional sales and support office.

ITEM 3. Legal Proceedings

We are a party to lawsuits in the normal course of our  business.  Litigation in
general, and intellectual property and securities litigation in particular,  can
be expensive and disruptive to normal business operations. Moreover, the results
of complex legal  proceedings are difficult to predict.  We believe that we have
defenses in each of the cases set forth below and are vigorously contesting each
of these  matters.  An  unfavorable  resolution  of one or more of the following
lawsuits  could  adversely  affect  our  business,  results  of  operations,  or
financial condition.

Securities Litigation

In December  1997, a securities  class action lawsuit  captioned  Reiver v. 3Com
Corporation,  et al., Civil Action No. C-97-21083JW  (Reiver),  was filed in the
United States  District Court for the Northern  District of California.  Several
similar actions have been consolidated into this action, including Florida State
Board of  Administration  and  Teachers  Retirement  System of Louisiana v. 3Com
Corporation,  et al.,  Civil  Action  No.  C-98-1355.  On August 17,  1998,  the
plaintiffs filed a consolidated  amended  complaint which alleged  violations of
the  federal  securities  laws,  specifically  Sections  10(b)  and 20(a) of the
Securities  and Exchange Act of 1934,  and which sought  unspecified  damages on
behalf of a purported class of purchasers of 3Com common stock during the period
from April 23, 1997 through  November 5, 1997.  In May 2000,  3Com  answered the
amended complaint. In October 2000, the parties agreed to settle this action and
all  other  related  actions,  including  Adler v.  3Com  Corporation,  which is
discussed  below.  On February  23,  2001,  the Court  entered a final  judgment
approving the settlement.

In October  1998, a securities  class action  lawsuit,  captioned  Adler v. 3Com
Corporation,  et al., Civil Action No. CV777368 (Adler),  was filed against 3Com
and certain of its officers  and  directors in the  California  Superior  Court,
Santa Clara County,  asserting the same class period and factual  allegations as
the Reiver action.  The complaint alleged violations of Sections 25400 and 25500
of the California  Corporations Code and sought unspecified damages. The parties
agreed to stay this case to allow the Reiver case to proceed. Along with Reiver,
this case was settled in October 2000. As part of the settlement, the plaintiffs
have agreed to dismiss this action with  prejudice.  The  settlement  amount was
$259.0 million, of which $9.0 million was recovered from insurance. Accordingly,
3Com recorded a litigation charge of $250.0 million in October 2000.

In November 2000, a shareholder  derivative  and class action lawsuit  captioned
Shaev v. Claflin, et al., No. CV794039,  was filed in California Superior Court.
The  complaint   alleges  that  the   Company's   directors  and  officers  made
misrepresentations  and/or  omissions and breached their fiduciary duties to the
Company in connection with the adjustment of employee and director stock options
in connection  with the  separation of the Company and Palm,  Inc. It is unclear
whether the  plaintiff is seeking  recovery from 3Com or if the Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company and the  individual  defendants  have  removed this action to the United
States District Court for the Northern District of California,  where the action
is captioned Shaev v. Claflin,  et al., No.  CV-01-0009-MJJ.  The case was later
remanded back to the California Superior Court. Defendants have not responded to
the complaint. No trial date has been set.


                                       13
<PAGE>

Intellectual Property

On May 26, 2000, 3Com Corporation filed suit against Xircom,  Inc. in the United
States District Court for the District of Utah,  Civil Action No.  2:00-CV-0436C
alleging  infringement of U.S.  Patents Nos.  6,012,953,  5,532,898,  5,696,660,
5,777,836 and 6,146,209,  accusing  Xircom of infringement of one or more of the
claims of the patents-in-suit by reason of the manufacture, sale, and use of the
Real Port and Real Port 2 families of PC Cards,  as well as a number of Xircom's
Type II PC Modem Cards. Xircom has  counter-claimed  for a declaratory  judgment
that  the  asserted  claims  of the  patents-in-suit  are  invalid  and / or not
infringed.  This case is currently in the  discovery  phase.  Currently  pending
before  the Court is 3Com's  motion  for a  preliminary  injunction  on the '209
patent. The Company intends to vigorously pursue this action.

On September 21, 2000, Xircom,  Inc. filed an action against 3Com Corporation in
the United States District Court for the Central  District of California,  Civil
Action No. Case No.: 00-10198 MRP, accusing 3Com of infringement of U.S. Patents
Nos.   5,773,332,   5,940,275,   6,115,257  and  6,095,851,   accusing  3Com  of
infringement  by reason of the  manufacture,  sale,  and use of the 3COM  10/100
LAN+Modem  CardBus  Type III PC Card,  the 3COM 10/100 LAN  CardBus  Type III PC
Card,  the 3COM  Megahertz(R)  10/100 LAN  CardBus PC Card,  the 3COM  Megahertz
10/100  LAN+56K  Global Modem CardBus PC Card and the 3COM  Megahertz 56K Global
GSM and  Cellular  Modem  PC  Card.  3Com has  counter-claimed  for  declaratory
judgment  that the  asserted  claims of the  patents-in-suit  are not  infringed
and/or  invalid and that the claims of the 5,940,275  patent are  unenforceable.
This case is in the  discovery  phase.  Xircom  filed a motion  for  preliminary
injunction seeking to enjoin 3Com from the continued manufacture and sale of its
Type III PC card products. The motion was heard on March 26, 2001 and was denied
by the Court.  Currently  pending  before the Court is 3Com's Motion for Summary
Judgment  of  Non-infringement  of the  '332  patent.  The  Company  intends  to
vigorously pursue this action.

On July 6, 2001, Xircom,  Inc. filed an action against the Company in the United
States District Court for the Central  District of California,  Civil Action No.
01-5902 GAF (JTLX).  Xircom's  complaint  accuses 3Com of  infringement  of U.S.
Patent No.  6,241,550 by reason of the  manufacture,  sale,  and use of the 3COM
10/100  LAN+Modem  CardBus Type III PC Card and the 3COM 10/100 LAN CardBus Type
III PC  Card.  3Com  has not yet  answered  the  Complaint,  but an  answer  and
counterclaim  will be filed and served in the near future.  This action has only
recently been filed,  but Xircom has threatened to file a motion for preliminary
injunction on the '550 patent.  That motion has not yet been filed.  The Company
intends to vigorously pursue this action.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

Executive Officers of 3Com Corporation

The following  table lists the names,  ages and positions  held by all executive
officers of 3Com.  There are no family  relationships  between  any  director or
executive officer and any other director or executive officer of 3Com. Executive
officers serve at the discretion of the Board of Directors.


                                       14
<PAGE>

         Name               Age     Position
         ----               ---     --------

     Bruce L. Claflin       49      Chief Executive Officer

     Irfan Ali              37      President, CommWorks Corporation

     Dennis Connors         47      President, 3Com Business Connectivity
                                    Company

     John McClelland        56      President, 3Com Business Networks Company

     Gwen McDonald          46      Interim Senior Vice President, Corporate
                                    Services

     Mark D. Michael        50      Senior Vice President, Legal and Government
                                    Relations, and Secretary

     Michael Rescoe         48      Senior Vice President, Finance and Planning,
                                    and Chief Financial Officer

     Janet L. Soderstrom    54      Senior Vice President, Worldwide Marketing
                                    and Brand Management

BRUCE L. CLAFLIN has been 3Com's Chief Executive  Officer since January 2001 and
President and Chief Operating  Officer since August 1998. Prior to joining 3Com,
Mr. Claflin worked for Digital Equipment  Corporation (DEC) from October 1995 to
June 1998. From July 1997 to June 1998, he was Senior Vice President and General
Manager,  Sales  and  Marketing  at DEC and  prior  to that  he  served  as Vice
President  and General  Manager of DEC's  Personal  Computer  Business Unit from
October 1995 to June 1997.  From April 1973 to October 1995,  Mr. Claflin held a
number of senior  management and executive  positions at International  Business
Machines  Corporation  (IBM).  Mr.  Claflin  serves as a director of Time Warner
Telecom.

IRFAN ALI has been President of CommWorks  Corporation  since December 2000 and,
prior to that, he was the Senior Vice  President  and General  Manager of 3Com's
Carrier Systems Business Unit, the predecessor to CommWorks  Corporation,  since
March 1999.  From  October 1997 to March 1999 he was Vice  President,  Worldwide
Marketing of 3Com's Carrier  Systems.  Prior to joining 3Com, Mr. Ali worked for
Newbridge Networks, Inc., where he was Vice President,  Marketing from July 1995
to October 1997 and Assistant  Vice  President,  Fast Packet  Networks from July
1993 to June 1995.  Prior to working at Newbridge  Networks,  Inc.,  Mr. Ali was
Senior Manager, Market Development for Strategic Technology at Northern Telecom,
Inc. from July 1991 to July 1993.

DENNIS  CONNORS has been President of 3Com Business  Connectivity  Company since
June 2001.  Prior to that,  he was 3Com's  Senior Vice  President of  e-Commerce
Group from June 2000 to June 2001 and Senior Vice  President of Global  Customer
Service from November 1999 to June 2001.  Prior to joining 3Com, Mr. Connors was
the Executive  Vice  President and General  Manager of Business  Operations  and
Services for  Ericsson,  Inc. He also served as  Ericsson's  Vice  President and
Global Business Manager for WorldCom in 1997. During his tenure in Private Radio
Systems in the Ericsson/General Electric joint venture, Mr. Connors was the Vice
President of Global Product  Development  and Operations from 1995 through 1997,
and between 1993 and 1995 Mr.  Connors was the Vice  President of Marketing  and
Research and Development.


                                       15
<PAGE>

JOHN MCCLELLAND has been the President of 3Com Business  Networks  Company since
June 2001.  Prior to that, he was 3Com's Senior Vice President,  Operations from
December 2000 to June 2001 and Senior Vice  President,  Supply Chain  Operations
from April 1999 to December  2000.  Prior to joining 3Com,  Mr.  McClelland  was
Chief  Industrial  Officer  for the  Philips  Consumer  Electronics  division of
Philips International, B.V. from November 1998 to March 1999. Mr. McClelland was
Vice  President  of  Manufacturing   and   Distribution  at  Digital   Equipment
Corporation  from February  1995 to October  1998.  From October 1968 to January
1995, Mr. McClelland held various management  positions at IBM. Most recently at
IBM, he held the position of Vice President Manufacturing and Distribution,  IBM
PC Co. from April 1994 to January 1995.

GWEN  MCDONALD  has been 3Com's  Interim  Senior  Vice  President  of  Corporate
Services  since  May  2001.  Prior to  that,  Ms.  McDonald  served  in  various
capacities in Human Resources within 3Com for the past 12 years,  including vice
president of worldwide  Human  Resources  for Staffing and  Operations  and vice
president of worldwide  Supply  Operations.  Prior to joining 3Com, Ms. McDonald
was the HR manager for LSI Logic's  Santa  Clara  operations  in 1988 and served
Fairchild  Semiconductor for the 12 years prior to that, holding numerous key HR
positions within Fairchild.

MARK D.  MICHAEL has been 3Com's  Senior Vice  President,  Legal and  Government
Relations,  and  Secretary  since May 1999.  Mr.  Michael  served as Senior Vice
President,  Legal,  General  Counsel and Secretary  since  September  1997.  Mr.
Michael joined 3Com in 1984 as Counsel,  was named Assistant  Secretary in 1985,
and General  Counsel in 1986.  Prior to joining 3Com, Mr. Michael was engaged in
the private practice of law with law firms in Honolulu, Hawaii from 1977 to 1981
and in San Francisco from 1981 to 1984.

MICHAEL RESCOE has been 3Com's Senior Vice President,  Finance and Planning, and
Chief  Financial  Officer since May 2000.  Prior to joining 3Com, Mr. Rescoe was
the Chief  Financial  Officer for Intelisys  Electronic  Commerce in New York in
1999. He also served as the Chief Financial  Officer for PG&E Corporation in San
Francisco from 1997 through 1999.  Before holding that position,  Mr. Rescoe was
the Chief  Financial  Officer of Enserch  Corporation in Dallas between 1995 and
1997.  Previous to his Enserch  position,  he was the Senior  Managing  Director
(Partner) at Bear Sterns in New York  beginning in 1992 through  1995.  Prior to
1992, Mr. Rescoe was the Senior Vice  President of Corporate  Finance at Kidder,
Peabody, also in New York.

JANET L. SODERSTROM has been 3Com's Senior Vice President,  Worldwide  Marketing
and Brand Management  since October 1999. Prior to joining 3Com, Ms.  Soderstrom
joined Visa USA in 1985 as Director of Advertising and Marketing.  She served as
Visa USA's Senior Vice  President of  Advertising  and  Marketing,  before being
appointed as the Executive  Vice  President of Marketing for Visa  International
from 1996 through 1999. In the past, Ms.  Soderstrom has served on the boards of
Winkler Advertising,  Decker Communications,  the Ad Council and the Association
of National Advertisers where she served as Chairman from 1994 through 1996.


                                       16
<PAGE>

PART II

ITEM 5.  Market for 3Com  Corporation's  Common  Stock and  Related  Stockholder
Matters

<TABLE>
<CAPTION>
     Fiscal 2001            High               Low            Fiscal 2000           High           Low
     -----------            ----               ---            -----------           ----           ---
<S>                       <C>                 <C>             <C>                  <C>            <C>
     First Quarter        $ 17.94             $ 9.65          First Quarter        $ 6.53        $ 4.75
     Second Quarter         20.69              12.25          Second Quarter         9.13          5.13
     Third Quarter          13.38               7.13          Third Quarter         17.19          8.25
     Fourth Quarter          7.16               4.55          Fourth Quarter        21.57          7.69
</TABLE>

Our common  stock has been traded in the Nasdaq  stock  market  under the symbol
COMS since our initial public  offering on March 21, 1984.  The preceding  table
sets forth the high and low closing sales prices as reported on the Nasdaq stock
market during the last two years. As of June 1, 2001 we had approximately  5,488
stockholders of record.  We have not paid and do not anticipate that we will pay
cash dividends on our common stock.

On July 27, 2000,  we  distributed  to our  shareholders  in the form of a stock
dividend 1.4832 shares of Palm for each outstanding  share of 3Com common stock.
The stock  prices  presented  above are  restated  stock  prices and reflect the
distribution of our ownership in Palm to our shareholders.

ITEM 6. Selected Financial Data

The following selected  financial  information has been derived from the audited
consolidated  financial  statements.  The  information  set  forth  below is not
necessarily  indicative  of results of future  operations  and should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                              Years ended
                                    ------------------------------------------------------------------------------------------

(In thousands, except                       June 1,            June 2,           May 28,            May 31,           May 31,
per share and employee data)                 2001               2000              1999               1998              1997

------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>               <C>               <C>                <C>
Sales                                     $2,820,881         $4,333,942        $5,202,253        $5,156,016         $5,481,681
Net income (loss)                          (965,376)            674,303           403,874            30,214            500,533
Income (loss) from
  continuing operations                    (969,913)            615,563           364,945            23,046            496,881
Income (loss) per share,
  continuing operations:
  Basic                                      ($2.81)              $1.77             $1.01             $0.07              $1.50
  Diluted                                     (2.81)               1.72              0.99              0.06               1.41
------------------------------------------------------------------------------------------------------------------------------
Total assets                              $3,452,802         $6,603,077        $4,239,159        $3,871,275         $3,504,984

Assets, net of discontinued
   operations                              3,452,802          5,544,840         4,158,879         3,776,901          3,471,766

Working capital, net of
   discontinued operations                 1,397,977          3,181,420         2,111,909         1,839,527          1,527,101

Long-term obligations                         10,536            141,285            94,268            92,135            170,652
Retained earnings                            771,639          1,982,079         1,403,709         1,079,775          1,049,561
Stockholders' equity                       2,505,421          4,043,064         3,196,455         2,807,495          2,228,344

Number of employees                            8,165             10,597            12,543            12,610             13,477
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       17
<PAGE>

ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

The following  discussion  should be read in conjunction  with the  consolidated
financial statements and notes thereto.

Our  consolidated  financial  statements  for all periods  account for Palm as a
discontinued  operation,  as a result of our  decision  to  distribute  the Palm
common  stock  we owned to 3Com  shareholders  in the form of a stock  dividend.
Unless otherwise  indicated,  the following discussion relates to our continuing
operations.  Subsequent to the  distribution  to  shareholders on July 27, 2000,
Palm's operations ceased to be part of our operations and reported results.

RESTRUCTURING ACTIVITIES

During fiscal 2001 and fiscal 2000, we undertook  several  initiatives  aimed at
both changing business strategy as well as improving  operational  efficiencies.
We recorded  restructuring  charges of $163.7  million and $68.9  million in the
fiscal years ended June 1, 2001 and June 2, 2000, respectively.

Exit of  Analog-Only  Modem  and  High-End  LAN/WAN  Chassis  Product  Lines and
Separation of Palm

We  realigned  our  strategy  in the fourth  quarter of fiscal  2000 to focus on
high-growth markets,  technologies,  and products.  Operations were restructured
around two  distinct  business  models:  1)  Commercial  and  Consumer  Networks
Business  and 2)  CommWorks.  In  support  of this new  strategy,  we exited our
analog-only  modem and high-end LAN and WAN chassis  product lines and completed
the  separation  of Palm.  For the fiscal  year ended June 1, 2001,  we recorded
restructuring  charges of $13.2 million  relating to these  activities.  For the
fiscal year ended June 2, 2000, we recorded net  restructuring  charges of $59.0
million,  consisting of restructuring  charges of approximately  $125.4 million,
partially  offset by a gain  recognized  upon  receipt of a warrant to  purchase
common  stock in  Extreme  Networks,  Inc.,  valued  at $66.4  million.  We also
recorded a credit of $0.2  million  and  charges of $9.9  million for the fiscal
years  ended  June 1,  2001  and  June 2,  2000,  respectively,  related  to the
separation of Palm. We completed our  restructuring  activities  associated with
the exit of the analog-only modem and high-end LAN and WAN chassis product lines
during fiscal 2001.

Global Cost Reduction to Improve Operational Efficiencies

On December  21,  2000,  we  announced  further  restructuring  activities.  The
Commercial  and  Consumer  Networks  Business  and  CommWorks   operations  were
restructured  to  enhance  the focus and cost  effectiveness  in  serving  their
respective  markets.  Effective for fiscal 2002, three independent  businesses -
Business   Connectivity   Company,   Business  Networks  Company  and  CommWorks
Corporation - were formed through this restructuring  effort, with each business
utilizing  central  shared  corporate  services.  Additionally,  we  implemented
reduction in force and cost containment actions and exited our consumer Internet
Appliance  product line to lower the cost structure of the Company and return it
to profitability. For the fiscal year ended June 1, 2001, we recorded charges of
approximately  $150.7  million  related  to  these  restructuring   initiatives.
Subsequent  to June 1, 2001, we announced  further cost  reduction and cash flow
generating  initiatives.  We plan to exit the consumer  broadband  cable and DSL
modem  product  lines and outsource  the  manufacturing  of high volume  server,
desktop  and  mobile  connectivity  products  to  Flextronics  under a  contract
manufacturing  arrangement.  Concurrent  with  such  outsourcing,  we  intend to
consolidate  our real  estate  portfolio  including  the  disposition  of excess
facilities.  We expect to incur  more  charges  related  to these  restructuring
efforts   during   fiscal  2002.  We  expect  to   substantially   complete  our
restructuring  activities  related  to the  global  cost  reduction  to  improve
operational efficiencies by May 2002.


                                       18
<PAGE>

BUSINESS COMBINATIONS AND JOINT VENTURES

We completed  the  following  transactions  during the fiscal year ended June 1,
2001:

o    During the third quarter of fiscal 2001,  we acquired the Gigabit  Ethernet
     NIC business of Alteon WebSystems  (Alteon),  a wholly-owned  subsidiary of
     Nortel  Networks  Corporation  (Nortel) for an aggregate  purchase price of
     $123.0 million,  consisting of cash paid to Nortel of $122.0  million,  and
     $1.0  million  of costs  directly  attributable  to the  completion  of the
     acquisition. We purchased the Alteon NIC business and are licensing certain
     Gigabit Ethernet-related technology and intellectual property from Alteon.

     Approximately  $22.5 million of the aggregate  purchase  price  represented
     purchased  in-process  technology  that had not yet  reached  technological
     feasibility and had no alternative future use, and accordingly, was charged
     to  operations  in the  third  quarter  of  fiscal  2001.  A risk  adjusted
     after-tax  discount  rate  of 25  percent  was  applied  to the  in-process
     project's cash flows.  This purchase  resulted in $86.0 million of goodwill
     and other  intangible  assets that are being  amortized  over an  estimated
     useful life of four years.

o    During the second quarter of fiscal 2001, we acquired Nomadic Technologies,
     Inc.  (Nomadic),  a developer of wireless  networking products that we will
     incorporate into solutions for both small business and enterprise customers
     for an aggregate  purchase price of $31.8 million,  consisting of cash paid
     to Nomadic of $23.5 million, issuance of restricted stock with a fair value
     of $3.8 million,  stock options  assumed with a fair value of $4.3 million,
     and $0.2 million of costs  directly  attributable  to the completion of the
     acquisition.

     For financial reporting purposes,  the aggregate purchase price was reduced
     by the  intrinsic  value of unvested  stock  options and  restricted  stock
     totaling   $6.9  million   which  was  recorded  as  deferred   stock-based
     compensation  and is being amortized over the respective  vesting  periods.
     Approximately  $8.3 million of the  aggregate  purchase  price  represented
     purchased  in-process  technology  that had not yet  reached  technological
     feasibility and had no alternative future use, and accordingly, was charged
     to  operations  in the  second  quarter  of fiscal  2001.  A risk  adjusted
     after-tax  discount  rate  of 30  percent  was  applied  to the  in-process
     projects' cash flows.  This purchase  resulted in $18.6 million of goodwill
     and other intangible  assets that are being amortized over estimated useful
     lives of three to five years.

o    During  the first  quarter  of fiscal  2001,  we  acquired  Kerbango,  Inc.
     (Kerbango),  developer of the  Kerbango(TM)  Internet  radio,  radio tuning
     system,  and radio  web  site,  for an  aggregate  purchase  price of $73.5
     million,  consisting of cash paid to Kerbango of $52.2 million, issuance of
     restricted stock with a fair value of $17.2 million,  stock options assumed
     with a fair  value of $3.8  million,  and $0.3  million  of costs  directly
     attributable to the completion of the  acquisition.  In addition,  deferred
     cash  payments  to founders  and certain  former  employees  totaling  $7.7
     million were contingent upon certain events through July 2002.


                                       19
<PAGE>

     For financial reporting purposes,  the aggregate purchase price,  excluding
     deferred  cash  payments,  was reduced by the  intrinsic  value of unvested
     stock  options  and  restricted  stock  totaling  $20.2  million  which was
     recorded as deferred stock-based  compensation and was being amortized over
     the  respective  vesting  periods.   Approximately  $29.4  million  of  the
     aggregate purchase price represented  purchased in-process  technology that
     had not yet reached technological feasibility and had no alternative future
     use, and  accordingly,  was charged to  operations  in the first quarter of
     fiscal  2001. A risk  adjusted  after-tax  discount  rate of 35 percent was
     applied to the in-process  project's cash flows.  This purchase resulted in
     $33.7  million of  goodwill  and other  intangible  assets  that were being
     amortized over estimated useful lives of three to five years.

     As part of our efforts to improve profitability, we announced that we would
     exit the  Internet  Appliance  product line during  fiscal year 2001.  As a
     result,  we  determined  that the net  unamortized  assets had no remaining
     future  value and  consequently  wrote  off the net  remaining  amounts  of
     deferred stock-based  compensation,  goodwill,  and intangible assets. This
     included $15.5 million of accelerated  amortization of deferred stock-based
     compensation for qualified  terminated Kerbango employees and $21.1 million
     of net goodwill and intangible assets related to the Kerbango  acquisition.
     These  charges  were  included as part of  restructuring  charges in fiscal
     2001.

o    During the first  quarter of fiscal 2001,  we completed the transfer of our
     analog-only modem product lines to U.S. Robotics Corporation (New USR), the
     new joint venture formed with Accton  Technology and NatSteel  Electronics.
     We  contributed  $3.1  million  of assets to New USR,  for an 18.7  percent
     investment in the joint venture.  U.S. Robotics Corporation has assumed the
     analog-only  modem product line,  including U.S. Robotics and U.S. Robotics
     Courier branded modems.

     During fiscal 2001, we wrote off our $3.1 million  investment in New USR as
     the value of this  investment was  determined to be  other-than-temporarily
     impaired. The amount was charged to gains (losses) on investments, net.

We completed  the  following  transactions  during the fiscal year ended June 2,
2000:

o    On April 3, 2000, we acquired Call Technologies,  Inc. (Call Technologies),
     a leading developer of Unified Messaging (UM) and carrier-class Operational
     Systems and Support (OSS) software solutions for telecommunications service
     providers, for an aggregate purchase price of $86.0 million,  consisting of
     cash of  approximately  $73.4  million,  assumption of stock options with a
     fair value of approximately $8.6 million, the assumption of $1.4 million in
     debt and $2.6 million of costs directly  attributable  to the completion of
     the  acquisition.  Approximately  $10.6 million of the total purchase price
     represented  purchased  in-process  technology  that  had not  yet  reached
     technological  feasibility,  had no alternative future use, and was charged
     to operations in the fourth quarter of fiscal 2000. This purchase  resulted
     in approximately $86.7 million of goodwill and other intangible assets that
     are being amortized over estimated useful lives of three to seven years.

     During  fiscal  year  2001,   we  determined   that  the  downturn  in  the
     telecommunications  industry resulted in an impairment of the developed OSS
     technology  and  related  goodwill  that arose  from the Call  Technologies
     acquisition.  These assets were  written down $18.2  million to fair value,
     which was estimated  using  discounted  future cash flows.  The  impairment
     charge was included in amortization and write down of intangibles, and is a
     component of  contribution  margin for  CommWorks as reported in Note 19 of
     the  consolidated   financial   statements.   Remaining  net  goodwill  and
     intangible  assets  continue to be  amortized  over their  original  useful
     lives.


                                       20
<PAGE>

o    On December 22, 1999, we acquired LANSource Technologies, Inc. (LANSource),
     a leading  developer of Internet  and LAN fax  software  and modem  sharing
     software,  for an  aggregate  purchase  price  of  $15.8  million  in  cash
     including $0.2 million of costs directly  attributable to the completion of
     the  acquisition.  Approximately  $2.9 million of the total  purchase price
     represented  purchased  in-process  technology  that  had not  yet  reached
     technological  feasibility,  had no alternative future use, and was charged
     to operations in the third quarter of fiscal 2000.  This purchase  resulted
     in approximately $13.3 million of goodwill and other intangible assets that
     are being amortized over estimated useful lives of two to five years.

     As part of our efforts to improve  profitability,  we decided that we would
     exit certain LANSource product lines and license the technology to a former
     competitor in that market. As a result of this decision, we determined that
     an impairment of developed  technology and related goodwill that arose from
     the LANSource acquisition had occurred. These assets were written down $1.1
     million to their estimated  realizable fair value. This amount was included
     in restructuring  charges in fiscal 2001. In addition, we determined that a
     customer's  product line  discontinuation  resulted in an  impairment  of a
     license  agreement  and  related  goodwill  that arose  from the  LANSource
     acquisition.  Those assets were  determined  to have no future  value,  and
     accordingly  $1.0  million  was  written  off.  The  impairment  charge was
     recorded in amortization and write down of intangibles,  and is a component
     of  contribution  margin  for  CommWorks  as  reported  in  Note  19 of the
     consolidated financial statements. Remaining net intangible assets continue
     to be amortized over their original useful lives.

o    On December 2, 1999, we acquired  Interactive Web Concepts,  Inc. (IWC), an
     Internet business  consulting,  creative design,  and software  engineering
     firm,  for an aggregate  purchase  price of $3.5 million in cash  including
     $0.1  million  of costs  directly  attributable  to the  completion  of the
     acquisition.  This  purchase  resulted  in  approximately  $4.1  million of
     goodwill  and other  intangible  assets that were being  amortized  over an
     estimated useful life of three years.

     As part of our efforts to improve  profitability,  we decided that we would
     discontinue providing IWC services during fiscal year 2001. As a result, we
     determined  that the net unamortized  assets had no remaining  future value
     and consequently wrote off $2.1 million, which was the net remaining amount
     of  goodwill   and   intangible   assets.   This  amount  was  included  in
     restructuring charges in fiscal 2001.

We completed  the  following  transactions  during the fiscal year ended May 28,
1999:

o    On March 5, 1999,  we  acquired  NBX  Corporation  (NBX),  a  developer  of
     IP-based  telephony  systems that integrate  voice and data  communications
     over small  business LANs and WANs.  The aggregate  purchase price of $87.8
     million  consisted of cash of  approximately  $75.4 million,  assumption of
     stock options with a fair value of  approximately  $11.9 million,  and $0.5
     million  of  costs   directly   attributable   to  the  completion  of  the
     acquisition.  Approximately  $5.6  million  of  the  total  purchase  price
     represented  purchased  in-process  technology  that  had not  yet  reached
     technological  feasibility,  had no alternative future use, and was charged
     to operations in the fourth quarter of fiscal 1999. This purchase  resulted
     in approximately $94.4 million of goodwill and other intangible assets that
     are being amortized over estimated useful lives of two to seven years.


                                       21
<PAGE>

o    On February 18, 1999, we acquired  certain assets of ICS  Networking,  Inc.
     (ICS), a wholly-owned  subsidiary of Integrated  Circuit Systems,  Inc. and
     manufacturer  of  integrated  circuit  products  focused  on the design and
     marketing  of  mixed  signal  integrated  circuits  for  frequency  timing,
     multimedia, and data communications applications, for an aggregate purchase
     price of $16.1  million in cash  including  $0.1 million of costs  directly
     attributable  to the  completion  of the  acquisition.  Approximately  $5.0
     million  of the  total  purchase  price  represented  purchased  in-process
     technology  that  had not yet  reached  technological  feasibility,  had no
     alternative  future use, and was charged to operations in the third quarter
     of fiscal 1999.  This purchase  resulted in  approximately  $6.9 million of
     goodwill  and  other  intangible  assets  that  are  being  amortized  over
     estimated useful lives of three to seven years.

o    On January 25, 1999, we entered into a joint  venture  named  ADMTek,  Inc.
     (ADMtek).  We  contributed  approximately  $5.3  million  in cash  for a 44
     percent  interest in the joint  venture and began  consolidating  the joint
     venture with our results,  due to our ability to exercise  control over the
     operating and financial  policies of the joint venture.  In September 1999,
     we sold a portion of our existing  interest in ADMTek to our joint  venture
     partner.  As a result of this sale, our ownership  interest was reduced and
     we no longer exercised  control over the joint venture.  Therefore,  during
     the second  fiscal  quarter of fiscal 2000,  we began  accounting  for this
     investment using the cost method.

o    On November 6, 1998, we acquired EuPhonics,  Inc. (EuPhonics),  a developer
     of  digital  signal  processor   (DSP)-based  audio  software  that  drives
     integrated circuits, sound cards, consumer electronics, and other hardware.
     The  aggregate  purchase  price  of  $8.3  million  consisted  of  cash  of
     approximately  $6.6 million,  assumption of stock options with a fair value
     of  approximately  $1.5  million,   and  $0.2  million  of  costs  directly
     attributable to the completion of the acquisition. The charge for purchased
     in-process technology associated with the acquisition was not material, and
     was included in research and development  expenses in the second quarter of
     fiscal 1999.  This  purchase  resulted in  approximately  $10.8  million of
     goodwill  and other  intangible  assets  that  were  being  amortized  over
     estimated useful lives of four years.

     As part of our efforts to change strategic focus in fiscal 2001, we decided
     that we  would  exit  the  products  and  technology  that  arose  from the
     EuPhonics acquisition.  As a result, we determined that the net unamortized
     assets  had no  remaining  future  value  and  consequently  wrote off $5.8
     million,  which was the net  remaining  amount of goodwill  and  intangible
     assets. This amount was included in restructuring charges in fiscal 2001.


                                       22
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years  indicated,  the percentage
of total  sales  represented  by the line items  reflected  in our  consolidated
statements of operations:

<TABLE>
<CAPTION>
                                                                         Fiscal Years Ended
                                                                 ---------------------------------

                                                                 June 1,       June 2,      May 28,
                                                                  2001          2000         1999
                                                                 ---------------------------------
<S>                                                              <C>           <C>           <C>
Sales                                                            100.0%        100.0%        100.0%
Cost of sales                                                     81.1          57.1          55.7
                                                                 -----         -----         -----
Gross margin                                                      18.9          42.9          44.3
                                                                 -----         -----         -----
Operating expenses:
     Sales and marketing                                          28.4          22.0          19.5
     Research and development                                     19.0          13.8          11.3
     General and administrative                                    6.5           4.9           4.3
     Amortization and write-down of intangibles                    2.5           0.6           0.4
     Purchased in-process technology                               2.1           0.3           0.2
     Merger-related credits, net                                    --          (0.1)         (0.3)
     Restructuring charges                                         5.8           1.6            --
                                                                 -----         -----         -----
         Total operating expenses                                 64.3          43.1          35.4
                                                                 -----         -----         -----
Operating income (loss)                                          (45.4)         (0.2)          8.9
Net gains on land and facilities                                   6.3           0.6           0.1
Gains (losses) on investments, net                                (0.7)         19.4          (0.1)
Litigation settlement                                             (8.8)           --            --
Interest and other income, net                                     5.1           2.4           1.1
                                                                 -----         -----         -----
Income (loss) from continuing operations before income
  taxes and equity interests                                     (43.5)         22.2          10.0
Income tax provision (benefit)                                    (9.1)          7.9           3.0
Other interests in loss of consolidated joint venture               --            --            --
Equity interest in loss of unconsolidated investee                  --           0.1            --
                                                                 -----         -----         -----
Income (loss) from continuing operations                         (34.4)         14.2           7.0

Income from discontinued operations                                0.2           1.4           0.8
                                                                 -----         -----         -----

Net income (loss)                                                (34.2)%        15.6%          7.8%
                                                                 =====         =====         =====
</TABLE>

Comparison of fiscal years ended June 1, 2001 and June 2, 2000

Sales

Fiscal 2001 sales  totaled $2.82  billion,  a decrease of 35 percent from fiscal
2000  sales of $4.33  billion.  During  fiscal  2001,  our  principal  operating
segments were: 1) Commercial and Consumer Networks and 2) CommWorks.


                                       23
<PAGE>

Commercial  and Consumer  Networks.  Sales of  commercial  and consumer  network
products (e.g., switches, desktop NICs, PC cards, LAN telephony, broadband cable
and DSL modems, hubs, wireless LANs, and customer service and support) in fiscal
2001 were $2.27  billion,  a decrease  of 19 percent  from  fiscal 2000 sales of
$2.80 billion. The decrease in sales of commercial and consumer network products
when compared to fiscal 2000 was due to significant competitive pressures in our
LAN  infrastructure,  NIC and PC Card product lines,  resulting in lower pricing
and loss of market share. The market growth for these mature  technologies  also
slowed  with the  economic  downturn in fiscal  2001.  The exiting of our large,
complex chassis products at the end of fiscal 2000 and cost reduction efforts in
fiscal 2001 also resulted in disruptions in sales of our ongoing  products.  The
decrease  in sales was  partially  offset by growth in new  product  and  market
segments  such  as  Layer  3+  switching,  LAN  telephony,   wireless  LANs  and
Gigabit-over-copper  NICs. We also  experienced  revenue  growth in our consumer
cable and DSL modem products, although we announced on June 7, 2001 that we have
discontinued these products due to an inability to sustain a profitable business
model. Sales of commercial and consumer network products  represented 81 percent
of total  sales in fiscal  2001  compared to 65 percent of total sales in fiscal
2000.

CommWorks.  Sales of CommWorks  products (e.g.,  access  infrastructures  and IP
services platforms for network service  providers,  enhanced data, IP telephony,
wireless,  cable, and DSL access systems, remote access concentrators) in fiscal
2001 were $0.40  billion,  a decrease  of 31 percent  from  fiscal 2000 sales of
$0.58  billion.  The decrease in sales of CommWorks  products  when  compared to
fiscal 2000 was due  primarily  to the  slowdown in the U.S.  telecommunications
industry,  which resulted in a significant decline in revenues from our enhanced
data  products,   partially  offset  by  growth  of  our  wireless  CDMA  access
infrastructure  products.  Sales of CommWorks products represented 14 percent of
total sales in fiscal 2001 compared to 13 percent of total sales in fiscal 2000.

Exited Product  Lines.  Sales of exited  product lines  (analog-only  modems and
high-end  LAN and WAN chassis  products)  in fiscal 2001 were $0.15  billion,  a
decrease of 84 percent from fiscal 2000 sales of $0.95 billion.  The decrease in
sales of exited  product lines when compared to fiscal 2000 was due primarily to
the impact of our business restructuring and change in strategic focus. Sales of
exited products  represented 5 percent of total sales in fiscal 2001 compared to
22 percent of total sales in fiscal 2000.

Geographic.  U.S.  sales  represented  45 percent of total  sales in fiscal 2001
compared to 49 percent in fiscal 2000 and  decreased 40 percent when compared to
fiscal  2000.  International  sales in fiscal  2001  decreased  30 percent  when
compared to fiscal  2000.  The overall  decline in both U.S.  and  international
sales  is  largely   attributable  to  the  worldwide   deteriorating   economic
conditions, especially the U.S. telecommunications market.

New  Operating  Segments.  Beginning in fiscal 2002,  we have  implemented a new
organizational  structure  to refine  our  strategic  focus.  As a  result,  the
principal  operating segments for fiscal 2002 will be: 1) Business  Connectivity
Company,  2) Business  Networks  Company and 3) CommWorks.  Revenues  related to
product lines we have exited in fiscal 2001 or have announced discontinuation in
fiscal 2002, such as our consumer cable and DSL modems,  will be aggregated with
other exited products and will be presented  separately from our three operating
segments beginning in the first quarter of fiscal 2002.


                                       24
<PAGE>

Gross Margin

Gross margin as a percentage of sales was 18.9 percent in fiscal 2001,  compared
to 42.9 percent in fiscal 2000.  Gross margin declined ten percentage  points in
fiscal 2001 due to reductions in standard margin. The decline in standard margin
was  primarily  caused  by a mix shift to  lower-margin  commercial  access  and
consumer broadband modem products and eroding prices on LAN infrastructure,  NIC
and PC Card products.  Gross margin declined eight  percentage  points in fiscal
2001 resulting from higher  provisions for excess and obsolete  inventory due to
reduced demand and the  discontinuation  of our consumer  product  lines.  Gross
margin  declined  six  percentage  points  in fiscal  2001 due to  underutilized
capacity in our manufacturing plants and commitment  shortfalls with subcontract
manufacturers.  We also  recorded  a  liability  related  to future  contractual
commitments with a subcontract manufacturer as a result of our intention to exit
our consumer  product  lines and the  reduction in sales  demand.  We are taking
actions to address  manufacturing  capacity and other  supply chain  utilization
issues  through our  restructuring  efforts.  As these efforts are  successfully
completed, we expect gross margins to improve over fiscal 2001 levels.

Operating Expenses

Operating expenses in fiscal 2001 were $1.81 billion,  or 64.3 percent of sales,
compared to $1.86  billion,  or 43.1 percent of sales in fiscal 2000.  Excluding
amortization and write down of intangibles  charges of $69.7 million,  purchased
in-process  technology charges of $60.2 million,  net merger-related  credits of
$0.7 million,  and restructuring  charges of $163.7 million,  operating expenses
would  have been  $1.52  billion,  or 53.9  percent  of sales for  fiscal  2001.
Excluding  amortization and write down of intangibles  charges of $24.5 million,
purchased  in-process  technology  charges of $13.5 million,  net merger-related
credits of $2.3 million, and restructuring  charges of $68.9 million,  operating
expenses  would have been  $1.76  billion,  or 40.6  percent of sales for fiscal
2000. We are taking  actions that are intended to reduce  operating  expenses in
future periods.

Sales and  Marketing.  Sales and  marketing  expenses in fiscal  2001  decreased
$145.2 million or 15.3 percent from fiscal 2000. Sales and marketing expenses as
a percentage of sales increased to 28.4 percent of sales in fiscal 2001 compared
to 22.0 percent of sales in fiscal 2000.  The  year-over-year  decrease in sales
and marketing  expenses in absolute  dollars was  attributable  to lower selling
expenses  resulting  from  the  decease  in  sales,  the exit of  product  lines
associated  with our  restructuring  activities,  reduced  headcount,  and other
cost-containment  efforts.  These  decreases were partially  offset by increased
spending  on  corporate   advertising  and  brand  recognition   programs.   The
year-over-year  increase as a percentage of sales was affected by the decline in
sales greater than the decrease in sales force and related expenses as described
above.

Research  and  Development.  Research  and  development  expenses in fiscal 2001
decreased $62.1 million, or 10.4 percent,  compared to fiscal 2000. Research and
development expenses as a percentage of sales increased to 19.0 percent of sales
in  fiscal  2001  compared  to  13.8  percent  of  sales  in  fiscal  2000.  The
year-over-year decrease in research and development expenses in absolute dollars
was  primarily  due  to  headcount  reductions  and  cost  containment  efforts,
especially in our discontinued and mature product lines. These cost savings were
partially offset by additional investments in emerging growth technologies, such
as  LAN  telephony,   wireless  LANs  and  next   generation   wireless   access
infrastructure carrier products. The year-over-year  increase as a percentage of
sales was affected by the decline in sales in fiscal 2001, as described above.


                                       25
<PAGE>

General and Administrative.  General and administrative  expenses in fiscal 2001
decreased  $31.0  million or 14.5 percent from fiscal 2000.  As a percentage  of
sales, general and administrative  expenses increased to 6.5 percent of sales in
fiscal 2001 compared to 4.9 percent of sales in fiscal 2000. The  year-over-year
decrease  in  general  and  administrative  expenses  in  absolute  dollars  was
primarily  due to  decreased  headcount,  cost  containment  efforts,  and lower
consulting  costs  associated with our  restructuring  activities.  In addition,
provisions  for bad debts were  significantly  lower than fiscal 2000 due to the
drop in sales volume. The  year-over-year  increase as a percentage of sales was
affected by the decline in sales in fiscal 2001, as described  above,  partially
offset by the decrease in expenses.

Purchased  In-Process  Technology.  During fiscal 2001, we recorded a charge for
purchased  in-process  technology of approximately $60.2 million associated with
the  acquisitions  of  certain  assets of Alteon  WebSystems  (Alteon),  Nomadic
Technologies  (Nomadic) and Kerbango.  We continued to develop technologies that
were in  process  at  Alteon,  Nomadic  and  Kerbango,  as of the  dates  of the
acquisitions.  The fair values of the existing products and technology currently
under  development were determined  using the income  approach,  which discounts
expected  future cash flows to present  value.  The  discount  rates used in the
present value calculations were typically derived from a  weighted-average  cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development life cycle. The costs to be incurred for the projects in process are
primarily labor costs for design, prototype development,  and testing. As of the
acquisition dates,  purchased in-process technology was approximately 70 percent
complete  for Alteon  projects  and 75 percent  complete  for both  Kerbango and
Nomadic  projects.  We  continued  development  of  nine  projects,   and  spent
approximately  $0.5 million,  $4.8 million and $0.6 million on Alteon,  Kerbango
and Nomadic  projects,  respectively,  as of June 1, 2001.  At the end of fiscal
2001, all purchased in-process technology projects were completed or terminated.

Merger-Related  Credits,  Net.  During  fiscal  2001,  we  recorded  net pre-tax
merger-related  credits of approximately $0.7 million.  This net amount reflects
adjustments to previously recorded merger and restructuring charges.

Restructuring Charges.  During fiscal 2001 and fiscal 2000, we undertook several
initiatives  aimed  at both  changing  business  strategy  as well as  improving
operational  efficiencies.  Restructuring  charges  in fiscal  2001 were  $163.7
million and related to the realignment of our business strategy and reduction in
force and cost containment  efforts.  Restructuring  charges in fiscal 2000 were
$68.9 million, of which $9.9 million related to the separation of Palm from 3Com
and $59.0 million related to implementing our change in strategic focus.

Net Gains on Land and Facilities.

During fiscal 2001,  3Com  finalized the sale of a 39-acre parcel of undeveloped
land in San Jose,  California to a financial  institution,  as directed by Palm,
for total net proceeds of approximately $215.6 million. 3Com recorded a net gain
of $174.4 million  related to this sale. In February  2001,  3Com sold a vacated
office  and  manufacturing  building  in Morton  Grove,  Illinois  for total net
proceeds of $12.4 million,  resulting in a gain of  approximately  $4.4 million.
During fiscal 2000,  we sold our  manufacturing  facility and related  assets in
Salt Lake City, Utah and recognized an impairment  charge for our remaining Salt
Lake City facility held for sale, which together resulted in a net gain of $25.5
million.


                                       26
<PAGE>

Gains (Losses) on Investments, Net

Net losses on  investments  of $18.6 million were  recorded  during fiscal 2001,
comprised of $117.1  million of net gains  realized on sales of publicly  traded
equity  securities and $135.7 million of net losses recognized due to fair value
adjustments  of  investments in limited  partnership  venture  capital funds and
write downs for  other-than-temporary  declines in value of both publicly traded
securities and investments in private  companies.  During fiscal 2000,  gains on
investments  were  $838.8  million,  comprised  of $792.7  million  of net gains
realized on sales of publicly traded equity  securities and $46.1 million of net
gains  recognized  due to fair  value  adjustments  of  investments  in  limited
partnership  venture capital funds and in private  companies  acquired by public
companies.

Litigation Settlement

We recorded a charge of $250.0  million during fiscal 2001 for the settlement of
the  Reiver  and  Adler  cases,  as  discussed  in Note  21 to the  consolidated
financial statements.

Interest and Other Income, Net

Interest and other income,  net was $144.6  million in fiscal 2001,  compared to
$104.3 million in fiscal 2000. The increase of $40.3 million  compared to fiscal
2000 was primarily due to higher interest income, attributable to higher average
cash and short-term investment balances, as well as higher interest rates.

Income Tax Provision

Our  effective  income tax benefit rate was 21.0 percent in fiscal 2001 compared
to an effective  income tax expense  rate of 35.5  percent in fiscal  2000.  The
fiscal 2001  benefit rate was  comprised  of a tax benefit on the United  States
federal tax loss,  offset by tax  provisions  in certain  foreign  countries,  a
valuation  allowance on deferred taxes, and  non-deductible  expenses related to
acquisitions.  The valuation  allowance reduces deferred tax assets to estimated
realizable value. The valuation allowance relates to a portion of the credit and
net operating loss  carryforwards  and other temporary  differences for which we
believe that  realization  is uncertain due to various  limitations on their use
and our operating loss in the current year.

Equity Interest in Loss of Unconsolidated Investee

In fiscal 2000, we invested $7.0 million in OmniSky Corporation (OmniSky).  This
investment  was  accounted for using the equity  method,  resulting in losses of
$1.4 million and $5.6 million in fiscal 2001 and 2000, respectively.

Income from Discontinued Operations

Income from discontinued  operations includes the results of operations of Palm.
Income from  discontinued  operations for the fiscal year ended June 1, 2001 was
$4.5 million, or $0.01 per share,  compared to $58.7 million, or $0.16 per share
for fiscal 2000.


                                       27
<PAGE>

Comparison of fiscal years ended June 2, 2000 and May 28, 1999

Sales

Fiscal 2000 sales totaled $4.33 billion,  a decrease of 16.7 percent from fiscal
1999 sales of $5.20 billion.

Commercial  and Consumer  Networks.  Sales of  commercial  and consumer  network
products in fiscal 2000 were $2.80 billion,  a decrease of 9 percent from fiscal
1999 sales of $3.09  billion.  The decrease in sales of commercial  and consumer
network products when compared to fiscal 1999 was due to price declines in NICs,
price  competition  and loss of market share in LAN workgroup hubs and switches,
and  disruption  to the sales of on-going  products that resulted from our March
20, 2000  announcement  to exit certain  product lines.  Sales of commercial and
consumer networks products  represented 65 percent of total sales in fiscal 2000
compared to 59 percent of total sales in fiscal 1999.

CommWorks.  Sales of CommWorks  products in fiscal 2000 were $0.58  billion,  an
increase of 27 percent from fiscal 1999 sales of $0.46 billion.  The increase in
sales of  CommWorks  products  when  compared  to fiscal  1999 was due to strong
demand for our CMDA wireless products.  Sales of CommWorks products  represented
13 percent of total sales in fiscal 2000 compared to 9 percent of total sales in
fiscal 1999.

Exited Product  Lines.  Sales of exited  product lines  (analog-only  modems and
high-end  LAN and WAN chassis  products)  in fiscal 2000 were $0.95  billion,  a
decrease of 42 percent from fiscal 1999 sales of $1.66 billion.  The decrease in
sales of exited  product lines when compared to fiscal 1999 was due to increased
price competition and the loss of market share in these markets. In addition, as
a result of our March  20,  2000  announcement  that we would be  exiting  these
product lines,  we experienced a significant  decrease in sales related to these
products  in the  fourth  quarter  of  fiscal  2000.  Sales of  exited  products
represented  22 percent of total sales in fiscal 2000  compared to 32 percent of
total sales in fiscal 1999.

Geographic.  U.S.  sales  represented  49 percent of total  sales in fiscal 2000
compared to 51 percent in fiscal 1999 and  decreased 21 percent when compared to
fiscal  1999.  International  sales in fiscal  2000  decreased  12 percent  when
compared to fiscal 1999. The overall decline in both U.S and international sales
was  largely  attributable  to our  decision  to exit our  high-end  LAN and WAN
chassis  and  analog-only  modem  product  lines  as part  of our  restructuring
initiative.  International  sales  reflected  strong  growth in the Asia Pacific
region, offset by lower sales in Europe.

Gross Margin

Gross margin as a percentage of sales was 42.9 percent in fiscal 2000,  compared
to 44.3 percent in fiscal 1999.  The decline in gross margins in fiscal 2000 was
due to the impact of our business  realignment  on our fourth  quarter  results,
partially  offset by higher  gross  margin  performance  during our first  three
fiscal  quarters.  For the first three quarters of fiscal 2000, the gross margin
percentage  was 46.5  percent.  The higher gross margin  performance  during the
first three  quarters of fiscal 2000 was  primarily due to  improvements  in our
inventory  management,  which  resulted in reduced  manufacturing  period costs,
partially  offset by higher  costs for certain  product  components.  During the
fourth  quarter of fiscal 2000,  gross  margins were lower due to reduced  sales
volumes associated with our restructuring  activities.  In addition, we incurred
one-time  charges of $55.5  million  within cost of sales  primarily  related to
excess and obsolete inventory, warranty reserves, and return and rebate programs
in  connection  with the  exiting of certain  product  lines.  The gross  margin
percentage  in the fourth  quarter of fiscal 2000 was 25.8  percent.  For fiscal
2000 in total,  the decline in the gross margin  percentage was relatively small
because the fourth  quarter  impact was moderated by higher gross margins during
our first three fiscal quarters.


                                       28
<PAGE>

Operating Expenses

Operating expenses in fiscal 2000 were $1.86 billion,  or 43.1 percent of sales,
compared to $1.84  billion,  or 35.4 percent of sales in fiscal 1999.  Excluding
amortization  and  write  down  of  intangibles  of  $24.5  million,   purchased
in-process  technology charges of $13.5 million,  net merger-related  credits of
$2.3 million and  restructuring  charges of $68.9  million,  operating  expenses
would  have been  $1.76  billion,  or 40.6  percent  of sales for  fiscal  2000.
Excluding  amortization  and  write-down  of  intangibles  of $19.6  million,  a
purchased in-process  technology charge of $10.6 million, and net merger-related
credits of $17.6 million,  operating expenses would have been $1.83 billion,  or
35.2 percent of sales for fiscal 1999.

Sales and Marketing. Sales and marketing expenses in fiscal 2000 decreased $66.5
million,  or 6.6 percent from fiscal  1999.  Sales and  marketing  expenses as a
percentage  of sales  increased to 22.0 percent of sales in fiscal 2000 compared
to 19.5 percent of sales in fiscal 1999.  The  year-over-year  decrease in sales
and marketing expenses in absolute dollars was attributable to lower sales force
expenses and reduced  spending on marketing  programs  related to  non-strategic
product lines. The year-over-year increase as a percentage of sales was affected
by the sharp decline in sales in the fourth quarter of fiscal 2000, as described
above,  partially  offset by the lower sales force expenses and reduced spending
on marketing programs related to non-strategic product lines.

Research  and  Development.  Research  and  development  expenses in fiscal 2000
increased  $11.7  million or 2.0 percent  compared to fiscal 1999.  Research and
development expenses as a percentage of sales increased to 13.8 percent of sales
in  fiscal  2000  compared  to  11.3  percent  of  sales  in  fiscal  1999.  The
year-over-year increase in research and development expenses in absolute dollars
was primarily due to increased  investments  in our  then-targeted  high-growth,
emerging  product  lines:   multi-services  access  to  carrier  networks,   LAN
telephony,  broadband access  (primarily cable and DSL),  wireless access,  home
networking,  and internet  appliances,  partially  offset by decreased  spending
related  to mature  product  lines  such as analog  modems.  The  year-over-year
increase as a percentage  of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described  above, as well as the increased
investments in our then-targeted emerging growth product lines.

General and Administrative.  General and administrative  expenses in fiscal 2000
decreased  $14.5  million or 6.4 percent  from fiscal 1999.  As a percentage  of
sales, general and administrative  expenses increased to 4.9 percent of sales in
fiscal 2000 compared to 4.3 percent of sales in fiscal 1999. The  year-over-year
decrease  in  general  and  administrative  expenses  in  absolute  dollars  was
primarily due to lower bad debt expenses,  which resulted from an increased rate
of  collection  of past-due  accounts,  partially  offset by higher  spending on
employee  incentive  programs and higher  consulting  costs. The  year-over-year
increase as a percentage  of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described  above,  as well as the increase
in spending on employee incentive  programs and consulting,  partially offset by
decreased bad debt expenses.

Purchased  In-Process  Technology.  During fiscal 2000, we recorded a charge for
purchased  in-process  technology of approximately $13.5 million associated with
the  acquisitions  of certain  assets of Call  Technologies  and  LANSource.  We
continued to develop  technologies that were in process at Call Technologies and
LANSource, as of the dates of the acquisitions.


                                       29
<PAGE>

Merger-Related  Credits,  Net.  During  fiscal  2000,  we  recorded  net pre-tax
merger-related  credits of approximately $2.3 million.  This net amount reflects
adjustments  to  estimates  for  previously  recorded  merger and  restructuring
charges.

Restructuring Charges. During fiscal 2000, we took steps to refocus our business
strategy,  change  our growth  profile,  and  streamline  our  operations.  This
included the separation  and IPO of Palm and the  realignment of our strategy to
focus on high-growth markets, technologies, and products.  Restructuring charges
in fiscal  2000  were  $68.9  million,  of which  $9.9  million  related  to the
separation  of Palm from 3Com and $59.0  million  related  to  implementing  our
change in strategic focus.

Net Gains on Land and Facilities

During fiscal 2000,  we sold our  manufacturing  facility and related  assets in
Salt Lake City, Utah and recognized an impairment  charge for our remaining Salt
Lake City facility held for sale, which together resulted in a net gain of $25.5
million.  During fiscal 1999, we recorded a $4.2 million net gain on the sale of
land in California.

Gains (Losses) on Investments, Net

Net gains on  investments  of $838.8  million were recorded  during fiscal 2000,
comprised of $792.7  million of net gains  realized on sales of publicly  traded
equity  securities  and $46.1 million of net gains  recognized due to fair value
adjustments of investments in limited  partnership  venture capital funds and in
private companies  acquired by public  companies.  During fiscal 1999, losses on
investments were $2.6 million.

Interest and Other Income, Net

Interest and other income,  net was $104.3  million in fiscal 2000,  compared to
$56.9 million in fiscal 1999.  The increase of $47.4 million  compared to fiscal
1999 was primarily due to higher  interest  income,  attributable to higher cash
and short-term investment balances, as well as higher interest rates.

Income Tax Provision

Our  effective  income tax rate was 35.5 percent in fiscal 2000 compared to 30.1
percent in fiscal 1999. The increase in tax rate from 1999 to 2000 was primarily
attributable  to our gains on investments  during fiscal 2000. The effective tax
rate on all other income for fiscal 2000 was 29.1 percent.

Other Interests in Loss of Consolidated Joint Venture

In  January  1999,  we  entered  into a joint  venture  named  ADMTek  and began
consolidating the joint venture with our results, due to our ability to exercise
control over its operating and financial policies.  In September 1999, we sold a
portion of our existing  interest in ADMTek to our joint venture  partner.  As a
result  of this  sale,  our  ownership  interest  was  reduced  and we no longer
exercised  control over the joint venture.  Therefore,  during our second fiscal
quarter,  we began  accounting for this  investment  using the cost method.  The
pro-rata share of the joint  venture's loss allocated to the other investors for
the period  during  which we had the ability to exercise  control over the joint
venture was $1.0 million in fiscal 2000 and $1.1 million in fiscal 1999.


                                       30
<PAGE>

Equity Interest in Loss of Unconsolidated Investee

In accordance  with equity method  accounting for our investment in OmniSky,  we
recorded a $5.6  million  charge for equity  interest in loss of  unconsolidated
investee in fiscal 2000.

Income from Discontinued Operations

Income from discontinued  operations includes the results of operations of Palm.
Income from  discontinued  operations for the fiscal year ended June 2, 2000 was
$58.7  million,  or $0.16 per share,  compared  to $38.9  million,  or $0.10 per
share, for fiscal 1999.

BUSINESS ENVIRONMENT AND INDUSTRY TRENDS

Industry trends and specific risks may affect our future business and results in
our business.  Some of the factors that could cause future results to materially
differ  from past  results  or those  described  in  forward-looking  statements
include the matters discussed below.

Our business has been adversely  impacted by the worldwide economic slowdown and
related uncertainties

Weaker economic conditions worldwide,  particularly in the U.S. and Europe, have
contributed  to the  current  technology  industry  slowdown  and  impacted  our
business resulting in:

o    reduced demand for most of our products;

o    increased risk of excess and obsolete inventories;

o    increased price competition for our products;

o    excess manufacturing capacity under current market conditions; and

o    higher overhead costs, as a percentage of revenues.

Additionally,  these economic  conditions are making it very difficult for 3Com,
our customers and our vendors to forecast and plan future  business  activities.
This level of uncertainty  severely challenges our ability to operate profitably
or to grow our business. In particular, it is difficult to develop and implement
strategy,  sustainable business models and efficient operations, and effectively
manage contract manufacturing and supply chain relationships. If the economic or
market  conditions  continue or further  deteriorate,  this will have a material
adverse impact on our financial position, results of operations and cash flow.

We are restructuring to operate as three independent businesses

We have recently  restructured our commercial and carrier systems  operations to
form three independent  businesses -- 3Com Business  Connectivity Company (BCC),
3Com Business  Networks Company (BNC) and CommWorks  Corporation  (CommWorks) --
with each  business  using  certain  central  shared  corporate  services.  Each
business has a dedicated  management  team focusing on developing  and executing
its own business  strategies,  assessing  and meeting the needs of its customers
and implementing sustainable efficient operations.


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<PAGE>

We cannot be certain that we will be able to  effectively  implement  and manage
the  restructuring of the company into three  independent  businesses or that we
can  properly  manage  these  businesses  or  that  each of the  businesses  can
successfully  run its own independent  operations.  We previously  operated as a
single  integrated  company and,  therefore,  may lack experience or operational
history in managing independently run businesses.  Also, the management teams of
each of the  businesses  may lack  the  requisite  expertise  or  experience  to
successfully  manage  and  operate  independent   businesses.   There  could  be
additional  changes  in the  management  teams as the  teams  begin  to  operate
independently,  thereby causing further disruption in both the specific business
and our combined  operations.  In addition,  this restructuring may likely cause
significant  diversion of  management  time and  resources  from other  business
activities.

Failure to effectively  implement and manage this  restructuring  or to properly
manage three independent  business operations or failure of the three businesses
to sustain  efficient  operations or to  successfully  implement  their business
strategies will likely cause further  deterioration  in revenues,  significantly
compromise our on-going  business  prospects and  materially  impair our overall
financial performance.

Cost and expense  reductions  are critical to achieving  positive  cash flow and
profitability

We are continuing  efforts to reduce our expense  structure.  In fiscal 2002, we
plan  to  reduce   fixed   costs  by   completing   our   previously   announced
reduction-in-force   plans,   substantially   increasing   outsourcing   of  our
manufacturing,  disposing of excess  facilities and completing our exit from the
broadband  cable and DSL consumer modem and Internet  Appliance  businesses.  We
believe  strict  cost  containment  and  expense  reductions  are  essential  to
achieving positive cash flow and profitability for the company, especially since
we have  experienced  a decline  in  revenues  sequentially  for the last  three
quarters  and the  outlook  on future  quarters  is  unclear  given the  general
economic  conditions.  A number of factors could  preclude us from  successfully
bringing costs and expenses in line with our revenues,  including  unplanned-for
use of cash  (see  Business  Environment  and  Industry  Trends -  "Future  cash
requirements  or  restrictions  on cash  could  have a  negative  impact  on our
financial  position"),  inability to accurately forecast business activities and
further  deterioration of our revenues. If we are not able to effectively reduce
our costs and  achieve  an  expense  structure  commensurate  with our  business
activities and revenues, we may have inadequate levels of cash for operations or
for capital  requirements,  which could significantly harm the company's ability
to operate its business.

We have  recently  changed  our  manufacturing  strategy  to  increase  contract
manufacturing

We have recently changed our manufacturing strategy so that more of our products
will be sourced from contract  manufacturers.  On September 30, 2000 we sold our
Mt.   Prospect,   Illinois   manufacturing   and   distribution   operation   to
Manufacturers'  Services Ltd. (MSL) and entered into a supply agreement with MSL
to manufacture CommWorks products,  broadband modems and certain mobile products
for us. On June 19, 2001 we announced a contract manufacturing  arrangement with
Flextronics  for our high volume server,  desktop and mobile  products,  and the
intended sale of the facilities associated with those manufacturing  operations.
The cost,  quality,  performance and  availability of third-party  manufacturing
operations  are and will be essential to the  successful  production and sale of
many of our  products.  The inability of any contract  manufacturer  to meet our
cost, quality, performance and availability standards could adversely impact our
financial  condition  or  results of  operations.  We may not be able to provide


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<PAGE>

contract  manufacturers  with  product  volumes  that are high enough to achieve
sufficient cost savings. For example,  because we have exited certain businesses
and the manufacturing  volume we provide to MSL is below the contractual minimum
requirements,  we may be subject to financial liabilities.  Also, our ability to
control  the  quality of products  produced  by  contract  manufacturers  may be
limited and quality  issues may not be resolved in a timely  manner  which could
adversely impact our financial condition or results of operations.

The smooth transition from internal manufacturing to contract manufacturing by a
third  party is  critical  to our  success.  Failure to  implement  and manage a
successful transition may cause severe disruptions in our supply chain that will
affect cost,  quality and availability of products.  Additionally,  from time to
time we may change our  arrangements  with  contract  manufacturers,  especially
where such  arrangements  are  uneconomical.  Such changes in arrangements  with
contract  manufacturers may also cause disruptions in our supply chain or result
in financial penalties if such transition is not managed properly.

Many factors may impact our ability to implement  these  changes,  including our
ability to manage the implementation internally, sustain the productivity of our
workforce, quickly respond to and recover from unforeseen events associated with
these  changes,  such as the  potential  for a sustained  economic  downturn and
reduced demand for our products.

We face increased  competition  and our financial  performance and future growth
depend  upon  sustaining  leadership  positions  in  our  existing  markets  and
successfully targeting new markets

Competitive  challenges  faced by 3Com are  likely  to  arise  from a number  of
factors,  including:  industry  volatility  resulting from rapid development and
maturation of technologies;  industry consolidation  resulting in companies with
greater  financial,   marketing  and  technical   resources;   increasing  price
competition in the face of weakening economic conditions and excess inventories;
and  continuing  silicon  integration of networking  products.  3Com competes in
three specific markets that serve enterprise and service provider customers. Our
principal  competitors in the enterprise networking market include Avaya, Cisco,
Enterasys (Cabletron),  Hewlett-Packard,  Lucent and Nortel. In the connectivity
market,  our principal  competitor is Intel;  other competitors  include Accton,
D-Link and NetGear.  Principal  competitors  in the  telecommunications  service
provider market include Cisco, Ericsson,  Lucent, Nortel, Siemens and Sonus. Our
competitors  range from  large,  diversified  telecommunications  equipment  and
networking  companies to smaller  companies with a more  specialized  focus.  As
siliconization  continues and networking  functions  become more embedded on the
motherboard,  we are increasingly  facing  competition from parties who are also
our current suppliers of products.  Our failure to compete  successfully against
current or future  competitors  could harm our  business,  operating  results or
financial condition.  Likewise, integration of networking,  communications,  and
computer   processing   functionality  on  a  reduced  number  of  semiconductor
components may adversely affect our future sales growth and operating results.

We are investing a significant  proportion of our resources in several  emerging
product  lines in markets  that are expected to grow at a  significantly  higher
rate than the networking industry average.  These emerging product lines include
Gigabit  Ethernet-Over-Copper  technology,  Voice  over  IP and  CDMA  services,
wireless  networking  products,  Layer 3+ switching and IP telephony.  We expect
these product lines to account for a higher  percentage of our future sales over
time,  although the markets for these  products and solutions are still emerging
and may not develop to our  expectations.  Industry  standards for some of these
technologies  are yet to be widely  adopted  and the  market  potential  remains
unproven.  If these  markets do not grow at a  significant  rate or if we do not
increase  our sales in these  product  lines,  our  financial  results  would be
adversely affected and we might need to change our business strategy.


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<PAGE>

Also,  in the  markets in which we  compete,  products  have short life  cycles.
Therefore, our success depends on our ability to identify new market and product
opportunities,  to develop and introduce new products in a timely manner, and to
gain market  acceptance of new products,  particularly in our targeted  emerging
markets. Any delay in new product  introductions,  lower than anticipated demand
for our new products or higher  manufacturing costs could have an adverse affect
on our operating results or financial  condition,  particularly in those product
markets we have identified as emerging high-growth opportunities.

Demand forecasting,  increased contract  manufacturing and historical components
shortages continue to pose major supply chain risks

Current  business  conditions and operational  challenges in managing our supply
chain affect our business in a number of ways:

o    certain key components, in the recent past, have had limited availability;

o    there are a smaller  number of suppliers  and we have narrowed our supplier
     base;

o    our ability to accurately forecast demand is diminished;

o    our significantly  increased reliance on third-party  manufacturing  places
     much of the supply chain  process out of our direct  control and  heightens
     the need for accurate forecasting;

o    our present supply capabilities exceed our current needs.

Some  key  components  of our  products  and some  services  that we rely on are
currently  available only from single or limited sources.  In addition,  some of
our suppliers are also our competitors.  We cannot be certain that in the future
our  suppliers  will be able to meet our demand for  components  in a timely and
cost-effective manner.

Increasingly,  we have been  sourcing  a greater  number  of  components  from a
smaller  number  of  vendors.  Also,  there  has  recently  been a trend  toward
consolidation  of vendors of electronic  components.  This greater reliance on a
smaller number of suppliers and the inability to quickly switch vendors increase
our risk of  experiencing  unfavorable  price  fluctuations  or a disruption  in
supply, particularly in a supply constrained environment.

Operation of the supply chain requires accurate forecasting of demand, which may
be more  challenging  in the case of  weakening  industry  conditions,  emerging
technologies  and products and  developing  markets.  If overall  demand for our
products,  product mix and growth of these markets are  significantly  different
from our forecasting and planning, we may face inadequate,  or excess, component
supply. This would result in buildup of inventory that cannot easily be sold, or
orders for products that could not be timely manufactured.  This would adversely
affect our revenues, financial results and market share. If our demand forecasts
are too high,  we may  experience  excess and  obsolete  inventories  and excess
manufacturing capacity, which could adversely impact our financial results.



                                       34
<PAGE>
Excess manufacturing capacity and third-party  commitments may negatively impact
our operations

Because we have  outsourced  significant  manufacturing  operations  to contract
manufacturers  and have  exited  a  number  of  businesses,  we now have  excess
manufacturing  capacity in existing facilities.  We are currently  restructuring
our operations and implementing  cost  containment  activities to eliminate this
excess  capacity,  including the  announced  intention to  consolidate  our real
estate  portfolio  and  facilities  associated  with  our  former  manufacturing
operations such as the Mt.  Prospect,  Illinois and  Marlborough,  Massachusetts
campuses  and  parts of the  Santa  Clara,  California  campus.  We will also be
transitioning  our  Singapore   facility  to  become  the  Asia  Pacific  region
distribution  center and office location for sales management,  IT, training and
customer  service  and  support  operations.  Our  ability  to reduce our excess
manufacturing  capacity and to consolidate facilities may be made more difficult
by  further  weakening  of the  networking  industry  and  worsening  of general
economic  conditions  in the  United  States and  globally.  If we are unable to
reduce our excess  manufacturing  capacity and  facilities,  this may negatively
impact our operations, cost structure and financial performance.

We enter into minimum  quantity or other  non-cancelable  commitments as needed.
For example, we have committed to minimum purchases of product components from a
subcontractor through September 2002. This type of agreement subjects us to risk
depending on future events.  If, for example,  sales volumes of certain products
fluctuate  significantly or we shift our production elsewhere,  we may be unable
to meet our commitments.  This may result in financial or other liabilities that
adversely affect our financial results.

Future cash requirements or restrictions on cash could have a negative impact on
our financial position

We incurred a loss in fiscal 2001 and failed to achieve  positive cash flow from
operations.  We do not  expect to be  profitable  from  operations  for  several
quarters and may continue to incur negative cash flow. If the negative cash flow
continues,  our liquidity and ability to operate our business  would be severely
adversely impacted.  Additionally, our ability to raise financial capital may be
hindered due to our  operational  losses and negative  cash flows,  reducing our
operating flexibility.

The following  items could require  unexpected  future cash payments or restrict
our use of cash:

o    Acceleration  of payment  obligations  or inability  to  refinance  current
     leasing arrangements;

o    Inability to dispose of or mortgage real estate holdings in a timely manner
     or at our anticipated price;

o    Legal or contractual  restrictions on or capital call obligations  relating
     to equity investments; and

o    Taxes due upon the transfer of cash held in foreign locations or pledged as
     collateral for financial instruments

We have  commitments  related to lease  arrangements in the U.S., under which we
have an option to purchase the properties  for an aggregate of $317 million,  or
at the end of the  lease,  arrange  for the  sale of the  properties  to a third
party.  These leases also contain  financial  covenants,  including  overall net
worth and "coverage ratio"  covenants,  that we must maintain.  While we believe
that we are in compliance as of June 1, 2001, we have had  discussions  with the
lessors regarding the interpretation of certain covenants. If it were determined
that we were not in  compliance,  the leases could  potentially  be  terminated,
resulting in an  acceleration  of the  obligation to purchase or arrange for the
sale of the related  properties  (with  recourse  back to us if the sale is less
than the option price). We have the right to prepay these leases without penalty
or adverse  consideration.  We also maintain cash deposits with the lessors that


                                       35
<PAGE>

will be  restricted  as to  transfer or  withdrawal  if we are in default on the
leases. If our financial  performance does not sufficiently  improve then we may
trigger  a  default  by  virtue  of  being  in  violation  of one or more of the
financial  covenants  that, in turn,  could lead to an acceleration of the lease
payments.  The technology  sector downturn and general economic  conditions have
heavily  impacted  the current  real estate  market in the  locations  where our
properties are located.  It is uncertain if we can timely  consolidate  the real
estate  portfolio and liquidate  holdings or if we can generate enough cash from
sales to third parties to fund the required payments under the operating leases.
In such event,  we may be required to make  unplanned-for  expenditures of cash,
thereby  lowering  the  cash of the  company.  We  believe  we  have  sufficient
financial resources,  including cash and short term investments, to retire these
leases.

Further,  as we engage in efforts to consolidate  our real estate  portfolio and
liquidate certain real estate holdings, we may enter into financial transactions
such  as  sale-leaseback  or  mortgage  arrangements  that  may  subject  us  to
additional financial covenants and restrictions;  thereby reducing our operating
flexibility.

We maintain certain cash deposits in foreign locations, portions of which may be
subject to significant tax or tax withholding upon transfer or withdrawal.

The above cash requirements or restrictions could lead to an inadequate level of
cash for  operations  or for capital  requirements,  which could have a material
negative impact on our financial  position and significantly  harm the company's
ability to operate its business.

Retaining key management and employees are critical to our success

Our success depends upon retaining and recruiting highly qualified employees and
management  personnel.  This is especially important in the new structure of the
three independent businesses since each management team must possess the skills,
experience and talent to run its business on an independent basis.  However,  we
face severe challenges in attracting and retaining such employees and management
personnel.  The significant  downturn in our business environment had a negative
impact on our operations. We are currently restructuring our operations and have
taken  actions to reduce our  workforce  and  implement  other cost  containment
activities.  These actions could lead to  disruptions  in our business,  reduced
employee  morale  and  productivity,   increased  attrition  and  problems  with
retaining  existing  employees  and  recruiting  future  employees and increased
financial costs.

Recruiting and retaining  skilled  personnel,  including  engineers,  to replace
attrition and grow emerging businesses  continues to be highly  competitive.  At
certain locations where we operate,  including the Silicon Valley area, the cost
of living is  extremely  high and it may be  difficult  to  attract  and  retain
quality  employees and management  personnel at a reasonable  cost. If we cannot
successfully recruit and retain such persons,  product  introduction  schedules,
customer  relationships,  operating  results and financial  condition may become
impaired and our overall ability to compete may be adversely affected.



                                       36
<PAGE>
A significant portion of our revenues is derived from sales to a small number of
customers  who  may  decide  not to  purchase  our  products  in the  future

We distribute many of our BCC and BNC products through  two-tiered  distribution
channels  that  include   distributors,   systems  integrators  and  value-added
resellers.  We also sell to PC Original  Equipment  Manufacturers  (PC OEMs) and
telecommunications service providers. Significant portions of our sales are made
to a few customers.  For fiscal 2001,  Ingram Micro and Tech Data,  both of whom
primarily sell our BCC and BNC products, represented approximately 15% and 7% of
our total sales,  respectively.  One PC OEM represented approximately 17% of our
overall PC OEM sales of BCC products for fiscal 2001. For CommWorks products,  a
significant   portion  of  sales  is   concentrated   with  the  major   telecom
infrastructure  companies.  We cannot  be  certain  that  these  customers  will
continue to purchase our products at current levels. Additionally, consolidation
among  distributors is reducing the number of distributors in the North American
market and, in an effort to streamline our operations,  we may increase focus of
our  resources on selected  distributors.  Because our sales are  becoming  more
concentrated  among a smaller  number of customers,  our results of  operations,
financial  condition,  or  market  share  could  be  adversely  affected  if our
customers:

o    stop  purchasing  our  products or focus more on selling  our  competitors'
     products;

o    reduce, delay, or cancel their orders; or

o    experience competitive,  operational, or financial difficulties,  impairing
     our ability to collect payments from them.

Additionally,  sales of our CommWorks  products have in the past fluctuated more
dramatically based upon timing of individual transactions because of the smaller
number of customers and higher dollar amount of each sale. Therefore revenues in
any  particular  quarter  from our  CommWorks  products may be more prone to and
adversely affected by operational decisions of individual customers.

BCC and BNC depend on  distributors  whose  reductions  in our  inventory  could
negatively impact our operations

Our distributors  maintain inventories of our products. We work closely with our
distributors to monitor  inventory levels and ensure that appropriate  levels of
products are available to resellers and end users. Notwithstanding such efforts,
as channel  partners reduce their levels of inventory or if they do not maintain
sufficient  levels  to meet  customer  demand,  our  sales  could be  negatively
impacted.

Changes in product mix to lower margin BCC products  may  negatively  impact our
revenues and margins

We sell our network access products to PC OEMs as well as to  distributors  who,
in  turn,  sell to  commercial  enterprises.  Sales  to  distributors  typically
generate higher average selling prices (ASPs) and gross margins than sales to PC
OEMs.  The trend over the past  several  years has shifted  sales from  two-tier
distribution to PC OEMs so that our revenue from PC OEM sales has increased as a
percentage of our total revenues while our revenue from  distribution  sales has
decreased as a percentage of our total revenues.  This mix shift towards PC OEMs
has lowered the ASPs for our  products.  If this trend  continues  and we cannot
lower our costs of the products or transition  customers to products with higher
ASPs,  then our  margins  will be  reduced  and our  financial  results  will be
adversely impacted.


                                       37
<PAGE>

We derive a significant portion of our commercial access sales from PC OEMs such
as  Dell  Computer,  Gateway,  Hewlett-Packard,   and  IBM,  all  of  which  are
manufacturers  that  incorporate  our NICs, PC cards,  Mini-PCI or chipsets into
their  products.  Ethernet  connectivity  to the corporate LAN is an established
technology and we are beginning to see the incorporation of 10/100 Mbps Ethernet
access product features into lower-priced form factors.  For desktop  computers,
we are seeing a migration from the NIC form factor to LOM. For laptop computers,
the transition is from PC cards to Mini-PCI and LOM. We expect that PC OEMs will
increasingly  purchase the lower-priced  form factors of established  technology
products,  as opposed to the higher-cost  form factors unless we are able to add
innovative  features at comparable  cost. If this trend  continues and we cannot
lower our costs of the products or transition  customers to products with higher
ASPs,  then our  margins  will be  reduced  and our  financial  results  will be
adversely impacted.

Continued  slowdown in the telecom industry capital  expenditures may negatively
impact CommWorks revenues

CommWorks  customers in our carrier  market  include  incumbent  local  exchange
carriers (ILECs);  interexchange  carriers (IXCs); post, telephone and telegraph
administrations  (PTTs); Internet service providers (ISPs) and other alternative
service providers. The recent economic and market slowdown,  capital expenditure
restrictions and excess capacity in the telecom industry has adversely  impacted
us,  as most of our  service  provider  customers  have  sharply  reduced  their
spending  levels.  Also,  certain  segments  of the telecom  industry  have been
adversely  impacted by large financial  expenditures  for wireless  licenses.  A
continued  slowdown in the telecom  industry and in capital  expenditures  could
have a material adverse effect on our sales and financial results.

Additionally,  the recent  economic  and market  slowdown has led to a number of
smaller  ILECs  and  ISPs  going  out of  business  or  consolidating.  This may
adversely  impact our financial  performance  due to increased  competition  for
CommWorks and further concentration of the CommWorks customer base (see Business
Environment  and  Industry  Trends  - "We  face  increased  competition  and our
financial  performance  and future  growth  depend  upon  sustaining  leadership
positions in our existing markets and successfully targeting new markets" and "A
significant  portion of our  revenues is derived from sales to a small number of
customers who may decide not to purchase our products in the future").

Our  current  and  future  decisions  to exit  certain  product  lines  may have
unforeseen negative impacts to our business

We  announced  on June 7,  2001 and March 21,  2001,  respectively,  that we are
exiting  our  broadband  cable and  consumer  DSL modem  and  consumer  Internet
Appliance businesses. The decision to exit these businesses may adversely impact
our ongoing relationships with our channel partners and end customers since many
of the channel  partners  and end  customers  for our on-going  businesses  also
purchased the products  that we are  discontinuing.  These channel  partners and
customers  may  perceive  our  remaining  products as not being part of a larger
integrated or complementary solution.  Also, they may question our commitment to
their  markets  and  therefore  shift  to  products  from  alternative  vendors.
Customers  and channel  partners  may also  attempt to return  products  already
purchased  by them or cancel  orders  recently  placed.  We have  experienced  a
certain  level of such  returns  and  cancellations  and  expect  that they will
continue  into the first  quarter  of our fiscal  2002.  In  certain  cases,  we
continue to be subject to certain long-term contractual  commitments for sale or
maintenance of products. We may incur additional expenses into the first quarter
of our fiscal 2002 associated with resolving these contractual commitments.


                                       38
<PAGE>

Additionally, we may consider exiting other businesses that do not meet our goal
of delivering  appropriate financial returns in a reasonable amount of time. Our
decision to exit future  businesses  could  result in increased  employee  costs
(such as severance,  outplacement and other benefits),  contract  breakage costs
and asset  impairments.  We may also  experience  delays in the execution of our
plan to exit a business that may create  disruptions  in our  transactions  with
suppliers and customers.

The role of acquisitions will be limited, which may negatively impact our growth
and increased reliance on strategic  relationships  could create competitive and
market risks

We are currently focusing on achieving positive cash flow and profitability from
our  current  operations.  Accordingly,  we  expect  that  our  acquisitions  of
businesses or product  lines will  decrease in comparison to historical  levels.
The networking  business is highly  competitive and our failure to pursue future
acquisitions could hamper our ability to enhance existing products and introduce
new products on a timely basis. Future consolidations in the networking industry
may result in new  companies  with greater  resources  and stronger  competitive
positions and products than us.  Furthermore,  companies may be created that are
able to respond more rapidly to market opportunities. Continued consolidation in
our industry may adversely affect our operating results or financial condition.

We will increasingly rely on strategic relationships rather than acquisitions to
develop  new   technologies,   enhance  existing  products  and  exploit  market
potentials. These strategic relationships can present additional problems since,
in most cases,  we must compete in some business areas with companies with which
we have  strategic  alliances  and,  at the same time,  cooperate  with the same
companies in other business  areas.  If these  companies fail to perform,  or if
these  relationships fail to materialize as expected,  we could suffer delays in
product or market  development or other operational  difficulties.  Furthermore,
our results of operations or financial  condition could be adversely impacted if
we  experience  difficulties  managing  relationships  with our  partners  or if
projects with partners are unsuccessful.  In addition, if our strategic partners
are  acquired  by third  parties or if our  competitors  enter  into  successful
strategic relationships, the competition that we face may increase.

Certain of our  international  markets are risky and may  negatively  impact our
operating results

We operate  internationally and expect that international  markets will continue
to  account  for a  significant  percentage  of our sales.  The recent  economic
slowdown  in the  United  States and  Europe  has  already  had and is likely to
continue to have a negative effect on various  international markets in which we
operate  such  as  Asia  and  Latin  America.  Some  international  markets  are
characterized  by economic and political  instability and currency  fluctuations
that  can  adversely  affect  our  operating  results  or  financial  condition.
Unforeseen  conditions and events will positively or negatively impact the level
of international sales or our international operations in different regions. For
example,  the recent strength of the U.S.  dollar  relative to other  countries'
currencies  has made our  products  more  expensive  than  locally  manufactured
products,  thereby  negatively  impacting  demand for our  products.  Also,  our
contract manufacturers  manufacture many of our products overseas,  sometimes in
politically or economically  unstable countries.  Should  international  regions
experience economic or political  instability,  our results of operations may be
adversely affected,  our ability to forecast demand for our products may also be
impeded and our supply of products may be interrupted.



                                       39
<PAGE>
Our  reliance  on  industry  standards,  a  favorable  regulatory   environment,
technological  change in the marketplace  and new product  initiatives may cause
our revenues to fluctuate or decline

Our success also depends on:

o    the timely adoption and market acceptance of industry standards;

o    resolution of conflicting U.S. and international industry standards;

o    requirements  created by the  convergence of technology  such as Voice-over
     Internet Protocol (VOIP);

o    the  timely  introduction  of  new  standards-compliant  products;  and

o    a favorable regulatory environment.

Slow  market  acceptance  of  new  technologies  and  industry  standards  could
adversely affect our results of operations or financial condition.  In addition,
if our technology is not included in the industry  standard on a timely basis or
if we fail to achieve timely  certification of compliance to industry  standards
for our products, our sales of such products could be adversely affected.  There
are a number of new product  initiatives,  particularly  in the area of wireless
access,  IP  telephony,  and  broadband  access that could be impacted by new or
revised  regulations,  which in turn  could  adversely  affect  our  results  of
operations or financial condition.

Our  customer  order  fulfillment  fluctuates  and  may  negatively  impact  our
operating results

The  timing  and  amount of our sales  depend on a number of  factors  that make
estimating  operating  results  prior to the end of any  period  uncertain.  For
example,  BCC and BNC do not typically maintain a significant  backlog and sales
are partially dependent on our ability to appropriately forecast product demand.
In addition, our customers historically request fulfillment of orders in a short
period of time,  resulting in limited  visibility  to sales trends and potential
pricing pressures.  Consequently, our operating results depend on the volume and
timing  of  orders  and our  ability  to  fulfill  orders  in a  timely  manner.
Historically,  sales in the third  month of the  quarter  have been  higher than
sales in each of the first two months of the quarter.  Recently this pattern has
become  more  pronounced,  which  may  increase  the risk of  unforeseen  events
negatively  impacting  our financial  results.  Non-linear  sales  patterns make
business  planning  difficult,  and increase the risk that our quarterly results
will  fluctuate due to disruptions  in functions  such as  manufacturing,  order
management, information systems, and shipping.

We face tax and equity dilution risks as a result of our spin-off of Palm

On July 27, 2000,  3Com  completed the spin-off of Palm,  our handheld  computer
business,  by distributing  our remaining  ownership of outstanding  Palm common
stock to our  shareholders.  To enable our  distribution of Palm common stock to
our  shareholders,  we received a ruling from the Internal  Revenue Service that
the distribution will be not be taxable.  Such ruling could be revoked if either
we or Palm,  for up to two years  following the  distribution  date,  engaged in
certain  business  combinations  that would  constitute a change of more than 50
percent of the equity interest in either company. If either we or Palm takes any
action that causes the ruling to be revoked,  the  distribution  could be deemed
taxable and we could suffer other material adverse financial consequences.


                                       40
<PAGE>

At the  time  of the  distribution  of  Palm  shares  to  our  shareholders,  an
adjustment  was made to stock  options  held by our  employees  to preserve  the
intrinsic  value of these  options  and the ratio of the  exercise  price to the
market price. As of July 27, 2000 there were  approximately  35 million employee
options  outstanding.  Immediately  after  the  Palm  distribution,  there  were
approximately 169 million employee options  outstanding,  of which approximately
60 million were vested and immediately  exercisable.  As of June 1, 2001,  there
were  approximately  148.1 million employee options  outstanding,  of which 64.4
million are vested and immediately exercisable. The exercise of stock options by
employees may potentially  result in a dilution in the ownership interest of our
current shareholders.

We may not always be able to  adequately  protect or maintain  our  intellectual
property rights

Many of our  competitors,  such as  telecommunications  and  computer  equipment
manufacturers,  have large intellectual  property portfolios,  including patents
that may cover technologies that are relevant to our business. In addition, many
smaller  companies,  universities,  and  individual  inventors  have obtained or
applied for patents in areas of technology that may relate to our business.  The
industry is moving towards aggressive  assertion,  licensing,  and litigation of
patents and other intellectual property rights.

In the course of our business,  we frequently  receive claims of infringement or
otherwise  become aware of potentially  relevant  patents or other  intellectual
property   rights  held  by  other   parties.   We  evaluate  the  validity  and
applicability of these intellectual  property rights, and determine in each case
whether we must negotiate  licenses or  cross-licenses to incorporate or use the
proprietary  technologies,  protocols,  or specifications in our products. If we
are unable to obtain and maintain  licenses on favorable terms for  intellectual
property  rights  required for the  manufacture,  sale, and use of our products,
particularly  those which must  comply  with  industry  standard  protocols  and
specifications to be commercially viable, our results of operations or financial
condition could be adversely impacted.

In addition to disputes  relating  to the  validity or alleged  infringement  of
other  parties'  rights,  we may become  involved  in  disputes  relating to our
assertion of our  intellectual  property  rights.  Whether we are  defending the
assertion  of   intellectual   property  rights  against  us  or  asserting  our
intellectual  property rights against others,  intellectual  property litigation
can be complex, costly, protracted, and highly disruptive to business operations
by  diverting  the  attention  and  energies  of  management  and key  technical
personnel.  Further,  plaintiffs  in  intellectual  property  cases  often  seek
injunctive  relief  and  the  measures  of  damages  in  intellectual   property
litigation are complex and often subjective or uncertain. Thus, the existence of
or any adverse determinations in this litigation could subject us to significant
liabilities and costs. In addition, if we are the alleged infringer, we could be
required to seek  licenses  from others or be prevented  from  manufacturing  or
selling our products,  which could cause  disruptions  to our  operations or the
markets in which we  compete.  If we are  asserting  our  intellectual  property
rights, we could be prevented from stopping others from manufacturing or selling
competitive  products.  Any one of these  factors  could  adversely  affect  our
results of operations or financial condition.



                                       41
<PAGE>

Our future  quarterly  operating  results are subject to factors  that can cause
fluctuations in our stock price

Our  quarterly  operating  results are  difficult  to predict and may  fluctuate
significantly.  In addition to factors  discussed  above, we anticipate that the
activities  surrounding  the  restructuring  of  our  business  will  contribute
significantly  to fluctuations in our quarterly  operating  results for the next
several  quarters.  These factors,  and  accompanying  fluctuations  in periodic
operating  results,  could have a  significant  adverse  impact on our sales and
financial results.

Accordingly,  our stock price has  historically  experienced  substantial  price
volatility  and  we  expect  that  this  will  continue,   particularly  due  to
fluctuations in quarterly  operating  results,  variations between our actual or
anticipated financial results and the published analysts'  expectations and as a
result of announcements  by our competitors.  Our operating losses have caused a
significant  depletion in our cash balances.  Accordingly our stock price may be
based on the break-up value of the company or tangible assets. In addition,  the
stock market has  experienced  extreme price and volume  fluctuations  that have
affected the market price of many technology  companies.  These factors, as well
as general economic and political conditions, may have a material adverse affect
on the market price of our stock in the future.

LIQUIDITY AND CAPITAL RESOURCES

Cash and  equivalents  and  short-term  investments  at June 1,  2001  were $1.6
billion,  a decrease of approximately  $1.5 billion from $3.1 billion at June 2,
2000.

For the fiscal year ended June 1, 2001,  net cash used in  operating  activities
was $993.1 million.  Cash flows used in operating  activities resulted primarily
from the net loss from  operations  of $969.9  million  and  changes  in working
capital components.  Accounts receivable at June 1, 2001 decreased $68.7 million
from June 2, 2000 to $286.8  million due primarily to the decrease in sales from
the prior year.  Days sales  outstanding in receivables  increased to 55 days at
June 1, 2001,  compared to 42 days at June 2, 2000,  due  primarily  to a higher
percentage  of sales  occurring  during the last month of the fiscal  year ended
June 1, 2001  compared  to sales in the last month of the fiscal year ended June
2, 2000. Inventory levels at June 1, 2001 decreased $38.4 million from the prior
fiscal year-end to $200.1 million due to increased excess and obsolete inventory
provisions based on lowered sales demand forecasts and product  discontinuation.
Investments and other assets at June 1, 2001 decreased  $558.2 million from June
2, 2000 to $207.7  million,  primarily  due to decreases in the market values of
our investments.  Accounts payable and accrued  liabilities and other at June 1,
2001 decreased  $114.8 million from June 2, 2000 to $856.0 million due primarily
to the decline in spending and lower salary  accruals due to reduced  headcount.
Net deferred tax assets at June 1, 2001  increased  $461.5  million from June 2,
2000,  primarily  due to increases in the United  States  Federal net  operating
loss.

For the fiscal  years ended June 1, 2001 and June 2, 2000,  we made  investments
totaling  $644.3  million  and $1.2  billion,  respectively,  in  municipal  and
corporate  bonds  and  government  agency  instruments,  as well as  investments
totaling $99.3 million and $41.2 million,  respectively,  in equity  securities.
For the  fiscal  years  ended  June 1,  2001 and  June 2,  2000,  proceeds  from
maturities  and sales of municipal and  corporate  bonds and  government  agency
instruments  were $1.3 billion and $439.0  million,  respectively,  and proceeds
from the sales of equity investments  totaled $232.3 million and $808.6 million,
respectively.


                                       42
<PAGE>

As  part  of  our  3Com  Ventures  initiative,  we  selectively  make  strategic
investments  in the equity  securities of privately  held  companies and venture
capital  funds.  We believe  these  investments  will  complement  our  business
opportunities and research and development activities. Under 3Com Ventures I, we
have committed to make capital  contributions  to certain  venture capital funds
totaling $7.4 million. We expect to pay $4.9 million over the next twelve months
as capital calls are made. We have  established 3Com Ventures II, which has made
strategic  investments  of $59.8  million over the last nine months.  Under 3Com
Ventures II, we have committed to make capital  contributions to certain venture
capital funds totaling  $44.7  million.  We expect to pay $16.3 million over the
next twelve months as capital calls are made.

For the fiscal  year ended June 1,  2001,  3Com made  $191.1  million in capital
expenditures.  Major capital expenditures included upgrades and expansion of our
facilities and purchases and upgrades of software and computer equipment.  As of
June  1,  2001,  we  had  approximately  $1.8  million  in  capital  expenditure
commitments  outstanding primarily associated with facilities  consolidation and
information  system  projects.  In  addition,  we have  commitments  related  to
operating  lease  arrangements  in the  U.S.,  under  which we have an option to
purchase the properties for an aggregate of $316.8  million,  or arrange for the
sale of the  properties to a third party.  If the properties are sold to a third
party at less  than  the  option  price,  3Com  retains  an  obligation  for the
shortfall,  subject to certain provisions of the lease. The leases expire on two
dates. The first expiration with respect to $148.9 million occurs in November of
2001 and the second  expiration on the remaining $167.9 million occurs in August
of 2002.  These leases  require us to maintain  specified  financial  covenants.
While we  believe  that we are in  compliance  as of June 1,  2001,  we have had
discussions with the lessors regarding the  interpretation of certain covenants.
If it  were  determined  that  we  were  not in  compliance,  the  leases  could
potentially be  terminated,  resulting in an  acceleration  of the obligation to
purchase or arrange for the sale of the related properties. We have the right to
prepay these leases without penalty or adverse  consideration.  If required,  we
believe we have sufficient financial  flexibility in the monetization of surplus
real  estate  and other  financial  resources,  including  cash and  short  term
investments, to retire these leases.

During fiscal 2001,  3Com received net proceeds of $258.9  million from the sale
of property and  equipment,  comprised of net sales  proceeds of $215.6  million
from the sale of  undeveloped  land in San Jose,  California to Palm,  net sales
proceeds  of  $12.4  million  related  to  the  sale  of a  vacated  office  and
manufacturing  facility in Morton Grove,  Illinois,  net sales proceeds of $12.9
million related to the sale of a manufacturing  and  distribution  operations in
Mount  Prospect,  Illinois,  and net sales proceeds of $18.0 million  related to
other fixed asset disposals. During fiscal 2001, we used cash of $197.7 million,
net of cash acquired,  to acquire Alteon  WebSystems,  Nomadic  Technologies and
Kerbango, Inc. as discussed in Note 5 to the consolidated financial statements.

During the fourth  quarter of fiscal 2000,  our Board of Directors  authorized a
stock repurchase  program of up to $1.0 billion.  Such repurchases could be used
to offset the issuance of additional shares resulting from employee stock option
exercises and the sale of shares under the employee  stock  purchase  plan.  The
Board authorized a two-year time limit on the repurchase authorizations.  During
fiscal 2001, we  repurchased  39.5 million shares of our common stock at a total
purchase price of $577.8 million.


                                       43
<PAGE>

In July 2000, we initiated a program of selling put options and purchasing  call
options on our common stock.  These were "European"  style options which, in the
case of put options,  entitle the holders to sell shares of 3Com common stock to
us on the expiration dates at specified prices and, in the case of call options,
entitle us to purchase  our common  stock on the  expiration  dates at specified
prices.  The  option  contracts  gave us the  choice of net cash  settlement  or
physical  settlement  or net  settlement  in shares of our common  stock.  These
options were accounted for as permanent equity instruments.  During fiscal 2001,
1.2 million shares of common stock were repurchased through exercised puts for a
cumulative  purchase  price of $19.9 million.  In addition,  we elected net cash
settlement for the remaining 15.3 million put options  outstanding,  and related
call options, which was recorded as a reduction of common stock in the amount of
$140.7  million.  As of June 1, 2001,  there were no put options or call options
outstanding.

During the year ended June 1, 2001, we received net cash of $247.1  million from
the sale of our common stock to employees  through our employee  stock  purchase
and option plans and repaid the  remaining  debt balance of $24.0  million under
the 7.52% Unsecured Senior Notes agreement.

There are no assurances  that we can reduce losses from  operations and negative
cash flow or raise  financial  capital as needed to fund the  operations  of the
Company. However, based on current plans and business conditions, but subject to
the discussion in the Business  Environment and Industry Trends, we believe that
our existing cash and equivalents,  short-term  investments,  and cash generated
from operations will be sufficient to satisfy  anticipated cash requirements for
at least the next twelve months.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998 and June 1999,  the  Financial  Accounting  Standards  Board (FASB)
issued Statement of Financial  Accounting  Standards (SFAS) No. 133, "Accounting
for  Derivative   Instruments  and  Hedging   Activities,"  as  amended,   which
establishes  accounting  and  reporting  standards for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities.  Under SFAS 133,  certain  contracts that were not formerly
considered  derivatives  may now meet the  definition of a  derivative.  We will
adopt SFAS 133 effective June 2, 2001. We do not expect the adoption of SFAS 133
to have a significant impact on our results of operations or financial position.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (SAB) No. 101,  "Revenue  Recognition  in  Financial  Statements."  We
adopted the  guidance in SAB 101 during our fourth  quarter of fiscal year 2001.
The  adoption  of SAB 101 did not  have a  material  effect  on our  results  of
operations or financial position.

In June 2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations"  which
addresses the financial  accounting and reporting for business  combinations and
supersedes   Accounting   Principles  Board  (APB)  Opinion  No.  16,  "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition  Contingencies of
Purchased  Enterprises." SFAS No. 141 requires that all business combinations be
accounted for by a single method, the purchase method, modifies the criteria for
recognizing  intangible  assets,  and  expands  disclosure   requirements.   The
provisions of SFAS No. 141 apply to all business  combinations  initiated  after
June 30,  2001.  We do not  expect  the  adoption  of SFAS No.  141 will  have a
material  effect  on our  results  of  operations  or  statements  of  financial
position.


                                       44
<PAGE>

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other  intangible  assets and  supersedes  APB Opinion  No. 17,  "Intangible
Assets."  SFAS No.  142  addresses  how  intangible  assets  that  are  acquired
individually  or with a  group  of  other  assets  should  be  accounted  for in
financial  statements upon their  acquisition and after they have been initially
recognized in the financial statements.  SFAS No. 142 requires that goodwill and
intangible  assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment,  and intangible assets that have finite
useful  lives be  amortized  over their  useful  lives.  SFAS No.  142  provides
specific  guidance for testing  goodwill and intangible  assets that will not be
amortized  for  impairment.  In  addition,  SFAS No. 142 expands the  disclosure
requirements  about goodwill and other intangible assets in the years subsequent
to their  acquisition.  SFAS No. 142 is effective for our fiscal year 2003, with
early  adoption  permitted at the beginning of our fiscal year 2002.  Impairment
losses for goodwill and indefinite-life  intangible assets that arise due to the
initial  application  of SFAS No. 142 are to be  reported  as  resulting  from a
change in accounting principle. However, goodwill and intangible assets acquired
after June 30, 2001 will be subject  immediately  to  provisions of SFAS 142. We
are in the  process of  determining  the impact that  adoption  will have on our
consolidated financial statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Market  Risk  Disclosures.  The  following  discussion  about  our  market  risk
disclosures  involves  forward-looking  statements.  Actual results could differ
materially  from  those  projected  in the  forward-looking  statements.  We are
exposed to market risk related to changes in interest  rates,  foreign  currency
exchange  rates,  and  equity  security  price  risk.  We do not use  derivative
financial instruments for speculative or trading purposes.

Interest  Rate  Sensitivity.  We  maintain  a  short-term  investment  portfolio
consisting mainly of income securities with an average maturity of less than two
years. These available-for-sale securities are subject to interest rate risk and
will fall in value if market interest rates  increase.  If market interest rates
were to increase  immediately and uniformly by 10 percent from levels at June 1,
2001 and June 2,  2000,  the fair  value of the  portfolio  would  decline by an
immaterial  amount.  It is our  current  intention  to  hold  our  fixed  income
investments  until  maturity,  and  therefore we would not expect our  operating
results  or cash  flows to be  affected  to any  significant  degree by a sudden
change  in  market  interest  rates.  If  necessary,   we  may  sell  short-term
investments  prior to maturity to meet the liquidity  needs of the Company which
would expose the Company to potential breakage costs.

At June 1,  2001  and June 2,  2000,  we had  approximately  $316.8  million  of
outstanding  obligations  under  certain  real estate  lease  arrangements  with
monthly   payments  tied  to  short-term   interest  rates  and  lease  residual
guarantees.  If  short-term  interest  rates were to increase  10  percent,  the
increased payments  associated with these arrangements would not have a material
impact on our  operating  results or cash  flows.  In  addition,  we also have a
mixture of fixed and floating rate long-term debt of approximately  $2.7 million
as of June 1, 2001 and $29.9  million  as of June 2,  2000.  A  hypothetical  10
percent  decrease in interest rates would not have a material impact on the fair
market  value or cash  flows  associated  with  this  debt.  We do not hedge any
interest rate exposures.


                                       45
<PAGE>

Foreign  Currency  Exchange  Risk.  We enter into foreign  exchange  forward and
option  contracts to hedge  certain  balance sheet  exposures  and  intercompany
balances against future movements in foreign exchange rates. Gains and losses on
the forward and option  contracts are largely  offset by gains and losses on the
underlying  exposure.  A hypothetical 10 percent appreciation of the U.S. Dollar
to June 1, 2001 and June 2, 2000 market  rates  would  increase  the  unrealized
value of our forward  contracts by $1.8 million and $0.7 million,  respectively.
Conversely, a hypothetical 10 percent depreciation of the U.S. Dollar to June 1,
2001 and June 2, 2000 market rates would  decrease the  unrealized  value of our
forward contracts by $1.8 million and $0.7 million, respectively.  There were no
outstanding  foreign  exchange  option  contracts as of June 1, 2001 and June 2,
2000. The gains or losses on the forward and option contracts are largely offset
by the gains or losses on the underlying  transactions and consequently a sudden
or significant change in foreign exchange rates would not have a material impact
on future net income or cash flows.

Equity  Security  Price Risk.  We hold a portfolio  of  publicly  traded  equity
securities  that are subject to market price  volatility.  Equity security price
fluctuations of plus or minus 15 percent would have had a $3.7 million impact on
the  value of these  securities  held at June 1,  2001.  Equity  security  price
fluctuations  of plus or minus 50 percent would have had a $12.2 million  impact
on the value of these  securities  held at June 1, 2001.  Equity  security price
fluctuations  of plus or minus 15 percent would have had an $85.5 million impact
on the  value  of  these  securities  at June 2,  2000.  Equity  security  price
fluctuations  of plus or minus 50 percent would have had a $285.0 million impact
on the value of these securities at June 2, 2000.


                                       46
<PAGE>

ITEM 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Financial Statement Schedule

                                                                      Page
                                                                      ----
Financial Statements:
     Independent Auditors' Report.....................................  48
     Consolidated Statements of Operations for the years ended
       June 1, 2001, June 2, 2000, and May 28, 1999...................  49
     Consolidated Balance Sheets at June 1, 2001 and June 2, 2000.....  50
     Consolidated Statements of Stockholders' Equity for the
        years ended June 1, 2001, June 2, 2000, and May 28, 1999......  51
     Consolidated Statements of Cash Flows for the years ended
        June 1, 2001, June 2, 2000, and May 28, 1999..................  52
     Notes to Consolidated Financial Statements.......................  53
     Quarterly Results of Operations (Unaudited)......................  88
Financial Statement Schedule:
     Schedule II - Valuation and Qualifying Accounts and Reserves.....  96

All  other  schedules  are  omitted,  because  they  are not  required,  are not
applicable,  or  the  information  is  included  in the  consolidated  financial
statements and notes thereto.




                                       47
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of 3Com Corporation:

We have audited the accompanying consolidated balance sheets of 3Com Corporation
and  subsidiaries  (3Com) as of June 1, 2001 and June 2, 2000,  and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the three  years in the  period  ended June 1,  2001.  Our  audits  also
included the financial  statement  schedule listed in the Index at Item 8. These
financial  statements and financial statement schedule are the responsibility of
3Com's management.  Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 3Com Corporation and
subsidiaries  at June 1,  2001  and  June 2,  2000,  and the  results  of  their
operations  and their cash flows for each of the three years in the period ended
June 1, 2001 in conformity with accounting  principles generally accepted in the
United  States of  America.  Also,  in our  opinion,  such  financial  statement
schedule   referred  to  above,   when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP

San Jose, California
June 25, 2001

                                       48
<PAGE>

Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                      Years ended
                                                                    -------------------------------------------------
(In thousands, except per share data)                                  June 1,           June 2,            May 28,
                                                                        2001              2000                1999
                                                                    -----------        -----------        -----------
<S>                                                                 <C>                <C>                <C>
Sales                                                               $ 2,820,881        $ 4,333,942        $ 5,202,253

Cost of sales                                                         2,287,250          2,475,934          2,898,038
                                                                    -----------        -----------        -----------

Gross margin                                                            533,631          1,858,008          2,304,215
                                                                    -----------        -----------        -----------

Operating expenses:
     Sales and marketing                                                803,994            949,228          1,015,763
     Research and development                                           535,718            597,816            586,079
     General and administrative                                         182,090            213,085            227,558
     Amortization and write down of intangibles                          69,707             24,535             19,620
     Purchased in-process technology                                     60,221             13,456             10,590
     Merger-related credits, net                                           (728)            (2,297)           (17,551)
     Restructuring charges                                              163,657             68,867               --
                                                                    -----------        -----------        -----------

     Total operating expenses                                         1,814,659          1,864,690          1,842,059
                                                                    -----------        -----------        -----------

Operating income (loss)                                              (1,281,028)            (6,682)           462,156
Net gains on land and facilities                                        178,844             25,483              4,200
Gains (losses) on investments, net                                      (18,614)           838,795             (2,643)
Litigation settlement                                                  (250,000)              --                 --
Interest and other income, net                                          144,596            104,258             56,922
                                                                    -----------        -----------        -----------

Income (loss) from continuing operations before income taxes
  and equity interests                                               (1,226,202)           961,854            520,635
Income tax provision (benefit)                                         (257,641)           341,672            156,791
Other interests in loss of consolidated joint venture                      --               (1,028)            (1,101)
Equity interest in loss of unconsolidated investee                        1,352              5,647               --
                                                                    -----------        -----------        -----------
Income (loss) from continuing operations                               (969,913)           615,563            364,945

Income from discontinued operations                                       4,537             58,740             38,929
                                                                    -----------        -----------        -----------

Net income (loss)                                                   $  (965,376)       $   674,303        $   403,874
                                                                    ===========        ===========        ===========

Net income (loss) per share:

     Basic:
         Continuing operations                                      $     (2.81)       $      1.77        $      1.01
         Discontinued operations                                    $      0.01        $      0.17        $      0.11
                                                                    -----------        -----------        -----------
                                                                    $     (2.80)       $      1.94        $      1.12
                                                                    ===========        ===========        ===========
     Diluted:
         Continuing operations                                      $     (2.81)       $      1.72        $      0.99
         Discontinued operations                                    $      0.01        $      0.16        $      0.10
                                                                    -----------        -----------        -----------
                                                                    $     (2.80)       $      1.88        $      1.09
                                                                    ===========        ===========        ===========
Shares used in computing per share amounts:
     Basic                                                              345,027            348,314            360,424
     Diluted                                                            345,027            357,883            369,361
</TABLE>

See notes to consolidated financial statements.


                                       49
<PAGE>

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                             June 1,         June 2,
(In thousands, except par value)                                              2001            2000
                                                                          -----------     -----------
<S>                                                                       <C>             <C>
ASSETS

Current assets:
    Cash and equivalents                                                  $   897,797     $ 1,700,420
    Short-term investments                                                    742,414       1,369,520
    Accounts receivable, less allowance for doubtful accounts
       ($47,309 and $76,468 in 2001 and 2000, respectively)                   286,813         355,540
    Inventories, net                                                          200,146         234,812
    Investments and other                                                     207,652         765,895
    Net assets of discontinued operations                                        --         1,058,237
                                                                          -----------     -----------
         Total current assets                                               2,334,822       5,484,424

Property and equipment, net                                                   609,679         756,954
Deferred income taxes                                                         163,349            --
Goodwill, intangibles, deposits, and other assets                             344,952         361,699
                                                                          -----------     -----------

Total assets                                                              $ 3,452,802     $ 6,603,077
                                                                          ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                      $   279,181     $   319,739
    Other accrued liabilities                                                 576,851         651,074
    Deferred income taxes                                                      80,485         259,495
    Current portion of long-term debt                                             328          14,459
                                                                          -----------     -----------
         Total current liabilities                                            936,845       1,244,767

Long-term debt                                                                  2,385          14,740
Deferred income taxes                                                            --           119,168
Other long-term obligations                                                     8,151           7,377

Commitments and contingencies (Note 10)                                          --              --

Equity interests in consolidated entities                                        --         1,173,961

Stockholders' equity:
    Preferred stock, no par value, 10,000 shares authorized;
       none outstanding                                                          --              --
    Common stock, $0.01 par value, 990,000 shares authorized;
       shares outstanding: 2001--365,711; 2000--365,825                     2,127,803       2,101,242
    Treasury stock, at cost: 2001--21,412 shares;
       2000--12,371 shares                                                   (373,661)       (312,428)
    Note receivable from sale of warrants                                     (21,052)           --
    Unamortized restricted stock grants                                        (9,820)         (6,450)
    Retained earnings                                                         771,639       1,982,079
    Accumulated other comprehensive income                                     10,512         278,621
                                                                          -----------     -----------
         Total stockholders' equity                                         2,505,421       4,043,064
                                                                          -----------     -----------

Total liabilities and stockholders' equity                                $ 3,452,802     $ 6,603,077
                                                                          ===========     ===========
</TABLE>

See notes to consolidated financial statements.


                                       50
<PAGE>

Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

(In thousands)                                        Common Stock               Treasury Stock              Note
                                                 Shares        Amount         Shares         Amount       Receivable
                                              -----------    -----------    -----------    -----------    -----------
<S>                                               <C>        <C>                <C>        <C>            <C>
Balances, May 31, 1998                            358,870    $ 1,730,676

Components of comprehensive income:
     Net income
     Change in unrealized gain on
        available-for-sale securities
     Accumulated translation adjustments

        Total comprehensive income

Repurchase of common stock                                                      (14,805)      (378,565)
Common stock issued under stock plans               6,935        123,850          6,615        181,501
Tax benefit from employee stock
     transactions                                                 86,312
Amortization of restricted stock grants
Stock options assumed in connection with
     acquisitions                                                 13,366
                                              -----------    -----------    -----------    -----------    -----------
Balances, May 28, 1999                            365,805      1,954,204         (8,190)      (197,064)          --

Components of comprehensive income:
     Net income
     Change in unrealized gain on
        available-for-sale securities
     Accumulated translation adjustments

        Total comprehensive income
Repurchase of common stock                                                      (20,515)      (540,780)
Common stock issued under stock plans                  20          4,398         16,334        425,416
Tax benefit from employee stock
     transactions                                                133,990
Amortization of restricted stock grants
Stock options assumed in connection with
     acquisitions                                                  8,650
                                              -----------    -----------    -----------    -----------    -----------
Balances, June 2, 2000                            365,825      2,101,242        (12,371)      (312,428)          --

Components of comprehensive income:
     Net loss
     Change in unrealized gain on
        available-for-sale securities
     Accumulated translation adjustments

        Total comprehensive income
Repurchase of common stock                                                      (39,455)      (577,759)
Common stock issued under stock plans,
  net of cancellations                               (114)        (3,421)        28,926        494,657
Amortization of restricted stock grants
Put option settlements                                          (140,700)
Effect of distribution of Palm, Inc. shares                      141,478
Issuance of warrant for note receivable                           21,052                                      (21,052)
Stock and stock options assumed in
     connection with acquisitions                                  8,152          1,488         21,869
                                              -----------    -----------    -----------    -----------    -----------
Balances, June 1, 2001                            365,711    $ 2,127,803        (21,412)   $  (373,661)   $   (21,052)
                                              ===========    ===========    ===========    ===========    ===========

<CAPTION>
                                               Unamortized                Accumulated Other
(In thousands)                                 Restricted       Retained   Comprehensive
                                              Stock Grants      Earnings       Income         Total
                                               -----------    -----------   -----------   -----------
<S>                                            <C>            <C>           <C>           <C>
Balances, May 31, 1998                         $    (4,157)   $ 1,079,775   $      1,201  $ 2,807,495

Components of comprehensive income:
     Net income                                                   403,874                     403,874
     Change in unrealized gain on
        available-for-sale securities                                             43,538       43,538
     Accumulated translation adjustments                                          (3,830)      (3,830)
                                                                                           ----------
        Total comprehensive income                                                            443,582

Repurchase of common stock                                                                   (378,565)
Common stock issued under stock plans               (3,234)       (79,940)                    222,177
Tax benefit from employee stock
     transactions                                                                              86,312
Amortization of restricted stock grants              2,088                                      2,088
Stock options assumed in connection with
     acquisitions                                                                              13,366
                                               -----------    -----------   -----------   -----------
Balances, May 28, 1999                              (5,303)     1,403,709        40,909     3,196,455

Components of comprehensive income:
     Net income                                                   674,303                     674,303
     Change in unrealized gain on
        available-for-sale securities                                           239,053       239,053
     Accumulated translation adjustments                                         (1,341)       (1,341)
                                                                                          -----------
        Total comprehensive income                                                            912,015
Repurchase of common stock                                                                   (540,780)
Common stock issued under stock plans               (3,526)       (95,933)                    330,355
Tax benefit from employee stock
     transactions                                                                             133,990
Amortization of restricted stock grants              2,379                                      2,379
Stock options assumed in connection with
     acquisitions                                                                               8,650
                                               -----------    -----------   -----------   -----------
Balances, June 2, 2000                              (6,450)     1,982,079       278,621     4,043,064

Components of comprehensive income:
     Net loss                                                    (965,376)                   (965,376)
     Change in unrealized gain on
        available-for-sale securities                                          (268,041)     (268,041)
     Accumulated translation adjustments                                            (68)          (68)
                                                                                          -----------
        Total comprehensive income                                                         (1,233,485)
Repurchase of common stock                                                                   (577,759)
Common stock issued under stock plans,
  net of cancellations                                 139       (244,222)                    247,153
Amortization of restricted stock grants             23,583                                     23,583
Put option settlements                                                                       (140,700)
Effect of distribution of Palm, Inc. shares                                                   141,478
Issuance of warrant for note receivable                                                          --
Stock and stock options assumed in
     connection with acquisitions                  (27,092)          (842)                      2,087
                                               -----------    -----------   -----------   -----------
Balances, June 1, 2001                         $    (9,820)   $   771,639   $    10,512   $ 2,505,421
                                               ===========    ===========   ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                       51
<PAGE>

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                         Years ended
                                                                                          -----------------------------------------
(In thousands)                                                                               June 1,        June 2,        May 28,
                                                                                              2001           2000           1999
                                                                                          -----------    -----------    -----------
<S>                                                                                       <C>            <C>            <C>
Cash flows from operating activities:
     Income (loss) from continuing operations                                             $  (969,913)   $   615,563    $   364,945
     Adjustments to reconcile income (loss) from continuing operations
       to net cash provided by (used in) operating activities:
         Depreciation and amortization                                                        277,415        304,415        271,076
         Loss (gain) on disposal of property and equipment                                   (121,159)        37,149         27,091
         Write-down of intangibles                                                             59,738           --           13,748
         (Gains) losses on investments, net                                                    18,614       (838,795)         2,643
         Deferred income taxes                                                               (284,585)       202,319        113,927
         Purchased in-process technology                                                       60,221         13,456         10,590
         Merger-related credits, net                                                             (728)        (2,297)       (17,551)
         Other interests in loss of consolidated joint venture                                   --           (1,028)        (1,101)
         Equity interest in loss of unconsolidated investee                                     1,352          5,647           --
         Changes in assets and liabilities, net of effects of acquisitions:
              Accounts receivable                                                              82,425        469,426        (50,500)
              Inventories                                                                      38,431         43,389        263,179
              Other assets                                                                    (79,503)       (43,187)        39,091
              Accounts payable                                                                (42,497)        51,860        (34,777)
              Accrued liabilities and other                                                   (75,563)       (14,738)        14,961
              Income taxes payable                                                             42,657        (16,472)       (33,023)
                                                                                          -----------    -----------    -----------
Net cash provided by (used in) operating activities                                          (993,095)       826,707        984,299
                                                                                          -----------    -----------    -----------

Cash flows from investing activities:
     Purchase of investments                                                                 (743,655)    (1,201,169)      (512,275)
     Proceeds from maturities and sales of investments                                      1,527,249      1,247,537        303,582
     Purchase of property and equipment                                                      (191,101)      (274,568)      (249,383)
     Proceeds from sale of property and equipment                                             258,930         93,169         29,347
     Businesses acquired in purchase transactions, net of cash acquired                      (197,712)       (92,432)       (97,764)
     Other, net                                                                                 4,304           (300)       (19,156)
                                                                                          -----------    -----------    -----------
Net cash provided by (used in) investing activities                                           658,015       (227,763)      (545,649)
                                                                                          -----------    -----------    -----------

Cash flows from financing activities:
     Issuance of common stock                                                                 247,153        464,345        308,489
     Repurchase of common stock                                                              (577,759)      (540,780)      (378,565)
     Repayments of short-term debt, notes payable,
       and capital lease obligations                                                           (2,109)        (2,357)        (2,561)
     Repayments of long-term borrowings                                                       (24,349)       (12,000)       (12,216)
     Net proceeds from issuance of debt                                                          --            2,499          9,521
     Net cash settlement of put options                                                      (140,700)          --             --
     Other, net                                                                                   (70)        (3,508)          (635)
                                                                                          -----------    -----------    -----------
Net cash used in financing activities                                                        (497,834)       (91,801)       (75,967)
                                                                                          -----------    -----------    -----------

Net cash provided by discontinued operations                                                   30,291        241,506         70,759

Increase (decrease) in cash and equivalents                                                  (802,623)       748,649        433,442
Cash and equivalents, beginning of period                                                   1,700,420        951,771        518,329
                                                                                          -----------    -----------    -----------
Cash and equivalents, end of period                                                       $   897,797    $ 1,700,420    $   951,771
                                                                                          ===========    ===========    ===========

Other cash flow information:
     Interest paid                                                                        $     1,094    $     2,256    $     4,132
     Income taxes paid (refunds received), net                                                (20,151)       111,899         16,884
     Non-cash investing and financing activities:
         Unrealized gain (loss) on investments, net                                          (268,041)       239,053         43,538
         Fair value of stock issued and options assumed in business combinations               29,179          8,650         13,366
         Issuance of warrants for note receivable                                              21,052           --             --
</TABLE>

See notes to consolidated financial statements.


                                       52
<PAGE>

Notes to Consolidated Financial Statements

Note 1:  Description of Business

Description of business.  3Com Corporation (3Com) was founded on June 4, 1979. A
pioneer in the  computer  networking  industry,  3Com evolved from a supplier of
discrete  products to a leading  provider of networking  products and solutions.
Its network offerings focus on targeted sectors of the commercial enterprise and
service provider markets. 3Com specializes in products and services that provide
straightforward solutions to complex networking challenges,  particularly in the
areas of wireless network access and IP telephony. Headquartered in Santa Clara,
California,   3Com  has  worldwide  research  and  development,   manufacturing,
marketing, sales, and support capabilities.

Note 2:  Significant Accounting Policies

Fiscal  year.  Effective  June 1, 1998,  3Com  adopted a 52-53 week  fiscal year
ending on the Friday  nearest to May 31. This change did not have a  significant
effect on 3Com's consolidated  financial statements.  Fiscal year 2000 contained
53 weeks, whereas fiscal years 2001 and 1999 contained 52 weeks. For fiscal year
2000,  the first three quarters  contained 13 weeks,  whereas the fourth quarter
contained 14 weeks.

Use of estimates in the preparation of consolidated  financial  statements.  The
preparation  of  the  consolidated   financial  statements  in  conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires 3Com to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the  consolidated  financial  statements and the reported amounts of
sales and expenses  during the reporting  periods.  Actual  results could differ
from those estimates.

Basis  of  presentation.  The  consolidated  financial  statements  include  the
accounts of 3Com and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation.

Certain  prior year amounts in the  consolidated  financial  statements  and the
notes thereto have been reclassified to conform to the 2001 presentation.

Discontinued  operations.  The financial  data related to Palm,  Inc.  (Palm) is
accounted for as a discontinued operation for all periods presented. See Note 3.

Cash  equivalents.  Cash  equivalents  consist of highly liquid debt investments
acquired with a remaining maturity of three months or less.

Short-term  investments.  Short-term investments consist of investments acquired
with maturities  exceeding three months but less than three years.  While 3Com's
intent is to hold debt  securities  to maturity,  consistent  with  Statement of
Financial   Accounting   Standards  (SFAS)  No.  115,  "Accounting  for  Certain
Investments  in Debt  and  Equity  Securities,"  3Com  has  classified  all debt
securities  and  all   investments  in  equity   securities  that  have  readily
determinable fair values as  available-for-sale,  as the sale of such securities
may be required  prior to  maturity to  implement  management  strategies.  Such
securities are reported at fair value,  with unrealized gains or losses excluded
from  earnings and included in other  comprehensive  income,  net of  applicable
taxes.  The cost of  securities  sold is based  on the  specific  identification
method.


                                       53
<PAGE>

Concentration of credit risk.  Financial  instruments which potentially  subject
3Com  to  concentrations  of  credit  risk  consist   principally  of  cash  and
equivalents,  short-term  investments and accounts receivable.  3Com maintains a
minimum average short-term investment portfolio credit quality of AA and invests
in instruments with an investment credit rating of A and better. 3Com places its
investments for safekeeping with high-credit-quality financial institutions, and
by policy,  limits the amount of credit  exposure  from any one  institution  or
issuer.

For the year ended and as of June 1, 2001,  3Com had one customer that accounted
for 15 percent of total sales,  and two customers  that accounted for 15 percent
and 11 percent of total accounts  receivable.  For the year ended and as of June
2, 2000,  these same customers  accounted for 15 percent and 13 percent of total
sales, respectively, and 12 percent and 12 percent of total accounts receivable,
respectively.  For the year ended and as of May 28, 1999,  these same  customers
accounted for 16 percent and 12 percent of total sales, respectively.

Inventories.  Inventories  are  stated  at the  lower of  standard  cost  (which
approximates first-in, first-out cost) or market.

Property  and  equipment.  Property and  equipment is stated at cost.  Equipment
under capital  leases is stated at the lower of fair market value or the present
value of the minimum lease payments at the inception of the lease.

Long-lived assets. The carrying value of long-lived assets,  including goodwill,
is  evaluated  whenever  events or changes in  circumstances  indicate  that the
carrying  value of the asset may be impaired.  An impairment  loss is recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset  including  disposition are less than the carrying value of the asset.
An impairment is measured as the amount by which the carrying amount exceeds the
fair value.  Impairments of long-lived assets are discussed in the related notes
included herein.

Depreciation and  amortization.  Depreciation and amortization are computed over
the  shorter  of the  estimated  useful  lives,  lease,  or  license  terms on a
straight-line  basis--generally  2-15  years,  except  for  buildings  which are
depreciated over 25 years. Purchased technology, other intangibles, and goodwill
are  included in other  assets and are  amortized  over their  estimated  useful
lives, generally two to seven years.

Revenue recognition.  3Com generally recognizes a sale when the product has been
delivered  and  risk of loss  has  passed  to the  customer,  collection  of the
resulting receivable is probable,  persuasive evidence of an arrangement exists,
and the fee is  fixed or  determinable.  3Com  accrues  related  product  return
reserves,   warranty,  other  post-contract  support  obligations,  and  royalty
expenses at the time of sale.  A limited  warranty is provided on 3Com  products
for periods ranging from 90 days to the lifetime of the product,  depending upon
the product.  Service and  maintenance  sales are  recognized  over the contract
term.  3Com  provides  limited  product  return and price  protection  rights to
certain distributors and resellers.  Product return rights are generally limited
to a percentage of sales over a one to three month period.

Advertising.  Cooperative  advertising  obligations are expensed at the time the
related  sales are  recognized.  All other  advertising  costs are  expensed  as
incurred.

Foreign  currency  translation.  The majority of 3Com's sales are denominated in
U.S. Dollars.  For foreign  operations with the local currency as the functional
currency,  assets and liabilities are translated at year-end exchange rates, and
statements of operations are translated at the average exchange rates during the
year. Gains or losses  resulting from foreign currency  translation are included
as a component of other comprehensive income.


                                       54
<PAGE>

For 3Com  entities  with the U.S.  Dollar as the  functional  currency,  foreign
currency  denominated  assets and  liabilities  are  translated  at the year-end
exchange  rates  except for  inventories,  prepaid  expenses,  and  property and
equipment,  which are  translated at historical  exchange  rates.  Statements of
income are  translated at the average  exchange rates during the year except for
those  expenses  related to balance  sheet  amounts  that are  translated  using
historical  exchange  rates.  Gains or losses  resulting  from foreign  currency
translation are included in interest and other income,  net, in the consolidated
statements of operations. Foreign currency losses were $0.8 million for the year
ended June 1, 2001,  and  foreign  currency  gains  were $1.2  million  and $2.0
million for the years ended June 2, 2000 and May 28, 1999, respectively.

Where available,  3Com enters into foreign exchange forward and option contracts
to hedge certain  balance  sheet  exposures and  intercompany  balances  against
future  movements  in foreign  exchange  rates.  Option  premiums,  if any,  are
expensed in the current period in interest and other income, net.

Stock-based  compensation.  Employee  stock  plans are  accounted  for using the
intrinsic value method  prescribed by Accounting  Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees."

Net income per share.  Basic  earnings per share is computed  using the weighted
average  number of common  shares  outstanding.  Diluted  earnings  per share is
computed  using the weighted  average  number of common  shares and  potentially
dilutive  common  shares  outstanding  during the period.  Potentially  dilutive
common shares consist of employee stock options,  warrants and restricted stock,
and are  excluded  from the  diluted  earnings  per  share  computation  in loss
periods.

Effects of recent  accounting  pronouncements.  In June 1998 and June 1999,  the
Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative  Instruments and Hedging  Activities," as amended,  which establishes
accounting and reporting standards for derivative instruments, including certain
derivative  instruments  embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered  derivatives
may now meet the definition of a derivative.  3Com will adopt SFAS 133 effective
June  2,  2001.  3Com  does  not  expect  the  adoption  of  SFAS  133 to have a
significant  impact on the financial  position,  results of operations,  or cash
flows of the Company.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (SAB) No. 101,  "Revenue  Recognition in Financial  Statements."  3Com
adopted the  guidance in SAB 101 during its fourth  quarter of fiscal year 2001.
The  adoption  of SAB 101 did not have a  material  effect on 3Com's  results of
operations or financial position.

In June 2001,  the FASB  issued  SFAS No.  141,  "Business  Combinations"  which
addresses the financial  accounting and reporting for business  combinations and
supersedes  APB  Opinion  No.  16,  "Business  Combinations,"  and SFAS No.  38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No.
141 requires that all business combinations be accounted for by a single method,
the purchase method,  modifies the criteria for recognizing  intangible  assets,
and expands disclosure requirements. The provisions of SFAS No. 141 apply to all
business  combinations  initiated  after June 30, 2001. 3Com does not expect the
adoption of SFAS No. 141 to have a material  effect on the results of operations
or statements of financial position of the Company.


                                       55
<PAGE>

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other  intangible  assets and  supersedes  APB Opinion  No. 17,  "Intangible
Assets."  SFAS No.  142  addresses  how  intangible  assets  that  are  acquired
individually  or with a  group  of  other  assets  should  be  accounted  for in
financial  statements upon their  acquisition and after they have been initially
recognized in the financial statements.  SFAS No. 142 requires that goodwill and
intangible  assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment,  and intangible assets that have finite
useful  lives be  amortized  over their  useful  lives.  SFAS No.  142  provides
specific  guidance for testing  goodwill and intangible  assets that will not be
amortized  for  impairment.  In  addition,  SFAS No. 142 expands the  disclosure
requirements  about goodwill and other intangible assets in the years subsequent
to their  acquisition.  SFAS No. 142 is effective for our fiscal year 2003, with
early  adoption  permitted at the beginning of our fiscal year 2002.  Impairment
losses for goodwill and indefinite-life  intangible assets that arise due to the
initial  application  of SFAS No. 142 are to be  reported  as  resulting  from a
change in accounting principle. However, goodwill and intangible assets acquired
after June 30, 2001 will be subject  immediately to provisions of SFAS 142. 3Com
is in the  process of  determining  the impact  that  adoption  will have on the
consolidated financial statements.

Note 3:  Discontinued Operations

On  September  13,  1999,  3Com  announced  a plan to conduct an initial  public
offering  (IPO) of its Palm  subsidiary.  On March 2,  2000,  3Com  sold 4.7% of
Palm's  stock to the public and 1.0% of Palm's stock in private  placements.  On
July  27,  2000,  3Com  distributed  its  remaining  Palm  common  stock to 3Com
shareholders.  The  distribution  ratio  was  1.4832  shares  of Palm  for  each
outstanding  share of 3Com  common  stock.  No gain was  recorded as a result of
these transactions. The decrease in the intrinsic value of 3Com's employee stock
plans  attributable to the  distribution of Palm was restored in accordance with
the  methodology  set forth in FASB  Emerging  Issues  Task  Force  Issue  90-9,
"Changes  to  Fixed   Employee   Stock  Option  Plans  as  a  Result  of  Equity
Restructuring."  Prior to the Palm  distribution,  there were  approximately  35
million   employee  stock  options   outstanding.   As  a  result  of  the  Palm
distribution,  these  converted  to  approximately  169 million  employee  stock
options outstanding as of July 27, 2000.

The  historical  consolidated  financial  statements  of 3Com  present Palm as a
discontinued  operation for all periods  presented.  The financial  data of Palm
reflects the  historical  results of operations and cash flows of the businesses
that  comprised  the  handheld  computing  business  segment of 3Com during each
respective  period;  they do not  reflect  many  significant  changes  that have
occurred in the  operations  and  funding of Palm as a result of the  separation
from 3Com and the IPO.  The Palm  financial  data  presented  as a  discontinued
operation reflects the assets and liabilities  transferred to Palm in accordance
with the  terms  of a master  separation  agreement  to which  Palm and 3Com are
parties.  Under the transitional  services agreement,  3Com continues to provide
corporate  and other  infrastructure  services to Palm,  with  specific  service
functions  ending at various dates during fiscal 2001 and fiscal 2002.  From the
date of the distribution, the amounts charged to Palm for such services were not
material to 3Com's statement of operations.

Discontinued  operations  include Palm net sales,  which totaled $188.9 million,
$1,057.6  million,  and $569.9  million for fiscal years 2001,  2000,  and 1999,
respectively.  Income from Palm  discontinued  operations  was  reported  net of
income tax expense of $2.7  million,  $44.8  million,  and $24.9 million for the
fiscal years 2001, 2000, and 1999,  respectively.  Allocated  corporate expenses
that ceased after the Palm  spin-off  are  included in income from  discontinued
operations.


                                       56
<PAGE>

The net assets of Palm included within net assets of discontinued  operations as
of June 2, 2000 were as follows (in millions):

Current assets                                           $ 1,259
Property and equipment, net                                   13
Deferred income taxes and other assets                        17
Current liabilities                                         (230)
Other liabilities                                             (1)
                                                         --------
         Net assets of discontinued operations           $ 1,058
                                                         =======

Note 4:  Restructuring Charges

During fiscal 2001 and fiscal 2000, 3Com undertook several  initiatives aimed at
both changing business strategy as well as improving  operational  efficiencies.
3Com recorded  restructuring  charges of $163.7 million and $68.9 million in the
fiscal years ended June 1, 2001 and June 2, 2000, respectively.

Exit of  Analog-Only  Modem  and  High-End  LAN/WAN  Chassis  Product  Lines and
Separation of Palm

3Com  realigned  its  strategy in the fourth  quarter of fiscal 2000 to focus on
high-growth markets,  technologies,  and products.  Operations were restructured
around two  distinct  business  models:  1)  Commercial  and  Consumer  Networks
Business  and 2)  CommWorks.  In support of this new  strategy,  3Com exited its
analog-only  modem and high-end  Local Area Network  (LAN) and Wide Area Network
(WAN) chassis product lines and completed the separation of Palm. For the fiscal
year ended June 1, 2001,  3Com recorded  restructuring  charges of $13.2 million
relating  to these  activities.  For the fiscal  year  ended June 2, 2000,  3Com
recorded net restructuring charges of $59.0 million, consisting of restructuring
charges of approximately  $125.4 million,  partially offset by a gain recognized
upon receipt of a warrant to purchase  common stock in Extreme  Networks,  Inc.,
valued at $66.4 million. 3Com also recorded a credit of $0.2 million and charges
of $9.9  million  for the  fiscal  years  ended  June 1, 2001 and June 2,  2000,
respectively,   related  to  the   separation  of  Palm.   3Com   completed  its
restructuring  activities  associated with the exit of the analog-only modem and
high-end  LAN  and  WAN  chassis  product  lines  during  fiscal  2001.  The net
restructuring   benefits   relate  to   revisions   of  previous   estimates  of
restructuring costs.  Components of accrued restructuring charges and changes in
accrued  amounts  related to this  restructuring  program as of June 1, 2001 and
June 2, 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                        Severance       Long-term       Facilities          Other
                                           and            Asset            Lease        Restructuring
                                      Outplacement     Write-downs      Terminations        Costs            Total
                                       ---------        ---------        ---------        ---------        ---------
<S>                                    <C>              <C>              <C>              <C>              <C>
     Balance at May 28, 1999           $    --          $    --          $    --          $    --          $    --

     Charges (benefits)                   59,890           20,187            8,932           36,404          125,413
     Deductions                          (25,678)         (20,187)            (632)         (30,731)         (77,228)
                                       ---------        ---------        ---------        ---------        ---------

     Balance at June 2, 2000              34,212             --              8,300            5,673           48,185

     Charges (benefits)                   (4,637)           9,761           (6,149)          14,270           13,245
     Deductions                          (29,214)          (9,761)          (2,151)         (19,943)         (61,069)
                                       ---------        ---------        ---------        ---------        ---------

     Balance at June 1, 2001           $     361        $    --          $    --          $    --          $     361
                                       =========        =========        =========        =========        =========
</TABLE>


                                       57
<PAGE>

Severance and  outplacement  costs related to the  termination of  approximately
2,700 employees.  Employee  separation costs included  severance,  medical,  and
other benefits.  Employee groups impacted by the restructuring include personnel
involved  in  corporate   services,   manufacturing   and   logistics,   product
organizations,  sales, and customer support.  As of June 2, 2000,  approximately
900 employees had begun the separation  process,  resulting in payments of $25.7
million.  The $4.6  million  benefit  during  fiscal 2001  relates  primarily to
approximately 200 employees who were originally  forecasted to be terminated but
were subsequently  retained by 3Com. As of June 1, 2001, all affected  employees
were  notified  of  termination   and  employee   separations   associated  with
announcements  made in the fourth quarter of fiscal 2000 have been substantially
completed, resulting in separation payments of $29.2 million for the fiscal year
2001, and $54.9 million since the inception of the restructuring. Remaining cash
expenditures   associated   with  employee   separations  are  estimated  to  be
approximately $0.4 million.

In fiscal  2000,  3Com wrote off $20.2  million for  sales-related  hardware and
software  applications that were no longer needed. During fiscal year 2001, $9.8
million of capital  assets were  written  off,  for a total of $29.9  million in
capital  asset  write-offs  since  the  inception  of  the  restructuring.   All
restructuring  activities  related to the disposal of long-term assets have been
completed as of June 1, 2001.

In fiscal 2000,  $8.9 million was accrued for costs  associated with the closure
of approximately 300,000 square feet of office space through lease terminations.
Space  reductions  included  approximately  120,000 square feet in the Americas,
170,000  square feet in Europe,  and 10,000 square feet in Asia  Pacific.  As of
June 2,  2000,  $0.6  million  of  expenses  had  been  paid  related  to  lease
terminations.  During  fiscal year 2001,  a benefit of $6.1 million was recorded
representing  a revision in the  estimate of costs  associated  with  facilities
lease  terminations  due to subsequent  decisions not to dispose of space in the
U.S., Europe and Latin America, as well as a thriving global real estate market,
which resulted in lower actual  disposal costs as landlords could easily replace
tenants at a higher  rent  level,  and $2.2  million of  expenses  had been paid
related to facilities  closures as of June 1, 2001,  for a total of $2.8 million
in facilities lease termination costs since the inception of the  restructuring.
All restructuring  activities  associated with the closure of facilities through
lease terminations have been completed as of June 1, 2001.

In fiscal  2000,  $36.4  million  was  accrued  for other  restructuring  costs,
consisting of  approximately  $27.2 million related to payments to suppliers and
vendors to terminate agreements and $9.2 million for professional fees and other
direct  costs.  As of June 2, 2000,  $25.0 million of this expense had been paid
for contract breakage costs and $5.7 million had been paid for professional fees
and other direct costs.  During  fiscal year 2001,  $14.3 million was accrued to
cover remaining  restructuring  costs and included the $11.7 million loss on the
sale of 3Com's  manufacturing  and  distribution  operations  during  the second
quarter of fiscal 2001. As of June 1, 2001,  $19.9 million had been paid related
to contract breakage costs, professional fees, costs associated with the sale of
3Com's  manufacturing and distribution  operations and other direct costs, for a
total of $50.6  million  since the  inception  of the  restructuring.  All other
restructuring activities have been completed as of June 1, 2001.

During  fiscal  2000,  as part of the  restructuring  strategy,  3Com  formed  a
strategic  alliance with Extreme Networks,  Inc. to provide a migration path for
customers  of 3Com's  high-end  LAN  products.  As part of the  agreement,  3Com
received a vested  warrant to purchase 1.5 million  shares of Extreme  Networks,
Inc. common stock at an exercise price of $79 per share. The term of the warrant
was two years, expiring on April 3, 2002. This warrant had a fair value of $66.4
million at the time of receipt.  The gain  recognized on receipt of this warrant
partially  offset the  business  realignment  charges for the year ended June 2,
2000.  During fiscal 2001, we entered into a collar against the warrant to hedge
changes in the fair value of the warrant.  This collar was settled during fiscal
2001 for a gain of  approximately  $56.6  million.  This gain was recorded as an
adjustment of the cost basis in the warrant.  The warrant was sold during fiscal
2001 for proceeds of $20.1 million, resulting in a gain of $8.7 million.


                                       58
<PAGE>

3Com has substantially  completed its restructuring  activities  associated with
the exit of the analog-only modem and high-end LAN and WAN chassis product lines
and  the  separation  of  Palm.  Remaining  cash  expenditures  relating  to the
restructuring activities are estimated to be $0.4 million,  relating to employee
severance. These expenditures are expected to be paid by August 2001.

Global Cost Reduction to Improve Operational Efficiencies

In fiscal 2001, 3Com announced the  restructuring of its Commercial and Consumer
Networks  Business  and  CommWorks  Corporation  to  enhance  the focus and cost
effectiveness  of these businesses in serving their  respective  markets.  Three
independent businesses -- Business Connectivity Company (BCC), Business Networks
Company (BNC), and CommWorks Corporation (CommWorks) -- were formed through this
restructuring  effort,  with each business  utilizing  central shared  corporate
services.  3Com  implemented a reduction in force and cost  containment  actions
aimed at expense and asset reduction, and exited its consumer Internet Appliance
product  line as part of this  restructuring  effort.  For the fiscal year ended
June 1, 2001, 3Com recorded charges of  approximately  $150.7 million related to
these restructuring activities.

Subsequent to June 1, 2001,  3Com  announced it will exit its consumer cable and
digital  subscriber  line  (DSL)  modem  businesses,  as well as its  intent  to
outsource  the   manufacturing  of  high  volume  server,   desktop  and  mobile
connectivity products in a contract manufacturing  arrangement.  Concurrent with
such  outsourcing,  3Com will  consolidate its real estate portfolio and certain
facilities will be sold. As these announcements were made during fiscal 2002, no
charges are reflected in the table below for the exit of the consumer  cable and
DSL modem businesses,  the consolidation of 3Com's real estate portfolio and the
sale of certain  facilities.  Components  of accrued  restructuring  charges and
changes in accrued amounts related to this  restructuring  program as of June 1,
2001 were as follows (in thousands):

<TABLE>
<CAPTION>
                                        Severance       Long-term       Facilities          Other
                                           and            Asset            Lease        Restructuring
                                      Outplacement     Write-downs      Terminations        Costs            Total
                                       ---------        ---------        ---------        ---------        ---------
<S>                                    <C>              <C>              <C>              <C>              <C>

     Charges                           $  86,439        $  59,601        $     944        $   3,761        $ 150,745
     Deductions                          (46,537)         (59,601)            (944)          (1,979)        (109,061)
                                       ---------        ---------        ---------        ---------        ---------

     Balance at June 1, 2001           $  39,902        $    --          $    --          $   1,782        $  41,684
                                       =========        =========        =========        =========        =========
</TABLE>


                                       59
<PAGE>

Severance and  outplacement  costs relate to the  termination  of  approximately
4,370 positions including full time regular employees and alternative workforce.
Employee  separation  expenses  are  comprised of  severance  pay,  outplacement
services,  medical and other related  benefits.  Employee groups impacted by the
restructuring include those in corporate services,  manufacturing and logistics,
product organizations,  sales, customer support and administrative positions. As
of June 1, 2001, 3Com communicated to all impacted employees  regarding employee
separation  benefits  and  the  timing  of  separation.   As  of  June  1,  2001
approximately  2,600 regular full time and alternative  workforce positions have
been separated or were currently in the separation  process,  resulting in $46.5
million of employee separation payments.  Remaining cash expenditures associated
with  employee  separation  are  estimated to be  approximately  $39.9  million.
Included  in  severance  and  outplacement  costs above is  approximately  $15.5
million of accelerated amortization of deferred stock compensation for qualified
employees of Kerbango, Inc. (Kerbango) during the fourth fiscal quarter of 2001.
Employee separations are expected to be substantially complete by May 2002.

Long term  asset  write-downs  include  those  assets  identified  that will not
support continuing  operations for 3Com. For the fiscal year ended June 1, 2001,
3Com  recorded a  provision  of $59.6  million for the  write-down  of long term
assets.  This provision included  discontinued  software  applications  totaling
$30.1  million,  as  well  as the  write-off  of net  goodwill  and  intangibles
associated with certain  acquisitions  relating to product lines 3Com is exiting
totaling $24.3  million.  Other asset  write-downs  amounted to $5.2 million for
assets related to exited product lines or separated employees.

3Com incurred and paid  approximately  $0.9 million for the period ended June 1,
2001 for facilities lease terminations.  As the current restructuring activities
continue to develop and definitive plans are established,  3Com expects to incur
substantial further expenses during fiscal year 2002 related to facilities lease
terminations and the consolidation of 3Com's real estate portfolio.

Other  restructuring  costs include  payments for  professional  services and to
suppliers.  As of June 1, 2001, 3Com recorded a provision of approximately  $3.8
million related to other  restructuring  costs. As of June 1, 2001, $2.0 million
was charged against this provision,  related  primarily to royalty  payments for
discontinued  products and professional  fees.  Remaining cash  expenditures for
other restructuring costs are estimated to be approximately $1.8 million. As the
current  restructuring  activities  continue to develop and definitive plans are
established, 3Com expects to incur further expenses during fiscal year 2002.

3Com expects to substantially  complete its restructuring  activities related to
the  reduction in force and cost  containment  measures  described  above during
calendar year 2002. Remaining cash expenditures related to the restructuring are
estimated to be $41.7  million,  related  primarily to employee  separation  and
payments to suppliers.

Note 5:  Business Combinations and Joint Ventures

For acquisitions accounted for as purchases,  3Com's consolidated  statements of
operations  include the operating  results of the acquired  companies from their
acquisition  dates.  Acquired  assets and  liabilities  were  recorded  at their
estimated fair values at the dates of  acquisition,  and the aggregate  purchase
price plus costs directly  attributable  to the  completion of the  acquisitions
have been  allocated  to the assets and  liabilities  acquired.  No  significant
adjustments  were  required to conform the  accounting  policies of the acquired
companies.  Proforma  results of operations  have not been  presented for any of
these acquisitions as the effects of these acquisitions were not material to the
company either individually or on an aggregate basis.


                                       60
<PAGE>

3Com completed the following  transactions  during the fiscal year ended June 1,
2001:

o    During the third quarter of fiscal 2001, 3Com acquired the Gigabit Ethernet
     network  interface card (NIC)  business of Alteon  WebSystems  (Alteon),  a
     wholly-owned  subsidiary  of Nortel  Networks  Corporation  (Nortel) for an
     aggregate  purchase  price of $123.0  million,  consisting  of cash paid to
     Nortel of $122.0 million,  and $1.0 million of costs directly  attributable
     to the  completion  of the  acquisition.  3Com  purchased  the  Alteon  NIC
     business and is licensing certain Gigabit  Ethernet-related  technology and
     intellectual property from Alteon.

     Approximately  $22.5 million of the aggregate  purchase  price  represented
     purchased  in-process  technology  that had not yet  reached  technological
     feasibility and had no alternative future use, and accordingly, was charged
     to operations in the third quarter of fiscal 2001.  This purchase  resulted
     in $86.0  million of goodwill  and other  intangible  assets that are being
     amortized over an estimated useful life of four years.

o    During  the  second   quarter  of  fiscal  2001,   3Com  acquired   Nomadic
     Technologies,  Inc. (Nomadic),  a developer of wireless networking products
     that 3Com will  incorporate  into  solutions  for both small  business  and
     enterprise  customers  for an aggregate  purchase  price of $31.8  million,
     consisting of cash paid to Nomadic of $23.5 million, issuance of restricted
     stock with a fair value of $3.8 million,  stock options assumed with a fair
     value of $4.3 million,  and $0.2 million of costs directly  attributable to
     the completion of the acquisition.

     For financial reporting purposes,  the aggregate purchase price was reduced
     by the  intrinsic  value of unvested  stock  options and  restricted  stock
     totaling   $6.9  million   which  was  recorded  as  deferred   stock-based
     compensation  and is being amortized over the respective  vesting  periods.
     Approximately  $8.3 million of the  aggregate  purchase  price  represented
     purchased  in-process  technology  that had not yet  reached  technological
     feasibility and had no alternative future use, and accordingly, was charged
     to operations in the second quarter of fiscal 2001. This purchase  resulted
     in $18.6  million of goodwill  and other  intangible  assets that are being
     amortized over estimated useful lives of three to five years.

o    During the first  quarter of fiscal  2001,  3Com  acquired  Kerbango,  Inc.
     (Kerbango),  developer of the  Kerbango(TM)  Internet  radio,  radio tuning
     system,  and radio  web  site,  for an  aggregate  purchase  price of $73.5
     million,  consisting of cash paid to Kerbango of $52.2 million, issuance of
     restricted stock with a fair value of $17.2 million,  stock options assumed
     with a fair  value of $3.8  million,  and $0.3  million  of costs  directly
     attributable to the completion of the  acquisition.  In addition,  deferred
     cash  payments  to founders  and certain  former  employees  totaling  $7.7
     million are contingent upon certain events through July 2002.

     For financial reporting purposes,  the aggregate purchase price,  excluding
     deferred  cash  payments,  was reduced by the  intrinsic  value of unvested
     stock  options  and  restricted  stock  totaling  $20.2  million  which was
     recorded as deferred stock-based  compensation and was being amortized over
     the  respective  vesting  periods.   Approximately  $29.4  million  of  the
     aggregate purchase price represented  purchased in-process  technology that
     had not yet reached technological feasibility and had no alternative future
     use, and  accordingly,  was charged to  operations  in the first quarter of
     fiscal 2001. This purchase  resulted in $33.7 million of goodwill and other
     intangible  assets that were being amortized over estimated useful lives of
     three to five years.


                                       61
<PAGE>

     As part of 3Com's efforts to improve  profitability,  the company announced
     that it would exit the Internet  Appliance  product line during fiscal year
     2001. As a result,  3Com determined that the net unamortized  assets had no
     remaining future value and consequently wrote off the net remaining amounts
     of deferred stock-based compensation, goodwill, and intangible assets. This
     included $15.5 million of accelerated  amortization of deferred stock-based
     compensation  for  qualified  Kerbango  employees  and $21.1 million of net
     goodwill and intangible assets related to the Kerbango  acquisition.  These
     charges were included as part of restructuring charges in fiscal 2001.

o    During the first quarter of fiscal 2001, 3Com completed the transfer of its
     analog-only modem product lines to U.S. Robotics Corporation (New USR), the
     new joint venture formed with Accton  Technology and NatSteel  Electronics.
     3Com  contributed  $3.1  million of assets to New USR,  for an 18.7 percent
     investment in the joint venture.  U.S. Robotics Corporation has assumed the
     analog-only  modem product line,  including U.S. Robotics and U.S. Robotics
     Courier branded modems.

     During fiscal 2001,  3Com wrote off its $3.1 million  investment in New USR
     as the value of this investment was determined to be other-than-temporarily
     impaired. The amount was charged to gains (losses) on investments, net.

3Com completed the following  transactions  during the fiscal year ended June 2,
2000:

o    On  April  3,  2000,   3Com  acquired   Call   Technologies,   Inc.   (Call
     Technologies),   a  leading   developer  of  Unified   Messaging  (UM)  and
     carrier-class  Operational Systems and Support (OSS) software solutions for
     telecommunications  service  providers,  for an aggregate purchase price of
     $86.0  million,   consisting  of  cash  of  approximately   $73.4  million,
     assumption  of  stock  options  with a fair  value  of  approximately  $8.6
     million,  the  assumption of $1.4 million in debt and $2.6 million of costs
     directly  attributable to the completion of the acquisition.  Approximately
     $10.6 million of the total purchase price represented  purchased in-process
     technology  that  had not yet  reached  technological  feasibility,  had no
     alternative future use, and was charged to operations in the fourth quarter
     of fiscal 2000. This purchase  resulted in  approximately  $86.7 million of
     goodwill  and  other  intangible  assets  that  are  being  amortized  over
     estimated useful lives of three to seven years.

     During  fiscal  year  2001,  3Com  determined  that  the  downturn  in  the
     telecommunications  industry  resulted in an  impairment  of developed  OSS
     technology  and  related  goodwill  that arose  from the Call  Technologies
     acquisition.  These assets were  written down $18.2  million to fair value,
     which was estimated  using  discounted  future cash flows.  The  impairment
     charge was included in amortization and write down of intangibles, and is a
     component  of  contribution  margin for  CommWorks  as reported in Note 19.
     Remaining net goodwill and intangible  assets continue to be amortized over
     their original useful lives.

o    On  December  22,  1999,  3Com  acquired   LANSource   Technologies,   Inc.
     (LANSource), a leading developer of Internet and LAN fax software and modem
     sharing software,  for an aggregate purchase price of $15.8 million in cash
     including $0.2 million of costs directly  attributable to the completion of
     the  acquisition.  Approximately  $2.9 million of the total  purchase price
     represented  purchased  in-process  technology  that  had not  yet  reached
     technological  feasibility,  had no alternative future use, and was charged
     to operations in the third quarter of fiscal 2000.  This purchase  resulted
     in approximately $13.3 million of goodwill and other intangible assets that
     are being amortized over estimated useful lives of two to five years.


                                       62
<PAGE>

     As part of 3Com's  efforts to improve  profitability,  the company  decided
     that it  would  exit  certain  LANSource  product  lines  and  license  the
     technology  to a former  competitor  in that  market.  As a result  of this
     decision,  3Com determined  that an impairment of developed  technology and
     related  goodwill that arose from the LANSource  acquisition  had occurred.
     These assets were written  down $1.1 million to estimated  realizable  fair
     value. This amount was included in restructuring charges in fiscal 2001. In
     addition,  3Com determined that a customer's  product line  discontinuation
     resulted in an impairment of a license  agreement and related goodwill that
     arose from the LANSource acquisition.  Those assets were determined to have
     no future  value,  and  accordingly  $1.0  million  was  written  off.  The
     impairment   charge  was  recorded  in  amortization   and  write  down  of
     intangibles,  and is a component of  contribution  margin for  CommWorks as
     reported  in Note  19.  Remaining  net  intangible  assets  continue  to be
     amortized over their original useful lives.

o    On December 2, 1999, 3Com acquired Interactive Web Concepts, Inc. (IWC), an
     Internet business  consulting,  creative design,  and software  engineering
     firm,  for an aggregate  purchase  price of $3.5 million in cash  including
     $0.1  million  of costs  directly  attributable  to the  completion  of the
     acquisition.  This  purchase  resulted  in  approximately  $4.1  million of
     goodwill  and other  intangible  assets that were being  amortized  over an
     estimated useful life of three years.

     As part of 3Com's  efforts to improve  profitability,  the company  decided
     that it would  discontinue  providing IWC services during fiscal year 2001.
     As a  result,  3Com  determined  that  the net  unamortized  assets  had no
     remaining future value and consequently  wrote off $2.1 million,  which was
     the net remaining amount of goodwill and intangible assets. This amount was
     included in restructuring charges in fiscal 2001.

3Com completed the following  transactions  during the fiscal year ended May 28,
1999:

o    On March 5, 1999,  3Com  acquired  NBX  Corporation  (NBX),  a developer of
     Internet  Protocol  (IP)-based  telephony  systems that integrate voice and
     data  communications  over  small  business  LANs and WANs.  The  aggregate
     purchase price of $87.8 million  consisted of cash of  approximately  $75.4
     million,  assumption  of stock  options with a fair value of  approximately
     $11.9  million,  and $0.5  million of costs  directly  attributable  to the
     completion  of the  acquisition.  Approximately  $5.6  million of the total
     purchase price represented purchased in-process technology that had not yet
     reached technological  feasibility,  had no alternative future use, and was
     charged to operations in the fourth  quarter of fiscal 1999.  This purchase
     resulted in  approximately  $94.4 million of goodwill and other  intangible
     assets that are being amortized over estimated useful lives of two to seven
     years.

o    On February 18, 1999, 3Com acquired certain assets of ICS Networking,  Inc.
     (ICS), a wholly-owned  subsidiary of Integrated  Circuit Systems,  Inc. and
     manufacturer  of  integrated  circuit  products  focused  on the design and
     marketing  of  mixed  signal  integrated  circuits  for  frequency  timing,
     multimedia, and data communications applications, for an aggregate purchase
     price of $16.1  million in cash  including  $0.1 million of costs  directly
     attributable  to the  completion  of the  acquisition.  Approximately  $5.0
     million  of the  total  purchase  price  represented  purchased  in-process
     technology  that  had not yet  reached  technological  feasibility,  had no
     alternative  future use, and was charged to operations in the third quarter
     of fiscal 1999.  This purchase  resulted in  approximately  $6.9 million of
     goodwill  and  other  intangible  assets  that  are  being  amortized  over
     estimated useful lives of three to seven years.


                                       63
<PAGE>

o    On January 25, 1999,  3Com entered into a joint venture named ADMTek,  Inc.
     (ADMtek).  3Com  contributed  approximately  $5.3  million in cash for a 44
     percent  interest in the joint  venture and began  consolidating  the joint
     venture  with its results due to its ability to exercise  control  over the
     operating and financial  policies of the joint venture.  In September 1999,
     3Com sold a portion of its existing interest in ADMTek to its joint venture
     partner.  As a result of this sale,  3Com's ownership  interest was reduced
     and it no  longer  exercised  control  over the joint  venture.  Therefore,
     during the second fiscal quarter of fiscal 2000, 3Com began  accounting for
     this investment using the cost method.

o    On November 6, 1998, 3Com acquired EuPhonics, Inc. (EuPhonics), a developer
     of  digital  signal  processor   (DSP)-based  audio  software  that  drives
     integrated circuits, sound cards, consumer electronics, and other hardware.
     The  aggregate  purchase  price  of  $8.3  million  consisted  of  cash  of
     approximately  $6.6 million,  assumption of stock options with a fair value
     of  approximately  $1.5  million,   and  $0.2  million  of  costs  directly
     attributable to the completion of the acquisition. The charge for purchased
     in-process technology associated with the acquisition was not material, and
     was included in research and development  expenses in the second quarter of
     fiscal 1999.  This  purchase  resulted in  approximately  $10.8  million of
     goodwill  and other  intangible  assets  that  were  being  amortized  over
     estimated useful lives of four years.

     As part of 3Com's  efforts to change  strategic  focus in fiscal 2001,  the
     Company  decided that it would exit the products and technology  that arose
     from the EuPhonics  acquisition.  As a result, 3Com determined that the net
     unamortized assets had no remaining future value and consequently wrote off
     $5.8 million, which was the net remaining amount of goodwill and intangible
     assets. This amount was included in restructuring charges in fiscal 2001.


                                       64
<PAGE>

Note 6:  Investments

Available-for-sale securities consist of:

<TABLE>
<CAPTION>
                                                                             June 1, 2001
                                                   -----------------------------------------------------------------
                                                                       Gross              Gross
                                                   Amortized        Unrealized         Unrealized         Estimated
(In thousands)                                        Cost             Gains              Losses          Fair Value
                                                   -----------------------------------------------------------------
<S>                                                <C>               <C>               <C>                <C>
State and municipal securities                     $  125,854        $    1,133        $     --           $  126,987
U.S. Government and agency securities                 209,522             5,820              --              215,342
Corporate debt securities                             394,247             5,998              (160)           400,085
                                                   ----------        ----------        ----------         ----------
Short-term investments                                729,623            12,951              (160)           742,414

Publicly traded corporate equity securities            20,025             4,570              (220)            24,375
                                                   ----------        ----------        ----------         ----------

Total                                              $  749,648        $   17,521        $     (380)        $  766,789
                                                   ==========        ==========        ==========         ==========

<CAPTION>
                                                                             June 2, 2000
                                                   -----------------------------------------------------------------
                                                                       Gross              Gross
                                                   Amortized        Unrealized         Unrealized         Estimated
(In thousands)                                        Cost             Gains              Losses          Fair Value
                                                   -----------------------------------------------------------------
<S>                                                <C>               <C>               <C>                <C>
State and municipal securities                     $  815,020        $    1,709        $   (1,763)        $  814,966
Corporate debt securities                             558,467               119            (4,032)           554,554
                                                   ----------        ----------        ----------         ----------
Short-term investments                              1,373,487             1,828            (5,795)         1,369,520

Publicly traded corporate equity securities           103,420           496,585           (30,014)           569,991
                                                   ----------        ----------        ----------         ----------

Total                                              $1,476,907        $  498,413        $  (35,809)        $1,939,511
                                                   ==========        ==========        ==========         ==========
</TABLE>

Publicly  traded  corporate  equity  securities  are  included in other  current
assets.


                                       65
<PAGE>

During the fiscal  year ended June 1, 2001,  publicly  traded  corporate  equity
securities  were sold for proceeds of $224.0  million.  Net  realized  losses on
investments  of $18.6  million were recorded  during  fiscal 2001,  comprised of
$135.7  million  of net  losses  recognized  due to fair  value  adjustments  of
investments  in limited  partnership  venture  capital funds and  impairments of
investments in private  companies and publicly traded  securities whose declines
in value have been  determined  to be other  than  temporary.  The  losses  were
partially  offset by $117.1  million of net gains  realized on sales of publicly
traded equity  securities.  During the fiscal year ended June 2, 2000,  publicly
traded corporate equity securities were sold for proceeds of $818.0 million. Net
realized  gains on  investments  of $838.8  million were recorded  during fiscal
2000,  comprised  of $792.7  million of net gains  realized on sales of publicly
traded equity  securities and $46.1 million of net gains  recognized due to fair
value  adjustments of investments in limited  partnership  venture capital funds
and in private companies  acquired by public  companies.  During the fiscal year
ended May 28, 1999,  publicly traded corporate  equity  securities were sold for
proceeds of $0.4 million, resulting in realized losses of $2.6 million.

The contractual maturities of available-for-sale debt securities at June 1, 2001
are as follows:

                                            Amortized         Estimated
(In thousands)                                Cost           Fair Value
                                          -----------------------------

Within one year                           $   555,816       $   562,566
Between one year and two years                168,987           174,788
Between two years and three years               4,820             5,060
                                          -----------       -----------

Short-term investments                    $   729,623       $   742,414
                                          ===========       ===========


Note 7:  Inventories, Net

Inventories, net, consist of:
                                             June 1,           June 2,
(In thousands)                                2001               2000
                                          -----------       -----------

Finished goods                            $    89,736       $   123,290
Work-in-process                                64,319            31,863
Raw materials                                  46,091            79,659
                                          -----------       -----------

Total                                     $   200,146       $   234,812
                                          ===========       ===========


                                       66
<PAGE>

Note 8:  Property and Equipment, Net

Property and equipment, net, consists of:
                                             June 1,          June 2,
(In thousands)                                2001              2000
                                          -----------       -----------

Land                                      $    44,635       $    46,412
Land, property, and equipment
  held for sale, net                           11,681            45,452
Buildings and improvements                    297,335           284,620
Machinery and equipment                       754,073           867,941
Software                                      163,592           134,148
Furniture and fixtures                         96,988           107,300
Leasehold improvements                         70,175            70,631
Construction in progress                       42,637            66,614
                                          -----------       -----------

Total                                       1,481,116         1,623,118
Accumulated depreciation and
  amortization                               (871,437)         (866,164)
                                          -----------       -----------

Property and equipment, net               $   609,679       $   756,954
                                          ===========       ===========

For the Year Ended June 1, 2001. In September  2000,  3Com sold a 39-acre parcel
of  undeveloped  land in San Jose,  California  to a financial  institution,  as
directed by Palm, for total net proceeds of approximately  $215.6 million.  3Com
recorded a net gain of $174.4 related to this sale. In February 2001,  3Com sold
a vacated office and manufacturing  building in Morton Grove, Illinois for total
net sales proceeds of $12.4 million,  resulting in a gain of approximately  $4.4
million.

For the Year Ended June 2, 2000.  3Com sold two  facilities  in the  Chicago and
Salt Lake City areas and equipment in the Chicago area for total net proceeds of
$93.2 million.  In addition,  an impairment charge of approximately $4.0 million
was recognized related to the write down to fair value of the remaining facility
held for sale in Salt  Lake  City.  A  combined  net gain of $25.5  million  was
recognized related to these transactions.

Note 9:  Other Accrued Liabilities

Other accrued liabilities consist of:
                                                    June 1,           June 2,
(In thousands)                                       2001              2000
                                                  -----------      -----------

Accrued purchase commitments (see Note 10)        $   178,942      $    33,222
Accrued payroll and related expenses                  123,092          186,382
Deferred revenue                                       76,496           76,610
Accrued product warranty                               53,571           86,437
Accrued distributor rebates                            25,595           35,077
Accrued promotion rebates                              13,481           33,605
Bank overdraft liability                                9,175           43,758
Other                                                  96,499          155,983
                                                  -----------      -----------

Other accrued liabilities                         $   576,851      $   651,074
                                                  ===========      ===========


                                       67
<PAGE>

Note 10:  Borrowing Arrangements and Commitments

As of June 1, 2001,  3Com had borrowings of $2.7 million related to an equipment
financing  transaction.  Also, as of June 1, 2001, 3Com had  approximately  $2.8
million in unused bank-issued standby letters of credit and bank guarantees.

During  July 1994,  3Com  arranged a private  placement  of $60 million in 7.52%
Unsecured Senior Notes with three insurance companies. The notes were payable in
five equal  installments  beginning  in June 1997.  During the first  quarter of
fiscal 2001,  3Com repaid the  remaining  debt balance of $24 million under this
agreement.   As  of  June  2,  2000,   borrowings   under  these  notes  totaled
approximately $24 million and $12 million of this debt was classified as current
portion of long-term debt.

As of June 1, 2001, the weighted  average  interest rate on outstanding debt was
approximately six percent.

3Com leases buildings comprising approximately 870,000 square feet for its Santa
Clara, California headquarters site. The lease expires in November 2001, with an
option to extend the lease term for two  successive  periods of five years each.
The lease contains an option to purchase the property for $148.9 million,  or at
the end of the lease  arrange for the sale of the property to a third party with
3Com  retaining an obligation to the owner for the  difference  between the sale
price and $148.9 million, subject to certain provisions of the lease.

3Com also leases buildings comprising  approximately  300,000 square feet at the
Santa Clara,  California  headquarters  site.  The lease expires in August 2002,
with an option to extend the lease term for two successive periods of five years
each.  The lease  contains an option to purchase the property for $82.6 million,
or at the end of the lease arrange for the sale of the property to a third party
with 3Com  retaining an obligation to the owner for the  difference  between the
sale  price and $82.6  million,  subject  to  certain  provisions  of the lease.
Approximately 160,000 square feet of these buildings are subleased to Palm under
an agreement that expires in August 2002.

3Com leases a 540,000 square foot office complex in  Marlborough,  Massachusetts
for  general  administration,   research  and  development,   and  manufacturing
operations.  The site will support  expansion of  approximately  660,000  square
feet. The lease expires in August 2002,  with an option to extend the lease term
for two  successive  periods of five years each.  3Com has an option to purchase
the property for $85.3 million,  or at the end of the lease arrange for the sale
of the property to a third party with 3Com  retaining an obligation to the owner
for the difference between the sale price and $85.3 million,  subject to certain
provisions of the lease.

The three  aforementioned  leases require 3Com to maintain  specified  financial
covenants.  While the Company  believes  that it is in  compliance as of June 1,
2001,  the  Company  has  had  discussions   with  the  lessors   regarding  the
interpretation of certain covenants.  If it were determined that the Company was
not in compliance,  the leases could potentially be terminated,  resulting in an
acceleration  of the  obligation  to  purchase  or  arrange  for the sale of the
related  properties.  The Company has the right to prepay these  leases  without
penalty or adverse  consideration.  If  required,  the  Company  believes it has
sufficient  financial  resources to retire these  leases.  Future  minimum lease
payments are included in the table below.

3Com leases certain of its facilities under operating  leases.  Leases expire at
various  dates from 2001 to 2015,  and  certain  facility  leases  have  renewal
options with rentals based upon changes in the Consumer  Price Index or the fair
market rental value of the property.


                                       68
<PAGE>

3Com subleases  certain of its facilities to third party tenants.  The subleases
expire at various dates from 2001 to 2007.

Future operating lease commitments and future sublease income are as follows:

                                        Future               Future
                                    Lease Payments       Sublease Income
Fiscal year                         (in thousands)       (in thousands)
------------------------------------------------------------------------
2002                                 $   34,607            $   42,099
2003                                     19,359                30,877
2004                                     12,702                 7,881
2005                                     10,953                 5,353
2006                                     10,489                 5,497
Thereafter                               14,365                 1,833
                                     ----------            ----------

Total                                $  102,475            $   93,540
                                     ==========            ==========

Rent expense was $58.0 million,  $51.5 million, and $53.7 million for the fiscal
years ended June 1, 2001, June 2, 2000 and May 28, 1999, respectively.  Sublease
income was $32.6  million,  $8.6 million,  and $1.0 million for the fiscal years
ended June 1, 2001,  June 2, 2000 and May 28,  1999,  respectively.  Included in
sublease  income was sublease income from Palm of $16.7 million and $2.6 million
for the fiscal years ended June 1, 2001 and June 2, 2000, respectively.

As of June 1, 2001, 3Com had approximately  $1.8 million in capital  expenditure
commitments,  primarily associated with facilities consolidation and information
system projects.

On September  30, 2000,  3Com  entered into a supply  agreement  with a contract
manufacturer   whereby  3Com  has  committed  to  a  minimum  dollar  amount  of
manufacturing  value-added  services,  excluding  the cost of  materials,  to be
performed by the contract  manufacturer.  These  commitments are for $31 million
per quarter during the first year of the agreement,  and $30 million per quarter
during the second  year of the  agreement.  For any  quarter in which there is a
deficit of more than ten  percent,  3Com is obligated to pay the amount by which
the deficit exceeds ten percent,  with the remaining  deficit  carried  forward.
This contract allows  termination  subject to payment of certain exit costs. Due
to 3Com's  announcement  to exit its consumer  product lines and the slowdown in
the  telecommunications  equipment  market,  3Com  does not  expect to reach the
minimum  purchase  commitments  in the future.  3Com has engaged in  discussions
regarding  termination  of the  supply  agreement.  Based on  management's  best
estimates,  a charge was recorded to cost of goods sold in the fourth quarter of
fiscal 2001 for estimated future purchase  commitment  shortfalls and exit costs
related to such termination.

Note 11: Warrants to Purchase Broadcom Common Stock and Purchase Agreement

In fiscal 2001,  3Com entered  into a Purchase and Warrant  Agreement  (purchase
agreement)  with  Altima  Communications,  Inc.  (Altima)  to  purchase  certain
components  through  December  2002.  The purchase  agreement  provided for cash
penalties  to Altima  in the  event  that  minimum  purchases  were not met on a
calendar quarter basis. The agreement  included a performance  warrant issued to
3Com to purchase common stock of Altima,  which vested as product purchases were
made. Since Altima was subsequently acquired by Broadcom Corporation (Broadcom),
the  warrant to  purchase  shares of common  stock of Altima was  replaced  by a
warrant to purchase 992,000 shares of common stock of Broadcom (warrant shares).
The fair value of the warrant was fixed at approximately $244 million, since the


                                       69
<PAGE>

agreement contained significant disincentives for nonperformance. The effects of
warrant  shares  earned were  recorded as a credit to cost of sales as purchases
were made,  based on the fixed  valuation  of the  warrant of $244  million.  In
January  2001,  3Com  exercised  its vested  portion of the warrant and received
126,940 shares of Broadcom common stock. The investment in Broadcom common stock
is  accounted  for in  accordance  with SFAS No.  115,  "Accounting  for Certain
Investments in Debt and Equity  Securities."  Due to the significant  decline in
the value of the Broadcom  common stock,  3Com recorded an  other-than-temporary
impairment  charge of $25.3  million in fiscal  2001.  As  certain  terms of the
purchase  agreement  were not met,  3Com  terminated  the purchase  agreement in
February 2001 without  penalty.  3Com continues to maintain an ongoing  purchase
arrangement with Broadcom that does not include a performance warrant.

Note 12: Common Stock

Outstanding  Options  Adjustment  for  Palm  Spin-Off.  On July 27,  2000,  3Com
completed  the  distribution  of Palm,  Inc.  common  stock held by 3Com to 3Com
stockholders (the Palm distribution).  As a result of the Palm distribution,  to
preserve the  intrinsic  value of the stock  options as discussed in Note 3, the
number of shares of 3Com common stock  subject to an option grant were  adjusted
by  multiplying  the pre-Palm  distribution  number by 4.827103 and the exercise
price per share was  adjusted by dividing  the  pre-Palm  distribution  exercise
price by 4.827103 (the Palm distribution adjustment).

Common Stock and Stock Option Plan Reserve  Adjustments  for Palm  Spin-Off.  On
July 27, 2000, as a result of the Palm  spin-off,  an adjustment was made to the
reserves for the Company's 1983 stock option plan,  1994 stock option plan, 1984
employee stock purchase plan,  restricted  stock plan,  director stock plan, and
all option plan  reserves  related to prior  acquisitions.  Such  reserves  were
multiplied by the Palm  adjustment  factor of 4.827103  pursuant to the terms of
such benefit plans.

Preferred Shares Rights Plan. In September 1989, the Board of Directors approved
a common stock purchase rights plan,  which was amended and restated in December
1994 (the Prior Plan).  In March 2001, the Board of Directors  approved a Second
Amended and Restated  Preferred  Shares Rights Plan (the Preferred Shares Rights
Plan),  which replaced the Prior Plan. The Preferred Shares Rights plan provides
that the preferred  share rights  become  exercisable  based on certain  limited
conditions related to acquisitions of stock, tender offers, and certain business
combination  transactions of 3Com. In the event one of the limited conditions is
triggered,  each right entitles the registered  holder of 3Com's common stock to
purchase for $55 one  one-thousandth  of a share of 3Com Series A  Participating
Preferred Stock (or any acquiring company).  The rights are redeemable at 3Com's
option for $.001 per right and expire on March 8, 2011.

Stock  Option  Plans.  3Com has stock  option  plans under which  employees  and
directors may be granted options to purchase common stock. Options are generally
granted at not less than the fair market value at grant date,  vest  immediately
or for periods ranging up to five years,  and expire five to ten years after the
grant date.


                                       70
<PAGE>

A summary of option transactions under the plans follows:

(Shares in thousands)                           Number        Weighted average
                                              of shares        exercise price
                                              ---------        --------------
Outstanding, May 31, 1998                        47,621           $  23.39

Granted and assumed                              18,934              27.19
Exercised                                       (11,820)             16.81
Canceled                                         (5,489)             30.85
                                               --------           --------
Outstanding, May 28, 1999                        49,246              25.60

Granted and assumed                              20,461              34.07
Exercised                                       (14,726)             19.78
Canceled                                        (12,146)             30.04
                                               --------           --------
Outstanding, June 2, 2000                        42,835              30.39

Granted and assumed                              30,172              14.42
Additional options granted to
    compensate for loss in intrinsic
    value due to Palm spin-off                  134,045                -
Exercised                                       (23,674)              8.98
Canceled                                        (35,237)             10.47
                                               --------           --------
Outstanding, June 1, 2001                       148,141           $   7.80
                                               ========           ========

As of June 1, 2001, there were 84.0 million shares available for future grant.

<TABLE>
<CAPTION>
                                  Outstanding options as of June 1, 2001                     Exercisable at June 1, 2001
                      ----------------------------------------------------------------   ---------------------------------
Range of                 Number          Weighted average        Weighted average           Number        Weighted average
exercise prices         of shares         exercise price    remaining contractual life     of shares       exercise price
---------------         ---------         --------------    --------------------------     ---------       --------------
                      (in thousands)                                (in years)           (in thousands)
<S>                       <C>                   <C>                     <C>                  <C>                <C>
$  0.04 -  $ 5.26          18,304               $ 3.52                  5.5                  14,375             $  3.22
   5.27 -    6.09          59,657                 5.77                  7.3                  29,158                5.88
   6.10 -    9.23          34,323                 8.20                  7.8                  15,763                7.96
   9.25 -   11.73          10,086                10.31                  8.3                   3,051               10.62
  11.76 -   13.71          20,371                13.51                  9.1                   1,137               13.04
  13.75 -   35.19           5,400                15.89                  9.1                     954               15.00
                          -------               ------                                      -------             -------
Total                     148,141               $ 7.80                  7.6                  64,438             $  6.28
                          =======                                                           =======
</TABLE>

There were 15.4 million and 23.6 million options  exercisable as of June 2, 2000
and May 28, 1999 with weighted  average exercise prices of $26.09 and $21.93 per
share, respectively.


                                       71
<PAGE>

Employee Stock Purchase  Plan.  3Com has an employee stock purchase plan,  under
which eligible employees may authorize payroll deductions of up to 10 percent of
their  compensation,  as  defined,  to  purchase  common  stock at a price of 85
percent of the lower of the fair market value as of the  beginning or the end of
the offering period.  During  September 1999, the Board of Directors  approved a
revision to the terms of the  employee  stock  purchase  plan that  extended the
offering  period to 24 months,  allowing for four  six-month  purchase  periods.
Price  declines,  if any, will be reflected at the  beginning of each  six-month
purchase period and remain in effect for the next 24-month offering period.

Restricted  Stock Plan. 3Com has a restricted  stock plan, under which shares of
common stock are reserved for issuance at no cost to key employees. Compensation
expense,  equal to the fair market value on the date of the grant, is recognized
as the granted shares vest over a one-to-four year period. Excluding accelerated
amortization for Kerbango employees as discussed in Note 4, compensation expense
recognized  for the  amortization  of restricted  stock was $8.1  million,  $1.6
million,  and $2.8 million for the years ended June 1, 2001,  June 2, 2000,  and
May 28, 1999,  respectively.  As of June 1, 2001,  there were 2.0 million shares
available for future grant.

Director  Stock  Plan.  3Com has a director  stock plan,  under which  shares of
common  stock are  issued to members of the Board of  Directors  at an  exercise
price equal to the fair market  value on the date of grant and vest  immediately
or over  24  month  increments.  Following  the  vesting  in  full of an  option
previously  received,  an  additional  option to purchase  shares of 3Com common
stock is automatically  granted to each eligible  participant in accordance with
the option grant provisions.

Stock Reserved for Issuance.  As of June 1, 2001, 3Com had common stock reserved
for issuance as follows:

     (In thousands)

     Stock Option Plans                                 232,091
     Employee Stock Purchase Plan                        15,806
     Warrants                                             7,100
     Restricted Stock Plan                                1,975
                                                       --------
     Total shares reserved for issuance                 256,972
                                                       ========

In addition,  as of June 1, 2001, 3Com had 0.3 million shares of preferred stock
reserved for issuance under its Preferred Shares Rights plan.

Stock Repurchase and Option Programs.  During the fourth quarter of fiscal 2000,
the Board of Directors authorized a stock repurchase program in the amount of up
to one billion dollars. Such repurchases could be used to offset the issuance of
additional shares resulting from employee stock option exercises and the sale of
shares  under the  employee  stock  purchase  plan.  The Board has  authorized a
two-year time limit on the repurchase  authorizations.  During fiscal 2001, 39.5
million shares of common stock, including those purchased through the put option
program  discussed below,  were repurchased for a total purchase price of $577.8
million.


                                       72
<PAGE>

In fiscal 2001,  3Com  initiated a program of selling put options and purchasing
call options on its common stock.  These were "European" style options which, in
the case of put options, entitle the holders to sell shares of 3Com common stock
to 3Com on the  expiration  dates at  specified  prices and, in the case of call
options,  entitle 3Com to purchase its common stock on the  expiration  dates at
specified  prices.  The  option  contracts  gave  3Com  the  choice  of net cash
settlement or physical  settlement or net settlement in its own shares of common
stock. These options were accounted for as permanent equity instruments.  During
fiscal  2001,  1.2  million  shares of common  stock  were  repurchased  through
exercised  puts for a cumulative  purchase  price of $19.9  million.  The option
contracts contained per share price floors,  whereby a drop in the price of 3Com
common stock below such price floor could require accelerated  settlement of the
put  options  by 3Com.  Due to a  decline  in the  price of 3Com  common  stock,
accelerated  settlement of the remaining put options was required.  3Com elected
net cash  settlement of 15.3 million put options  outstanding,  and related call
options,  which was  recorded as a reduction  of share  capital in the amount of
$140.7  million.  As of June 1, 2001,  there were no put options or call options
outstanding.

Note  Receivable  from  Broadcom  for Sale of Warrants  to Purchase  3Com Common
Stock.  During fiscal 2001, 3Com announced a strategic alliance with Broadcom to
accelerate the deployment of Gigabit Ethernet into business networks. As part of
the strategic  alliance,  3Com issued to Broadcom a warrant to acquire up to 7.1
million  shares of 3Com common stock,  representing  approximately  2 percent of
3Com's current  outstanding  shares.  The term of the warrant is from January 1,
2001 through  December 4, 2002.  The per share  exercise  price is $9.31 and the
purchase price of the warrant is  approximately  $21 million.  Broadcom paid for
the warrant by  issuance of a full  recourse  promissory  note in the  principal
amount of approximately  $21 million.  The note bears interest at LIBOR plus one
percent.  Payments  of interest  only are due  quarterly  beginning  April 2001.
Principal payments of approximately $3.5 million plus interest are due quarterly
beginning  October  2001  through  December  2002.  The  note has  optional  and
mandatory prepayment provisions if certain conditions are met.

Accounting for Stock-Based  Compensation.  As permitted under SFAS 123, 3Com has
elected  to  follow  APB  25  and  related  Interpretations  in  accounting  for
stock-based  awards to  employees.  Under APB 25, 3Com  generally  recognizes no
compensation expense with respect to such awards.

Pro forma information regarding net income and earnings per share is required by
SFAS 123. This information is required to be determined as if 3Com had accounted
for its stock-based  awards to employees  (including  employee stock options and
shares  issued under the  Employee  Stock  Purchase  Plan,  collectively  called
"options")  granted  subsequent  to May 31, 1995 under the fair value  method of
that Statement.  The fair value of options  granted in fiscal years 2001,  2000,
and 1999  reported  below  has been  estimated  at the date of grant  using  the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                            Employee Stock Option Plans       Employee Stock Purchase Plan
                           ----------------------------      ------------------------------
                             2001       2000       1999          2001       2000       1999
                           ----------------------------      ------------------------------
<S>                         <C>        <C>        <C>           <C>        <C>        <C>
Risk-free interest rate      4.5%       6.5%       5.3%          3.7%       6.4%       4.9%
Volatility                  79.4%      78.4%      62.0%         79.4%      78.4%      62.0%
Dividend yield               0.0%       0.0%       0.0%          0.0%       0.0%       0.0%
</TABLE>


                                       73
<PAGE>

As of June 1, 2001,  the expected  lives of the options under the Employee Stock
Option Plan were estimated at approximately two years after the vesting date for
directors  and  approximately  one and one half years after the vesting date for
non-directors.  As of June 2, 2000,  the  expected  lives of  options  under the
Employee  Stock  Option Plan were  estimated at  approximately  two and one half
years after the vesting date for  directors and  approximately  one and one half
years after the vesting date for non-directors. As of May 28, 1999, the expected
lives of  options  under  the  Employee  Stock  Option  Plan were  estimated  at
approximately  three  years  and one  half  years  after  the  vesting  date for
directors and approximately two years after the vesting date for  non-directors.
As of June 1, 2001, June 2, 2000, and May 28, 1999, the expected life of options
under the Employee Stock Purchase Plan was estimated at six months.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options  that have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions,  including  the expected  stock price  volatility.  The
weighted  average  estimated fair value of employee stock options granted during
fiscal  years  2001,  2000 and 1999 was  $7.99,  $21.10,  and  $14.95 per share,
respectively.  The weighted average estimated fair value of shares granted under
the Employee  Stock  Purchase Plan during  fiscal years 2001,  2000 and 1999 was
$5.16, $10.26, and $8.41,  respectively.  As 3Com's options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
the opinion of  management,  the existing  models do not  necessarily  provide a
reliable single measure of the fair value of its options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is assumed to be  amortized to expense over the  options'  vesting  period.  Pro
forma information follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                    Years ended
                                                    --------------------------------------------
                                                       June 1,         June 2,           May 28,
                                                        2001            2000              1999
                                                    -----------      ----------       ----------
<S>                                                 <C>              <C>              <C>
Net income (loss):         As reported              $  (965,376)     $  674,303       $  403,874
                           Pro forma                 (1,148,416)        535,539          216,695

Earnings (loss) per share: As reported--basic       $     (2.80)     $     1.94       $     1.12
                           Pro forma--basic               (3.33)           1.54             0.60
                           As reported--diluted     $     (2.80)     $     1.88       $     1.09
                           Pro forma--diluted             (3.33)           1.50             0.59
</TABLE>

Note 13:  Financial Instruments

The following summary  disclosures are made in accordance with the provisions of
SFAS No. 107,  "Disclosures  About Fair Value of Financial  Instruments,"  which
requires the disclosure of fair value information about both on- and off-balance
sheet financial  instruments where it is practicable to estimate the value. Fair
value is  defined  in SFAS 107 as the  amount  at which an  instrument  could be
exchanged in a current  transaction  between willing  parties,  rather than in a
forced or liquidation sale.

As SFAS  107  excludes  certain  financial  instruments  and  all  non-financial
instruments from its disclosure requirements,  any aggregation of the fair value
amounts presented would not represent the underlying value to 3Com.


                                       74
<PAGE>

<TABLE>
<CAPTION>
                                           June 1, 2001                  June 2, 2000
                                   -------------------------      -------------------------
                                     Carrying      Estimated       Carrying       Estimated
(In thousands)                        Amount      Fair Value        Amount       Fair Value
                                   --------------------------------------------------------
<S>                                <C>            <C>             <C>            <C>
Assets:
  Cash and equivalents             $  897,797     $  897,797      $1,700,420     $1,700,420
  Short-term investments              742,414        742,414       1,369,520      1,369,520
  Corporate equity securities         110,976        110,976         620,390        620,390

Liabilities:
  Long-term debt                   $     --       $     --        $   24,000     $   24,675
</TABLE>

The following methods and assumptions were used in estimating the fair values of
financial instruments:

Cash and equivalents.  The carrying amounts reported in the consolidated balance
sheets for cash and equivalents approximate their estimated fair values.

Short-term  investments  and  long-term  debt.  The fair  values  of  short-term
investments  and  long-term  debt are based on quoted  market  prices or pricing
models using current market rates.

Corporate equity  securities.  Publicly traded  corporate equity  securities are
included in other current assets.  The fair value of publicly  traded  corporate
equity  securities is based on quoted market  prices.  Privately  held corporate
equity  securities are included in goodwill,  intangibles,  deposits,  and other
assets.  Investments in privately held corporate equity  securities are recorded
at the lower of cost or fair value.  For these  non-quoted  investments,  3Com's
policy  is  to  regularly  review  the  assumptions   underlying  the  financial
performance  of the  privately  held  companies  in which  the  investments  are
maintained.  If and when a  determination  is made that a decline  in fair value
below the cost basis is other than temporary,  the related investment is written
down to its estimated fair value.

Foreign exchange contracts.  3Com does not use derivative financial  instruments
for speculative or trading purposes.  Where available,  3Com enters into foreign
exchange  forward  contracts  to  hedge  certain  balance  sheet  exposures  and
intercompany  balances  against future  movements in foreign exchange rates. The
premiums on long-term  foreign  exchange  forward hedges of firm commitments are
capitalized as part of the underlying  asset.  Foreign exchange option contracts
are  selectively  entered into to hedge  certain  balance  sheet  exposures  and
intercompany  balances against future movements in foreign exchange rates. Gains
and losses on the foreign exchange  contracts are included in interest and other
income,  net, which offset foreign  exchange gains or losses from revaluation of
foreign currency-denominated balance sheet items and intercompany balances.

The  foreign  exchange  forward  contracts  require  3Com  to  exchange  foreign
currencies for U.S.  Dollars or vice versa, and generally mature in one month or
less. As of June 1, 2001 and June 2, 2000, 3Com had outstanding foreign exchange
forward  contracts  with aggregate  notional  amounts of $38.9 million and $52.9
million, respectively, that had remaining maturities of one month or less. As of
June 1,  2001,  3Com did not  have  any  outstanding  foreign  exchange  forward
contracts with  maturities  greater than one month. As of June 2, 2000, 3Com had
one  outstanding  foreign  exchange  forward  contract with a notional amount of
$24.0 million with a remaining  maturity  greater than one month.  As of June 1,
2001 and June 2, 2000, the carrying amounts and estimated fair values of foreign
exchange forward contracts were  insignificant,  and the difference  between the
two  values  was  insignificant.  The fair  value of  foreign  exchange  forward
contracts is based on prevailing financial market information.


                                       75
<PAGE>

Note 14: Merger-Related Credits, Net, and Net Gains on Land and
Facilities

Merger-Related Credits, Net

On June 12,  1997,  3Com  completed  a merger  with  U.S.  Robotics,  which  was
accounted  for as a pooling of interests.  As a result of this merger,  3Com has
recorded  aggregate  merger-related  charges of $239.6  million  through June 1,
2001, which included $195.8 million of integration expenses and $43.8 million of
direct  transaction costs (consisting  primarily of investment banking and other
professional   fees).   The  following  table  displays  a  rollforward  of  the
integration  expense  activity and balances of the U.S.  Robotics merger reserve
from May 31, 1998 through June 1, 2001 (in thousands):

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                           1999
                                                         -------------------------------------
                                        May 31, 1998           Provision/                                May 28, 1999
Type of cost                               Balance       Revisions in Estimates      Deductions             Balance
---------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                  <C>                  <C>
Facilities                                $  36,584             $ (16,196)           $   6,453            $  13,935
Severance and outplacement                    6,210                (2,016)               3,599                  595
Long-term assets                              1,289                   251                  797                  743
Inventory                                     6,429                  (666)               5,763                    -
---------------------------------------------------------------------------------------------------------------------
Total                                     $  50,512             $ (18,627)           $  16,612            $  15,273
---------------------------------------------------------------------------------------------------------------------

<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                           2000
                                                         -------------------------------------
                                        May 28, 1999           Provision/                                June 2, 2000
Type of cost                               Balance       Revisions in Estimates      Deductions             Balance
---------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                  <C>                  <C>
Facilities                                $  13,935             $  (1,976)           $  11,713            $     246
Severance and outplacement                      595                   (57)                 538                   --
Long-term assets                                743                  (174)                 277                  292
---------------------------------------------------------------------------------------------------------------------
Total                                     $  15,273             $  (2,207)           $  12,528            $     538
---------------------------------------------------------------------------------------------------------------------

<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                           2001
                                                         -------------------------------------
                                        June 2, 2000           Provision/                                June 1, 2001
Type of cost                               Balance       Revisions in Estimates      Deductions             Balance
---------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                  <C>                  <C>
Facilities                                $     246             $    (246)           $      --            $      --
Long-term assets                                292                  (112)                 180                   --
---------------------------------------------------------------------------------------------------------------------
Total                                     $     538             $    (358)           $     180            $      --
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       76
<PAGE>

As of June 1, 2001, 3Com has completed all exit  activities  associated with the
U.S. Robotics merger.

As of June 1, 2001 and June 2, 2000, 3Com also had a remaining merger accrual of
$0.8 million and $1.3 million, respectively,  related to the Chipcom Corporation
merger.

In addition,  merger-related  credits,  net,  during fiscal 1999 included a $3.0
million  charge  reflecting a change in the  estimated net  realizable  value of
closed  manufacturing  plants in  Chicago.  The charge  reflects a change in the
estimated net realizable value of the plant, reflecting market conditions at the
time.

Net Gains on Land and Facilities

During fiscal 2001, 3Com sold a 39-acre parcel of undeveloped  land in San Jose,
California  to a  financial  institution,  as  directed  by Palm,  for total net
proceeds of  approximately  $215.6  million.  3Com recorded a net gain of $174.4
related  to this  sale.  In  February  2001,  3Com  sold a  vacated  office  and
manufacturing building in Morton Grove, Illinois for total net sales proceeds of
$12.4 million, resulting in a gain of approximately $4.4 million.

During fiscal 2000,  3Com sold two  facilities in the Chicago and Salt Lake City
areas and equipment in the Chicago area for total net proceeds of $93.2 million.
In addition,  an impairment charge of approximately  $4.0 million was recognized
related to the write down to fair value of the remaining  facility held for sale
in Salt Lake City. A combined net gain of $25.5 million was  recognized  related
to these transactions.

During  fiscal 1999,  3Com recorded a $4.2 million net gain on the sale of land,
which had previously been deferred pending  resolution of certain  contingencies
that were resolved during the year.


Note 15:  Interest and Other Income, Net

Interest and other income, net, consists of:
<TABLE>
<CAPTION>
                                                                   Years ended
                                                    -------------------------------------------
                                                     June 1,         June 2,           May 28,
(In thousands)                                        2001            2000               1999
                                                    ---------       ---------         ---------
<S>                                                 <C>             <C>               <C>
Interest income                                     $ 142,472       $ 110,404         $  63,245
Interest expense                                       (1,174)         (3,612)           (3,756)
Other                                                   3,298          (2,534)           (2,567)
                                                    ---------       ---------         ---------

Total                                               $ 144,596       $ 104,258         $  56,922
                                                    =========       =========         =========
</TABLE>


                                       77
<PAGE>

Note 16:  Income Taxes

The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
                                                                   Years ended
                                                    -------------------------------------------
                                                     June 1,         June 2,           May 28,
(In thousands)                                        2001            2000               1999
                                                    ---------       ---------         ---------
<S>                                                 <C>             <C>               <C>
Current:
   Federal                                          $  16,172       $  84,107         $  (7,689)
   State                                               (7,931)         38,892            24,992
   Foreign                                             16,000          39,361            49,805
                                                    ---------       ---------         ---------

Total current                                          24,241         162,360            67,108
                                                    ---------       ---------         ---------

Deferred:
   Federal                                           (285,969)        171,315           104,510
   State                                               (6,549)          8,182            (4,697)
   Foreign                                             10,636            (185)          (10,130)
                                                    ---------       ---------         ---------

Total deferred                                       (281,882)        179,312            89,683
                                                    ---------       ---------         ---------

Total                                               $(257,641)      $ 341,672         $ 156,791
                                                    =========       =========         =========
</TABLE>

The components of net deferred tax assets (liabilities) consist of:
<TABLE>
<CAPTION>
                                                     June 1,         June 2,
(In thousands)                                        2001            2000
                                                    ---------       ---------
<S>                                                 <C>             <C>
Deferred tax assets:
   Operating loss carryforwards, net                $ 409,380       $   2,781
   Amortization and depreciation                       19,786            --
   Tax credit carryforwards                            49,010          14,822
   Intercompany profit eliminations                    10,554          17,575
   Unrealized losses on private investments, net       29,099            --
   Valuation allowance                               (194,085)        (11,482)
                                                    ---------       ---------
Unrealized losses on private investments, net
Total deferred tax assets                             323,744          23,696
                                                    ---------       ---------

Deferred tax liabilities:
   Reserves recognized in different
        periods for tax purposes                     (139,354)       (115,199)
   Unremitted earnings                                (87,500)        (81,960)
   Royalty and purchased research and development      (8,965)           --
   Amortization and depreciation                         --            (9,218)
   Unrealized gain on investments, net                 (1,740)       (179,240)
   Other                                               (3,321)        (16,742)
                                                    ---------       ---------
Net deferred tax assets (liabilities)               $  82,864       $(378,663)
                                                    =========       =========
</TABLE>


                                       78
<PAGE>

3Com has  operating  losses  related  to the  following  tax  jurisdictions  and
expiration  periods:  U.S.  federal income tax  carryforward of approximately $1
billion  expiring in fiscal  2021;  various  state income tax  carryforwards  of
approximately $798.4 million expiring between 2006 and 2021; and various foreign
taxing  jurisdictions,  $2.9 million  expiring  between 2004 and 2006, and $36.8
million  with an  unlimited  carryforward  period.  3Com  also has U.S.  federal
research credit  carryforwards  of $27.1 million expiring between 2010 and 2021.
U.S. federal  alternative minimum tax credits of $21.9 million have an unlimited
carryforward period.

The  valuation  allowance  reduces  deferred tax assets to estimated  realizable
value.  The  valuation  allowance  relates  to a portion  of the  credit and net
operating loss  carryforwards and temporary  differences for which 3Com believes
that  realization  is uncertain due to various  limitations on their use and the
Company's  operating loss in the current year. The valuation allowance increased
$182.6  million in fiscal 2001,  which includes  $98.8 million  attributable  to
stock option  deductions,  which, if recognized,  will be allocated  directly to
paid-in-capital. For fiscal 2000, the valuation allowance decreased $40 million.

The provision for income taxes differs from the amount  computed by applying the
federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
                                                                 Years ended
                                                     -------------------------------------
                                                      June 1,       June 2,       May 28,
                                                       2001          2000           1999
                                                     ---------    ---------      ---------
<S>                                                   <C>            <C>            <C>
Tax computed at federal statutory rate                (35.0)%        35.0%          35.0%
State income taxes, net of federal effect              (2.6)          3.2            2.5
Tax exempt investment income                           (0.7)         (0.9)          (1.4)
Provision for taxes on unremitted earnings              0.5           --             --
Provision for combined foreign and U.S. taxes on
   certain foreign income at rates greater than
   (less than) U.S. rates                               6.9          (4.2)          (6.5)
Research tax credits                                   (0.1)         (0.3)          (0.6)
Valuation allowance                                     6.8           --             --
Non-deductible purchased in-process technology
   and merger-related charges                           3.5           1.0            0.5
Other                                                  (0.3)          1.7            0.6
                                                       ----          ----           ----

Total                                                 (21.0)%        35.5%          30.1%
                                                       ====          ====           ====
</TABLE>

Income  before  income  taxes for the fiscal  years ended June 1, 2001,  June 2,
2000, and May 28, 1999,  includes foreign  subsidiary  income (loss) of ($152.5)
million,  $213.3 million,  and $227.1 million,  respectively.  3Com has provided
$87.5 million for the potential  repatriation of certain undistributed  earnings
of its foreign  subsidiaries.  3Com has not provided for federal income taxes on
approximately   $383.6  million  of   undistributed   earnings  of  its  foreign
subsidiaries  since 3Com considers these earnings to be indefinitely  reinvested
in foreign subsidiary  operations.  It is not practicable to estimate the income
tax liability that might be incurred upon the remittance of such earnings.


                                      79
<PAGE>

During  fiscal years ended June 1, 2001 and June 2, 2000,  certain  domestic and
foreign taxing  jurisdictions  began audits of 3Com's income tax returns.  While
the ultimate results of these  examinations  cannot be predicted with certainty,
3Com's  management  believes the  examinations  will not have a material adverse
effect on its consolidated financial condition or results of operations.

Note 17:  Comprehensive Income (Loss)

Comprehensive  income  (loss)  is the  total  of net  income  (loss)  and  other
comprehensive income (loss). The components of other comprehensive income (loss)
and their related tax effects are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                   Years ended
                                                                 -----------------------------------------------
                                                                  June 1,             June 2,            May 28,
                                                                    2001               2000               1999
                                                                 ---------          ---------          ---------
<S>                                                              <C>                <C>                <C>
Gains (losses) on investments during the year, net of
     tax expense (benefit) of $(170,084), $(173,702), and
     $28,577 in 2001, 2000, and 1999, respectively               $(256,843)         $(275,098)         $  45,157
Less: adjustment for gains (losses) included in net
     income (loss), net of tax expense (benefit) of
     $(7,416), $324,644, and $(1,024) in 2001, 2000,
     and 1999, respectively                                        (11,198)           514,151             (1,619)
Change in accumulated translation adjustments during
     the year                                                          (68)            (1,341)            (3,830)
                                                                 ---------          ---------          ---------
Other comprehensive income (loss)                                $(268,109)         $ 237,712          $  39,708
                                                                 =========          =========          =========
</TABLE>

Accumulated  other  comprehensive  income (loss)  presented in the  accompanying
consolidated  balance sheets  consists of the accumulated net unrealized gain on
available-for-sale   investments   and  the  accumulated   foreign   translation
adjustments.


                                       80
<PAGE>

Note 18:  Net Income per Share

The following table presents the  calculation of basic and diluted  earnings per
share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                  Years ended
                                               ------------------------------------------------
                                                 June 1,             June 2,           May 28,
                                                  2001                2000              1999
                                               -----------        -----------       -----------
<S>                                            <C>                <C>               <C>
Income from continuing operations              $  (969,913)       $   615,563       $   364,945
Income from discontinued operations                  4,537             58,740            38,929
                                               -----------        -----------       -----------
                                               $  (965,376)       $   674,303       $   403,874
                                               ===========        ===========       ===========

Weighted average shares--Basic                     345,027            348,314           360,424
Effect of dilutive securities:
       Employee stock options                         --                9,267             8,735
       Restricted stock                               --                  302               202
                                               -----------        -----------       -----------
Weighted average shares--Diluted                   345,027            357,883           369,361
                                               ===========        ===========       ===========

Net income per share--Basic:
         Continuing operations                 $     (2.81)       $      1.77       $      1.01
         Discontinued operations                      0.01               0.17              0.11
                                               -----------        -----------       -----------
                                               $     (2.80)       $      1.94       $      1.12
                                               ===========        ===========       ===========

Net income per share--Diluted:
         Continuing operations                 $     (2.81)       $      1.72       $      0.99
         Discontinued operations                      0.01               0.16              0.10
                                               -----------        -----------       -----------
                                               $     (2.80)       $      1.88       $      1.09
                                               ===========        ===========       ===========
</TABLE>

Employee stock options and restricted stock totaling 30.3 million shares for the
year ended June 1, 2001,  were not  included  in the  diluted  weighted  average
shares calculation as the effects of these securities were antidilutive.


                                       81
<PAGE>

Note 19:  Business Segment Information

3Com  provides  network  connectivity  products  and  solutions  for  people and
businesses,  as well as access  infrastructure  and IP  services  platforms  for
network  service  providers.  For fiscal 2001,  3Com was  organized  around four
business units. Three of these units represented ongoing  operations--Commercial
and Consumer Network Products,  CommWorks Corporation, and Customer Service--and
the fourth unit included product lines that in the fourth quarter of fiscal 2000
3Com  decided  to exit.  Also in the  fourth  quarter  of fiscal  2000,  a final
decision was made to spin-off Palm (the Handheld  Computing  business  segment).
Accordingly,  the  financial  data  related  to  Palm  is  accounted  for  as  a
discontinued  operation for all periods  presented.  3Com's business  activities
have been aggregated  into three  reportable  segments:  Commercial and Consumer
Networks,  CommWorks,  and Exited Product Lines.  The Customer  Service business
unit has been  combined  into  Commercial  and  Consumer  Networks,  as customer
service  operations are an integral part of the Commerical and Consumer Networks
business  unit and the two business  units are  regularly  combined for internal
management  reviews when assessing  performance and making  decisions  regarding
allocation of resources and  investments.  The Commercial and Consumer  Networks
segment manufactures and sells desktop NICs, PC cards, switches, hubs, broadband
cable  and DSL  modems  as well as  services  associated  with  sales  of  these
products. The CommWorks segment manufactures and sells access infrastructure and
IP services  platforms for network service  providers.  Exited Products  include
analog-only modems and high-end LAN and WAN chassis products.

3Com's  Chief  Executive  Officer  has been  identified  as the chief  operating
decision  maker (CODM) as he assesses the  performance of the business units and
decides how to allocate resources to the business units.  Contribution margin is
the measure of profit and loss that the CODM uses to assess performance and make
decisions.  Contribution  margin represents the sales less the cost of sales and
direct expenses incurred within the operating segments.  Certain corporate level
operating  expenses  (primarily  bonuses  based on 3Com  results,  3Com's sales,
corporate  marketing and  administration  groups,  other  unallocated  corporate
expenses,  and  one-time  charges or credits)  are not  allocated  to  operating
segments  and are  included  in  corporate  and other in the  reconciliation  of
operating results.

The two business segments do not sell to each other, and accordingly,  there are
no intersegment  sales. 3Com's CODM does not review total assets or depreciation
and amortization by operating segment, but he does review inventory by operating
segment.  The accounting policies for reported segments are the same as for 3Com
as a whole.


                                       82
<PAGE>

Reportable Operating Segments

Information on reportable  operating  segments for the three years ended June 1,
2001,  June 2, 2000, and May 28, 1999, and as of June 1, 2001, and June 2, 2000,
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                           June 1,            June 2,              May 28,
                                                            2001               2000                 1999
                                                        -----------         -----------         -----------
<S>                                                     <C>                 <C>                 <C>
     Sales:
         Commercial and Consumer Networks               $ 2,270,942         $ 2,802,138         $ 3,089,281
         CommWorks                                          399,716             577,767             456,410
         Exited Product Lines                               150,223             954,037           1,656,562
                                                        -----------         -----------         -----------
                                                        $ 2,820,881         $ 4,333,942         $ 5,202,253
                                                        ===========         ===========         ===========

     Contribution Margin:
         Commercial and Consumer Networks               $  (129,808)        $   757,596         $ 1,283,980
         CommWorks                                         (174,695)             97,404              24,863
         Exited Product Lines                               (19,500)             28,565              96,263
                                                        -----------         -----------         -----------
                                                        $  (324,003)        $   883,565         $ 1,405,106
                                                        ===========         ===========         ===========
</TABLE>

     A reconciliation  of the totals reported for the operating  segments to the
     applicable line items in the consolidated financial statements is set forth
     below (in thousands):

<TABLE>
<CAPTION>
                                                           June 1,            June 2,              May 28,
                                                            2001               2000                 1999
                                                        -----------         -----------         -----------
<S>                                                     <C>                 <C>                 <C>
     Total contribution margin from
       operating segments                               $  (324,003)        $   883,565         $ 1,405,106
         Indirect operating expenses (1)                    733,875             810,221             949,911
         Purchased in-process technology                     60,221              13,456              10,590
         Merger-related credits, net                           (728)             (2,297)            (17,551)
         Restructuring charges                              163,657              68,867                --
                                                        -----------         -----------         -----------
     Total operating income (loss)                       (1,281,028)             (6,682)            462,156
         Gain on sale of land and facilities, net           178,844              25,483               4,200
         Gain (loss) on investments, net                    (18,614)            838,795              (2,643)
         Litigation settlement                             (250,000)               --                  --
         Interest and other income, net                     144,596             104,258              56,922
                                                        -----------         -----------         -----------
     Income (loss) from continuing operations before
         income taxes and equity interests              $(1,226,202)        $   961,854         $   520,635
                                                        ===========         ===========         ===========
</TABLE>

     (1)  Indirect  operating  expenses  include  expenses that are not directly
          attributable to an operating segment,  such as field sales,  corporate
          marketing, and general and administrative expenses.


                                       83
<PAGE>


                                                  June 1,           June 2,
                                                   2001              2000
                                               -----------      -----------
     Inventory:
         Commercial and Consumer Networks      $   166,115      $   123,564
         CommWorks                                  29,284           26,719
         Exited Product Lines                        4,747           84,529
                                               -----------      -----------
                                               $   200,146      $   234,812
                                               ===========      ===========

Geographic Information

3Com's  foreign  operations  consist  primarily of central  distribution,  order
administration,  manufacturing,  and  research  and  development  facilities  in
Western Europe, Israel, and Singapore.  Sales,  marketing,  and customer service
activities  are  conducted  through  sales  subsidiaries  throughout  the world.
Geographic  sales  information  for the last three  fiscal years is based on the
location of the end customer.  Geographic long-lived assets information is based
on the physical  location of the assets at the end of each fiscal year. Sales to
unaffiliated customers and long-lived assets by geographic region are as follows
(in thousands):

                                         Years ended
                       -----------------------------------------------
                         June 1,            June 2,           May 28,
                          2001               2000              1999
                       ----------         ----------        ----------
Sales

Americas               $1,523,863         $2,435,838        $2,982,902
Europe                    856,127          1,354,567         1,740,826
Asia Pacific              440,891            543,537           478,525
                       ----------         ----------        ----------

Total                  $2,820,881         $4,333,942        $5,202,253
                       ==========         ==========        ==========


For the fiscal years ended June 1, 2001,  June 2, 2000,  and May 28,  1999,  the
United States within the Americas region above had sales of $1,277.9 million, or
45 percent  of total  sales,  $2,114.4  million,  or 49  percent  of sales,  and
$2,667.8  million,  or 51 percent of sales,  respectively.  No other  individual
country within the regions above had sales exceeding ten percent of total sales.

                         June 1,            June 2,
                          2001               2000
                       ----------         ----------
Long-Lived Assets

United States          $  397,290         $  522,549
Ireland                    84,801             78,524
United Kingdom             71,741             86,586
Other                      55,847             69,295
                       ----------         ----------

Total                  $  609,679         $  756,954
                       ==========         ==========

As of June 1, 2001 and June 2, 2000 no other  individual  country had long-lived
assets exceeding 10 percent of total long-lived assets.


                                       84
<PAGE>

Note 20:   Employee Benefit Plan

3Com has  adopted a plan  known as the 3Com  401(k)  Plan (the  Plan) to provide
retirement benefits to all of its employees.  As allowed under Section 401(k) of
the Internal Revenue Code, the Plan provides  tax-deferred salary deductions for
eligible employees.  Participants may elect to contribute from one percent to 22
percent of their annual  compensation to the Plan each calendar year, limited to
a maximum annual amount as set periodically by the Internal Revenue Service.  In
addition,  the Plan  provides for  contributions  as  determined by the Board of
Directors.  3Com will match 50 percent  for each dollar on the first six percent
of target income  contributed by the employee.  Employees  become vested in 3Com
matching  contributions  according  to a three year  vesting  schedule  based on
initial date of hire.  Matching  contributions to the Plan totaled $11.8 million
in fiscal 2001, $12.9 million in fiscal 2000, and $13.6 million in fiscal 1999.

Note 21:  Litigation

3Com is a party to  lawsuits in the normal  course of  business.  Litigation  in
general, and intellectual property and securities litigation in particular,  can
be expensive and disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict. 3Com believes that it has
defenses in each of the cases set forth below and is vigorously  contesting each
of these  matters.  An  unfavorable  resolution  of one or more of the following
lawsuits  could  adversely  affect  its  business,  results  of  operations,  or
financial condition.

Securities Litigation

In December 1997, a securities  class action lawsuit,  captioned  Reiver v. 3Com
Corporation,  et al., Civil Action No. C-97-21083JW  (Reiver),  was filed in the
United States  District Court for the Northern  District of California.  Several
similar actions have been consolidated into this action, including Florida State
Board of  Administration  and  Teachers  Retirement  System of Louisiana v. 3Com
Corporation,  et al.,  Civil  Action  No.  C-98-1355.  On August 17,  1998,  the
plaintiffs filed a consolidated  amended  complaint which alleged  violations of
the  federal  securities  laws,  specifically  Sections  10(b)  and 20(a) of the
Securities  and Exchange Act of 1934,  and which sought  unspecified  damages on
behalf of a purported class of purchasers of 3Com common stock during the period
from April 23, 1997 through  November 5, 1997.  In May 2000,  3Com  answered the
amended complaint. In October 2000, the parties agreed to settle this action and
all  other  related  actions,  including  Adler v.  3Com  Corporation,  which is
discussed  below.  On February  23,  2001,  the Court  entered a final  judgment
approving the settlement.

In October  1998, a securities  class action  lawsuit,  captioned  Adler v. 3Com
Corporation,  et al., Civil Action No. CV777368 (Adler),  was filed against 3Com
and certain of its officers  and  directors in the  California  Superior  Court,
Santa Clara County,  asserting the same class period and factual  allegations as
the Reiver action.  The complaint alleged violations of Sections 25400 and 25500
of the California  Corporations Code and sought unspecified damages. The parties
agreed to stay this case to allow the Reiver case to proceed. Along with Reiver,
this case was settled in October  2000.  As part of the  settlement,  plaintiffs
have agreed to dismiss this action with  prejudice.  The  settlement  amount was
$259.0 million, of which $9.0 million was recovered from insurance. Accordingly,
3Com recorded a litigation charge of $250.0 million in October 2000.


                                       85
<PAGE>

In November 2000, a shareholder  derivative and class action lawsuit,  captioned
Shaev v. Claflin, et al., No. CV794039,  was filed in California Superior Court.
The  complaint   alleges  that  the   Company's   directors  and  officers  made
misrepresentations  and/or  omissions and breached their fiduciary duties to the
Company in connection with the adjustment of employee and director stock options
in connection  with the  separation of the Company and Palm,  Inc. It is unclear
whether the  plaintiff is seeking  recovery from 3Com or if the Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company and the  individual  defendants  have  removed this action to the United
States District Court for the Northern District of California,  where the action
is captioned Shaev v. Claflin,  et al., No.  CV-01-0009-MJJ.  The case was later
remanded back to the California Superior Court. Defendants have not responded to
the complaint. No trial date has been set.

Intellectual Property

On May 26, 2000, 3Com Corporation filed suit against Xircom,  Inc. in the United
States District Court for the District of Utah,  Civil Action No.  2:00-CV-0436C
alleging  infringement of U.S.  Patents Nos.  6,012,953,  5,532,898,  5,696,660,
5,777,836 and 6,146,209,  accusing  Xircom of infringement of one or more of the
claims of the patents-in-suit by reason of the manufacture, sale, and use of the
Real Port and Real Port 2 families of PC Cards,  as well as a number of Xircom's
Type II PC Modem Cards. Xircom has  counter-claimed  for a declaratory  judgment
that  the  asserted  claims  of the  patents-in-suit  are  invalid  and / or not
infringed.  This case is currently in the  discovery  phase.  Currently  pending
before the Court is 3Com's motion for a preliminary  injunction on the 6,146,209
patent. The Company intends to vigorously pursue this action.

On September 21, 2000, Xircom,  Inc. filed an action against 3Com Corporation in
the United States District Court for the Central  District of California,  Civil
Action No. Case No.: 00-10198 MRP, accusing 3Com of infringement of U.S. Patents
Nos.   5,773,332,   5,940,275,   6,115,257  and  6,095,851,   accusing  3Com  of
infringement  by reason of the  manufacture,  sale,  and use of the 3COM  10/100
LAN+Modem  CardBus  Type III PC Card,  the 3COM 10/100 LAN  CardBus  Type III PC
Card, the 3COM Megahertz  10/100 LAN CardBus PC Card, the 3COM Megahertz  10/100
LAN+56K  Global Modem CardBus PC Card and the 3COM  Megahertz 56K Global GSM and
Cellular Modem PC Card. 3Com has counter-claimed  for declaratory  judgment that
the asserted claims of the  patents-in-suit are not infringed and/or invalid and
that the claims of the 5,940,275 patent are  unenforceable.  This case is in the
discovery  phase.  Xircom filed a motion for preliminary  injunction  seeking to
enjoin  3Com  from the  continued  manufacture  and sale of its Type III PC card
products.  The motion  was heard on March 26,  2001 and was denied by the Court.
Currently  pending  before the Court is 3Com's  Motion for  Summary  Judgment of
Non-infringement  of the  5,773,332  patent.  The Company  intends to vigorously
pursue this action.

On July 6, 2001, Xircom,  Inc. filed an action against the Company in the United
States District Court for the Central  District of California,  Civil Action No.
01-5902 GAF (JTLX).  Xircom's  complaint  accuses 3Com of  infringement  of U.S.
Patent No.  6,241,550 by reason of the  manufacture,  sale,  and use of the 3COM
10/100  LAN+Modem  CardBus Type III PC Card and the 3COM 10/100 LAN CardBus Type
III PC  Card.  3Com  has not yet  answered  the  Complaint,  but an  answer  and
counterclaim  will be filed and served in the near future.  This action has only
recently been filed,  but Xircom has threatened to file a motion for preliminary
injunction  on the  6,241,550  patent.  That motion has not yet been filed.  The
Company intends to vigorously pursue this action.


                                       86
<PAGE>

Note 22:  Subsequent Events

During the first quarter of fiscal 2002,  3Com  announced a third party contract
manufacturing arrangement for its high-volume server, desktop and certain mobile
connectivity products. In conjunction with this announcement, 3Com announced the
intended consolidation and liquidation of several facilities associated with its
manufacturing   operations.   These   facilities  are  located  in  Marlborough,
Massachusetts,  Mount Prospect,  Illinois, and Santa Clara,  California.  3Com's
Singapore   facility  will   transition  to  become  the  Asia  Pacific   region
distribution  center and office location for sales management,  IT, training and
customer service and support operations.

During the first quarter of fiscal 2002, 3Com announced it will  discontinue its
consumer  cable  and DSL  modem  product  lines  as  part  of its  restructuring
initiatives.  3Com has  discontinued  these products  because it no longer views
these markets as profitable in the near term.  Revenues of approximately  $244.3
million,  $98.9  million  and $17.3  million  associated  with the  discontinued
product  lines above are included in the  consolidated  statements of operations
for the  fiscal  years  ended  June 1,  2001,  June 2,  2000  and May 29,  1999,
respectively.


                                       87
<PAGE>

Quarterly Results of Operations (Unaudited)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                              Fiscal 2001 Quarters Ended                         Fiscal 2000 Quarters Ended
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per     June 1,     March 2,    Dec. 1,      Sept. 1,      June 2,      Feb. 25,     Nov. 26,     Aug. 27,
share data)                   2001        2001        2000         2000          2000         2000         1999         1999

----------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>         <C>         <C>          <C>           <C>          <C>          <C>          <C>
Sales                         $468,033    $629,586    $789,498     $933,764      $763,684     $1,142,965   $1,214,097   $1,213,196
                              --------    --------    --------     --------      --------     ----------   ----------   ----------

Gross margin                  (168,620)   70,126      291,397      340,728       196,804      517,048      569,060      575,096
Gross margin %                (36.0%)     11.1%       36.9%        36.5%         25.8%        45.2%        46.9%        47.4%
                              -------     -----       -----        -----         -----        -----        -----        -----

Operating income (loss)       (621,055)   (373,563)   (140,864)    (145,546)     (340,047)    72,708       123,196      137,461
                              ---------   ---------   ---------    ---------     ---------    ------       -------      -------

Income (loss) from
   continuing operations      (517,727)   (246,043)   (142,406)    (63,737)      (159,359)    490,159      156,459      128,304
Income (loss) from
   continuing operations %    (110.6%)    (39.1%)     (18.0%)      (6.8%)        (20.9%)      42.9%        12.9%        10.6%
                              --------    -------     -------      ------        -------      -----        -----        -----
Income from
   discontinued operations         --          --          --      4,537         12,532       16,155       20,866       9,187
Income from
   discontinued operations %       --          --          --      0.5%          1.6%         1.4%         1.7%         0.8%
                                                                   ----          ----         ----         ----         ----

Diluted income (loss)
  per share - continuing
  operations                  ($1.52)     ($0.72)     ($0.41)      ($0.18)       ($0.45)      $1.36        $0.45        $0.36
                              -------     -------     -------      -------       -------      -----        -----        -----
Diluted income per
  share - discontinued
  operations                       --          --          --       $0.01         $0.04       $0.04        $0.06        $0.03
                                                                    -----         -----       -----        -----        -----

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Gross  margin was  significantly  reduced in the fourth  quarter of fiscal  2001
primarily from incremental charges of $215.1 million. These charges consisted of
excess and obsolete  inventory  provisions  due to product  discontinuation  and
reduced demand, and a liability related to future contractual commitments with a
subcontract  manufacturer  as a result of 3Com's  intention to exit its consumer
product lines and the reduction in sales demand.


                                      88
<PAGE>

ITEM 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

Not applicable.

PART III

ITEM 10. Directors and Executive Officers of 3Com Corporation

The information  required by Item 10 of Form 10-K with respect to identification
of directors is incorporated by reference from the information  contained in the
section  captioned  "Election of Directors" in 3Com's definitive Proxy Statement
for the Annual Meeting of  Stockholders to be held September 20, 2001 (the Proxy
Statement),  a copy of which  will be filed  with the  Securities  and  Exchange
Commission  before  the  meeting  date.  For  information  with  respect  to the
executive officers of 3Com, see "Executive  Officers of 3Com Corporation" at the
end of Part I of this report.

ITEM 11. Executive Compensation

The  information  required by Item 11 of Form 10-K is  incorporated by reference
from the information contained in the section captioned "Executive  Compensation
and Other Matters" in the Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The  information  required by Item 12 of Form 10-K is  incorporated by reference
from the information contained in the section captioned "General Information" in
the Proxy Statement.

ITEM 13. Certain Relationships and Related Transactions

The  information  required by Item 13 of Form 10-K is  incorporated by reference
from the information contained in the section captioned  "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.


                                       89
<PAGE>

PART IV

ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K

     (a)  (1)  Financial  Statements  -  See  Index  to  Consolidated  Financial
               Statements and Financial  Statement Schedule at  page  47 of this
               Form 10-K.

          (2)  Financial   Statement   Schedule  -  See  Index  to  Consolidated
               Financial  Statements  and Financial  Statement  Schedule at page
               47 of this Form 10-K.

          (3)  Exhibits - See Exhibit Index at page 91 of this Form 10-K.

     (b)  3Com filed five  reports on Form 8-K during the fiscal year ended June
          1, 2001, as follows:

          (1)  A report on Form 8-K filed on June 19, 2000, reporting under Item
               5 the  announcement  that  3Com,  Accton  Technology  Corporation
               (Accton),  and  NatSteel  Electronics  (NEL) have entered into an
               agreement  whereby  pursuant to an Asset  Contribution  Agreement
               between U.S. Robotics  Corporation and 3Com,  3Com's  analog-only
               product lines and business will be  contributed to a newly formed
               corporation, "U.S. Robotics Corporation." US Robotics Corporation
               is owned by 3Com, Accton, and NEL.

          (2)  A report on Form 8-K filed on July 14, 2000, reporting under Item
               5 the  announcement  that the  final  distribution  ratio for the
               distribution  of  shares  of  Palm,  Inc.  common  stock  to 3Com
               stockholders  is 1.484 shares of Palm common stock for each share
               of 3Com common  stock that was  outstanding  on the record  date,
               July 11, 2000.

          (3)  A report on Form 8-K filed on July 17, 2000, reporting under Item
               5 the  announcement  that 3Com  issued an  Information  Statement
               about  its  spin-off  of Palm,  Inc.  The  Information  Statement
               contains a  description  of the terms of the  spin-off,  Palm and
               Palm's common  stock,  and is attached as an exhibit to this form
               8-K.

          (4)  A report on Form 8-K filed on July 31, 2000, reporting under Item
               5 the  announcement  that  on July  28,  2000,  3Com  Corporation
               announced that it has completed the separation of Palm, Inc. from
               3Com through the  distribution  of 3Com's  532,000,000  shares of
               Palm, Inc. common stock.

          (5)  A report on Form 8-K filed on May 8, 2001, reporting under Item 5
               the  announcement  that  guidance  provided by the  Registrant on
               March 21, 2001 on its financial analyst  conference call included
               forward-looking  statements  regarding  the  potential  range  of
               revenue  for the fourth  fiscal  quarter  ending on June 1, 2001,
               which was then indicated to be between  $550-600  million.  Given
               the current  difficult  economic  environment,  together with the
               operational  restructuring  and expense and headcount  reductions
               announced by the  Registrant on March 7, 2001, the Registrant now
               expects a wider range of outcomes  than  indicated by its earlier
               guidance for the fourth quarter of fiscal 2001.

     (c)  See Exhibit Index at page 91 of this Form 10-K.

     (d)  See Index to Consolidated Financial Statements and Financial Statement
          Schedule at page 47 of this Form 10-K.


                                       90
<PAGE>

                                  EXHIBIT INDEX

       Exhibit
        Number      Description
        ------      -----------

          2.1       Master  Separation and  Distribution  Agreement  between the
                    Registrant and Palm, Inc. effective as of December 13, 1999,
                    as amended (15)

          2.2       General  Assignment  and  Assumption  Agreement  between the
                    Registrant and Palm, Inc., as amended (15)

          2.3       Master  Technology  Ownership and License  Agreement between
                    the Registrant and Palm, Inc. (15)

          2.4       Master Patent  Ownership and License  Agreement  between the
                    Registrant and Palm, Inc. (15)

          2.5       Master Trademark Ownership and License Agreement between the
                    Registrant and Palm, Inc. (15)

          2.6       Employee Matters  Agreement between the Registrant and Palm,
                    Inc. (15)

          2.7       Tax Sharing  Agreement between the Registrant and Palm, Inc.
                    (15)

          2.8       Master   Transitional   Services   Agreement   between   the
                    Registrant and Palm, Inc. (15)

          2.9       Real Estate  Matters  Agreement  between the  Registrant and
                    Palm, Inc. (15)

          2.10      Master   Confidential   Disclosure   Agreement  between  the
                    Registrant and Palm, Inc. (15)

          2.11      Indemnification  and Insurance Matters Agreement between the
                    Registrant and Palm, Inc. (15)

          3.1       Certificate of Incorporation (11)

          3.2       Certificate  of Correction  filed to correct an error in the
                    Certificate of Incorporation (11)

          3.3       Certificate of Merger (11)

          3.4       Corrected Certificate of Merger filed to correct an error in
                    the Certificate of Merger (14)

          3.5       Registrant's Bylaws, as amended (12)

          4.1       Amended and Restated  Rights  Agreement  dated  December 31,
                    1994 (4)

          4.2       Amended and  Restated  Senior Notes  Agreement  between U.S.
                    Robotics  Corporation,  Metropolitan Life Insurance Company,
                    The  Northwestern   Mutual  Life  Insurance   Company,   and
                    Metropolitan Property and Casualty Insurance Company (5)


                                       91
<PAGE>

          4.3       Amendment to Amended and Restated  Note  Agreements  between
                    the Registrant,  Metropolitan  Life Insurance  Company,  The
                    Northwestern Mutual Life Insurance Company, and Metropolitan
                    Property and Casualty Insurance Company (13)

          4.4       Second  Amendment  to Amended and Restated  Note  Agreements
                    between the Registrant, Metropolitan Life Insurance Company,
                    The  Northwestern   Mutual  Life  Insurance   Company,   and
                    Metropolitan Property and Casualty Insurance Company (14)

          4.5       Second   Amended  and   Restated   Preferred   Share  Rights
                    Agreement, dated as of March 8, 2001 (19)

          10.1      3Com Corporation 1983 Stock Option Plan, as amended (14)*

          10.2      Amended and Restated Incentive Stock Option Plan (2)*

          10.3      License Agreement dated March 19, 1981 (1)

          10.4      3Com  Corporation  Amended and Restated 1984 Employee  Stock
                    Purchase Plan (6)*

          10.5      3Com Corporation Director Stock Option Plan (6)*

          10.6      3Com Corporation  Restricted Stock Plan, as amended (6)*

          10.7      3Com Corporation 1994 Stock Option Plan, as amended (14)*

          10.8      Lease  Agreement   between  BNP  Leasing   Corporation,   as
                    Landlord,  and the  Registrant,  as Tenant,  effective as of
                    November 20, 1996 (8)

          10.9      Purchase  Agreement between BNP Leasing  Corporation and the
                    Registrant, effective as of November 20, 1996 (8)

          10.10     Agreement and Plan of  Reorganization  among the Registrant,
                    OnStream Acquisition Corporation and OnStream Networks, Inc.
                    dated as of October 5, 1996 (7)

          10.11     Lease  Agreement   between  BNP  Leasing   Corporation,   as
                    Landlord,  and the  Registrant,  as Tenant,  effective as of
                    February 3, 1997 for the Combined Great America Headquarters
                    site (10)

          10.12     Purchase  Agreement between BNP Leasing  Corporation and the
                    Registrant,  effective  as  of  February  3,  1997  for  the
                    Combined Great America Headquarters site (10)

          10.13     Credit  Agreement  dated as of  December  20, 1996 among the
                    Registrant,  Bank of  America  National  Trust  and  Savings
                    Association,  as Agent, and the Other Financial Institutions
                    Party Hereto Arranged by BA Securities,  Inc. (10)

          10.14     Amended  and  Restated  Agreement  and Plan of Merger by and
                    among the  Registrant,  TR  Acquisitions  Corporation,  3Com
                    (Delaware) Corporation, and U.S. Robotics Corporation, dated
                    as of February 26, 1997 and amended as of March 14, 1997 (9)


                                       92
<PAGE>

          10.15     Lease  Agreement   between  BNP  Leasing   Corporation,   as
                    Landlord,  and the  Registrant,  as Tenant,  effective as of
                    July 25,  1997 for the Great  America  Phase III (PAL)  site
                    (11)

          10.16     Purchase  Agreement between BNP Leasing  Corporation and the
                    Registrant,  effective  as of July 25,  1997  for the  Great
                    America Phase III (PAL) site (11)

          10.17     Lease  Agreement   between  BNP  Leasing   Corporation,   as
                    Landlord,  and the  Registrant,  as Tenant,  effective as of
                    July 29, 1997 for the Marlborough site (11)

          10.18     Purchase  agreement between BNP Leasing  Corporation and the
                    Registrant,   effective   as  of  July  29,   1997  for  the
                    Marlborough site (11)

          10.19     Lease  Agreement   between  BNP  Leasing   Corporation,   as
                    Landlord,  and the  Registrant,  as Tenant,  effective as of
                    August 11, 1997 for the Rolling Meadows site (11)

          10.20     Purchase  Agreement between BNP Leasing  Corporation and the
                    Registrant,  effective as of August 11, 1997 for the Rolling
                    Meadows site (11)

          10.21     First Amendment to Credit Agreement (11)

          10.22     Form of Management Retention Agreement, effective as of June
                    2, 1999, with attached list of parties (16)*

          10.23     Form of Management Retention  Agreement,  with attached list
                    of parties and effective dates (16)*

          10.24     Agreement  for  Purchase and Sale of Land at Highway 237 and
                    North First Street, San Jose,  California entered into as of
                    May 22, 2000 by and between the  Registrant  and Palm,  Inc.
                    (17)

          10.25     Employment  Agreement  with Bruce  Claflin,  effective as of
                    January 1, 2001 (18)*

          10.26     Summary of Severance Plan for Section 16b Officers*

          21.1      Subsidiaries of Registrant

          23.1      Consent of Deloitte & Touche LLP

-----------------

          *         Indicates a management contract or compensatory plan.

          (1)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously filed as an Exhibit to Registrant's  Registration
                    Statement  on Form S-1 filed on January  25,  1984 (File No.
                    2-89045)

          (2)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously filed as an Exhibit to Registrant's  Registration
                    Statement  on Form S-4 filed on August  31,  1987  (File No.
                    33-16850)


                                       93
<PAGE>

          (3)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 10, 1992 (File No. 000-12867)

          (4)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 17, 1995 (File No. 000-12867)

          (5)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on May 16, 1995 (File No. 000-19550)

          (6)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 16, 1996 (File No. 000-12867)

          (7)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously filed as an Exhibit to Registrant's  Registration
                    Statement  on Form S-4 filed on October  11,  1996 (File No.
                    333-13993)

          (8)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 13, 1997 (File No. 000-12867)

          (9)       Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously filed as an Exhibit to Registrant's  Registration
                    Statement  on Form S-4  filed on March  17,  1997  (File No.
                    333-23465)

          (10)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on April 11, 1997 (File No. 000-12867)

          (11)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on October 14, 1997 (File No. 000-12867)

          (12)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 11, 1999 (File No. 000-12867)

          (13)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-K
                    filed on August 17, 1999 (File No. 002-92053)

          (14)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on October 8, 1999 (File No. 002-92053)

          (15)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on April 9, 2000 (File No. 333-34726)

          (16)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-K
                    filed on August 17, 2000 (File No. 000-12867)

          (17)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on October 13, 2000 (File No. 000-12867)

          (18)      Incorporated  by  reference  to  the  corresponding  Exhibit
                    previously  filed as an  Exhibit to  Registrant's  Form 10-Q
                    filed on January 16, 2001 (File No. 000-12867)

          (19)      Incorporated  by  reference  to  Registrant's   Registration
                    Statement on Form 8-A 12G/A filed on June 15, 2001 (File No.
                    333-34726)

                                       94
<PAGE>

SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized,  on the 8th day of
August, 2001.

                                          3Com Corporation
                                          (Registrant)

                                          By /s/ Bruce L. Claflin
                                             --------------------------------
                                                      Bruce L. Claflin
                                                  Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated on the 8th day of August, 2001.

          Signature                                    Title
          ---------                                    -----

/s/ Bruce L. Claflin                          Chief Executive Officer
-----------------------------
    (Bruce L. Claflin)                     (Principal Executive Officer)
                                   Senior Vice President, Finance and Planning,
/s/ Michael E. Rescoe                       and Chief Financial Officer
-----------------------------
    (Michael E. Rescoe)             (Principal Financial and Accounting Officer)

/s/ Eric A. Benhamou                          Chairman of the Board
-----------------------------
    (Eric A. Benhamou)

/s/ Fred D. Anderson                                 Director
-----------------------------
    (Fred D. Anderson)

/s/ James E. Cowie                                   Director
-----------------------------
    (James E. Cowie)

/s/  Gary T. DiCamillo                               Director
-----------------------------
    (Gary T. DiCamillo)

/s/ David W. Dorman                                  Director
-----------------------------
    (David W. Dorman)

/s/  Jean-Louis Gassee                               Director
-----------------------------
    (Jean-Louis Gassee)

/s/ Philip C. Kantz                                  Director
-----------------------------
    (Philip C. Kantz)

/s/ James Long                                       Director
-----------------------------
    (James Long)

/s/  Janice C. Peters                                Director
-----------------------------
    (Janice C. Peters)

/s/  Raj Reddy                                       Director
-----------------------------
    (Raj Reddy)

/s/  Paul Yovovich                                   Director
-----------------------------
    (Paul Yovovich)

/s/ William F. Zuendt                                Director
-----------------------------
    (William F. Zuendt)



                                       95
<PAGE>

                                   SCHEDULE II

3Com Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended May 28, 1999, June 2, 2000 and June 1, 2001
(In thousands)

<TABLE>
<CAPTION>
                                                          Additions
                                          Balance at      charged to                                         Balance at
                                           beginning       costs and                                           end of
Description                                of period       expenses    Reclassifications     Deductions        period
-----------                                ---------       --------    -----------------     ----------        ------
<S>                                        <C>             <C>              <C>              <C>             <C>
Year ended May 28, 1999:

Allowance for doubtful accounts            $  70,152       $  49,109        $   2,033 (2)    $  16,214 (1)   $ 105,080
Product return reserve                        83,958         152,224               --          169,820          66,362
Accrued product warranty                      86,135          82,877               --           60,375         108,637
Acquisition-related reserves:
  Chipcom                                      5,261          (2,150)              --            1,007           2,104
  U.S. Robotics
   Inventory reserve                           6,429            (666)              --            5,763              --
   Facilities reserve                         36,584         (16,196)              --            6,453          13,935
   Severance and outplacement costs            6,210          (2,016)              --            3,599             595

Year ended June 2, 2000:

Allowance for doubtful accounts            $ 105,080       $  10,047        $  (4,500) (3)   $  34,159 (1)   $  76,468
Product return reserve                        66,362         244,032               --          245,732          64,662
Accrued product warranty                     108,637          45,276               --           67,476          86,437
Restructuring reserves:
   Facilities reserve                             --           8,932               --              632           8,300
   Severance and outplacement costs               --          59,890               --           25,678          34,212
   Other restructuring costs                      --          36,404               --           30,731           5,673
Acquisition-related reserves:
  Chipcom                                      2,104             123               --              888           1,339
  U.S. Robotics
   Facilities reserve                         13,935          (1,976)              --           11,713             246
   Severance and outplacement costs              595             (57)              --              538              --

Year ended June 1, 2001:

Allowance for doubtful accounts            $  76,468       $ (12,387)       $      --        $  16,772 (1)   $  47,309
Product return reserve                        64,662         121,173               --          156,702          29,133
Accrued product warranty                      86,437          52,021               --           84,887          53,571
Restructuring reserves:
   Facilities reserve                          8,300          (5,205)              --            3,095              --
   Severance and outplacement costs           34,212          81,802               --           75,751          40,263
   Other restructuring costs                   5,673          18,031               --           21,922           1,782
Acquisition-related reserves:
  Chipcom                                      1,339            (147)              --              354             838
  U.S. Robotics
   Facilities reserve                            246            (246)              --               --              --
</TABLE>

(1)  Accounts written off - net of recoveries.

(2)  Reclassification  from notes  receivable  reserve to allowance for doubtful
     accounts.

(3)  Reclassification   from   allowance   for  doubtful   accounts  to  accrued
     liabilities.


                                       96