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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

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

                                    FORM 10-K

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

For the Fiscal Year Ended May 31, 1997             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)

         California                                             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) 764-5000

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

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock, $.01
par value.  

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 XX 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. [ X ]

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 15,
1997,   as  reported  by  the  Nasdaq   National   Market,   was   approximately
$18,421,186,000.  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 15, 1997,  344,644,309 shares of the Registrant's Common Stock were
outstanding.

The   Registrant's   definitive  Proxy  Statement  for  the  Annual  Meeting  of
Shareholders  to be held on October 7, 1997 is incorporated by reference in Part
III of this Form 10-K to the extent stated herein.

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<TABLE>
                                                 3Com Corporation
                                                    Form 10-K
                                      For the Fiscal Year Ended May 31, 1997
                                                Table of Contents

<CAPTION>
Part I                                                                                                       Page
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<S>               <C>                                                                                         <C>
   Item 1.        Business....................................................................................1
   Item 2.        Properties..................................................................................12
   Item 3.        Legal Proceedings...........................................................................14
   Item 4.        Submission of Matters to a Vote of Security Holders.........................................16
                  Executive Officers of the Registrant .......................................................16

Part II
-------
   Item 5.        Market for Registrant's Common Stock and Related Stockholder Matters........................22
   Item 6.        Selected Financial Data.....................................................................23
   Item 7.        Management's Discussion and Analysis of Financial Condition and Results
                     of Operations............................................................................24
   Item 8.        Financial Statements and Supplementary Data.................................................36
   Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial
                     Disclosure...............................................................................61

Part III
-------
   Item 10.       Directors and Executive Officers of 3Com....................................................62
   Item 11.       Executive Compensation......................................................................62
   Item 12.       Security Ownership of Certain Beneficial Owners and Management..............................62
   Item 13.       Certain Relationships and Related Transactions..............................................62

Part IV
-------
   Item 14.       Exhibits, Financial Statement Schedule, and Reports on Form 8-K.............................62

                  Exhibit Index...............................................................................63
                  Signatures..................................................................................66
                  Financial Statement Schedule................................................................S-1
</TABLE>


3Com, AccessBuilder, Boundary Routing, CELLplex, EtherLink, LANplex, NETBuilder,
NETBuilder II, OfficeConnect,  ONcore, Parallel Tasking,  SuperStack,  Transcend
and XJACK are registered  trademarks of 3Com  Corporation  or its  subsidiaries.
CoreBuilder,  DynamicAccess,  PalmPilot,  SimulCom, Total Control, TranscendWare
and x2 are trademarks of 3Com Corporation or its subsidiaries.

                                                        i

<PAGE>


                                     PART I

     Subsequent to the end of fiscal year 1997,  3Com  Corporation  (referred to
herein  as 3Com,  Registrant  or the  Company)  consummated  a merger  with U.S.
Robotics  Corporation (U.S.  Robotics) on June 12, 1997. See Note 17 of Notes to
the Consolidated  Financial  Statements.  The following information set forth in
Part I of this Form 10-K regarding the Company's business reflects 3Com and U.S.
Robotics on a combined basis. The information  contained in Parts II, III and IV
of this Form 10-K have not been  restated  to include the  operating  results of
U.S. Robotics, and does not represent the results of the combined company.

ITEM 1.   Business

     3Com  Corporation  was founded on June 4, 1979 and pioneered the networking
industry.  Over  the  years,  3Com  has  evolved  from a  supplier  of  discrete
networking  products to a  broad-based  supplier of local area network (LAN) and
wide area network (WAN) systems for the large enterprise,  small business, home,
and service provider  markets.  Following its recent merger with U.S.  Robotics,
the world's leading provider of modems and remote access  products,  3Com offers
customers a broad range of data networking solutions that include routers, hubs,
remote access systems,  switches,  adapters,  modems,  connected  organizers and
telephony  products.  3Com's  products are  distributed  and serviced  worldwide
through 3Com and its  partners:  principally  systems  integrators,  value-added
resellers  (VARs),  national  resellers and dealers,  distributors  and original
equipment  manufacturers  (OEMs).  Certain products,  such as analog and digital
modems,  adapters,  connected organizers,  and the Network Starter Kit, are also
sold through electronics catalogs and retailers.

     3Com's  name  is  derived   from  its  focus  on   computer   communication
compatibility.  Since its inception,  the Company has been a leader in defining,
shaping and  promoting the growth of  networking  infrastructures  that transmit
information  to all parts of the world  quickly and  efficiently.  The Company's
commitment to its customers goes beyond point-product  excellence to making data
networks  fundamentally  easier to design,  install,  maintain  and evolve.  The
Company's  objective is to make the network invisible to the individual end-user
as well as flexible and unconstrained for the network manager.

     Since 1992, 3Com has augmented its internal  growth by actively  pursuing a
course of expanding its technologies  and product  offerings  through  strategic
acquisitions.  From  fiscal year 1993  through  1996,  the  Company  acquired 10
companies that furthered its technological growth and market position, primarily
in enterprise networking. Of particular note, Synernetics,  Inc., NiceCom, Ltd.,
Chipcom Corporation and AXON Networks,  Inc. enhanced 3Com's product offering in
LAN and Asynchronous Transfer Mode (ATM) switching and remote network management
and monitoring  (RMON2).  The Company's  activity in mergers and acquisitions is
consistent with the current trend of consolidation  in the networking  industry.
Such consolidation is expected to continue.

     In the  second  quarter  of fiscal  1997,  the  Company  acquired  OnStream
Networks,  Inc.  (OnStream),  a leading  provider of ATM and  broadband  WAN and
access products.  OnStream's products are  standards-based  solutions that allow
customers to integrate traffic from data, video and voice networks, and adapt it
to ATM for transport over local and wide area ATM networks.  The acquisition was

                                       1

<PAGE>

accounted for as a  pooling-of-interests  and was valued at  approximately  $245
million on the date the acquisition was announced.

     In fiscal 1997, the Company introduced  TranscendWare(TM)  software,  which
consists of  comprehensive  integrated  software  modules  that are  embedded in
3Com's broad line of networking systems and adapters.  TranscendWare software is
an integral part of the Transcend(R)  Networking framework and is used to manage
all  aspects  of  the  network.   TranscendWare  software,  including  Transcend
management  applications,   probes  and  embedded  intelligence,   delivers  the
pervasive management needed for universal visibility and control.

     Also in fiscal 1997,  3Com began shipping  several new products,  including
new high speed switching modules for the LANplex(R),  CELLplex(R), and ONcore(R)
High-Function   Switches,   as  well  as   SuperStack(R)   II,   the   Company's
next-generation line of stackable systems and extensions to the OfficeConnect(R)
small office system. In the fourth quarter of fiscal 1997, the Company rebranded
its chassis switching product family which includes ONcore, CELLplex and LANplex
under the CoreBuilder(TM)  brand to identify its industry leading  High-Function
Switching  platforms.  The Company also extended its leadership  position as the
number one global  provider of Ethernet and Fast  Ethernet  adapters for desktop
PCs,  servers  and  mobile  computers,  according  to the March  1997  report of
International Data Corporation (IDC).

     In the third  quarter of fiscal  1997,  the Company  announced a definitive
agreement  to merge with U.S.  Robotics,  the leading  supplier of products  and
systems for accessing information across the wide area network, including modems
and remote access  products.  The transaction was closed in the first quarter of
fiscal  1998.  Combining  3Com's  capabilities  and  leadership  position in the
enterprise and local area networking market with U.S. Robotics' capabilities and
leadership  position in remote  access and modem  markets  creates a  networking
company with the ability to deliver integrated  end-to-end LAN and WAN solutions
to the broadest set of customers in the industry.  The acquisition was accounted
for as a  pooling-of-interests  and was valued at approximately  $6.6 billion on
the date the acquisition was announced.

     The Company believes that its principal  competitive  advantages lie in the
depth and breadth of its product lines,  its ability to recognize and respond to
new trends in networking,  its focus on making all aspects of networking  easier
for  network   managers  and  users,   and  a  strong  yet   flexible   business
infrastructure.  3Com has strong brand  recognition  in modems and LAN workgroup
products,  which it believes is  transferable  to other  product and  technology
areas and markets,  such as core LAN  switching,  and remote office and personal
office  internetworking  platforms.   Additionally,  the  Company  believes  its
low-cost manufacturing,  worldwide presence, flexible distribution strategy, and
comprehensive  service  and  support  capabilities  allow  the  Company  to take
advantage of market trends that are extending the reach,  scope and  performance
of today's data networks.


INDUSTRY SEGMENT INFORMATION

     3Com operates in one industry segment as described above.

                                       2

<PAGE>

PRODUCTS

     3Com  Corporation  is  committed  to making the  complexities  of  networks
invisible  to end users  and to  making  networks  easier  to  design,  install,
maintain and evolve.  As the cornerstone of this commitment,  3Com has developed
Transcend  Networking,  a unique framework that adds end-to-end  intelligence to
networks,   giving  them  the  power  to  satisfy  burgeoning   performance  and
connectivity  demands while  keeping  complexity  and costs in check.  Transcend
Networking takes a "three-vectored"  approach to evolving networks.  Each vector
consists  of  a  host  of  innovative  architectures,  networking  technologies,
platforms and specific products. The three vectors include:

   o     Scaling  the   Performance  of  the  Network:   Switching  and  desktop
         connectivity   solutions  which  provide  migration  to  increased  LAN
         bandwidth/capacity by meeting the distinct requirements of the core and
         boundary of the LAN;

   o     Extending  the Reach of the  Network:  Wide area  network  routing  and
         remote access solutions which provide remote  workgroups and individual
         users with connectivity to resources on corporate  backbones by meeting
         the specific requirements of central and remote sites and of mobile and
         home users;

   o     Managing the Growth of the Network:  Networking products with embedded,
         scaleable  management  features  and  innovative   distributed  network
         monitoring, analysis and management solutions.

     3Com TranscendWare software is an integral part of the Transcend Networking
framework.  TranscendWare  software enables  centralized global network policies
that support key business  objectives  and the various  communities  of interest
within the  network.  TranscendWare  software  modules  are  grouped  into three
functional categories: pervasive management, network control, and global policy.

Enterprise Systems

     LAN switching platforms:  3Com switches provide cost-effective,  high-speed
links between multiple network segments, simplifying network design and reducing
network  latency in  client/server  networks.  Switches can also provide  direct
links  to  either  the  desktop  or  server,  providing  dedicated  capacity  to
high-bandwidth  users. The development of custom application specific integrated
circuits (ASICs) for switching is central to the Company's  switching  strategy.
Virtually   all  of  3Com's   internally   developed   switches   are  based  on
custom-designed  ASICs,  which the Company  believes will  dramatically  improve
performance and reliability while reducing costs. 3Com switches are available in
either chassis or stackable formats and are optimized to meet the specific needs
of the network core and its boundaries.

     High-Function  Switches:  High-Function  Switches  are designed to meet the
requirements  of the network  core  (backbone)  for high  density  connectivity,
scaleable capacity,  reliability and network control,  and to meet the migration
needs  of the  customer.  In a  collapsed  backbone  environment,  High-Function
Switches  might  act as  high-performance,  high  capacity  switches  connecting
multiple boundary switches or hubs, or both, depending on the network design and
bandwidth needs of the different network segments.

                                       3

<PAGE>

   o     The CoreBuilder 5000 (formerly the ONcore Integrated  System) switch is
         an  intelligent  switching  platform  that  delivers  the  reliability,
         flexibility,  and manageability  required for enterprise networking now
         and  in  the  future.  It  supports  Ethernet,  Fast  Ethernet,   Fiber
         Distributed Data Interface (FDDI), Token Ring, and ATM switching.

   o     The CoreBuilder 2500 and 6000 (formerly  LANplex 2500 and 6000) provide
         nonblocking    performance   while   providing    extensive    software
         functionality,  including integrated routing and layer 3 switching. The
         CoreBuilder  2500 offers  high-speed  links to FDDI, Fast Ethernet,  or
         ATM, and the CoreBuilder 6000 switch supports switched Ethernet,  Token
         Ring, FDDI, and Fast Ethernet technologies.

   o     The  CoreBuilder  7000 and 7000HD  (formerly  CELLplex 7000 and 7000HD)
         switch  provides a  switching  fabric for ATM,  Ethernet/ATM,  and Fast
         Ethernet interface cards.

     Boundary  switches:  The  Company's  complete  line  of  Boundary  Switches
includes  the  award-winning  SuperStack  II switches  and  FastModules  for the
CoreBuilder 5000 switch. Boundary switches are designed to meet the requirements
of the LAN  boundary  to reduce  network  latency at the  desktop  by  providing
increased bandwidth,  and to provide simple,  plug-and-play  connectivity.  3Com
boundary  switches  are  available  in either  chassis or  stackable  format and
provide for Ethernet-to-Ethernet,  Ethernet-to-Fast Ethernet,  Ethernet-to-FDDI,
Ethernet-to-ATM, and Ethernet-to-Gigabit Ethernet connectivity.

     Hubs:  Hubs act as  concentrators  of network  traffic  generated  from the
desktop and define specific network segments, relaying the traffic either within
the  workgroup  or onto the network  backbone.  Unlike  switches,  each  desktop
connected  through a hub shares the total  available  bandwidth  of the hub with
other users. Their relatively low cost per port,  manageability and ease-of-use,
make  hubs a  popular  choice  for  workgroup  connectivity.  Multiple  hubs are
frequently connected to a switch, which acts as a "hub of a hub," to segment the
network and improve overall performance.

     The Company  designs,  manufactures  and markets a full range of  Ethernet,
Fast  Ethernet,  Token Ring and FDDI hubs in either  stackable or  chassis-based
configurations.   The   CoreBuilder   5000   system   combines   multitechnology
connectivity and workgroup and backbone  switching in one manageable,  reliable,
and secure package.  SuperStack II Ethernet hubs offer superior flexibility with
security features,  distributed RMON2 management,  bridging, and resilient links
for LANs at a low cost of entry.

     Small office systems:  OfficeConnect products bring the enormous advantages
of  networking  to  every  office.   The   OfficeConnect   system   includes  an
Ethernet/Fast  Ethernet switch,  Ethernet and Fast Ethernet hubs, print, fax and
CD-ROM servers,  remote  connectivity  devices and branch office routers for the
small office.  OfficeConnect  systems combine simplicity of design and operation
with advanced functionality and outstanding speed.

     Enterprise   internetworking   platforms:   Internetworking   devices  link
multiprotocol  LANs  within the  building/campus  environment  and  provide  WAN
connectivity  to link  multiple  remote  locations  and  provide  access  to the
Internet  and  other  remote  network  resources.   3Com  offers  a  variety  of

                                       4

<PAGE>

internetworking solutions that extend the reach of the network, each tailored to
the specific needs of the application.

     Backbone   and  remote   office   routers:   For  central   sites   needing
high-performance  bridge/routing and a choice of Ethernet, Fast Ethernet,  Token
Ring,   FDDI,  ATM  and  WAN   connectivity,   3Com  offers  the   high-density,
multiprotocol NETBuilder II(R) bridge/router. Available in a range of compatible
chassis  with the  ability to add  additional  processing  power over time,  the
NETBuilder II offers a high degree of  scaleability  to handle  evolving LAN and
WAN integration  requirements.  The NETBuilder II also provides the central site
connection for NETBuilder(R) remote office solutions running Boundary Routing(R)
software.

     For remote offices,  SuperStack II NETBuilder and OfficeConnect  NETBuilder
routers provide scaleable, multiprotocol links to locations of any size. Easy to
set up and use, they simplify  remote office  connectivity  and offer  extensive
upgradability and flexibility as remote office routing needs evolve.

     For  network  service   providers  with  large  dial-up  networks  and  for
enterprises  building  large-scale  corporate  intranets,  3Com offers  industry
leading   network   access   concentrators.    For   large   enterprises,    the
AccessBuilder(R)  5000  LAN/WAN  switch  can  support  many  hundreds  of remote
employees using a mix of analog, Integrated Services Digital Network (ISDN), and
digital modem access.

     ATM enterprise  broadband access:  The AccessBuilder 9000 ATM multiservices
access family makes it easy to access any carrier service or private WAN network
over a single network  interface.  Whether  extending LANs,  accessing  Internet
Protocol  (IP) or Frame  Relay  services,  or  transporting  voice to private or
public voice networks,  the  AccessBuilder  9000 family of platforms  affordably
supports all these  services  through its  standards-based  implementations  and
interfaces.

     Network  management:  Transcend network management  software,  an important
element  of  TranscendWare  software,   encompasses  a  full  range  of  network
management applications and data collection methods and supports open platforms.
Its complementary  hardware-based  network monitoring  products,  software-based
applications, and network management agents deliver two great solutions: global,
networked  application views to support customers'  business goals; and detailed
information about device operations with port-level detail for precise technical
control of the network.

Carrier Systems

     The Total  Control(TM)  Hub is a  high-density  remote access  platform for
carrier and large enterprise  markets.  Total Control supports a wide variety of
dial-up applications at a low cost per port. Uses of the Total Control Hub range
from  providing  central site or Point of Presence  (POP) access to networks for
Internet service providers, on-line information services, interexchange carriers
and  corporations,  to transaction  processing  applications such as credit card
verification.  Total Control's  flexible  platform  provides ISDN or analog dial
access.  The  communications  modules can be  configured  and  managed  remotely
through the network  management card, and the  functionality and features of the
various communications  modules can be upgraded through software downloads.  For
example,  ISPs and other businesses  employing Total Control Hubs can easily add
the  Company's  new x2(TM)  technology,  developed by U.S.  Robotics,  through a
downloadable software upgrade.

                                       5

<PAGE>

Client Access Products

     Network interface cards (NICs), also known as adapters,  are add-in printed
circuit boards that allow network servers, personal computers,  laptop computers
and workstations to connect to the LAN. 3Com adapters provide complete solutions
for a full range of network applications and environments. 3Com offers Ethernet,
Fast Ethernet, Token Ring, FDDI and ATM adapters.

     EtherLink(R) Family of Network Interface Cards: EtherLink NICs are designed
to optimize the  performance of servers and desktop  clients in 10 Mbps Ethernet
networks,  they are ideal  for small  workgroup  and large  enterprise  networks
alike.

     Fast EtherLink Family of Network Interface Cards: Dual-speed Fast EtherLink
NICs bring the highest-performance 10 Mbps and 100 Mbps networking to PCI, EISA,
and ISA PCs and servers.  Fast EtherLink NICs provide top performance at both 10
Mbps  and  100  Mbps,  guaranteed  compatibility,  easy  installation,  complete
Standard  Network   Management   Protocol  (SNMP)   management  and  unsurpassed
reliability.

     All 3Com EtherLink and Fast  EtherLink  adapters  feature  3Com's  patented
Parallel   Tasking(R)   architecture  which  improves  network  performance  and
DynamicAccess(TM) software which optimizes network performance and control.

     Mobile Communications  Products: For mobile users linking to Ethernet, Fast
Ethernet or Token Ring networks,  3Com offers solutions that deliver the fastest
available  performance.  And for notebooks  needing both  fax/modem and Ethernet
access,  3Com LAN+Modem PC Cards combine the industry's fastest Ethernet PC Card
and fastest  V.34 modem.  The  Company's  PC Card  modems  feature the  patented
XJACK(R)  connector system.  This convenient RJ11 connector is built into the PC
Card,  eliminating the  inconvenience  of a proprietary  external  connector and
currently comply with the V.34 standard.

     Direct-connect  PC Card modems allow users to communicate from their mobile
computers  through any of the largest  selling  cellular  phones.  The  cellular
capable  modems  feature  dual  functionality,  offering a choice of  connecting
through a  cellular  phone or  through a  standard  telephone  line.  Also,  the
Company's wireless PC Card for notebook computers and connected organizers allow
users to access the Internet, corporate LANs, and other on-line services.

     Desktop  modems:  Desktop  modem  products  are  designed  based  upon  the
Company's  proprietary data pump architecture and offer reliable  connections in
compliance with virtually all official and most proprietary data  communications
standards.  In the third quarter of fiscal 1997, x2 (56 Kbps) technology  became
available in desktop modems.  Some of the Company's desktop modems sold prior to
the  announcement  of x2 technology are upgradeable  via  downloadable  software
upgrades or through substitution of memory chips.

     Telephony   products:   The  Company's   telephony   products  reflect  the
application   of  its   digital   signal   processing   (DSP)   expertise   into
telephone-based    information   access   products   that   provide   integrated
communications   solutions.   The  telephony  products  consist  of  full-duplex
conference  speakerphones  featuring  automatic  gain  control and  SimulCom(TM)
technology  which  allows users to speak and listen  simultaneously  for smooth,
natural two-way, conversation.

                                       6

<PAGE>

Connected Organizers

     The  PalmPilot(TM)  connected  organizer  is a hand-held  computing  device
designed  to work as a  companion  product  to  desktop  and  laptop  computers,
allowing personal  information  management both remotely and on the desktop. The
PalmPilot  includes a docking cradle which is connected to the user's Windows PC
or   Macintosh   computer  and  allows  for   automatic   back-up  and  seamless
synchronization  of  information  between  the  PalmPilot  device and the larger
computer, thus ensuring that both systems have the most current information. The
PalmPilot  organizer,  which is based upon the proprietary Palm operating system
(OS) software,  also includes  character  recognition  software which allows the
user to add and edit information with a stylus while away from the desktop.  The
Palm OS has been made widely  available to independent  software  developers who
are producing a variety of  applications,  utilities and games for the PalmPilot
platform.


PRODUCT DEVELOPMENT

     The Company's product  development  efforts are focused  exclusively on its
strategic products:  enterprise systems, carrier systems, client access products
and  connected   organizers.   The  Company's   ownership  of  core   networking
technologies creates  opportunities to leverage its engineering  investments and
develop  more  integrated  products  for  simpler,  more  innovative  networking
solutions for  customers.  The Company plans to invest in emerging  technologies
for use in  existing  and future  products,  as well as to improve  and  enhance
existing products to extend their  lifecycles,  reduce  manufacturing  costs and
increase  functionality.  In  addition  to the  development  of custom  ASICs to
improve  performance,  increase  reliability  and reduce  costs,  the Company is
investing in the following areas:  network  management,  Fast Ethernet (100 Mbps
Ethernet),  Gigabit  Ethernet  (1000  Mbps  Ethernet),  ATM and other high speed
networking  technologies,  virtual local area network (VLAN) capabilities,  ISDN
and other remote access technologies, enhanced connectivity in IBM environments,
and remote  access for single and mobile users  (including  data-over-cable  and
Asymmetric Digital Subscriber Line or ADSL technologies).

     The  Company's   modem  and  remote  access  products  are  designed  using
proprietary  software  programs  that  run  on  digital  signal  processors  and
microprocessors.  These  designs  allow for rapid  modification  or  addition of
product features.  As a result,  the Company believes it is  well-positioned  to
exploit advances in semiconductor  technology quickly,  introducing new features
and  improving  performance  faster  and  at a  lower  cost  than  many  of  its
competitors. Also, controlling the software content and architecture of its data
pumps enables the Company to offer  upgrades to several of its products  through
software downloads.

     The  industry  in which 3Com  competes  is  subject to rapid  technological
developments,  evolving industry standards, changes in customer requirements and
frequent new product introductions and enhancements.  As a result, the Company's
success in part depends upon its ability,  on a cost-effective and timely basis,
to continue to enhance its existing  products and to develop and  introduce  new
products  that take  advantage  of  technological  advances.  The  Company  will
continue  to make  strategic  acquisitions  where  appropriate.  There can be no
assurance that 3Com will be able to successfully develop new products to address
new industry  transmission  standards and technological changes or to respond to
new product  announcements  by others or that such products will achieve  market
acceptance.

                                       7

<PAGE>

For a more complete  discussion  regarding the  Company's  risks,  see "Business
Environment and Risk Factors" included in Part II of this Form 10-K.


MARKETS AND CUSTOMERS

     3Com's  customers  range  from  individual  home  PC  users,  to  corporate
enterprises,  to  telecommunications  companies  and are  represented  among the
world's  leading  industries,  including  finance,  health care,  manufacturing,
government,  education,  and service organizations.  The acquisition of OnStream
enhanced the Company's  presence  within the network  service  provider  market,
while the merger with U.S. Robotics gives 3Com a broader reach and more leverage
across  the four  strategic  markets  that  comprise  the  networking  industry:
enterprises, carriers, small businesses and consumers.

     The Company's strong channel  presence enables  customers to gain access to
3Com  solutions  through their  supplier of choice.  The Company's  unparalleled
retail and reseller distribution channels provide ready access to the wide array
of 3Com products and solutions on a worldwide basis. 3Com also partners directly
with end-users to establish long-term customer relationships.

     Around the world,  3Com  serves  its  customers  through a variety of sales
channels  including  direct and indirect  channels.  Indirect  channels  include
systems integrators,  VARs, distributors,  national dealers and resellers,  OEMs
and retail stores. 3Com nurtures these relationships with incentive and training
programs that have earned special  recognition from the industry.  The Company's
multi-channel  sales strategy  encourages broad market coverage by allowing 3Com
sales  personnel  to create  demand  for the  Company's  products  while  giving
customers the flexibility to choose the most appropriate  delivery channels.  In
fiscal 1995, the Company began building a global  end-user sales force to target
large enterprise  accounts,  and established a separate sales force to market to
telephone carriers and network service providers.  Over the last 18 months, 3Com
has  strengthened  its global  end-user  sales  force and  service  and  support
organization by doubling the number of dedicated professionals.

     International  Operations:  3Com  distinguishes  itself  from  many  of its
competitors with its dedicated  research and development,  manufacturing,  sales
and service  organizations  outside  the United  States.  The Company  maintains
approximately  160 sales  offices in 45  countries,  with new offices  opened in
fiscal 1997 in Eastern Europe,  Latin America and the Asia Pacific  region.  The
Company primarily  markets its products  internationally  through  subsidiaries,
sales offices and relationships with local distributors in Europe,  Canada, Asia
Pacific and Latin  America (see Note 15 of the Notes to  Consolidated  Financial
Statements relating to geographic area information).

     Customer  Service:  Since global  networking  infrastructures  are becoming
increasingly complex,  customers require vendors to help them manage and support
their  networks as well as design and build them.  Additionally,  as  customers'
networking  purchases  transition from point-product to connectivity  systems, a
more solutions-oriented approach to service and support is required. The Company
recognized  these  trends early and has  invested in a  comprehensive  worldwide
service and support organization capable of providing virtually around-the-clock
customer  support  regardless of  geographic  location.  3Com customer  services
provide design,  installation,  maintenance,  and delivery assistance across the
network.  The Company supports its offerings  internationally with 135 logistics
centers and 8 escalation  centers  communicating  with  customers in at least 17
languages.   In  addition  to  on-site

                                       8

<PAGE>

training, the Company also provides  computer-based courses that allow customers
to learn networking technologies at their own pace in their own environments.


BACKLOG

     3Com  manufactures  its  products  based  upon its  forecast  of  worldwide
customer  demand and maintains  inventories  of finished  products in advance of
receiving  firm orders from its  customers.  Orders are generally  placed by the
customer on an as-needed  basis and products are usually  shipped  within one to
four weeks after receipt of an order.  Such orders  generally may be canceled or
rescheduled  by the  customer  without  significant  penalty.  Accordingly,  the
Company  does  not  maintain  a  substantial  backlog,  and  backlog  as of  any
particular date is not indicative of 3Com's future sales.


MANUFACTURING AND SUPPLIERS

     3Com  has  manufacturing  facilities  in  Santa  Clara,   California,   and
Blanchardstown,  Ireland.  Purchasing,  mechanical assembly,  burn-in,  testing,
final assembly,  and quality assurance  functions are performed at both of these
facilities. The Company also procures certain products and subassemblies through
subcontractors.  Over the past several years,  the Company has been investing in
automating its manufacturing  capabilities,  decreasing the costs and increasing
the  quality  of both  manufacturing  design  and  production.  In fiscal  1996,
construction  was  completed on a 225,000  square foot office and  manufacturing
facility  at its  headquarters  in Santa  Clara,  and the Ireland  facility  was
expanded  to  120,000  square  feet.  In  fiscal  1997,  the  Company  commenced
construction on an additional 170,000 square feet of office, manufacturing,  and
research and  development  space in Ireland,  and commenced  construction of the
first phase of  development  of a 325,000  square foot office and  manufacturing
facility in Singapore. The new Singapore manufacturing operations center, due to
open in the third quarter of fiscal 1998,  will be 3Com's first  production site
in the  fast  growing  Asia  Pacific  region.  The  plant  will be the  first in
Singapore to manufacture networking equipment and will produce 3Com's full range
of  high-volume   products  from  network   adapter  cards  and  modems  through
sophisticated enterprise systems.

     Through the merger with U.S.  Robotics,  the Company also has manufacturing
facilities  in Mount  Prospect and Morton Grove,  Illinois,  and Salt Lake City,
Utah.

     The   Company  is   committed   to  being  an   environmentally   conscious
manufacturer,  and pioneered  implementation of a chlorofluorocarbon  (CFC)-free
semi-aqueous  cleaning  process at its California  plant with DuPont and Corpane
Corporations. The same process is used at the Ireland facility, and 3Com met its
goal of being CFC-free by the end of calendar year 1993.

     Components  purchased by the Company are generally  available from multiple
suppliers.  However,  certain components may be available from sole sources. The
inability  of 3Com to obtain  certain  components  could  require the Company to
redesign or delay  shipments  of several of its data  networking  products.  The
Company has sought to establish close  relationships with sole-source  suppliers
and/or  to build up  inventory  of such  components;  however,  there  can be no
assurance that production would not be interrupted due to the  unavailability of
components.  The Company believes that its inventory levels of these components,
combined with finished components held by 3Com's suppliers, are adequate for its
currently forecasted needs.

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<PAGE>

COMPETITION

     Networking is an expanding  field within the information  systems  industry
encompassing  both LAN and WAN technologies  primarily for data networking,  but
increasingly  including  voice  and  video  traffic.  The  Company  participates
primarily in designing,  manufacturing  and marketing both LAN/WAN  products and
systems.  The  evolution  of high  speed  network  technologies  including  Fast
Ethernet,  Gigabit Ethernet,  and ATM has changed the competitive  landscape and
resulted in shorter  product life cycles,  and the creation of new standards and
competitors. 3Com's competitors typically compete in one or more segments of the
LAN/WAN sector of the data  networking  market.  These companies are using their
resources and  technical  expertise to improve and expand their product lines in
an effort to gain market share.  Several competitors are extending their product
offerings  beyond a single  market  segment  and are  pursuing  strategies  more
closely resembling 3Com's global networking strategy.  The industry continues to
witness a wave of merger,  acquisition and strategic partnering activity as many
of these companies seek to provide broader networking solutions.

     Enterprise Systems:  Competition in the network systems business,  formerly
characterized by niche-based  competitors  focused on a single industry segment,
is shifting toward more broad-based  suppliers  offering multiple product lines.
This has been achieved through mergers and acquisitions, through joint marketing
agreements,   and  through   internally   developed   products.   This  industry
consolidation, and the convergence of hub, switching and routing technologies on
single platforms,  will likely continue,  thus intensifying  competition among a
small group of companies with broad product offerings.  Principal competitors in
the network systems  products  market include Bay Networks,  Cabletron and Cisco
Systems.

     The market for high-speed, broadband networking products has grown rapidly,
driven by companies' implementation of bandwidth-intensive  applications. As the
need for high-speed  wide-area  communications  continues to grow, many carriers
and  enterprises are looking to vendors to provide a new generation of equipment
which  permits  increases  in  performance  both in terms of speed and number of
connections   supported  by  the  network.   Other  companies  including  Ascend
Communications  and Cisco Systems,  have  introduced,  or have  announced  their
intention to develop,  network  access  switching  products  that are or will be
competitive with 3Com.

     Carrier Systems: The market for remote access concentrators,  primarily POP
connectivity equipment,  has been characterized by a few networking vendors with
many  complementary  hardware products.  Integrated remote access  concentrators
like  AccessBuilder  and Total Control replace these  multiple,  single function
hardware  products with a single  software-defined  platform capable of handling
both digital and analog signals.  3Com competes against various manufacturers of
the products mentioned above, including Ascend Communications, Bay Networks, and
Cisco Systems who manufacture integrated remote access concentrators.

     Client  Access  Products:   The  market  for  network  adapters  is  highly
competitive,  with companies offering products that support a range of Ethernet,
Fast Ethernet, Token Ring and FDDI media. Traditional competitors in the adapter
market include Intel,  IBM, Madge N.V.,  Olicom A/S,  Standard  Microsystems and
Xircom.  However,  as the trend  from  Ethernet  to Fast  Ethernet  10/100  Mbps

                                       10

<PAGE>

technology  accelerates,  the  competitive  landscape  is  changing  to  reflect
companies that have a strong position in Fast Ethernet, namely 3Com and Intel.

     3Com and U.S.  Robotics'  primary  competitors  with respect to desktop and
mobile  communications  products  include Best Data,  Boca  Research,  Cardinal,
Diamond Multimedia,  Hayes,  Microcomputer  Products,  Motorola,  Rockwell, TDK,
Xircom  and Zoom  Telephonies.  The  Company's  near term  success  will  depend
significantly on the market acceptance of its recently  introduced x2 technology
developed  by  U.S.  Robotics  (pulse  code  modulation   technology  permitting
downloading  of data  over  regular  analog  telephone  lines at speeds up to 56
kilobits  per second  (Kbps)).  The  Company  was the first to begin  commercial
volume shipments of 56 Kbps technology  products,  named x2, in March 1997. 3Com
anticipates  vigorous  competition from many of the significant modem and remote
access  equipment  manufacturers,  most  of  which  have  begun  shipment  of or
announced  their  intentions to bring products  featuring the same basic 56 Kbps
technology  and  capabilities  to market in the  coming  weeks and  months.  The
majority of these manufacturers have indicated their intention to implement this
high-speed   technology  with  chipsets   provided  by  Rockwell   International
Corporation or Lucent Technologies,  Inc. Industry standards will most likely be
determined   in  the  first  half  of  fiscal   1998.   3Com  is   committed  to
standards-based  networking and will migrate to the industry standard technology
via electronically downloadable upgrades.

     Connected  Organizers:  The Company's  primary  competitors with respect to
connected organizers are Apple, Casio, Hewlett Packard, Psion and Sharp.


PATENTS, LICENSES AND RELATED MATTERS

     The Company relies on U.S. and foreign patents, copyrights,  trademarks and
trade secrets to establish and maintain proprietary rights in its technology and
products. 3Com has an active program to file applications for and obtain patents
in the United States and in selected foreign  countries where a potential market
for the Company's products exists. The Company's general policy has been to seek
patent   protection  for  those  inventions  and   improvements   likely  to  be
incorporated in its products or otherwise expected to be of value. 3Com has been
issued 77  utility  patents  and six design  patents  in the U.S.,  and has been
issued 14 foreign patents.  After the merger with U.S. Robotics, the Company has
been  issued a total of 114 utility  patents and six design  patents in the U.S.
and has been issued 24 foreign patents.  Numerous other patent  applications are
currently pending which relate to the Company's research and development.

     There  can be no  assurance  that any of these  patents  would be upheld as
valid if  litigated.  While the  Company  believes  that its  patents and patent
applications have value, it also believes that its competitive  position depends
primarily on the  innovative  skills,  technological  expertise  and  management
abilities of its employees.

     The Company has been  granted  licenses by others,  including a fully paid,
perpetual, non-exclusive license to a patent held by Xerox covering a portion of
the Ethernet technology.

     3Com has  registered 72 trademarks in the United States and has  registered
25 trademarks in one or more of 43 foreign countries. After the merger with U.S.
Robotics,  the  Company  has  registered  93

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<PAGE>

trademarks  in the U. S.  and 77  trademarks  in one or  more  of 43  countries.
Numerous  applications for  registration of domestic and foreign  trademarks are
currently pending.

     Many  of  3Com's  products  are  designed  to  include  software  or  other
intellectual property licensed from third parties. The Company actively seeks to
license  software that promotes the  compatibility of its products with industry
standards, including standard protocols and architectures. The loss of rights to
software or other intellectual property licensed from a third party and designed
into a particular  product  might disrupt or delay 3Com's  distribution  of that
product.  While it may be  necessary  in the  future  to seek or renew  licenses
relating to various aspects of its products,  the Company  believes that,  based
upon past experience and standard  industry  practice,  such licenses  generally
could be obtained on commercially reasonable terms.


EMPLOYEES

     As of May 31, 1997, 3Com had 7,109 full-time employees,  of whom 1,584 were
employed in engineering,  2,853 in sales,  marketing and customer service, 1,731
in  manufacturing,  and  941 in  finance  and  administration.  None  of  3Com's
employees is represented by a labor  organization and the Company  considers its
employee relations to be excellent.

     After the merger  with U.S.  Robotics,  the  Company  had 13,639  full-time
employees, of whom 2,917 were employed in engineering, 4,353 in sales, marketing
and  customer  service,  4,426  in  manufacturing,  and  1,943  in  finance  and
administration.


ITEM 2.   Properties

     During the third  quarter of fiscal 1997,  the Company  signed an operating
lease which combines and replaces three prior operating lease  agreements on the
Company's  existing  headquarters  site  and on land  adjacent  to its  existing
headquarters site. The combined lease includes approximately 870,000 square feet
of office  and  manufacturing  space and two  parking  garages,  and  expires in
November 2001 with an option to extend the lease term for two successive periods
of five years each. The Company has an option to purchase the combined  property
for  $152.6  million,  or at the end of the  lease  arrange  for the sale of the
property to a third party with the Company  retaining an obligation to the owner
for the difference between the sale price and $152.6 million, subject to certain
provisions of the lease.

     During the second quarter of fiscal 1997,  the Company  purchased a 14 acre
parcel of land and signed a two-year  lease for an  adjacent  58 acre  parcel of
land, both of which are near its existing headquarters in Santa Clara. The lease
expires  in  November  1998  with an option  to  extend  the lease  term for two
successive periods of five years each. The Company has an option to purchase the
property for $49.5  million,  or at the end of the lease arrange for the sale of
the property to a third party with the Company  retaining an  obligation  to the
owner for the difference  between the sale price and $49.5  million,  subject to
certain provisions of the lease.

     The Company  owns a facility  comprised of three  buildings  near its Santa
Clara headquarters  site. The 120,000 square foot facility,  which was purchased
and occupied in the fourth  quarter of fiscal 1996,  is used  primarily  for its
Customer Services Operations.

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<PAGE>

     The Company's primary distribution facility consists of 113,000 square feet
of warehouse and  distribution  space in Santa Clara.  The space was occupied in
November  1995.  The lease expires in December  2000, and has an option to renew
for an additional three year period.

     3Com leases 163,000 square feet of office,  manufacturing  and distribution
space in  Southborough,  Massachusetts.  The lease  covers  two  locations,  and
expires in July 1998 and January 1999, respectively.

     3Com also  leases a facility  consisting  of 100,000  square feet of office
space in Marlborough,  Massachusetts. The lease expires in December 1999. During
the third  quarter of fiscal 1997,  3Com signed a ground lease on an  additional
128  acres in  Marlborough  for the  consolidation  and  expansion  of  existing
operations.

     In November 1996, 3Com exercised its option to purchase 72 acres, including
a  150,000  square  foot  office  and  manufacturing   facility  in  Boxborough,
Massachusetts, which it had previously leased.

     In  May  1996,  3Com  purchased  a  10.5  acre  site  in   Hemel-Hempstead,
Hertfordshire,  including a 100,000  square foot facility for the  consolidation
and expansion of the existing operations in  Hemel-Hempstead.  During the second
quarter of fiscal 1997,  3Com commenced  construction of a second 100,000 square
foot   research  and   development   and  customer   service   facility  at  the
Hemel-Hempstead  campus, which is expected to be completed in the fourth quarter
of fiscal 1998.

     In July 1992, 3Com Ireland, a wholly-owned  subsidiary of 3Com,  completed,
occupied  and began  operations  in its  Blanchardstown,  Ireland  manufacturing
facility.  In January 1996 the  facility  was  expanded to 120,000  square feet.
During the third quarter of fiscal 1997, 3Com Ireland purchased approximately 32
acres of land adjacent to this facility,  and secured an option on an additional
9 acres.  3Com Ireland  commenced  construction of an additional  170,000 square
feet of manufacturing, research and development and office space, and expects to
commence occupancy in the second quarter of fiscal 1998.

     During the second quarter of fiscal 1997, 3Com Technologies, a wholly-owned
subsidiary  of the  Company,  signed a lease for seven  acres of land in Changi,
Republic of Singapore.  The Company began construction of 325,000 square feet of
office  and  manufacturing  space in  December  1996,  and plans to  occupy  the
manufacturing facility in the third quarter of fiscal 1998.

     3Com also leases  various sales and service  offices  throughout the United
States,  Canada,  Europe,  Australia,  Latin  America,  and Asia.  All of 3Com's
facilities  are well  maintained  and are  adequate  to conduct  3Com's  current
business.

The following is additional information regarding the properties acquired in the
merger with U.S. Robotics:

     The Company owns two office facilities  totaling 230,000 square feet and an
85,000 square foot manufacturing facility in Skokie,  Illinois. The Company also
owns a 300,000 square foot manufacturing facility in Morton Grove, Illinois. The
Company purchased a 675,000 square foot facility for manufacturing, research and
development and customer services operations in Mount Prospect,  Illinois,

                                       13

<PAGE>

which was  previously  leased.  The Company  also  leases a 400,000  square foot
facility  in Rolling  Meadows,  Illinois  that it intends to use to  accommodate
future growth in its business operations.

     The Company  owns a 185,000  square foot  office  facility  and an adjacent
154,000 square foot manufacturing facility in Salt Lake City, Utah.


ITEM 3.   Legal Proceedings

     The Company is a party to lawsuits  in the normal  course of its  business.
The Company  and its counsel  believe  that it has  meritorious  defenses in all
lawsuits in which the Company or its  subsidiaries  is a defendant.  The Company
notes that (i) litigation in general and patent  litigation in particular can be
expensive and disruptive to normal  business  operations and (ii) the results of
complex legal proceedings can be very difficult to predict with any certainty.

     On October 13, 1995, the Company acquired  Chipcom,  which had already been
named as a defendant in the litigation  described  below.  Five  complaints were
filed  between  May 30, 1995 and June 16, 1995 that  alleged  violations  by the
defendants  of Sections  10(b) and 20(a) of the  Securities  and Exchange Act of
1934, and sought unspecified  damages.  The cases were consolidated for pretrial
purposes  pursuant  to an order  entered  by the  Court on June  15,  1995.  The
consolidated  action is entitled In re:  Chipcom  Securities  Litigation,  Civil
Action No.  95-111114-DPW.  A Consolidated  Complaint was filed on September 13,
1995, and an Amended Consolidated Complaint was filed on November 30, 1995.

     The defendants'  motion to dismiss the Amended  Consolidated  Complaint was
granted  without leave to amend on May 1, 1996.  The  dismissal  covers all five
cases. The plaintiffs  appealed the order granting the dismissal.  On October 1,
1996,  the parties to these cases  agreed upon what the Company  considers to be
favorable  financial  terms for  settlement of all five cases,  which amount the
Company does not consider  material to its operations,  financial  position,  or
liquidity.  Pursuant to the settlement  which was approved by the District Court
on June 26,  1997,  all claims of all  persons  which are related to the subject
matter of the Consolidated Complaint were settled and released.

     On March 24, 1997, a putative  shareholder  class action lawsuit,  entitled
Hirsch v. 3Com Corporation, et al., Civil Action No. CV764977, was filed against
the Company and certain of its officers and directors in the California Superior
Court,  Santa Clara County. The complaint  alleges,  among other things,  fraud,
negligent  misrepresentation  and violations of the California  securities laws,
including that during the putative class period, sales of the Company's stock by
officers and directors of 3Com and  acquisitions  made with the Company's  stock
occurred at inflated prices in light of undisclosed  information.  Specifically,
the complaint  alleges  violations of Sections 25400 and 25500 of the California
Corporations  Code,  Sections 1709 and 1710 of the  California  Civil Code,  and
Sections  17200  et seq.  and  17500  et seq.  of the  California  Business  and
Professions Code. The complaint, which covers a putative period of September 24,
1996 through February 10, 1997, does not specify the damages sought.  Management
believes that the action is not  meritorious  and intends to vigorously  contest
it. An adverse  resolution of the action could have a material adverse effect on
the Company's  results of operations  and financial  condition in the quarter in
which such adverse resolution occurs.

                                       14

<PAGE>

     U.S.  Robotics and certain of its  directors  were named as  defendants  in
eleven  lawsuits  relating to the merger  between the Company and U.S.  Robotics
brought  in the  Delaware  Chancery  Court  (In re:  U.S.  Robotics  Corporation
Shareholder's Litigation,  Delaware Chancery Court Consolidated Civil Action No.
15580).  See Note 17 of  Notes to the  Consolidated  Financial  Statements.  The
Company has been named as a defendant in nine of these  actions.  The  lawsuits,
which  purport to be  stockholder  class  actions  brought on behalf of all U.S.
Robotics  stockholders,  allege, inter alia, that the directors of U.S. Robotics
have breached their fiduciary duties by approving the Merger Agreement, and that
the Company  aided and abetted  this  alleged  breach of duty.  An  agreement in
principle to settle this litigation has been reached with plaintiffs' counsel on
what the Company  considers to be favorable  financial  terms,  which amount the
Company does not consider to be material to its operations,  financial position,
or  liquidity.  This  settlement  is not yet final  and will not be final  until
approved by the Court after a hearing.

     On February 13, 1997,  Motorola,  Inc. filed suit against U.S.  Robotics in
the United States  District Court for the District of  Massachusetts  (Motorola,
Inc.  v. U.S.  Robotics  Corporation,  et al.,  Civil  Action No.  97-10339RCL),
claiming  infringement  of eight United States  patents.  The complaint  alleges
willful infringement and prays for unspecified damages and injunctive relief. In
a  separate  statement  announcing  the  filing  of  the  lawsuit  published  on
PRNewswire  on the same date,  Motorola  alleged that the patents at issue cover
"technologies essential to the International Telecommunications Union (ITU) V.34
modem  standard." In the same statement,  a Motorola officer is quoted as saying
that Motorola is "committed" to making its technology  incorporated in standards
available on a "fair,  reasonable and  non-discriminatory  basis." U.S. Robotics
has  filed an  answer to  Motorola's  claims  setting  forth  its  defenses  and
asserting  counterclaims  which allege  infringement of a U.S.  Robotics patent,
violation  of  antitrust  laws,  promissory  estoppel  and  unfair  competition.
Although the Company believes it has meritorious  defenses to Motorola's  claims
and  intends to contest  this  lawsuit  vigorously,  an adverse  outcome of such
litigation  could have a material  adverse  effect on the  business,  results of
operations or financial condition of the Company.

     On April 26, 1997, Xerox  Corporation  filed suit against U.S.  Robotics in
the United  States  District  Court for the Western  District of New York (Xerox
Corporation v. U.S.  Robotics  Corporation and U.S.  Robotics Access Corp.,  No.
97-CV-6182T),  claiming  infringement of one United States Patent. The complaint
alleges willful  infringement  and prays for unspecified  damages and injunctive
relief.  In a press release dated April 30, 1997, Xerox alleged that its patent,
issued January 21, 1997,  "covers the use and  recognition  of handwritten  text
using an alphabet  system  designed  especially for reliable  recognition in pen
computers," and that U.S. Robotics'  PalmPilot hand-held computer and "Graffiti"
software  infringe the Xerox  patent.  The Company  believes it has  meritorious
defenses to Xerox's  claims and intends to contest  the lawsuit  vigorously.  An
adverse  resolution  of the action could have a material  adverse  effect on the
Company's results of operations and financial  condition in the quarter in which
such adverse resolution occurs.

     On April 21, 1997, U.S. Robotics and three of its customers,  Best Buy Co.,
Inc.,  Egghead,  Inc.  and Fry's  Electronics,  Inc.,  were sued in a  purported
consumer  class  action  filed in  Superior  Court in Marin  County,  California
(Bendall  et al v. U.S.  Robotics  Corporation  et al,  No.  170441).  The named
plaintiffs  are  residents of the states of Alabama,  California,  Tennessee and
Washington  and they  purport to represent  various  classes of persons who have
purchased  or otherwise  acquired  U.S.  Robotics'  new x2 products and products
upgradeable to x2. Damages,  including  punitive  damages,  and other relief are
sought under the  California  Consumer  Legal  Remedies  Act and the  California
Song-Beverly  Consumer  Warranty  Act, and under  various  common law  theories,
including  breach of contract,  fraud and deceit,

                                       15

<PAGE>

negligent  misrepresentation,  breach of implied warranty and unjust enrichment.
The Company believes it has meritorious  defenses to this lawsuit and intends to
contest the lawsuit vigorously. An adverse resolution of the action could have a
material  adverse  effect on the Company's  results of operations  and financial
condition in the quarter in which such adverse resolution occurs.

     Another lawsuit, purporting to be "For the interests of the General Public"
was filed  against  U.S.  Robotics  in the same court on March 13, 1997 (Levy v.
U.S. Robotics Corporation,  No. 170968). This action alleges that U.S. Robotics'
promotion and  advertising of x2 products  constituted  unfair  competition  and
deceptive,  untrue and  misleading  advertising  in violation of the  California
Business  and  Professional  Code,  and  seeks  injunctive   relief,   including
"restitution  of all revenues" and an award of attorney  fees.  Additionally,  a
purported  public interest  plaintiff sued U.S.  Robotics on January 29, 1997 in
California  Superior Court in San Francisco  (Intervention Inc. v. U.S. Robotics
Corporation,   Case  No.  984352)  under  the  same  statute,  alleging  various
misrepresentations  in connection  with the promotion  and  advertising  of U.S.
Robotics'  x2  products,  and seeking  injunctive  and other  relief,  including
attorney's  fees.  The  Company  believes  it has  meritorious  defenses to this
lawsuit and intends to contest the lawsuit vigorously.  An adverse resolution of
the action  could have a material  adverse  effect on the  Company's  results of
operations  and  financial  condition  in the  quarter  in  which  such  adverse
resolution occurs.


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

     None.


Executive Officers of the Registrant

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

        Name                   Age                      Position (1)
        ----                   ---                      ------------

 Eric A. Benhamou...............41       Chairman, President and Chief Executive
                                         Officer

 Casey Cowell...................44       Vice Chairman

 Richard L. Edson...............43       Senior Vice President, Client Access
                                         Products, New Business Initiatives

 Debra J. Engel.................45       Senior Vice President, Corporate 
                                         Services

 Ralph B. Godfrey...............57       Senior Vice President, Client Access
                                         Products, Americas Sales

                                       16

<PAGE>

        Name                   Age                      Position (1)

 John H. Hart...................51       Senior Vice President and
                                         Chief Technical Officer

 Randy R. Heffner...............47       Senior Vice President, Client Access
                                         Products, Operations

 Richard W. Joyce...............41       Senior Vice President, Remote Access
                                         Products Division

 Alan J. Kessler................40       Senior Vice President, Enterprise 
                                         Systems Business Unit, Global Sales

 Ross W. Manire.................45       Senior Vice President, Carrier Systems
                                         Business Unit

 John McCartney.................44       President, Client Access Business Unit

 Mark D. Michael................46       Senior Vice President, General Counsel
                                         and Secretary

 Christopher B. Paisley.........45       Senior Vice President, Finance and
                                         Chief Financial Officer

 Janice M. Roberts..............41       Senior Vice President, Marketing and
                                         Business Development

 Michael S. Seedman.............40       Senior Vice President, Personal
                                         Communications Division

 Ronald A. Sege.................40       Senior Vice President, Enterprise 
                                         Systems Business Unit, Global Products

 Douglas C. Spreng..............53       Executive Vice President, Interface 
                                         Products Group

 Thomas L. Thomas...............48       Senior Vice President,  Global  
                                         Information  Systems and Chief 
                                         Information Officer


(1)  Robert J.  Finocchio  was  President,  3Com Systems until he resigned as an
     officer of the Company in May 1997.

                                       17

<PAGE>


     Eric A.  Benhamou  has been the  Company's  President  and Chief  Executive
Officer since April 1990 and September 1990,  respectively.  Mr. Benhamou became
Chairman of the Board of  Directors  of the Company in July 1994.  Mr.  Benhamou
served  as the  Company's  Chief  Operating  Officer  from  April  1990  through
September  1990. From October 1987 through April 1990, Mr. Benhamou held various
general management positions within the Company. Prior to that, Mr. Benhamou was
one of the founders of Bridge Communications,  Inc., in September 1981, and held
various  executive  positions in that company in the fields of  engineering  and
product development, most recently as Vice President of Engineering,  until that
company  combined with 3Com in September 1987. Mr. Benhamou serves as a director
of Cypress Semiconductor, Inc., Legato Systems, Inc. and Netscape Communications
Corporation.  Mr.  Benhamou  also serves on President  Clinton's  I.T.  Advisory
Council (PITAC).

     Casey Cowell has been Vice Chairman of the Company  since June 1997.  Prior
to joining the Company,  Mr.  Cowell  served as President of U.S.  Robotics from
1978 until  January  1997.  Mr.  Cowell was also  Chairman  of the Board,  Chief
Executive Officer,  and Director of U.S. Robotics since 1978. Mr. Cowell founded
U.S.  Robotics  in 1976.  Mr.  Cowell  also  serves as a Director of Eagle River
Interactive,  Inc.,  May & Speh,  Northwestern  Memorial  Corporation,  a parent
company  of  Northwestern  Memorial  Hospital,  and a  trustee  of the  Illinois
Institute of Technology.

     Richard L. Edson has been Senior Vice  President,  Client Access  Products,
New Business  Initiatives  since June 1997.  Prior to joining the  Company,  Mr.
Edson  was  with  U.S.   Robotics  as  Vice   President  and  General   Manager,
Manufacturing,  since July 1995.  From 1987 to 1995, Mr. Edson was with Thinking
Machines Corporation, where he held the position of Chief Operating Officer from
1994 to 1995, and held other management  positions,  including Vice President of
Core Products,  Vice President of  Manufacturing  and Director of  Manufacturing
from 1987 to 1993.  Prior to 1987, Mr. Edson held  management  positions at Data
General Corporation and Digital Equipment Corporation.

     Debra J. Engel has been Senior Vice  President,  Corporate  Services  since
August 1996.  From March 1990 through July 1996,  Ms. Engel was Vice  President,
Corporate Services.  From the time Ms. Engel joined the Company in November 1983
until March 1990, she was Vice President,  Human  Resources.  Prior to that, Ms.
Engel  was with  Hewlett-Packard  Company  for seven  years,  most  recently  as
Corporate  Staffing Manager at  Hewlett-Packard's  Corporate  Headquarters.  Ms.
Engel  also  serves as a director  of Aspect  Telecommunications,  the  American
Leadership  Forum and is Chairman of the Board of Directors of the Career Action
Center.

     Ralph B. Godfrey has been Senior Vice  President,  Client Access  Products,
Americas Sales since June 1997. Mr.  Godfrey was Senior Vice  President,  Global
Channel sales from August 1996 to May 1997.  Prior to that, Mr. Godfrey was Vice
President,  Channel  Sales - North  America,  from June 1993 to July  1996.  Mr.
Godfrey  joined 3Com in June 1990 as Vice  President  of 3Com USA, a position he
held through May 1993. Prior to joining 3Com, Mr. Godfrey was with Unisys,  Inc.
for two years, where he held several executive positions in sales, most recently
as President of the Value-Added Marketing Division. Prior to Unisys, Mr. Godfrey
was with Hewlett-Packard  Company for 20 years where he held several field sales
management  positions,  the most recent as National  Sales  Manager for Business
Systems.

                                       18

<PAGE>


     John H. Hart has been Senior Vice  President  and Chief  Technical  Officer
since August 1996.  From the time Mr. Hart joined the Company in September  1990
until July 1996, he was Vice  President and Chief  Technical  Officer.  Prior to
joining the Company, Mr. Hart worked for Vitalink Communications Corporation for
seven years,  where he held various executive  positions in product  engineering
and  development.  Mr. Hart's final position with Vitalink was Vice President of
Network Products.

     Randy R. Heffner has been Senior Vice  President,  Client Access  Products,
Operations  since June 1997.  Previously,  Mr. Heffner was the Vice President of
Manufacturing for 3Com's Personal  Connectivy  Operations from July 1992 through
June 1997.  Prior to joining the Company,  Mr.  Heffner worked for NeXT Computer
Inc. as Vice President of Manufacturing  for five years. Mr. Heffner also worked
for  Hewlett  Packard  Company  for  thirteen  years in a variety  of  Materials
Management and Production Control positions.

     Richard W. Joyce has been Senior Vice  President,  Remote  Access  Products
Division  since June 1997.  Mr.  Joyce was Senior Vice  President,  New Business
Operations  from August 1996 to June 1997. From June 1995 through July 1996, Mr.
Joyce was Vice President, New Business Operations.  From June 1993 to June 1995,
Mr.  Joyce  served as Vice  President,  Sales Europe and Asia Pacific Rim (APR).
From January  1990 to June 1995,  Mr.  Joyce  served as  President,  3Com Europe
Limited.  From  September  1988 until January 1990, Mr. Joyce served as Managing
Director of 3Com (UK) Limited.  Mr. Joyce joined the Company in November 1987 as
Sales Manager of 3Com (UK)  Limited,  a position he held until  September  1988.
Most  recently  prior to joining the  Company,  Mr.  Joyce held the  position of
Managing  Director Europe for State Street Trade  Development  Corporation  from
1985 to 1987.

     Alan J. Kessler became Senior Vice President,  Enterprise  Systems Business
Unit,  Global Sales in June 1997.  From August 1996 to May 1997, Mr. Kessler was
Senior Vice President of the Company's  Global Systems Sales and Services.  From
June 1995 to July 1996, Mr. Kessler served as Vice President,  Customer  Service
Operations.  From  June 1993  through  June  1995,  Mr.  Kessler  served as Vice
President,  Systems  Sales-North  America.  From May 1991 through May 1993,  Mr.
Kessler served as Vice President and General Manager,  Network Systems Division.
From April 1990 until May 1991, Mr. Kessler served as Vice President and General
Manager, Distributed Systems Division. Previously, Mr. Kessler served as Product
Marketing Manager of the Distributed Systems Division from November 1988 through
April 1990 and as Product Line Manager from October 1985 through November 1988.

     Ross W. Manire become Senior Vice President,  Carrier Systems Business Unit
in June 1997. Prior to joining the Company,  Mr. Manire worked for U.S. Robotics
as Vice  President,  Finance,  since  August 1991 and was named Chief  Financial
Officer in March 1992, holding that position until March 1995. Mr. Manire served
as Secretary  from March 1993 to February 1994. Mr. Manire served as Senior Vice
President,  Operations  from August 1992 through  March 1995.  In April 1995 Mr.
Manire was named General Manager, Network Systems. From 1989 to 1991, Mr. Manire
was Vice President of Ridge Capital  Corporation,  a private  equity  investment
firm.  Prior to that  Mr.  Manire  was a  partner  at  Ernst &  Young,  a public
accounting  firm.  Mr.  Manire  serves as a Director for several  privately  and
publicly held companies.

                                       19

<PAGE>


     John McCartney has been  President,  Client Access Business Unit since June
1997.  Prior to joining the Company,  Mr.  McCartney served as President of U.S.
Robotics since January 1997 and as Chief  Operating  Officer since January 1996.
Mr.  McCartney was Executive  Vice  President  from 1988 until January 1997. Mr.
McCartney  held the position of  Secretary  from 1989 to 1993,  Chief  Financial
Officer from 1984 to 1992,  Vice  President from 1984 to 1988 and was a Director
since 1985.

     Mark D.  Michael  has been the  Company's  Senior Vice  President,  General
Counsel and Secretary since June 1997. Mr. Michael joined the Company in 1984 as
Counsel,  and was named Assistant Secretary in 1985 and General Counsel in 1986.
In 1989, Mr. Michael was named  Secretary,  and became a Vice President in 1991.
Prior to joining the Company, Mr. Michael was engaged in the private practice of
law with law firms in  Honolulu,  Hawaii  from  1977 to 1981 and San  Francisco,
California from 1981 to 1984.

     Christopher B. Paisley has served as the Company's  Senior Vice  President,
Finance and Chief Financial Officer since August 1996. From the time Mr. Paisley
joined the Company in  September  1985 until July 1996,  he was Vice  President,
Finance and Chief Financial Officer.  Prior to joining the Company,  Mr. Paisley
was Vice President,  Finance of Ridge Computers from May 1982 to September 1985.
Previously,  Mr. Paisley was employed by Hewlett-Packard  Company for five years
in a variety of accounting and finance  positions.  Mr. Paisley also serves as a
Director of Applied Digital Access, Inc. and ShareData, Inc.

     Janice M. Roberts has been Senior Vice  President,  Marketing  and Business
Development since August 1996. From June 1992 through July 1996, Ms. Roberts was
Vice  President,  Marketing.  From February 1994 to June 1995,  Ms. Roberts also
served as General Manager,  Personal Office  Division.  From February 1992 until
June 1992, Ms.  Roberts was Vice  President and General  Manager of the Premises
Distribution  Division.  During the period  January 1989 to February  1992,  Ms.
Roberts  served as Director of BICC  Technologies  Limited and President of BICC
Technologies,  Inc.  and BICC  Communications,  Inc.  She was also  Chairman and
Managing  Director of BICC Data  Networks  Limited.  From  December 1986 through
January 1989,  Ms.  Roberts was Manager of Sales and Marketing of STC Components
Ltd. located in Harlowe, United Kingdom.

     Michael S. Seedman has been Senior Vice President,  Personal Communications
Division  since June 1997.  Prior to joining the Company Mr.  Seedman  served as
Senior Vice President of U.S. Robotics from March 1997 to June 1997. Mr. Seedman
served as Vice President and General Manager, Personal Communications, from June
1993 to March  1997.  Mr.  Seedman  previously  served  as  President  and Chief
Executive Officer of Practical Peripherals,  Inc., a data communications company
which he founded, from 1981 to 1993.

     Ronald A. Sege has been 3Com's Senior Vice  President,  Enterprise  Systems
Business Unit,  Global Products since June 1997. From October 1996 to June 1997,
Mr. Sege served as Senior Vice  President,  LAN  Operations.  Mr. Sege served as
Vice President and General  Manager,  Integrated  Systems  Division from October
1995 to October 1996.  From July 1993 to October  1995,  Mr. Sege served as Vice
President and General Manager, Premises Distribution Division. In June 1991, Mr.
Sege  became  3Com's  Vice  President  and General  Manager,  Customer  Services
Operation and held this  position  until July 1993.  Prior to joining 3Com,  Mr.
Sege held a variety of service and sales positions at ROLM Corporation. Mr. Sege
serves as a Director of Artel Video  Systems,  Massachusetts  Telecommunications
Council and Junior Achievement of Boston.

                                       20

<PAGE>

     Douglas C. Spreng was promoted to Executive Vice President,  3Com Interface
Products  in August  1996.  From July 1995 to July 1996,  Mr.  Spreng  served as
Executive Vice President,  Personal Connectivity  Operations.  Mr. Spreng joined
the  Company  as Vice  President  and  General  Manager of the  Network  Adapter
Division in March 1992.  Prior to joining the Company,  Mr. Spreng was President
and  Chief  Operations  Officer  of  Domestic   Automation  Company,  a  private
communications  system  start-up  company  based  in  San  Carlos,   California.
Previously,  Mr.  Spreng spent 23 years with  Hewlett-Packard  Company (HP) in a
variety  of key  marketing,  manufacturing  and  general  management  positions,
including  General Manager of HP's Commercial  Systems Group.  Most recently Mr.
Spreng served as General Manager of HP's Manufacturing  Applications  Group. Mr.
Spreng also serves as a Director of Com21, Inc. and Junior  Achievement of Santa
Clara Valley.

     Thomas L.  Thomas has been  Senior  Vice  President  and Chief  Information
Officer,  Global  Information  Systems since August 1996.  From  September  1995
through July 1996, Mr. Thomas was Vice President and Chief Information  Officer,
Global Information  Systems.  Prior to joining the Company,  Mr. Thomas had been
Vice President and Chief Information  Officer of Dell Computer  Corporation from
1993 to 1995.  Prior to that,  Mr. Thomas served as Vice President of Management
Information  Systems at Kraft General  Foods from 1987 to 1993,  and at Sara Lee
Corporation from 1981 to 1987.

                                       21

<PAGE>


                                     PART II

     Subsequent to the end of the fiscal year,  3Com  Corporation  consummated a
merger with U.S.  Robotics  Corporation  (U.S.  Robotics) on June 12, 1997.  The
following information included in Parts II, III and IV of this Form 10-K has not
been restated to include the operating  results of U.S.  Robotics,  and does not
represent results of the combined company.


<TABLE>
ITEM 5.       Market  for  Registrant's  Common  Stock and  Related  Stockholder
              Matters

<CAPTION>
     Fiscal 1997            High            Low                        Fiscal 1996          High               Low
     -----------            ----            ---                        -----------          ----               ---
<S>                        <C>               <C>                       <C>                   <C>              <C>
     First Quarter         $50 7/8           $33 1/2                   First Quarter         $40 7/8          $30 7/16
     Second Quarter         76 1/2            45                       Second Quarter         53 5/8           38 3/8
     Third Quarter          81 3/8            33                       Third Quarter          51 7/8           35 1/2
     Fourth Quarter         51 1/8            24                       Fourth Quarter         52               36 1/8

</TABLE>
     3Com  Corporation  common  stock has been  traded  in the  over-the-counter
market  under the symbol COMS since the  Company's  initial  public  offering on
March 21, 1984. The preceding  table sets forth the high and low sales prices as
reported on the Nasdaq  National  Market during the last two years  (adjusted to
reflect a two-for-one  stock split on August 25, 1995).  As of May 31, 1997, the
Company had approximately  4,900  shareholders of record.  3Com has not paid and
does not anticipate it will pay cash dividends on its common stock.

                                       22

<PAGE>


ITEM 6.  Selected Financial Data

<TABLE>
     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.

<CAPTION>
                                                                     Years ended May 31,
(Dollars in thousands, except
per share and employee data)                     1997             1996            1995             1994            1993
------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>             <C>              <C>               <C>     
Sales                                      $3,147,106       $2,327,101      $1,593,469       $1,011,533        $723,231
Net income (loss)                             373,950          177,854         144,559          (11,870)         45,047
Net income (loss) per share:
   Primary                                       2.02             1.01            0.85            (0.08)           0.31
   Fully diluted                                 2.01             1.00            0.84            (0.08)           0.30

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

Total assets                               $2,266,275       $1,525,117      $1,074,810      $   614,688        $458,869
Working capital                             1,234,232          825,190         570,691          307,017         244,767
Long-term obligations                         115,391          115,492         116,221            4,642           4,833
Retained earnings                             736,881          379,358         200,030           73,686          98,699
Shareholders' equity                        1,517,510          978,805         633,724          414,122         323,307

Number of employees                             7,109            5,190           4,048            3,019           2,514

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


Net income for fiscal 1997 included a charge of approximately $6.6 million ($.04
per share) for  merger-related  costs.  Net  income for fiscal  1996  included a
charge of approximately $69.0 million ($.28 per share) for merger-related costs,
a  charge  of  approximately  $52.4  million  ($.29  per  share)  for  purchased
in-process technology, and a charge of approximately $1.0 million (approximately
$.01 per share) for a litigation settlement. Net income for fiscal 1995 included
a  charge  of  approximately  $68.7  million  ($.25  per  share)  for  purchased
in-process technology,  a charge of approximately $11.2 million ($.06 per share)
for  merger-related  costs and a credit of $1.1  million  ($.01 per share) for a
reduction in accrued  restructuring  costs.  Net loss for fiscal 1994 included a
charge of approximately $134.5 million ($.82 per share) for purchased in-process
technology,  a gain  of  $17.7  million  ($.07  per  share)  on the  sale  of an
investment and a tax benefit of $1.2 million ($.01 per share) resulting from tax
law changes.  Net income for fiscal 1993 included a charge of approximately $1.3
million  ($.01 per share)  for  non-recurring  items.  See Notes 3 and 12 to the
Consolidated  Financial  Statements  for  additional  information  on the  above
transactions for fiscal years 1997, 1996 and 1995.  Excluding the  non-recurring
items noted above,  net income and net income per share on a fully diluted basis
would have been as follows:

                                                                    Years ended May 31,
(Dollars in thousands,
except per share data)                           1997             1996            1995             1994            1993
------------------------------------------------------------------------------------------------------------------------
Net income excluding
    non-recurring items                      $380,550         $280,033        $195,545         $103,713         $46,255
Net income per share excluding
    non-recurring items                      $   2.05         $   1.58        $   1.14         $   0.66         $  0.31
</TABLE>

                                                            23

<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.

SUBSEQUENT EVENT

     On June 12, 1997, 3Com  Corporation  ("the  Company")  consummated a merger
with U.S. Robotics  Corporation (U.S. Robotics) the leading supplier of products
and systems for accessing  information  across the wide area network,  including
modems and remote access products.  The Company issued approximately 158 million
shares of its common stock in exchange for all outstanding  common stock of U.S.
Robotics and assumed and exchanged all options to purchase U.S.  Robotics' stock
for options to purchase  approximately 31 million shares of the Company's common
stock.  The  transaction  was  accounted  for  as a  pooling-of-interests.  U.S.
Robotics'  sales and net income for the twelve  months ended March 30, 1997 were
$2,493.8  million and $237.3 million,  respectively.  As of March 30, 1997, U.S.
Robotics'  assets and  stockholder's  equity totaled $1,407.3 million and $863.5
million, respectively.

     The  Company  anticipates  that as a result  of the  merger,  the  combined
company will incur  restructuring  charges and direct transaction costs relating
to the  business  combination,  estimated  to be between  $325  million and $375
million.  These  non-recurring  costs will be charged to operations in the first
quarter  of  fiscal  1998.  See  Note  17 of  Notes  to  Consolidated  Financial
Statements.

     The  following  information  has not been restated to include the operating
results  of U.S.  Robotics,  and  does not  represent  results  of the  combined
company.  The following  discussion,  including  Business  Environment  and Risk
Factors,  represents 3Com on a standalone basis. For information  regarding 3Com
and  U.S.   Robotics   on  a   combined   basis,   refer  to  the  Joint   Proxy
Statement/Prospectus  dated May 8, 1997.  For historical  information  regarding
U.S. Robotics on a standalone basis,  refer to its quarterly report on Form 10-Q
for the quarter  ended March 30, 1997,  and its report on Form 10-K for the year
ended September 29, 1996.


BUSINESS COMBINATIONS

     On  October  31,  1996,  the  Company  acquired  OnStream  Networks,   Inc.
(OnStream),  a provider of  Asynchronous  Transfer Mode (ATM) and broadband wide
area network (WAN) and access  products.  The Company issued  approximately  3.3
million shares of its common stock in exchange for all the outstanding  stock of
OnStream,  and assumed and exchanged all options to purchase  OnStream stock for
options to purchase  approximately 400,000 shares of the Company's common stock.
The acquisition was accounted for as a  pooling-of-interests.  Financial data of
the Company has been  restated for the quarter  ended August 31, 1996 to include
the  historical  financial  information  of  OnStream  for that  period.  As the
historical  operations of OnStream were not significant to any period presented,
the  Company's  financial  statements  for periods prior to fiscal 1997 have not
been restated.

     To enhance its product  offerings and accelerate its  time-to-market in new
technologies,  the Company completed  several business  combinations in previous
years. In fiscal 1996, the Company acquired  Chipcom  Corporation  (Chipcom),  a
provider  of  computer  networking  multi-function  platforms,

                                       24

<PAGE>

including  hubs,  switching,  and network  management  products,  Primary Access
Corporation  (Primary Access),  a provider of integrated network access systems,
and AXON Networks,  Inc.  (AXON), a developer and manufacturer of remote network
management and data network  traffic  management  products.  In fiscal 1995, the
Company  acquired  Sonix  Communications,  Ltd.  (Sonix),  a  provider  of  ISDN
connectivity  solutions in the United Kingdom, and NiceCom,  Ltd. (NiceCom),  an
innovator  of  ATM  technology,   and  Chipcom  acquired  Artel   Communications
Corporation  (Artel), a provider of high-performance  communication  systems for
the internetworking and video distribution markets and DSI ExpressNetworks, Inc.
(DSI), a developer of intelligent hubs and internetworking products.

     The  impact  of  acquisition-related  charges  on the  Company's  operating
expenses, net income and earnings per share are discussed below. See Notes 3 and
12 of Notes to Consolidated  Financial Statements for additional  information on
the above business combinations.


RESULTS OF OPERATIONS

<TABLE>
The following table sets forth for the fiscal years indicated, the percentage of
total  sales   represented  by  the  line  items   reflected  in  the  Company's
consolidated statements of income:

<CAPTION>
                                                                                      Years Ended May 31,
                                                                              ----------------------------------------  
                                                                               1997            1996              1995
                                                                              ------           -----             -----  
<S>                                                                          <C>              <C>               <C>    
Sales......................................................................    100.0%           100.0%            100.0%
Cost of sales .............................................................     46.1             47.1              46.3
                                                                              ------            -----             -----
Gross margin ..............................................................     53.9             52.9              53.7
Operating expenses:
    Sales and marketing ...................................................     21.0             20.5              20.0
    Research and development ..............................................     10.7             10.0              10.5
    General and administrative ............................................      4.1              4.2               4.2
    Non-recurring charges:
       Purchased in-process technology.....................................        -              2.2               4.3
       Acquisition-related charges and other...............................      0.2              3.0               0.6
                                                                              ------           ------             -----  
Total operating expenses ..................................................     36.0             39.9              39.6
                                                                              ------           ------             -----  
Operating income ..........................................................     17.9             13.0              14.1
Other income - net ........................................................      0.7              0.3               0.3
                                                                              ------           ------             -----  
Income before income taxes ................................................     18.6             13.3              14.4
Income tax provision ......................................................      6.7              5.7               5.3
                                                                              ------           ------             -----  
Net income ................................................................     11.9%             7.6%              9.1%
                                                                              ======           ======             =====  

Excluding non-recurring charges:
    Total operating expenses ..............................................     35.7%            34.6%             34.6%
    Operating income ......................................................     18.1             18.2              18.9
    Net income ............................................................     12.1             12.0              12.3

</TABLE>

Comparison of fiscal years ended May 31, 1997 and 1996

     Fiscal 1997 sales increased 35 percent to $3.1 billion from $2.3 billion in
fiscal 1996. The Company  believes that the increase in fiscal 1997 sales is due
to  several  factors,  including  growth  in the data  networking  market as the
Internet,  corporate  intranets,  client server  applications  and remote access
services  stimulate  customers to migrate  from shared to switched  media and to
larger bandwidth and higher speed  technologies,  such as Fast Ethernet and ATM,
to support data, voice and video multimedia  traffic.  The

                                       25

<PAGE>

Company also believes that the strength of the  Company's  product  offerings at
the edge of the network,  including workgroup switches and hubs, the impact of a
strong new  product  cycle in  systems  and  adapter  products,  the  continuous
expansion of 3Com's product offerings,  and the ability to deliver complete data
networking solutions for different connectivity  environments contributed to the
increase in sales over the prior year.

     Although the Company  experienced  relatively strong year over year growth,
the  Company's  growth rate has  moderated in the last half of fiscal 1997.  The
Company believes this moderation reflects recent slowed growth in the networking
industry,  in combination with increased  competitive  pricing  pressures in the
form of aggressive price reductions and product promotions for certain products,
particularly  network  adapters,  stackable  hubs, and workgroup  switches.  The
Company  also  experienced  declines in its router  business,  which the Company
believes  are  primarily  due to delays in  certain  large  enterprise  customer
orders.  The Company believes that the industry is transitioning  from shared to
switched  networks,  from  lower  to  higher-speed  technologies,  and  to  more
volume-based  pricing  and  distribution,  and  that  these  transitions  may be
adversely affecting customer purchasing decisions. Competitive pricing pressures
in adapters,  stackable  hubs and  workgroup  switches  have resulted in average
selling prices  declining  more rapidly than in the past.  The Company  believes
such pricing trends, as well as the  uncertainties  created by the trend towards
switched networks,  may adversely affect the industry's and the Company's growth
rates in the coming quarters, and consequently,  the Company's historical growth
rates should not be relied upon as an indication of its future performance.  See
Business Environment and Risk Factors discussed below.

     Sales of network systems products (i.e.,  internetworking platforms, remote
access servers,  hubs,  switching  products and customer  service)  increased 30
percent from fiscal 1996,  and  represented  57 and 59 percent of total sales in
fiscal  years 1997 and 1996,  respectively.  The increase in fiscal 1997 network
systems  product  sales was led  primarily  by the  SuperStack(R)  II  workgroup
switching family, the CELLplex(R) ATM High-Function switching family, SuperStack
II Ethernet and Fast  Ethernet  hubs,  and the ONcore(R)  intelligent  switching
system.  The  increase  in network  systems  products  was  partially  offset by
declines in sales of the AccessBuilder(R) 8000 access concentrator.  The Company
experienced  a  significant  increase  in unit  volume  in  workgroup  switching
products and Ethernet and Fast Ethernet  stackable hubs,  partially  offset by a
decline in average  selling  prices  resulting from  increased  competition  and
pricing  pressures.  Customer  service  revenue is included  in network  systems
products  (previously  this  revenue  was  classified  as other  products),  and
accordingly,   all  sales  composition  and  growth  percentages   reflect  this
reclassification.

     Sales of network  adapters  increased  45 percent  from  fiscal  1996,  and
represented  42 and 40  percent  of total  sales in fiscal  years 1997 and 1996,
respectively.  The increase in fiscal 1997 network  adapter sales  represented a
significant  increase in unit volume,  partially  offset by a decline in average
selling prices. The increase in sales was led primarily by the Fast EtherLink(R)
PCI adapters,  the EtherLink PC Card  adapters,  and the EtherLink III family of
network  adapters.  During the third quarter of fiscal 1997, a major  competitor
reduced  its  average  selling  prices  on Fast  Ethernet  adapter  products  by
approximately 40 percent.  The Company immediately  responded with similar price
cuts.  As  a  result,  the  Company  has  recently  experienced  an  accelerated
transition from 10 Mb Ethernet to Fast Ethernet adapters.

     Sales of other  products  represented  one percent of total sales in fiscal
1997 and 1996, and are not significant to the Company's operations.

     Sales  outside  of the United  States  increased  36 percent  from the same
period a year ago, and  comprised 53 percent of total sales in fiscal years 1997
and 1996.  International sales increased in all major geographic

                                       26

<PAGE>

regions,  with  especially  strong  growth in the Asia Pacific and Latin America
regions,  however,  in the latter half of fiscal 1997, sales in certain European
countries moderated. The Company believes that the growth in international sales
is due primarily to the Company's continued global expansion through the opening
of new sales offices,  and the expansion of its worldwide  field sales,  service
and support programs.  Sales in the U.S. increased 34 percent compared to fiscal
1996.  Substantially all of the Company's sales are denominated in U.S. Dollars.
The Company's  operations  were not  significantly  impacted by  fluctuations in
foreign currency exchange rates in fiscal years 1997, 1996 and 1995.

     Gross  margin as a  percentage  of sales was 53.9  percent in fiscal  1997,
compared to 52.9 percent in fiscal 1996.  The 1.0  percentage  point increase in
gross  margin in fiscal 1997  primarily  reflected  an improved  shipment mix of
higher  margin  workgroup  switching  and hub products and lower margin  network
access  concentrators,  and lower  product  material  costs of  certain  adapter
products.  Factors causing the increase in gross margin were partially offset by
a higher mix of certain lower margin adapter products.  During the third quarter
of fiscal 1997, the Company  reduced its average selling prices on Fast Ethernet
adapter products by  approximately 40 percent in response to the  aforementioned
increased competition, thus causing a recent decline in gross margins, which was
not  completely  reflected  in  fiscal  1997.  The  Company  believes  that  the
competitive  pricing pressures in the Fast Ethernet adapters,  stackable hub and
workgroup  switching  products  may well  result  in  future  declines  in gross
margins.

     Total operating expenses in fiscal 1997 were $1,131.4 million,  compared to
$928.6 million in fiscal 1996. Excluding an  acquisition-related  charge of $6.6
million  related  to the  acquisition  of  OnStream  (see  Note 12 of  Notes  to
Consolidated  Financial  Statements),  total  operating  expenses in fiscal 1997
would  have been  $1,124.8  million,  or 35.7  percent  of sales.  Excluding  an
acquisition-related  charge  of $69.0  million  related  to the  acquisition  of
Chipcom,  a  charge  of  $52.4  million  for  purchased  in-process   technology
associated  with the  acquisition  of AXON and a charge  of  approximately  $1.0
million for a settlement of litigation,  total operating expenses in fiscal 1996
would have been $806.3 million, or 34.6 percent of sales.

     Sales and marketing  expenses in fiscal 1997 increased $183.8 million or 39
percent from fiscal  1996.  The increase in such  expenses  reflected  increased
costs   associated  with  the  35  percent  increase  in  sales,  a  52  percent
year-over-year  increase  in  sales  and  marketing  personnel,  as the  Company
continued to invest in the expansion of its direct sales force,  and an increase
in the  Company's  customer  support  programs and  marketing  promotions.  As a
percentage of sales,  sales and  marketing  expenses were 21.0 percent in fiscal
1997, compared to 20.5 percent in fiscal 1996.

     Research and development  expenses in fiscal 1997 increased  $102.2 million
or 44 percent  from the prior  year.  As a  percentage  of sales,  research  and
development expenses increased to 10.7 percent in fiscal 1997, from 10.0 percent
in fiscal 1996. The increase in research and development  expenses was primarily
attributable  to the cost of  developing  3Com's new products and  technologies,
primarily  switching,  network  management  and  value-added  software,  and the
Company's expansion into new technologies and markets.  The Company believes the
timely  introduction of new technologies and products is crucial to its success,
and  plans  to  continue  to  make  acquisitions  or  strategic  investments  to
accelerate  time to market where  appropriate.  As of May 31, 1997,  most of the
in-process  research and  development  projects  acquired in connection with the
Company's business acquisitions have been completed.  The Company estimates that
the remaining  costs in connection  with the completion of outstanding  acquired
research and development projects are not significant, and are primarily made up
of labor costs for design,  prototype  development and testing.  The increase in
research and  development  expenses is consistent  with the Company's  continued
commitment to develop and introduce high quality, innovative products.

                                       27

<PAGE>

     General and administrative  expenses in fiscal 1997 increased $32.6 million
or 33 percent from the prior year.  The  increase in general and  administrative
expenses  reflects  the  worldwide  expansion  of the  Company's  infrastructure
through internal growth and acquisitions,  including an increase in personnel of
35 percent  compared to the prior year,  increased  investment  in the Company's
worldwide  information systems and costs associated with the Company's expansion
into the Asia Pacific region. As a percentage of sales, such expenses  decreased
to 4.1 percent in fiscal 1997, compared to 4.2 percent in fiscal 1996.

     Other  income  (net) was $20.9  million in fiscal  1997,  compared  to $6.8
million in fiscal 1996.  These  amounts  consist  primarily of interest  income,
which  increased  $12.8 million in fiscal 1997, due primarily to larger cash and
investment balances.

     The  Company's  effective  income tax rate was 36.0 percent in fiscal 1997.
Excluding the merger costs  associated  with the OnStream  merger which were not
tax  deductible,  the  effective  tax rate for fiscal  1997 would have been 35.6
percent.  The  Company's  effective  income tax rate was 42.3  percent in fiscal
1996. Excluding the charge for purchased in-process  technology  associated with
the  acquisition of AXON,  which was not tax deductible,  and the  nondeductible
portion  of the  merger  costs  associated  with the  Chipcom  acquisition,  the
effective tax rate for fiscal 1996 would have been 35.0 percent.

     Net income for fiscal 1997 was $374.0 million, or $2.01 per share, compared
to net income of $177.9 million,  or $1.00 per share for fiscal 1996.  Excluding
the aforementioned acquisition-related charge of $6.6 million, the Company would
have realized net income of $380.6 million,  or $2.05 per share for fiscal 1997.
Net income for  fiscal  1996  included  the  aforementioned  acquisition-related
charge of $69.0  million,  the $52.4  million  charge for  purchased  in-process
technology  and the $1.0 million charge for a litigation  settlement.  Excluding
these charges,  the Company would have realized net income of $280.0 million, or
$1.58 per share for fiscal 1996.

Comparison of fiscal years ended May 31, 1996 and 1995

     Fiscal 1996 sales increased 46 percent to $2.3 billion from $1.6 billion in
fiscal 1995. The Company believes that the increase in fiscal 1996 sales was due
to several factors,  including  continued strength in the data networking market
as  customers  migrate  to new  technologies  such  as LAN  switching  and  Fast
Ethernet,  increases in worldwide personal computer sales, rapid growth in sales
outside the U.S., and the continuous  expansion of 3Com's product  offerings and
its  ability  to  deliver  complete  data  networking  solutions  for  different
connectivity environments.

     Sales of network  systems  products  increased 56 percent from fiscal 1995,
and  represented 59 and 55 percent of total sales in fiscal years 1996 and 1995,
respectively.  The increase in fiscal 1996 network systems product sales was led
primarily by the  LinkBuilder  FMS II stackable  hub, the LANplex and LinkSwitch
families of switching products, the AccessBuilder 8000 integrated network access
system and the ONcore  intelligent  switching  system.  The  increase in network
systems  products was partially  offset by declines in sales of certain  product
lines acquired from Chipcom.

     Sales of network  adapters  increased  35 percent  from  fiscal  1995,  and
represented  40 and 43  percent  of total  sales in fiscal  years 1996 and 1995,
respectively.  The increase in fiscal 1996 network  adapter sales  represented a
significant increase in unit volume,  primarily the result of increased sales of
the  EtherLink  III network  adapter and the  EtherLink  PC Card adapter and the
introduction  of the Fast  EtherLink  PCI adapter.

                                       28

<PAGE>

The trend  toward  decreasing  average  selling  prices in all adapter  products
continued in fiscal 1996,  but was mostly  offset by the  increased  mix of Fast
Ethernet and PC Card products, which carry higher average selling prices.

     Sales of other  products  represented  one percent of total sales in fiscal
1996 and two percent of total sales in fiscal 1995, and were not  significant to
the Company's operations.

     Sales  outside  of the United  States  increased  48 percent  from the same
period a year ago,  and  comprised  53  percent of total  sales in fiscal  1996,
compared to 52 percent in fiscal 1995. The Company believes that the increase in
international  sales was a result of strong  growth in the Asia Pacific  region,
the breadth of the Company's product  offerings,  its continued global expansion
through the opening of new sales offices in Asia, Latin America and Europe,  and
the  expansion  of  worldwide  service and support  programs.  Sales in the U.S.
increased 44 percent compared to fiscal 1995.

     Gross  margin as a  percentage  of sales was 52.9  percent in fiscal  1996,
compared to 53.7 percent in fiscal 1995. The 0.8 percentage  point  reduction in
gross  margin in fiscal  1996  resulted  primarily  from a higher mix of certain
lower margin adapter and network access system products and increased provisions
for obsolete and excess  inventory.  Factors causing the decline in gross margin
were partially offset by a favorable shipment mix toward the Company's switching
products and reductions in adapter product material costs.

     Total operating  expenses in fiscal 1996 were $928.6  million,  compared to
$630.9 million in fiscal 1995. Excluding the acquisition-related charge of $69.0
million related to the  acquisition of Chipcom,  the charge of $52.4 million for
purchased in-process  technology  associated with the acquisition of AXON, and a
charge of approximately $1.0 million for a settlement of litigation (see Note 12
of Notes to Consolidated  Financial  Statements),  total  operating  expenses in
fiscal 1996 would have been $806.3 million, or 34.6 percent of sales.  Excluding
a charge of $68.7 million for purchased  in-process  technology  associated with
the  acquisitions of NiceCom and DSI, a  non-recurring  charge of $10.1 million,
which  consisted of  approximately  $11.2  million in merger  transaction  costs
associated  with the  acquisitions  of Artel,  Primary  Access and Sonix,  and a
credit of $1.1 million for the reduction in accrued costs relating to the fiscal
1991  restructuring,  total  operating  expenses  in fiscal 1995 would have been
$552.1 million, or 34.6 percent of sales.

     Sales and marketing  expenses in fiscal 1996 increased $156.5 million or 49
percent from fiscal  1995.  The increase in such  expenses  reflected  increased
selling  costs  related  to the 46  percent  increase  in  sales,  higher  costs
associated  with  marketing  promotions  and  sales  support  programs,   and  a
year-over-year  increase in sales and  marketing  personnel  of 35 percent.  The
Company believes the increase in sales and marketing  expenses was also a direct
result of the Chipcom acquisition. As a percentage of sales, sales and marketing
expenses  were 20.5 percent in fiscal  1996,  compared to 20.0 percent in fiscal
1995.

     Research and development expenses in fiscal 1996 increased $66.8 million or
40 percent  from the prior  year.  The  increase  in  research  and  development
expenses was  primarily  attributable  to the cost of  developing  new products,
including the Company's  expansion into new technologies and markets.  Full time
research and  development  personnel  increased 27 percent in fiscal 1996.  As a
percentage  of sales,  research and  development  expenses  were 10.0 percent in
fiscal 1996, compared to 10.5 percent in fiscal 1995.

                                       29

<PAGE>

     General and administrative  expenses in fiscal 1996 increased $30.9 million
or 47 percent from the prior year.  The  increase in general and  administrative
expenses  reflected  the  worldwide  expansion of the  Company's  infrastructure
through  internal  growth  and  acquisitions.  As a  percentage  of sales,  such
expenses remained flat at 4.2 percent in fiscal 1996 and 1995.

     Other  income  (net) was $6.8  million  in fiscal  1996,  compared  to $4.9
million in fiscal  1995.  The  fiscal  1996  increase  was  primarily  caused by
interest income, which increased $9.3 million in fiscal 1996, due to larger cash
and investment  balances and higher  interest rates.  Partially  offsetting this
increase  in other  income was the  issuance  of $110.0  million of  convertible
subordinated  notes in the second  quarter of fiscal 1995,  which in addition to
increasing cash balances, contributed to an increase in interest expense of $5.5
million in fiscal 1996.

     The  Company's  effective  income tax rate was 42.3 percent in fiscal 1996.
Excluding  the  purchased  in-process  technology  charge  associated  with  the
acquisition of AXON, which was not tax deductible, and the nondeductible portion
of the merger costs associated with the Chipcom  acquisition,  the effective tax
rate would have been 35.0 percent.  The Company's  effective income tax rate was
36.9  percent in fiscal 1995.  Excluding  the charges for  purchased  in-process
technology  associated  with the  acquisitions of NiceCom and DSI and the merger
costs associated with the Sonix and Primary Access acquisitions,  which were not
tax deductible, the effective tax rate would have been 36.0 percent.

     Net income for fiscal 1996 was $177.9 million, or $1.00 per share, compared
to net income of $144.6 million,  or $0.84 per share for fiscal 1995. Net income
for fiscal 1996 included the aforementioned  acquisition-related charge of $69.0
million,  the $52.4 million charge for purchased  in-process  technology and the
$1.0 million charge for a litigation  settlement.  Excluding these charges,  the
Company would have realized net income of $280.0 million, or $1.58 per share for
fiscal  1996.  Net income for fiscal  1995  included  the  aforementioned  $68.7
million charge for purchased in-process technology, the $11.2 million charge for
merger costs and the $1.1 million credit for the reduction in the  restructuring
reserve.  Excluding  these charges and credits,  the Company would have realized
net income of $195.5 million, or $1.14 per share for fiscal 1995.


BUSINESS ENVIRONMENT AND RISK FACTORS

     This  report  contains  certain  forward  looking   statements,   including
statements regarding future trends in sales, gross margin, expense and liquidity
levels,  and the amount of the expected  non-recurring  charge to operations for
the U.S.  Robotics  merger.  Actual results could vary  materially  based upon a
number of  factors,  including  but not  limited to those set forth  below.  The
Company's future operating results may be affected by various trends and factors
which  the  Company  must  successfully  manage  in order to  achieve  favorable
operating  results.  In  addition,  there are  trends  and  factors  beyond  the
Company's control which affect its operations. In accordance with the provisions
of the  Private  Securities  Litigation  Reform  Act  of  1995,  the  cautionary
statements  set forth below identify  important  factors that could cause actual
results to differ materially from those in any forward-looking  statements which
may be contained in this report.  Such trends and factors  include,  but are not
limited to, adverse changes in general economic  conditions or conditions in the
specific  markets  for  the  Company's  products,   governmental  regulation  or
intervention  affecting  communications  or  data  networking,  fluctuations  in
foreign exchange rates, and other factors, including those listed below.

                                       30

<PAGE>


     The Company  participates in a highly volatile and rapidly growing industry
which is  characterized  by  vigorous  competition  for  market  share and rapid
technological  development  carried  out amidst  uncertainty  over  adoption  of
industry standards and protection of proprietary  intellectual  property rights.
This has in the past resulted and could result in aggressive  pricing practices,
such as those  recently  adopted by a  competitor  in the  adapter  market,  and
growing  competition,  both from start-up  companies  and from  well-capitalized
computer systems and communications  companies. The Company's ability to compete
in this environment depends upon a number of competitive and market factors, and
is subject to the risks set forth in this report and other factors.

     The  market  for  the  Company's  products  is  intensely  competitive  and
characterized by rapidly changing technology.  The Company's success depends, in
substantial part, on the timely and successful  introduction of new products. An
unexpected change in one or more of the technologies  affecting data networking,
or in market demand for products based on a particular  technology,  such as the
recent  change  from shared to switched  networks  and the  slowdown in sales of
certain  products  for the edge of the  network,  could have a material  adverse
effect on the Company's operating results if the Company does not respond timely
and  effectively  to such  changes.  The  Company  is engaged  in  research  and
development activities in certain emerging LAN and WAN high-speed  technologies,
such as ATM, ISDN, DSL, Fast Ethernet, Gigabit Ethernet and data-over-cable.  As
the industry standardizes on high-speed technologies,  there can be no assurance
that the  Company  will be able to  respond  promptly  and  cost-effectively  to
compete in the  marketplace.  In addition,  if the PC industry  migrates  toward
standardizing  the  integration  of  network  interface  capabilities  on the PC
motherboard, and if the Company does not manage its business to cost-effectively
transition  toward  this  technology,  it could  have an  adverse  impact on the
Company.

     Although  long-term  annual growth rates for the  networking  industry have
recently been in the 30 to 50 percent range, there can be no assurance that this
industry  growth rate will  continue at the same  level,  or that the  Company's
results in any  particular  quarter will fall within that range.  In particular,
based on recent  softening of demand for  networking  products  and  competitive
pricing pressures, the Company anticipates that its results may fall below those
levels in the coming quarters.

     The Company's  customers  historically  request  fulfillment of orders in a
short  period of time,  resulting  in a  minimal  backlog.  Quarterly  sales and
results of operations  generally depend on the volume and timing of orders,  and
the ability to fulfill them within the quarter. As a result, the lack of backlog
provides limited visibility to the Company's future sales trends.

     Recruiting and retaining skilled personnel, especially in certain locations
in which the Company  operates,  is highly  competitive.  Unless the Company can
successfully recruit and retain such personnel, the Company's ability to achieve
continued growth in sales and earnings may be adversely affected.

     The  Company  operates  in an  industry  in which the ability to compete is
dependent on the  development or acquisition  of proprietary  technology,  which
must  be  protected  both to  preserve  the  benefits  of  exclusive  use of the
Company's  own  technology,  and enable the Company to license  technology  from
other  parties  on  acceptable  terms.  The  Company  attempts  to  protect  its
intellectual  property  rights  through a  combination  of patents,  copyrights,
trademarks and trade secret laws. There can be no assurance that the steps taken
by the Company will be sufficient to prevent  misappropriation  of  intellectual
properties or that competitors will not independently  develop technologies that
are equivalent or superior to the technologies of the Company.

                                       31

<PAGE>

     Some key components of the Company's products are currently  available only
from single sources.  There can be no assurance that in the future the Company's
suppliers  will be able to meet the Company's  demand for components in a timely
and  cost-effective   manner.  The  Company's  operating  results  and  customer
relationships  could be adversely  affected by either an increase in prices for,
or an interruption or reduction in supply of, any key components.

     The Company distributes a significant portion of its products through third
party  distributors and resellers.  Due to consolidation in the distribution and
reseller  channels  and the  Company's  increased  volume  of sales  into  these
channels, the Company has experienced an increased concentration of credit risk.
While  the  Company  continually  monitors  and  manages  this  risk,  financial
difficulties  on the part of one or more of the  Company's  resellers may have a
material adverse effect on the Company.  Likewise,  the Company's expansion into
certain  emerging  geographic  markets,  characterized by economic and political
instability and currency  fluctuations,  may subject the Company's  resellers to
financial difficulties which may have an adverse impact on the Company.

     The Company  will  continue to invest in  expanding  its sales,  marketing,
service,  logistics and manufacturing  operations worldwide. The Company's sales
and  earnings  may be  adversely  affected  unless the Company can  successfully
assimilate and train new employees in a timely  manner.  The Company may also be
adversely affected if it cannot  successfully  expand its sales and distribution
capabilities,  in particular, the new manufacturing and distribution facility in
the Asia Pacific region, in a timely manner.

     Acquisitions  of  complementary  businesses  and  technologies,   including
technologies and products under development, are an active part of the Company's
overall business strategy.  Certain of the Company's major competitors have also
been engaged in merger and  acquisition  transactions.  Such  consolidations  by
competitors are creating  entities with increased  market share,  customer base,
technology and marketing expertise,  sales force size, or proprietary technology
in segments in which the Company  competes.  These  developments  may  adversely
affect the Company's ability to compete in such segments.

     On June 12, 1997,  the Company  merged with U.S.  Robotics  (see Note 17 of
Notes to  Consolidated  Financial  Statements)  and has completed  several other
acquisitions  in  recent  years.  There  can  be  no  assurance  that  products,
technologies,   distribution  channels,   management  information  systems,  key
personnel and businesses of acquired  companies will be effectively  assimilated
into the Company's business or product offerings,  or that such integration will
not adversely affect the Company's  business,  financial condition or results of
operations.  The  difficulties of such  integration may be increased by the size
and  number  of  such   acquisitions   and  the   requirements  of  coordinating
geographically separated organizations,  such as the U.S. Robotics merger. There
can be no assurance that any acquired products,  technologies or businesses will
contribute at anticipated levels to the Company's sales or earnings, or that the
sales, earnings and technologies under development from acquired businesses will
not be adversely  affected by the integration  process or other general factors.
If the Company is not successful in the integration of such acquisitions,  there
could be an adverse impact on the financial results of the Company.

     The high-growth nature of the computer  networking  industry,  coupled with
critical   time-to-market   factors,   has  caused  increased   competition  and
consolidation.  As a  result,  there  has  been a  significant  increase  in the
acquisition  cost of computer  networking  companies.  Future  acquisitions  are
therefore  more  likely to result in costs that are  material  to the  Company's
operations.  There can be no assurance

                                       32

<PAGE>

that the Company will  continue to be able to identify and  consummate  suitable
acquisition  transactions in the future.  However, should the Company consummate
acquisitions in the future,  the impact may result in increased  dilution of the
Company's earnings.

     The Company's  business is characterized by the continuous  introduction of
new products and the  management of the  transition of those products from prior
generations  of  technology  or product  platforms.  In each product  transition
cycle,  the Company  faces the  challenge of managing the inventory of its older
products, including materials,  work-in-process, and products held by resellers.
If the Company is not successful in managing these  transitions,  there could be
an adverse impact on the financial results of the Company.

     The Company's  products are covered by product  warranties  and the Company
may be  subject  to  contractual  commitments  concerning  product  features  or
performance.  If unexpected  circumstances  arise such that the product does not
perform as  intended  and the Company is not  successful  in  resolving  product
quality or  performance  issues,  there could be an adverse  impact on sales and
earnings.

     The market price of the Company's  common stock has been,  and may continue
to be, extremely volatile.  Factors such as new product or pricing announcements
by the  Company or its  competitors,  quarterly  fluctuations  in the  Company's
operating  results,  challenges  associated  with  integration of businesses and
general conditions in the data networking market,  such as a decline in industry
growth rates, may have a significant impact on the market price of the Company's
common stock.  These  conditions,  as well as factors which generally affect the
market for stocks of high  technology  companies,  could  cause the price of the
Company's stock to fluctuate substantially over short periods.

     Notwithstanding the Company's increased geographical  diversification,  the
Company's  corporate  headquarters  and a  large  portion  of its  research  and
development  activities  and other critical  business  operations are located in
California,  near major earthquake  faults.  The Company's  business,  financial
condition and operating  results could be materially  adversely  affected in the
event of a major earthquake.

     Because of the foregoing  factors,  as well as other factors  affecting the
Company's operating results,  past trends and performance should not be presumed
by investors to be an accurate indicator of future results or trends.

LIQUIDITY AND CAPITAL RESOURCES

     Cash, cash  equivalents and temporary cash investments at May 31, 1997 were
$889.9 million,  increasing $390.6 million,  or 78 percent from May 31, 1996. At
the end of fiscal 1996,  cash, cash  equivalents and temporary cash  investments
were $499.3 million.

     For the fiscal year ended May 31, 1997,  net cash  generated from operating
activities  was $600.9  million.  Trade  receivables  at May 31, 1997  increased
$164.3  million to $523.5 million from May 31, 1996.  Days sales  outstanding in
receivables  was 57 days at the end of fiscal  1997,  compared to 49 days at the
end of fiscal  1996.  The  increase  in the days  sales  outstanding  metric was
primarily a result of the  non-linearity  of sales during the fourth  quarter of
fiscal 1997.  Inventory  levels at May 31, 1997 decreased $12.3 million from the
prior fiscal year-end to $228.8  million.  Inventory  turnover  increased to 6.5
turns at May 31, 1997, compared to 5.4 turns at May 31, 1996.

                                       33

<PAGE>


     During the fiscal year ended May 31, 1997,  the Company made $247.8 million
in capital  expenditures.  Major  capital  expenditures  included  purchases and
upgrades of desktop systems,  purchases of land in Santa Clara, California,  the
U.K. and  Ireland,  upgrades and  additions to product  manufacturing  lines and
facilities in Ireland and Santa Clara,  purchase of a building in the U.K.,  and
the continuing development of the Company's worldwide information systems. As of
May 31, 1997, the Company had outstanding  approximately  $95 million in capital
expenditure commitments primarily associated with the construction and expansion
of office and manufacturing space in the U.K., Singapore, and Ireland.

     During the year ended May 31,  1997,  the  Company  received  cash of $68.7
million  from the sale of its common  stock to  employees  through its  employee
stock purchase and option plans.

     During the third  quarter of fiscal 1997,  the Company  signed an operating
lease which combines and replaces three prior operating lease  agreements on the
Company's  existing  headquarters  site  and on land  adjacent  to its  existing
headquarters site. The combined lease includes approximately 870,000 square feet
of office  and  manufacturing  space and two  parking  garages,  and  expires in
November 2001 with an option to extend the lease term for two successive periods
of five years each. The Company has an option to purchase the combined  property
for  $152.6  million,  or at the end of the  lease  arrange  for the sale of the
property to a third party with the Company  retaining an obligation to the owner
for the difference between the sale price and $152.6 million, subject to certain
provisions of the lease.  Lease payments on the new lease commenced in the third
quarter  of fiscal  1997 and are not  materially  different  from the  aggregate
payments under the previously separate leases.

     During the second quarter of fiscal 1997, a wholly-owned  subsidiary of the
Company signed a lease for seven acres of land in Changi, Republic of Singapore.
The  Company  began   construction   of  325,000   square  feet  of  office  and
manufacturing  space in  December  1996,  and plans to occupy the  manufacturing
facility in the third quarter of fiscal 1998.

     During the second quarter of fiscal 1997,  the Company  purchased a 14 acre
parcel of land and signed a lease for an adjacent  58 acre parcel of land,  both
of which are near its existing headquarters in Santa Clara. The lease expires in
November 1998 with an option to extend the lease term for two successive periods
of five years each. The Company has an option to purchase the property for $49.5
million,  or at the end of the lease  arrange for the sale of the  property to a
third  party  with the  Company  retaining  an  obligation  to the owner for the
difference  between  the sale  price  and  $49.5  million,  subject  to  certain
provisions of the lease.

     The three  aforementioned  leases require the Company to maintain specified
financial  covenants,  all of which the Company was in compliance with as of May
31, 1997.

     The Company  has a $100  million  revolving  bank  credit  agreement  which
expires  December 20, 1999.  Payment of cash  dividends are permitted  under the
credit agreement,  subject to certain  limitations based on net income levels of
the Company.  The Company has not paid and does not  anticipate it will pay cash
dividends  on its common  stock.  The credit  agreement  requires the Company to
maintain  specified  financial  covenants.  As of May 31,  1997,  there  were no
outstanding  borrowings  under  the  credit  agreement  and the  Company  was in
compliance with all required covenants.

                                       34

<PAGE>


     The Company anticipates a significant decrease in cash and cash equivalents
and temporary  cash  investments in the first half of fiscal 1998 to retire some
or all of U.S.  Robotics'  existing debt, and to fund the cash components of the
merger reserve. See Note 17 of Notes to Consolidated Financial Statements.

     Based on current plans and business  conditions,  the Company believes that
its existing cash and cash equivalents,  temporary cash investments,  cash to be
generated from operations and the available  revolving  credit agreement will be
sufficient to satisfy  anticipated  operating cash requirements for at least the
next twelve months.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENT

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards No. 128 (SFAS 128),  "Earnings per
Share." This Statement  establishes  and simplifies  standards for computing and
presenting  earnings  per share.  SFAS 128 will be effective  for the  Company's
third  quarter  of fiscal  1998,  and  requires  restatement  of all  previously
reported  earnings  per share data that are  presented.  Early  adoption of this
Statement is not permitted. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted  earnings per share.  The Company  expects that
basic  earnings per share  amounts will be accretive  compared to the  Company's
primary earnings per share amounts,  and diluted earnings per share amounts will
not be materially  different from the Company's fully diluted earnings per share
amounts.

                                       35

<PAGE>


ITEM 8.       Financial Statements and Supplementary Data

<TABLE>
Index to Consolidated Financial Statements and Financial Statement Schedule

<CAPTION>
                                                                                                                     Page
Financial Statements:
<S>                                                                                                                    <C>
     Independent Auditors' Reports:
         Report of Deloitte & Touche LLP............................................................................   37
         Report of Price Waterhouse LLP.............................................................................   38
     Consolidated Statements of Income for the years ended May 31, 1997, 1996 and 1995..............................   39
     Consolidated Balance Sheets at May 31, 1997 and 1996...........................................................   40
     Consolidated Statements of Shareholders' Equity for the years ended May 31, 1997, 1996
         and 1995...................................................................................................   41
     Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1996
         and 1995...................................................................................................   42
     Notes to Consolidated Financial Statements.....................................................................   43
     Quarterly Results of Operations (Unaudited)....................................................................   61
Financial Statement Schedule:
     Schedule II - Valuation and Qualifying Accounts and Reserves...................................................   S-1
</TABLE>

     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.

                                       36

<PAGE>


Independent Auditors' Report

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

We have audited the  consolidated  balance  sheets of 3Com  Corporation  and its
subsidiaries  as of  May  31,  1997  and  1996,  and  the  related  consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended May 31, 1997.  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 the Company's management.
Our  responsibility  is to express an opinion on the  financial  statements  and
financial  statement  schedule based on our audits.  The consolidated  financial
statements give retroactive effect to the fiscal 1996 merger of 3Com Corporation
with Chipcom Corporation, which has been accounted for as a pooling-of-interests
as  described in Note 3 to the  consolidated  financial  statements.  We did not
audit the  consolidated  statements of income,  shareholders'  equity,  and cash
flows of Chipcom  Corporation  for the year ended December 31, 1994,  which were
combined with 3Com Corporation's statements for the year ended May 31, 1995, and
reflect revenues of $267,776,000, and net income of $18,560,000. We also did not
audit the information in the financial  statement  schedule  relating to Chipcom
Corporation for the year ended December 31, 1994, which  information is included
in 3Com Corporation's schedule for the year ended May 31, 1995. Those statements
and financial  statement  schedule  information  were audited by other  auditors
whose reports have been furnished to us, and our opinion,  insofar as it relates
to the amounts included for Chipcom Corporation for fiscal 1995, is based solely
on the reports of such other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 and the  reports  of the other  auditors  provide a
reasonable basis for our opinion.

In our opinion,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material   respects,   the  financial  position  of  3Com  Corporation  and  its
subsidiaries  at May 31, 1997 and 1996, and the results of their  operations and
their cash flows for each of the three years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles.  Also, in our opinion,
based on our  audits  and the  report  of the  other  auditors,  such  financial
statement  schedule,  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.


/s/ Deloitte & Touche LLP

San Jose, California
June 23, 1997

                                       37

<PAGE>


Report of Independent Accountants

To the Board of Directors and Stockholders of Chipcom Corporation

In our opinion,  the consolidated  statements of income, of stockholders' equity
and of cash flows of Chipcom  Corporation  and its  subsidiaries  (not presented
separately  herein) present  fairly,  in all material  respects,  the results of
their  operations  and their cash flows for the year ended December 31, 1994, in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.  We have not audited the  consolidated  financial  statements  of Chipcom
Corporation for any period subsequent to December 31, 1994.


/s/ Price Waterhouse LLP
------------------------
PRICE WATERHOUSE LLP

Boston, Massachusetts
February 7, 1995

                                       38

<PAGE>


<TABLE>
Consolidated Statements of Income

<CAPTION>
                                                                                                   Years Ended May 31,
                                                                                      ----------------------------------------------

(In thousands, except per share data)                                                   1997               1996              1995
                                                                                      ----------        ----------        ----------
<S>                                                                                   <C>               <C>               <C>       
Sales                                                                                 $3,147,106        $2,327,101        $1,593,469

Cost of sales                                                                          1,452,350         1,096,846           738,093
                                                                                      ----------        ----------        ----------

Gross margin                                                                           1,694,756         1,230,255           855,376

Operating Expenses:
    Sales and marketing                                                                  659,573           475,769           319,310
    Research and development                                                             335,266           233,107           166,327
    General and administrative                                                           129,952            97,395            66,462
    Purchased in-process technology                                                         --              52,353            68,696
    Acquisition-related charges and other                                                  6,600            69,950            10,125
                                                                                      ----------        ----------        ----------

    Total                                                                              1,131,391           928,574           630,920
                                                                                      ----------        ----------        ----------

Operating income                                                                         563,365           301,681           224,456

Other income--net                                                                         20,889             6,788             4,895
                                                                                      ----------        ----------        ----------

Income before income taxes                                                               584,254           308,469           229,351

Income tax provision                                                                     210,304           130,615            84,792
                                                                                      ----------        ----------        ----------

Net income                                                                            $  373,950        $  177,854        $  144,559
                                                                                      ==========        ==========        ==========

Net income per common and equivalent share:

    Primary                                                                           $     2.02        $     1.01        $     0.85
    Fully diluted                                                                     $     2.01        $     1.00        $     0.84

Common and equivalent shares used in computing per share amount:

    Primary                                                                              185,316           176,517           169,443
    Fully diluted                                                                        186,019           176,972           171,079

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

                                                                 39

<PAGE>


<TABLE>
Consolidated Balance Sheets
<CAPTION>
                                                                                                       Years Ended May 31,
                                                                                                 ----------------------------------
     (Dollars in thousands)
                                                                                                    1997                    1996
                                                                                                 -----------            -----------
<S>                                                                                              <C>                    <C>        
Assets

Current Assets:
    Cash and cash equivalents                                                                    $   351,237            $   216,759
    Temporary cash investments                                                                       538,706                282,578
    Trade receivables, less allowance for doubtful accounts
       ($37,259 and $26,921 in 1997 and 1996, respectively)                                          523,501                359,182
    Inventories                                                                                      228,754                241,018
    Deferred income taxes                                                                            108,360                 79,259
    Other                                                                                             80,725                 60,915
                                                                                                 -----------            -----------
Total current assets                                                                               1,831,283              1,239,711

Property and equipment - net                                                                         377,349                246,652
Deposits and other assets                                                                             57,643                 38,754
                                                                                                 -----------            -----------

Total                                                                                            $ 2,266,275            $ 1,525,117
                                                                                                 ===========            ===========

Liabilities and Shareholders' Equity

Current Liabilities:
    Accounts payable                                                                             $   148,846            $   120,211
    Accrued and other liabilities                                                                    279,263                211,620
    Income taxes payable                                                                             168,942                 82,690
                                                                                                 -----------            -----------
Total current liabilities                                                                            597,051                414,521

Long-term debt                                                                                       110,000                110,000
Other long-term obligations                                                                            5,391                  5,492
Deferred income taxes                                                                                 36,323                 16,299

Shareholders' Equity:
    Preferred stock, no par value, 3,000,000 shares authorized;
       none outstanding                                                                                 --                     --
    Common stock, $.01 par value, 400,000,000 shares authorized;
       shares outstanding: 1997--178,373,867;
       1996--168,799,586                                                                             784,685                597,452
    Unamortized restricted stock grants                                                               (5,165)                (4,487)
    Retained earnings                                                                                736,881                379,358
    Unrealized net gain on available-for-sale securities                                               2,320                  7,159
    Accumulated translation adjustments                                                               (1,211)                  (677)
                                                                                                 -----------            -----------
Total shareholders' equity                                                                         1,517,510                978,805
                                                                                                 -----------            -----------

Total                                                                                            $ 2,266,275            $ 1,525,117
                                                                                                 ===========            ===========

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

                                                                 40

<PAGE>


<TABLE>
Consolidated Statements of Shareholders' Equity
<CAPTION>
                                                                                        Unrealized Net
                                                                                        Gain (Loss) on
                                                Common Stock    Unamortized               Available- Accumulated
                                              ----------------  Restricted    Retained     For-Sale  Translation
(In thousands)                                Shares    Amount  Stock Grants  Earnings    Securities  Adjustments  Total
                                            -----------------------------------------------------------------------------
<S>                                          <C>       <C>        <C>         <C>          <C>       <C>        <C>     
Balances, June 1, 1994                       151,288   $340,943   $  (202)    $ 73,686     $    -    $  (305)   $  414,122

Common stock issued under stock plans
   and for business acquisitions               8,494     44,364    (2,128)                                          42,236
Repurchase of common stock                    (1,570)    (2,674)               (16,916)                            (19,590)
Tax benefit from employee stock
   transactions                                          45,794                                                     45,794
Amortization of restricted stock grants                               293                                              293
Stock options assumed in connection with
   acquisitions                                           6,508                                                      6,508
Adjustment to conform pooled entity-Sonix      2,416        844                 (2,079)                  (69)       (1,304)
Adjustment to conform fiscal year of
   pooled entity-Primary Access                  284        143                    780                                 923
Unrealized loss on available-for-
   sale securities                                                                            (22)                     (22)
Accumulated translation adjustments                                                                      205           205
Net income                                                                     144,559                             144,559
                                             -------   --------   --------    --------     ------    --------   ----------
Balances, May 31, 1995                       160,912    435,922    (2,037)     200,030        (22)      (169)      633,724

Common stock issued under stock plans          7,619     74,648    (3,502)                                          71,146
Repurchase of common stock                       (23)       (52)                  (923)                               (975)
Tax benefit from employee stock
   transactions                                          79,774                                                     79,774
Amortization of restricted stock grants                             1,052                                            1,052
Stock options assumed in connection with
   acquisitions                                           3,671                                                      3,671
Adjustment to conform fiscal year of
   pooled entity-Chipcom                         292      3,489                  2,397        151                    6,037
Unrealized gain on available-for-
   sale securities                                                                          7,030                    7,030
Accumulated translation adjustments                                                                     (508)         (508)
Net income                                                                     177,854                             177,854
                                             -------   --------   --------    --------     ------    --------   ----------
Balances, May 31, 1996                       168,800    597,452    (4,487)     379,358      7,159       (677)      978,805

Common stock issued under stock plans          6,282     71,102    (2,412)                                          68,690
Tax benefit from employee stock
   transactions                                          90,757                                                     90,757
Amortization of restricted stock grants                             1,734                                            1,734
Adjustment to conform pooled
   entity-OnStream                             3,292     25,374                (16,427)                              8,947
Unrealized loss on available-for-
   sale securities                                                                         (4,839)                  (4,839)
Accumulated translation adjustments                                                                     (534)         (534)
Net income                                                                     373,950                             373,950
                                             -------   --------   --------    --------     ------    --------   ----------
Balances, May 31, 1997                       178,374   $784,685   $(5,165)    $736,881     $2,320    $(1,211)   $1,517,510
                                             =======   ========   ========    ========     ======    ========   ==========

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

                                                                 41

<PAGE>


<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
                                                                                                    Years Ended May 31,
                                                                                          -----------------------------------------
(Dollars in thousands)
                                                                                            1997             1996           1995
                                                                                          ---------       ---------       ---------
<S>                                                                                       <C>             <C>             <C>      
Cash flows from operating activities:
    Net income                                                                            $ 373,950       $ 177,854       $ 144,559
    Adjustments to reconcile net income to cash
             provided by operating activities:
         Depreciation and amortization                                                      140,540          90,969          57,687
         Deferred income taxes                                                               (4,498)         (7,474)        (27,980)
         Purchased in-process technology                                                       --            52,353          68,696
         Adjustments to conform pooled entities                                               4,850          (3,048)          3,013
         Non-cash acquisition-related charges and other                                        --            44,320          (1,100)
         Changes in assets and liabilities net of effects of acquisitions:
             Trade receivables                                                             (162,960)       (124,753)        (87,348)
             Inventories                                                                      8,140         (71,852)        (81,738)
             Other current assets                                                           (29,741)        (21,088)        (13,667)
             Accounts payable                                                                28,010          11,636          48,754
             Accrued and other liabilities                                                   65,573          57,707          44,934
             Income taxes payable                                                           177,009         103,719          82,429
                                                                                          ---------       ---------       ---------

Net cash provided by operating activities                                                   600,873         310,343         238,239
                                                                                          ---------       ---------       ---------

Cash flows from investing activities:
    Purchase of property and equipment                                                     (247,803)       (179,982)       (100,706)
    Purchase of temporary cash investments                                                 (479,249)       (301,960)       (246,313)
    Proceeds from temporary cash investments                                                221,228         231,904         140,377
    Businesses acquired in purchase transactions                                               --           (60,246)        (70,174)
    Other--net                                                                              (26,654)         (9,874)         (1,378)
                                                                                          ---------       ---------       ---------

Net cash used for investing activities                                                     (532,478)       (320,158)       (278,194)
                                                                                          ---------       ---------       ---------

Cash flows from financing activities:
    Common stock issued under stock plans                                                    68,690          71,146          38,556
    Repayments of notes payable and capital lease obligations                                (1,740)         (2,997)         (7,263)
    Repurchase of common stock                                                                 --              (975)        (19,590)
    Net proceeds from issuance of debt                                                         --              --           107,330
    Other--net                                                                                 (867)           (508)            205
                                                                                          ---------       ---------       ---------

Net cash provided by financing activities                                                    66,083          66,666         119,238
                                                                                          ---------       ---------       ---------

Increase in cash and cash equivalents                                                       134,478          56,851          79,283

Cash and cash equivalents at beginning of year                                              216,759         159,908          80,625
                                                                                          ---------       ---------       ---------

Cash and cash equivalents at end of year                                                  $ 351,237       $ 216,759       $ 159,908
                                                                                          =========       =========       =========

Other cash flow information:
    Interest paid                                                                         $  11,830       $  12,961       $   5,903
    Income taxes paid                                                                        46,523          34,921          33,272
    Non-cash investing and financing activities--
         Tax benefit from employee stock option transactions                                 90,757          79,774          45,794
         Fair value of stock issued and options assumed
             in business combinations                                                          --             3,671          10,188

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

                                                                 42

<PAGE>


Notes to Consolidated Financial Statements


Note 1:  Description of Business

Description  of business.  3Com  Corporation,  founded in 1979,  is committed to
providing  customers global access to critical  information  through  high-speed
networks designed to serve large enterprises,  Internet service providers, small
businesses  and homes.  3Com offers a broad range of networking  products  which
include routers,  switches,  hubs,  remote access servers,  adapters and network
management  software for Ethernet,  Token Ring,  FDDI, ATM and other  high-speed
networks.  Headquartered in Santa Clara, California, 3Com has worldwide research
and development, manufacturing, marketing, sales and support capabilities.

On June 12,  1997,  the Company  merged  with U.S.  Robotics  Corporation  (U.S.
Robotics). U.S. Robotics is one of the world's leading suppliers of products and
systems that provide access to information. U.S. Robotics designs, manufactures,
markets and supports remote access servers,  enterprise  communications  systems
and desktop and mobile client  products,  including  modems,  LAN adapter cards,
hand-held computing devices and telephony  products,  that connect computers and
other equipment over analog,  digital,  wireless and switched cellular networks,
enabling users to gain access to, manage,  and share data, fax, voice, sound and
video  information.  The  accompanying  Consolidated  Financial  Statements  and
related Notes  thereto have not been  restated to include the operating  results
and financial position of U.S. Robotics. See Note 17.


Note 2:  Significant Accounting Policies

Use of estimates in the preparation of financial statements.  The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management 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 financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

Principles of consolidation.  The consolidated  financial statements include the
accounts of 3Com Corporation and its wholly-owned  subsidiaries ("the Company").
All  significant  intercompany  balances  and  transactions  are  eliminated  in
consolidation.

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

Temporary  cash  investments  consist of  short-term  investments  acquired with
maturities  exceeding three months.  While the Company'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," the Company has classified all securities 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 reported as a separate
component of shareholders' equity, net of applicable taxes.

Concentration of credit risk and major customers.  Financial  instruments  which
potentially  subject  the  Company  to  concentrations  of credit  risk  consist
principally of temporary cash  investments  and trade  receivables.  The Company
invests in instruments  with an investment  credit rating of AA and better.  The
Company also places its  investments for  safekeeping  with  high-credit-quality
financial institutions, and by policy, limits the amount of credit exposure from
any one financial institution.

                                       43

<PAGE>


Due to consolidation in the distribution and reseller channels and the Company's
increased  volume of sales into these  channels,  the Company has experienced an
increased  concentration  of  credit  risk,  and,  as  a  result,  may  maintain
individually  significant receivable balances with such distributors.  While the
Company continuously  monitors and manages this risk, financial  difficulties on
the part of one or more of the Company's  resellers may have a material  adverse
effect on the Company.  As of and for the year ended May 31,  1997,  the Company
had one customer which accounted for 13 percent of total sales and 15 percent of
trade  receivables.  The Company did not have any customers  which  individually
accounted  for more than 10  percent  of total  sales or trade  receivables  for
fiscal years 1996 and 1995.

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

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.

In March 1995, the Financial  Accounting Standards Board (FASB) issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be  Disposed  Of."  The  Company  adopted  this  statement  effective  as of the
beginning  of fiscal 1997.  The  adoption did not have a material  effect on the
Company's consolidated financial statements.

Depreciation  and  amortization  are computed  over the shorter of the estimated
useful lives,  lease terms,  or terms of license  agreements  of the  respective
assets,  on a  straight-line  basis - generally 2-7 years,  except for buildings
which are depreciated over 25 years.

Purchased  technology  is included in other  assets and is  amortized  over four
years.

Revenue  recognition.  The Company  recognizes revenue when the product has been
shipped,  no  material  vendor  or  post-contract   support  obligations  remain
outstanding,  except as provided by a separate service agreement, and collection
of the resulting  receivable is probable.  The Company  accrues  related product
return reserves,  warranty and royalty expenses at the time of sale. Service and
subscription  revenue is recognized  over the contract term. The Company extends
limited product return and price protection  rights to certain  distributors and
resellers.  Such rights are generally  limited to a certain  percentage of sales
over a three to six-month  period.  Historically,  actual  amounts  recorded for
product  returns  and  price  protection  have  not  varied  significantly  from
estimated  amounts.  The Company  warrants  products for periods ranging from 90
days to life, depending upon the product.

Foreign currency  translations.  Substantially all of the Company's revenues 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 income are translated at the average exchange
rates  during  the  year.  Gains  or  losses  resulting  from  foreign  currency
translation are accumulated as a separate component of shareholders' equity.

For foreign operations with the U.S. dollar as the functional  currency,  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 other income
- net in the statements of income and were not  significant for any of the years
presented.

Stock-based compensation. In October 1995, the FASB issued SFAS 123, "Accounting
for  Stock-Based  Compensation."  As permitted under the provisions of SFAS 123,
the Company has elected to follow  Accounting  Principles  Board  Opinion No. 25
(APB 25) and related Interpretations in accounting for its stock-based awards to
employees.  Under APB 25,  the  Company  generally  recognizes  no  compensation
expense with respect to such awards. See Note 9.

                                       44

<PAGE>

Net income  per  common and  equivalent  share is  computed  using the  weighted
average number of common and common equivalent shares outstanding  including the
dilutive effects of stock options,  using the treasury stock method.  The effect
of the  assumed  conversion  of the 10.25%  convertible  subordinated  notes was
antidilutive for the periods presented.

Effects of recent  accounting  pronouncement.  In February 1997, the FASB issued
SFAS 128,  "Earnings  per Share."  This  Statement  establishes  and  simplifies
standards  for  computing and  presenting  earnings per share.  SFAS 128 will be
effective  for  the  Company's  third  quarter  of  fiscal  1998,  and  requires
restatement  of all  previously  reported  earnings  per  share  data  that  are
presented.  Early adoption of this Statement is not permitted. SFAS 128 replaces
primary and fully diluted earnings per share with basic and diluted earnings per
share.  The  Company  expects  that basic  earnings  per share  amounts  will be
accretive  compared to the Company's  primary  earnings per share  amounts,  and
diluted  earnings per share  amounts will not be materially  different  from the
Company's fully diluted earnings per share amounts.


Note 3:  Business Combinations

Unless   otherwise   stated,   for   acquisitions   accounted   for   under  the
pooling-of-interests method, all financial data of the Company has been restated
to  include  the  historical  financial  data of these  acquired  companies.  No
significant  adjustments were required to conform the accounting policies of the
acquired companies.  For acquisitions accounted for as purchases,  the Company's
consolidated results 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
acquisitions have been allocated to the assets and liabilities acquired.

For the Year Ended May 31,  1997.  On October 31,  1996,  the  Company  acquired
OnStream Networks,  Inc. (OnStream) by issuing  approximately 3.3 million shares
of its common stock in exchange for all the outstanding  stock of OnStream.  The
Company also assumed and  exchanged all options to purchase  OnStream  stock for
options to purchase  approximately 400,000 shares of the Company's common stock.
The acquisition was accounted for as a  pooling-of-interests.  Financial data of
the Company has been  restated for the quarter  ended August 31, 1996 to include
the historical financial  information of OnStream for that period, in accordance
with generally  accepted  accounting  principles and pursuant to Regulation S-X.
Such restatement  increased the Company's sales and decreased net income by $3.2
million and $1.5 million,  respectively,  for the quarter ended August 31, 1996.
Financial  information  as of May 31, 1997 and for the year then ended  reflects
the Company's and OnStream's  operations  for those  periods.  As the historical
operations  of  OnStream  were not  significant  to any  period  presented,  the
Company's  financial  statements  for periods prior to fiscal 1997 have not been
restated. The financial effect of the results of operations of OnStream prior to
fiscal 1997 has been accounted for as a $16.4 million  charge  against  retained
earnings in fiscal 1997. As a result of the  acquisition,  in the second quarter
of fiscal  1997 the  Company  recorded  acquisition-related  charges,  primarily
transaction   costs,   totaling  $6.6  million.   OnStream  was  a  provider  of
Asynchronous  Transfer  Mode (ATM) and  broadband  wide area  network  (WAN) and
access products.

For the Year Ended May 31, 1996. On June 9, 1995, the Company  acquired  Primary
Access Corporation (Primary Access) by issuing  approximately 4.6 million shares
of its common  stock for all of the  outstanding  stock of Primary  Access.  The
Company also assumed and exchanged all options and warrants to purchase  Primary
Access  stock for options and  warrants  to purchase  approximately  1.0 million
shares of the Company's  common stock.  The  acquisition  was accounted for as a
pooling-of-interests. Primary Access maintained its financial records on a 52-53
week fiscal year ending  nearest to September  30. The results of  operations of
Primary Access for the eight-month  period ended May 31, 1994 reflected sales of
$14.6 million and net income of $780,000, which has been reported as an

                                       45

<PAGE>

increase  to  the  Company's  fiscal  1995  retained  earnings.  Primary  Access
developed, manufactured and marketed network access systems.

On October 13,  1995,  the Company  acquired  Chipcom  Corporation  (Chipcom) by
issuing  approximately  18.3 million  shares of its common stock in exchange for
all the  outstanding  common  stock of  Chipcom.  The Company  also  assumed and
exchanged all options to purchase  Chipcom  common stock for options to purchase
approximately  2.4 million shares of the Company's common stock. The acquisition
was accounted for as a  pooling-of-interests.  Chipcom  maintained its financial
records on a 52-53 week fiscal year ending  nearest to December 31. The restated
consolidated statements of income and cash flows for the year ended May 31, 1995
includes the statement of operation and cash flows of Chipcom for the year ended
December  31,  1994.  The results of  operations  of Chipcom for the  five-month
period ended May 31, 1995  reflected  sales of $118.1  million and net income of
$2.4 million,  and has been reported as an increase to the Company's fiscal 1996
retained earnings. As a result of the acquisition,  during the second quarter of
fiscal 1996, the Company recorded  acquisition-related  charges of approximately
$69.0  million.  See Note 12. Chipcom  designed,  manufactured  and  distributed
computer networking multifunction platforms.

On March 12,  1996,  the Company  acquired  substantially  all of the assets and
assumed substantially all of the liabilities of AXON Networks,  Inc. (AXON). The
aggregate  purchase  price  of $65.3  million  consisted  of  cash,  net of cash
acquired,  of approximately  $60.2 million,  which was paid using funds from the
Company's  working  capital,  assumption  of stock  options with a fair value of
approximately $3.7 million,  and $1.4 million of costs directly  attributable to
the  completion  of the  acquisition.  Approximately  $52.4 million of the total
purchase price  represented the value of in-process  technology that had not yet
reached  technological  feasibility  and had no  alternative  future use and was
charged to the Company's  operations in the fourth  quarter of fiscal 1996.  The
acquisition was accounted for as a purchase.  AXON developed,  manufactured  and
marketed remote network management and data network traffic management products.

For the Year Ended May 31,  1995.  On October 18,  1994,  the  Company  acquired
substantially all of the assets and assumed substantially all of the liabilities
of NiceCom,  Ltd. (NiceCom),  and assumed all outstanding NiceCom stock options.
The purchase price  consisted of cash, net of cash  acquired,  of  approximately
$48.0 million which was paid using funds from the Company's  working capital and
the  issuance of  approximately  186,000  shares of common stock of the Company,
with a fair value of $3.7  million.  In  addition,  the  Company  assumed  stock
options with a fair value of $5.7 million and incurred direct  transaction costs
of approximately  $2.0 million.  NiceCom  developed  asynchronous  transfer mode
(ATM) switches and an Ethernet-to-ATM  solution to provide a migration path from
existing Ethernet LANs to ATM networking.

On October 14,  1994,  the Company  acquired all of the  outstanding  shares and
assumed all outstanding stock options of a company engaged in the development of
network adapter  technology.  The purchase price consisted of approximately $2.3
million  in cash  plus the  assumption  of stock  options  with a fair  value of
approximately  $400,000.  The  purchase  price  was paid  using  funds  from the
Company's working capital.

The  acquisitions   were  accounted  for  as  purchases.   Acquired  assets  and
liabilities  were  recorded  at  their  estimated  fair  value  at the  date  of
acquisition. The aggregate purchase price of $61.6 million, plus $2.0 million of
costs  directly  attributable  to the completion of the  acquisitions,  has been
allocated to the assets and liabilities acquired. Approximately $60.8 million of
the total purchase price represented the value of in-process technology that had
not yet reached technological  feasibility and had no alternative future use and
was charged to the Company's operations in the second quarter of fiscal 1995.

                                       46
<PAGE>

On May 1, 1995, the Company  acquired Sonix  Communications  Limited  (Sonix) by
issuing  approximately  2.4  million  shares  of  common  stock  for  all of the
outstanding   stock  of  Sonix.   The   acquisition   was  accounted  for  as  a
pooling-of-interests. All financial data of the Company for fiscal 1995 has been
restated to include the operating results of Sonix. As the historical operations
of Sonix were not  significant to any year  presented,  the Company's  financial
statements for years prior to fiscal 1995 have not been restated.  The financial
effect of the  results  of  operations  of Sonix  prior to fiscal  1995 has been
accounted for as a $2.1 million charge against retained earnings in fiscal 1995.
Sonix developed,  manufactured  and marketed a range of networking  connectivity
solutions using ISDN technology.

In  the  Company's  first  quarter  of  fiscal  1995,   Chipcom  acquired  Artel
Communications  Corporation (Artel) by issuing  approximately 1.2 million shares
of common  stock in exchange for all of the  outstanding  common stock of Artel.
The  merger  was  accounted  for  as  a  pooling-of-interests.  Artel  designed,
manufactured  and  marketed  high-performance   communication  systems  for  the
internetworking and video distribution markets.

In the  Company's  third  quarter of fiscal  1995,  Chipcom  acquired all of the
outstanding  common  stock  of  DSI  ExpressNetworks,  Inc.  (DSI).  Cash  paid,
including  transaction costs, was approximately  $4.4 million.  Chipcom acquired
assets  with a fair value of $19.5  million  and  assumed  liabilities  of $15.2
million.  The  acquisition was accounted for as a purchase.  Approximately  $7.9
million  of the  total  purchase  price  represented  the  value  of  in-process
technology  that  had  not  yet  reached  technological  feasibility  and had no
alternative  future use and was charged to the  Company's  operations  in fiscal
1995.  DSI was  engaged  in the  development  of  intelligent  hubs and  related
internetworking products.


Note 4:  Investments

Available-for-sale securities consist of:

                                                    May 31, 1997
                                     -------------------------------------------
                                                  Gross      Gross
                                     Amortized  Unrealized  Unrealized Estimated
(Dollars in thousands)                 Cost       Gains      Losses   Fair Value
                                     -------------------------------------------

State and municipal securities        $361,052   $    498   $   (288)   $361,262
Corporate debt securities              130,519         83        (99)    130,503
U.S. Government and agency
  securities                            47,024         12        (95)     46,941
                                      --------   --------   --------    --------
Temporary cash investments             538,595        593       (482)    538,706

Corporate equity securities              9,330      3,754       --        13,084
                                      --------   --------   --------    --------

Total                                 $547,925   $  4,347   $   (482)   $551,790
                                      ========   ========   ========    ========

                                       47
<PAGE>

                                                    May 31, 1996
                                    -------------------------------------------
                                                 Gross      Gross
                                    Amortized  Unrealized  Unrealized Estimated
(Dollars in thousands)                Cost       Gains      Losses   Fair Value
                                    -------------------------------------------
State and municipal securities      $152,998   $    135   $   (296)   $152,837
Corporate debt securities             79,299         11       (107)     79,203
U.S. Government and agency
  securities                          50,910         11       (383)     50,538
                                    --------   --------   --------    --------
Temporary cash investments           283,207        157       (786)    282,578

Corporate equity securities            3,010     12,609       --        15,619
                                    --------   --------   --------    --------

Total                               $286,217   $ 12,766   $   (786)   $298,197
                                    ========   ========   ========    ========

Corporate equity securities are included in other current assets

Realized gains or losses on sales of available-for-sale securities for the years
ended May 31, 1997 and 1996 were not significant. The cost of securities sold is
based on the specific identification method.

The contractual maturities of available-for-sale debt securities at May 31, 1997
are as follows:

                                    Amortized     Estimated  
(Dollars in thousands)                Cost       Fair Value
                                    -----------------------
Within one year                     $317,983      $317,963
Over one year to two years           220,612       220,743
                                    --------      --------
                                                 
Temporary cash investments          $538,595      $538,706
                                    ========      ========
                                                 
                                              
Note 5:  Inventories

Inventories at May 31 consist of:

(Dollars in thousands)                1997          1996
                                    --------      --------
                                                 
Finished goods                      $148,316      $132,363
Work-in-process                       17,652        22,310
Raw materials                         62,786        86,345
                                    --------      --------
                                                 
Total                               $228,754      $241,018
                                    ========      ========
                                                 
                                       48        
<PAGE>                                         

Note 6:  Property and Equipment

Property and equipment at May 31 consists of:

(Dollars in thousands)                         1997             1996
                                          -----------       -----------


Land                                      $    36,495       $    15,257
Buildings                                      43,471            35,226
Machinery and equipment                       455,460           325,262
Furniture and fixtures                         45,522            35,475
Leasehold improvements                         47,297            30,218
Construction in progress                       66,909            29,514
                                          -----------       -----------

Total                                         695,154           470,952
Accumulated depreciation and
  amortization                               (317,805)         (224,300)
                                          -----------       -----------

Property and equipment - net              $   377,349       $   246,652
                                          ===========       ===========


Note 7:  Accrued and Other Liabilities

Accrued and other liabilities at May 31 consist of:

(Dollars in thousands)                   1997       1996
                                       --------   --------

Accrued payroll and related expenses   $ 63,512   $ 49,761
Accrued product warranty                 44,987     30,574
Accrued distributor rebates              29,164     14,976
Deferred revenue                         28,950     19,448
Other accrued liabilities               112,650     96,861
                                       --------   --------

Accrued and other liabilities          $279,263   $211,620
                                       ========   ========


Note 8: Borrowing Arrangements and Commitments

During the third quarter of fiscal 1997, the Company  signed an operating  lease
which  combines and  replaces  three prior  operating  lease  agreements  on the
Company's  existing  headquarters  site  and on land  adjacent  to its  existing
headquarters site. The combined lease includes approximately 870,000 square feet
of office  and  manufacturing  space and two  parking  garages,  and  expires in
November 2001 with an option to extend the lease term for two successive periods
of five years each. The Company has an option to purchase the combined  property
for  $152.6  million,  or at the end of the  lease  arrange  for the sale of the
property to a third party with the Company  retaining an obligation to the owner
for the difference between the sale price and $152.6 million, subject to certain
provisions of the lease.  Lease payments on the new lease commenced in the third
quarter  of fiscal  1997 and are not  materially  different  from the  aggregate
payments under the previously separate leases.

During the second  quarter of fiscal  1997,  a  wholly-owned  subsidiary  of the
Company signed a lease for seven acres of land in Changi, Republic of Singapore.
The  Company  began   construction   of  325,000   square  feet  of  office  and
manufacturing  space in  December  1996,  and plans to occupy the  manufacturing
facility in the third quarter of fiscal 1998.

                                       49
<PAGE>

During the second quarter of fiscal 1997, the Company purchased a 14 acre parcel
of land and signed a two-year lease for an adjacent 58 acre parcel of land, both
of which are near its existing headquarters in Santa Clara. The lease expires in
November 1998 with an option to extend the lease term for two successive periods
of five years each. The Company has an option to purchase the property for $49.5
million,  or at the end of the lease  arrange for the sale of the  property to a
third  party  with the  Company  retaining  an  obligation  to the owner for the
difference  between  the sale  price  and  $49.5  million,  subject  to  certain
provisions of the lease.

The three  aforementioned  leases  require  the  Company to  maintain  specified
financial  covenants,  all of which the Company was in compliance with as of May
31, 1997. Future minimum lease payments are included in the table below.

The Company leases its facilities and certain  equipment under operating leases.
Leases  expire at various  dates from 1997 to 2013 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.

Future operating lease commitments are as follows:

Fiscal year                                                      (in thousands)
-------------------------------------------------------------------------------
1998                                                              $    39,321
1999                                                                   29,782
2000                                                                   22,903
2001                                                                   16,354
2002                                                                    8,955
Thereafter                                                              9,976
                                                                  -----------
Total                                                             $   127,291
                                                                  ===========

Rent expense was $36.4  million,  $28.2  million,  and $19.9  million for fiscal
years ended May 31, 1997, 1996 and 1995, respectively.

As of May 31,  1997,  the  Company  had  approximately  $95  million  in capital
expenditure   commitments,   primarily  associated  with  the  construction  and
expansion of office and manufacturing space in the U.K., Singapore, and Ireland.

The Company has a $100 million  revolving bank credit agreement which expires on
December 20, 1999.  Under the  agreement,  the Company may select among  various
interest rate options,  including borrowing at the bank's prime rate. The credit
agreement  requires that the Company  maintain  specified  financial  ratios and
minimum net worth.  Payment of cash  dividends  are  permitted  under the credit
agreement,  subject to  certain  limitations  based on net income  levels of the
Company.  The  Company  has not paid and  does not  anticipate  it will pay cash
dividends on its common  stock.  As of May 31, 1997,  there were no  outstanding
borrowings under the credit agreement and the Company was in compliance with all
required covenants.

In November  1994,  the Company  completed a private  placement  of $110 million
aggregate principal amount of convertible  subordinated notes under Rule 144A of
the  Securities  Act of 1933.  The notes  mature in 2001.  Interest  is  payable
semi-annually  at 10.25% per annum.  The notes are  convertible at the option of
the note holders into the Company's common stock at an initial  conversion price
of $34.563 per share. Beginning in November 1997, the notes become redeemable at
the option of the  Company at an initial  redemption  price of  102.929%  of the
principal  amount.  The Company has reserved 3.2 million  shares of common stock
for the conversion of these notes.

                                       50
<PAGE>

Note 9:  Common Stock

On September 26, 1996, the Company's Board of Directors approved an amendment to
the Company's  articles of  incorporation  establishing  a par value of $.01 per
share for the Company's  common stock. On June 11, 1997, the shareholders of the
Company approved a proposal to change the Company's state of incorporation  from
California to Delaware.  The reincorporation  was effected  immediately prior to
the  consummation  of the merger with U.S.  Robotics  and,  among other  things,
resulted in an increase in the number of  authorized  shares of its common stock
from 400  million  to 990  million,  and  preferred  stock  from 3 million to 10
million.

Shareholder  Rights Plan. In September  1989,  the Company's  Board of Directors
approved an amendment  and  restatement  of the stock  purchase  rights plan and
declared a dividend  distribution  of one common stock  purchase  right for each
outstanding share of its common stock. The Company's Board of Directors approved
an amendment and  restatement  of the rights plan in December  1994.  The rights
become  exercisable based on certain limited  conditions related to acquisitions
of stock,  tender offers and certain  business  combination  transactions of the
Company.  In the event one of the limited  conditions is  triggered,  each right
entitles the  registered  holder to purchase for $250 a number of shares of 3Com
common stock (or any acquiring  company)  with a fair market value of $500.  The
rights are  redeemable at the Company's  option for $.01 per right and expire on
December 13, 2004.

Stock Option Plans. The Company 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 over a two-
or four-year period, and expire ten years after the grant date.

A summary of option transactions under the plans follows:

(Shares in thousands)           Number       Weighted average      Range of
                               of shares      exercise price    exercise prices
                               ---------      --------------    ---------------

Outstanding, June 1, 1994         27,566                         $0.22-$51.29
Granted and assumed                8,164                          0.02- 46.93
Exercised                         (6,932)                         0.22- 33.33
Canceled                          (1,271)                         0.37- 51.29
                               ---------                         ------------
Outstanding, May 31, 1995         27,527                          0.02- 46.93

Granted and assumed                6,912          $39.39          4.65- 51.63
Exercised                         (6,661)           8.43          0.02- 46.13
Canceled                          (1,489)          20.12          0.02- 51.00
                               ---------        --------         ------------
Outstanding, May 31, 1996         26,289           16.65          0.02- 51.63

Granted and assumed                8,220           50.83          1.72- 80.13
Exercised                         (5,459)           8.50          0.02- 62.88
Canceled                          (1,012)          38.82          0.02- 80.13
                               ---------        --------         ------------
Outstanding, May 31, 1997         28,038          $26.69         $0.02-$80.13
                               =========        ========         ============

As of May 31, 1997, there were 4.8 million shares available for future grant.

                                       51
<PAGE>
<TABLE>
<CAPTION>

                                  Outstanding options as of May 31, 1997                     Exercisable at May 31, 1997
                    --------------------------------------------------------------     ---------------------------------
Range of                Number         Weighted average        Weighted average           Number        Weighted average
exercise prices:       of shares        exercise price         contractual life          of shares       exercise price
                       ---------        --------------         ----------------          ---------       --------------
                    (in thousands)                                (in years)          (in thousands)

<S>                     <C>                <C>                        <C>                    <C>             <C>    
$ 0.02-$13.21           11,101             $ 6.05                    5.4                    9,028            $ 5.42
$13.28-$48.25           12,030             $32.28                    8.1                    4,323            $28.22
$48.38-$80.13            4,907             $59.68                    9.2                      757            $57.67
                        ------             ------                    ---                   ------            ------
Total                   28,038             $26.69                    7.2                   14,108            $15.21
                        ======             ======                    ===                   ======            ======
                                                            
</TABLE>

There were 12.8 million options  exercisable as of May 31, 1996, with a weighted
average exercise price of $8.43 per share.

In  connection  with the fiscal 1997 business  combination  with  OnStream,  the
Company assumed all outstanding options to purchase common stock of OnStream and
exchanged  them for  options  to  acquire  approximately  400,000  shares of the
Company's common stock at exercise prices of $0.43 to $42.79 per share. See Note
3.

Employee  Stock  Purchase Plan. The Company 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.

Restricted  Stock Plan.  The Company 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.

Common Stock  Reserved for Issuance.  As of May 31, 1997, the Company had common
stock reserved for issuance as follows:

         (In thousands)
         Shareholder Rights Plan                              178,374
         Stock Option Plans                                    32,805
         Employee Stock Purchase Plan                           5,283
         Convertible subordinated notes                         3,183
         Restricted Stock Plan                                    633
                                                              -------
         Total shares reserved for issuance                   220,278
                                                              =======

Stock  Repurchase  Program.  In the second  quarter of fiscal 1997, the Board of
Directors voted to rescind the Company's  previously  announced share repurchase
program.  This  action  was  taken by the  Board as a  result  of  uncertainties
regarding  the  Securities  and Exchange  Commission's  interpretation  of Staff
Accounting Bulletin No. 96 (SAB 96). Specifically, SAB 96 raises the possibility
that  under  certain   circumstances,   companies  which  have  announced  share
repurchase   programs   will  not   have   the   flexibility   to   employ   the
pooling-of-interests  accounting method when making acquisitions.  The Company's
previously  announced  share  repurchase  program was authorized by the Board of
Directors in March of 1990.  The Company did not repurchase any shares of common
stock during fiscal 1997.

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

                                       52
<PAGE>

Pro forma information regarding net income and earnings per share is required by
SFAS 123.  This  information  is required to be determined as if the Company 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 1997 and
1996  reported  below  has  been  estimated  at the  date  of  grant  using  the
Black-Scholes option pricing model with the following assumptions:

                               Employee               Employee Stock
                           Stock Option Plans         Purchase Plan
                          --------------------       ------------------
                            1997       1996          1997         1996
                          --------------------       ------------------
Risk-free interest rate    6.1%           5.4%        5.4%         5.4%
Volatility                54.0%          54.0%       54.0%        54.0%
Dividend yield             0.0%           0.0%        0.0%         0.0%

The expected lives of options under the Employee Stock Option and Employee Stock
Purchase  Plans are  estimated  at one year  after vest  date,  and six  months,
respectively.

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.  Because
the Company'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.  The  weighted  average  estimated  fair value of employee
stock  options  granted  during fiscal years 1997 and 1996 was $23.18 and $18.02
per share,  respectively.  The weighted  average  estimated fair value of shares
granted under the Employee Stock Purchase Plan during fiscal years 1997 and 1996
was $12.46 and $12.86, respectively.

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.  The
Company's pro forma information follows:


                                                        1997         1996
                                                     ---------     ---------
Net income:                As reported                $373,950      $177,854
                           Pro forma                   312,009       152,398

Earnings per share:        As reported                   $2.01         $1.00
                           Pro forma                      1.68           .86

The effects on pro forma  disclosures  of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years.  Because
SFAS 123 is applicable only to options  granted  subsequent to May 31, 1995, the
full effect on pro forma net income and earnings per share will not be reflected
until fiscal 1999.


Note 10:  Foreign Exchange Contracts

Intercompany  balances  and balance  sheet  exposures.  The Company does not use
derivative  financial  instruments  for  speculative  or trading  purposes.  The
Company enters into foreign exchange forward  contracts 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 other  income - net,  which  offset  foreign  exchange  gains or losses  from
revaluation of foreign currency-denominated balance sheet items and intercompany
balances.  The contracts require the Company to 

                                       53
<PAGE>

exchange foreign currencies for U.S. dollars or vice versa, and generally mature
in one month,  unless  otherwise  noted below.  At May 31, 1997, the Company had
outstanding  foreign  exchange  forward  contracts of $18.9  million  which have
remaining maturities of one month. At May 31, 1997, the Company did not have any
outstanding  foreign exchange forward contracts with maturities greater than one
month.

At May 31, 1996, the Company had outstanding  foreign exchange forward contracts
of $24.1  million,  excluding  the  foreign  exchange  contracts  related to the
purchase of manufacturing equipment and the refurbishment of a U.K. facility. At
May  31,  1996,  the  outstanding  foreign  exchange  contracts  related  to the
manufacturing equipment and refurbishment of the U.K. facility were $5.6 million
and $10.7 million, respectively. During fiscal 1997, the manufacturing equipment
was purchased and the refurbishment of the U.K. facility was completed.


Note 11: Financial Instruments Fair Value Disclosure

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, which is not the Company's intent.

Because 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 of the Company.

                                          May 31, 1997          May 31, 1996
                                     ---------------------  --------------------
                                     Carrying   Estimated   Carrying  Estimated
(Dollars in thousands)                Amount    Fair Value   Amount   Fair Value
                                     -------------------------------------------
Assets:
  Cash and cash equivalents           $351,237   $351,237   $216,759   $216,759
  Temporary cash investments           538,706    538,706    282,578    282,578
  Corporate equity securities           13,084     13,084     15,619     15,619

Liabilities:
  Convertible subordinated notes      $110,000   $161,425   $110,000   $182,463

Commitments:
  Foreign exchange contracts          $ 18,856   $ 18,864   $ 29,752   $ 29,711

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

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

Temporary   cash   investments,   corporate   equity   securities,   convertible
subordinated notes, and foreign exchange contracts.  The fair value of temporary
cash investments,  corporate equity securities,  convertible subordinated notes,
and foreign exchange contracts are based on quoted market prices.

                                       54
<PAGE>

Note 12:  Acquisition-related Charges and Other

Acquisition-related  charges for the year ended May 31, 1997 consisted of direct
transaction  costs of $6.6  million,  primarily  investment  banking  and  other
professional fees, related to the acquisition of OnStream. See Note 3.

Acquisition-related  charges  for the  year  ended  May 31,  1996  consisted  of
acquisition  costs of $69.0 million related to the  acquisition of Chipcom.  See
Note 3. The $69.0  million  charge  included  $60.8 million of exit expenses and
$8.2 million of direct transaction  costs,  primarily for investment banking and
other professional fees. Exit expenses included  approximately  $37.8 million of
costs of  eliminating  duplicate  and  discontinued  products,  $5.1  million of
severance and related costs for approximately 80 employees primarily  associated
with duplicate or  discontinued  product lines,  field sales and  administrative
functions,  $4.3 million of costs of eliminating  duplicate facilities and $13.6
million   of   other    acquisition-related    costs.   In   addition   to   the
acquisition-related  charges in fiscal 1996 was a charge of  approximately  $1.0
million for a litigation settlement.

Acquisition-related  charges for the year ended May 31, 1995 consisted of direct
transaction  costs of $11.2 million related to 3Com's  acquisitions of Sonix and
Primary Access,  and Chipcom's  acquisition of Artel. See Note 3. Offsetting the
acquisition-related  charges  in fiscal  1995 was a $1.1  million  reduction  in
accrued costs  associated  with the fiscal 1991  restructuring  based on revised
estimates of future costs.


Note 13:  Other Income - Net

Other income - net consists of:                   Years ended May 31,
                                         ---------------------------------------
(Dollars in thousands)                     1997           1996           1995
                                         --------       --------       --------

Interest income                          $ 34,447       $ 21,636       $ 12,338
Interest expense                          (11,830)       (12,611)        (7,144)
Other                                      (1,728)        (2,237)          (299)
                                         --------       --------       --------

Total                                    $ 20,889       $  6,788       $  4,895
                                         ========       ========       ========

                                       55
<PAGE>

Note 14:  Income Taxes

The provision for income taxes consists of:         Years ended May 31,
                                            -----------------------------------
(Dollars in thousands)                         1997         1996         1995
                                            ---------    ---------    ---------
Current:                                   
  Federal                                   $ 126,610    $  67,645    $  69,113
  State                                        39,648       22,957       22,112
  Foreign                                      49,520       46,163       23,380
                                            ---------    ---------    ---------
                                           
Total current                                 215,778      136,765      114,605
                                            ---------    ---------    ---------
                                           
Deferred:                                  
  Federal                                      (4,254)      (3,195)     (22,333)
  State                                        (7,166)      (3,449)      (7,790)
  Foreign                                       5,946          494          310
                                            ---------    ---------    ---------
                                           
Total deferred                                 (5,474)      (6,150)     (29,813)
                                            ---------    ---------    ---------
                                           
Total                                       $ 210,304    $ 130,615    $  84,792
                                            =========    =========    =========
                                           
                                       
The components of the net deferred tax assets at May 31 consist of:

(Dollars in thousands)                                   1997            1996
                                                       ---------      ---------

Deferred tax assets:
  Reserves not recognized for tax purposes             $  99,526      $  65,537
  Net operating loss carryforwards                        23,691         24,229
  Amortization and depreciation                           17,918         20,418
  Other                                                   18,016         17,494
  Valuation allowance                                    (26,785)       (27,491)
                                                       ---------      ---------

Total deferred tax assets                                132,366        100,187
                                                       ---------      ---------

Deferred tax liabilities:
  Unremitted earnings                                    (57,863)       (32,406)
  Net unrealized gain on available-for-sale
    securities                                            (1,546)        (4,821)
  Other                                                     (920)          --
                                                       ---------      ---------

Net deferred tax assets                                $  72,037      $  62,960
                                                       =========      =========

The valuation  allowance  relates primarily to the remaining portion of acquired
net operating losses as the Company  believes that, due to various  limitations,
it is more  likely  than not  that  such  benefits  will  not be  realized.  The
allowance  also relates to certain  expenses,  the  realization  of which is not
assured on future state income tax returns.  The valuation  allowance  decreased
$706,000 and $491,000 in fiscal 1997 and 1996, respectively, and increased $15.8
million in fiscal 1995.

                                       56
<PAGE>

The provision for income taxes differs from the amount  computed by applying the
federal statutory income tax rate to income before taxes as follows:

                                                          Years ended May 31,
                                                        ----------------------
                                                        1997     1996     1995
                                                        ----     ----     ----
Tax computed at federal statutory rate                  35.0%    35.0%    35.0%
State income taxes, net of federal effect                3.6      4.1      4.1
Foreign sales corporation                               (0.4)    (0.7)    (1.1)
Tax exempt investment income                            (0.6)    (0.6)    (0.9)
Provision for combined foreign and U.S. 
   taxes on certain foreign income at
   rates less than U.S. rates                           (2.4)    (4.6)    (3.5)
Research tax credits                                    (0.5)    (0.1)    (1.5)
Non-deductible purchased in-process technology
   and acquisition-related charges                       0.6      7.6      3.1
Other                                                    0.7      1.6      1.8
                                                        ----     ----     ----

Total                                                   36.0%    42.3%    37.0%
                                                        ====     ====     ====


Income  before  income taxes for the fiscal  years ended May 31, 1997,  1996 and
1995 includes  income of $340.9  million,  $241.1  million,  and $131.2 million,
respectively  from the  Company's  foreign  subsidiaries.  The  Company  has not
provided  for  federal   income  taxes  on   approximately   $173.5  million  of
undistributed  earnings of its foreign  subsidiaries  in  countries in which the
statutory  tax  rates are less  than the U.S.  rates.  The  Company  intends  to
reinvest in subsidiary operations  indefinitely.  If such undistributed earnings
were to be remitted,  the related tax  liability  would be  approximately  $48.2
million.


Note 15:  Geographic Area Information

The Company  operates in a single  industry  segment:  the design,  manufacture,
marketing,  and  support  of data  networking  systems.  The  Company's  foreign
operations  consist  primarily of central  distribution,  order  administration,
manufacturing  and research and development  facilities in Western  Europe,  and
sales,  marketing  and  customer  service  activities  conducted  through  sales
subsidiaries throughout the world.

Sales,  operating  income  and  identifiable  assets,  classified  by the  major
geographic areas in which the Company operates, are as follows:

(Dollars in thousands)                         1997         1996         1995
                                            ----------   ----------   ----------

Sales to unaffiliated customers:
United States operations                    $1,482,438   $1,104,350   $  767,484
Export sales from United States operations     560,485      456,906      302,670
European operations                          1,104,183      764,992      523,151
Other                                             --            853          164
                                            ----------   ----------   ----------

Total                                       $3,147,106   $2,327,101   $1,593,469
                                            ==========   ==========   ==========

                                       57
<PAGE>

Transfers from geographic areas
  (eliminated in consolidation):

United States operations            $   237,470     $   218,500     $   144,862
European operations                     573,180         300,482         123,360
Other                                    25,461          28,154             439
                                    -----------     -----------     -----------

Total                               $   836,111     $   547,136     $   268,661
                                    ===========     ===========     ===========

Operating income (loss):
United States operations            $   162,377     $   103,020     $   105,305
European operations                     395,017         247,399         143,349
Other                                     5,215          21,185          (2,351)
Eliminations                                756         (69,923)        (21,847)
                                    -----------     -----------     -----------

Total                               $   563,365     $   301,681     $   224,456
                                    ===========     ===========     ===========

Identifiable assets:

United States operations            $ 1,614,593     $ 1,091,091
European operations                     617,229         441,668
Other                                    84,799          32,015
Eliminations                            (50,346)        (39,657)
                                    -----------     -----------

Total                               $ 2,266,275     $ 1,525,117
                                    ===========     ===========

Operating  income for the United States  operations  for the years ended May 31,
1996 and 1995 included charges of approximately $52.4 million and $68.7 million,
respectively,  for purchased in-process  technology resulting from the Company's
acquisitions  in those years.  See Note 3. In connection with the acquisition of
Chipcom, approximately $63.0 million of acquisition-related costs was charged to
the United States  operations  in fiscal 1996.  See Note 12.  Transfers  between
geographic  areas are accounted  for at prices  representative  of  unaffiliated
party transactions.


Note 16:  Litigation

On October 13, 1995, the Company acquired Chipcom,  which had already been named
as a defendant in the litigation  described  below.  Five  complaints were filed
between May 30, 1995 and June 16, 1995 that alleged violations by the defendants
of Sections  10(b) and 20(a) of the  Securities  and Exchange  Act of 1934,  and
sought  unspecified  damages.  The cases were consolidated for pretrial purposes
pursuant to an order  entered by the Court on June 15,  1995.  The  consolidated
action is  entitled  In re:  Chipcom  Securities  Litigation,  Civil  Action No.
95-111114-DPW.  A Consolidated Complaint was filed on September 13, 1995, and an
Amended Consolidated Complaint was filed on November 30, 1995.

The defendants' motion to dismiss the Amended Consolidated Complaint was granted
without leave to amend on May 1, 1996. The dismissal  covers all five cases. The
plaintiffs  appealed the order granting the  dismissal.  On October 1, 1996, the
parties to these cases  agreed upon what the Company  considers  to be favorable
financial terms for settlement of all five cases,  which amount the Company does
not consider  material to its  operations,  financial  position,  or  liquidity.
Pursuant to the settlement  which was approved by the District Court on June 26,
1997,  all claims of all persons which are related to the subject  matter of the
Consolidated Complaint were settled and released.

                                       58
<PAGE>

On March 24, 1997, a putative shareholder class action lawsuit,  entitled Hirsch
v 3Com  Corporation,  et al.,  Civil Action No.  CV764977 was filed  against the
Company and certain of its officers and  directors  in the  California  Superior
Court,  Santa Clara County. The complaint  alleges,  among other things,  fraud,
negligent  misrepresentation  and violations of the California  securities laws,
including that during the putative class period, sales of the Company's stock by
officers and directors of 3Com and  acquisitions  made with the Company's  stock
occurred at inflated prices in light of undisclosed  information.  Specifically,
the complaint  alleges  violations of Sections 25400 and 25500 of the California
Corporations  Code,  Sections 1709 and 1710 of the  California  Civil Code,  and
Sections  17200  et seq.  and  17500  et seq.  of the  California  Business  and
Professions Code. The complaint, which covers a putative period of September 24,
1996 through February 10, 1997, does not specify the damages sought.  Management
believes that the action is not  meritorious  and intends to vigorously  contest
it. An adverse  resolution of the action could have a material adverse effect on
the Company's  results of operations  and financial  condition in the quarter in
which such adverse resolution occurs.

U.S.  Robotics and certain of its  directors  were named as defendants in eleven
lawsuits  relating to the merger  between the  Company  and U.S.  Robotics  (the
Merger) brought in the Delaware  Chancery Court ("the Court").  See Note 17. The
Company has been named as a defendant in nine of these  actions.  The  lawsuits,
which  purport to be  stockholder  class  actions  brought on behalf of all U.S.
Robotics  stockholders,  allege, inter alia, that the directors of U.S. Robotics
have breached their fiduciary duties by approving the Merger Agreement, and that
the Company  aided and abetted  this  alleged  breach of duty.  An  agreement in
principle to settle this litigation has been reached with plaintiffs' counsel on
what the Company  considers to be favorable  financial  terms,  which amount the
Company does not consider to be material to its operations,  financial position,
or  liquidity.  This  settlement  will not be final until  approved by the Court
after a hearing.


Note 17:  Subsequent Event

On June 12, 1997 the Company merged with U.S. Robotics by issuing  approximately
158 million  shares of its common stock in exchange for all  outstanding  common
stock of U.S.  Robotics.  The Company also assumed and  exchanged all options to
purchase U.S.  Robotics' stock for options to purchase  approximately 31 million
shares of the Company's  common stock.  The  transaction  was accounted for as a
pooling-of-interests.  U.S.  Robotics  is the leading  supplier of products  and
systems for accessing information across the wide area network, including modems
and remote access products.

The Company  anticipates  that as a result of the merger,  the combined  company
will incur  restructuring  charges and direct  transaction costs relating to the
business  combination,  estimated to be between  $325 million and $375  million.
These  non-recurring costs will be charged to operations in the first quarter of
fiscal 1998. Restructuring charges will include costs related to the closure and
elimination of duplicate owned and leased facilities, the write-off of inventory
associated  with  duplicate and  discontinued  products,  the write-off of fixed
assets,  and severance and outplacement  costs.  Direct  transaction  costs will
consist primarily of investment banking and other professional fees.

The following  unaudited pro forma summary presents the consolidated  results of
operations  assuming the merger with U.S. Robotics had occurred on June 1, 1994.
U.S.  Robotics  maintained  its  financial  records on a 52-53 week  fiscal year
ending nearest to September 30. The pro forma  consolidated  statement of income
for the year ended May 31, 1997 includes the U.S. Robotics'  statement of income
for  the  twelve  months  ended  March  30,  1997.  The pro  forma  consolidated
statements  of income for the fiscal  years ended May 31, 1996 and 1995  include
the U.S. Robotics' statements of income for the fiscal years ended September 29,
1996 and  October 1, 1995,  respectively.  This  presentation  has the effect of
including  U.S.  Robotics'  results of operations for the six month period ended
September 29, 1996 in both the combined  years ended May 31, 1997 and 1996,  and
reflects sales of $1,158.2  million and net income of $76.8  million,  which has
been reported as a decrease to the Company's fiscal 1997 retained earnings.  The
pro forma combined results below reflect  reclassifications to conform financial
statement 

                                       59
<PAGE>

presentation and adjustments to conform the companies fixed asset capitalization
policies.  These pro forma results have been prepared for  comparative  purposes
only and do not purport to be  indicative  of what would have  occurred had this
transaction  been effected on the date  indicated  above or of results which may
occur in the future.

(Unaudited.  In thousands, except per share amounts) Years Ended May 31,

                                          1997           1996           1995
--------------------------------------------------------------------------------

Sales:
     3Com                             $ 3,147,106    $ 2,327,101    $ 1,593,469
     U.S. Robotics                      2,493,791      1,977,512        889,347
     Reclassifications to conform
        accounting policies               (36,751)       (20,105)        (3,056)
                                      -----------    -----------    -----------
     Combined                         $ 5,604,146    $ 4,284,508    $ 2,479,760
                                      ===========    ===========    ===========

Net income:
     3Com                             $   373,950    $   177,854    $   144,559
     U.S. Robotics                        237,258        170,021         65,951
     Adjustments to conform
        accounting policies               (13,585)        (7,259)        (6,954)
                                      -----------    -----------    -----------
     Combined                         $   597,623    $   340,616    $   203,556
                                      ===========    ===========    ===========

Net income per share
 (on a fully diluted basis):
     3Com                             $      2.01    $      1.00    $      0.84
     U.S. Robotics (1)                       1.41           1.02           0.43
     Adjustments to conform
        accounting policies                 (0.04)         (0.02)         (0.02)
                                      -----------    -----------    -----------
     Combined                         $      1.69    $      0.99    $      0.63
                                      ===========    ===========    ===========


(1)  Adjusted  for effect of exchange  ratio of 1.75 shares of 3Com Common Stock
for each share of U.S. Robotics common stock.

If the  merger  with  U.S.  Robotics  had  been  consummated  on May  31,  1997,
consolidated total assets, liabilities, shareholders' equity and working capital
would have increased by $1,342.9 million,  $520.3 million,  $822.6 million,  and
$529.5 million,  respectively.  Such May 31, 1997 pro forma consolidated balance
sheet  information  includes the balance sheet of U.S.  Robotics as of March 30,
1997.

                                       60
<PAGE>

<TABLE>

Quarterly Results of Operations (Unaudited)
<CAPTION>

                                Fiscal 1997 Quarters Ended                     Fiscal 1996 Quarters Ended
                      ------------------------------------------- ------------------------------------------------
                       May 31,     Feb. 28,    Nov. 30,   Aug. 31,     May 31,    Feb. 29,    Nov. 30,    Aug. 31,
                        1997        1997        1996       1996         1996        1996        1995        1995
--------------------- --------    --------    --------    --------    --------    --------    --------    --------
(Dollars in thousands,
except per share data)

<S>                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>     
Sales                 $829,892    $786,778    $820,296    $710,140    $660,266    $606,002    $563,544    $497,289
                      --------    --------    --------    --------    --------    --------    --------    --------

Gross margin           433,811     428,462     448,990     383,493     350,508     321,183     296,825     261,739
Gross margin %            52.3%       54.5%       54.7%       54.0%       53.1%       53.0%       52.7%       52.6%
                      --------    --------    --------    --------    --------    --------    --------    --------

Operating income       131,584     129,371     162,518     139,892      71,711     113,010      29,921      87,039
                      --------    --------    --------    --------    --------    --------    --------    --------

Net income              89,164      87,645     105,569      91,572      29,498      74,590      16,345      57,421
Net income %              10.7%       11.1%       12.9%       12.9%        4.5%       12.3%        2.9%       11.5%
                      --------    --------    --------    --------    --------    --------    --------    --------

Fully diluted net
   income per share   $   0.48    $   0.47    $   0.56    $   0.50    $   0.16    $   0.42    $   0.09    $   0.33
                      --------    --------    --------    --------    --------    --------    --------    --------
</TABLE>
<TABLE>

Net  income  for the  quarter  ended  November  30,  1996  included  a charge of
approximately $6.6 million ($.04 per share) for merger-related costs. Net income
for the quarter  ended May 31,  1996  included a charge of  approximately  $52.4
million ($.29 per share) for  purchased  in-process  technology  and a charge of
approximately  $1.0  million  (approximately  $.01 per share)  for a  litigation
settlement. Net income for the quarter ended November 30, 1995 included a charge
of approximately  $69.0 million ($.28 per share) for  merger-related  costs. See
Notes  3  and  12  to  the  Consolidated  Financial  Statements  for  additional
information on the above  transactions.  Excluding the non-recurring items noted
above,  net income and net income per share on a fully  diluted basis would have
been as follows:
<CAPTION>

                               Fiscal 1997 Quarters Ended                     Fiscal 1996 Quarters Ended
                      ------------------------------------------- ------------------------------------------------
(Dollars in thousands, May 31,    Feb. 28,    Nov. 30,    Aug. 31,     May 31,     Feb. 29,   Nov. 30,    Aug. 31,
except per share data)  1997        1997       1996        1996         1996        1996        1995       1995
--------------------- --------    --------    --------    --------    --------    --------    --------    --------
<S>                   <C>          <C>        <C>          <C>         <C>         <C>         <C>         <C>    

Net income excluding
  non-recurring items $89,164      $87,645    $112,169     $91,572     $82,469     $74,590     $65,553     $57,421
Net income per share
  excluding non-
  recurring items     $  0.48      $  0.47    $   0.60     $  0.50     $  0.46     $  0.42     $  0.37     $  0.33
                      --------     -------    --------     -------     -------     -------     -------     -------
</TABLE>

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

     None.

                                       61

<PAGE>


                                    PART III

ITEM 10.  Directors and Executive Officers of 3Com

     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  Shareholders  to be held October 7,
1997 (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 the  Registrant,  see  "Executive  Officers  of the
Registrant" 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.


                                     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 36 of this
                  Form 10-K.

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

        (3)       Exhibits - See Exhibit Index at page 63 of this Form 10-K.

     (b)          The  Registrant  did not file or amend any reports on Form 8-K
                  during the last quarter of the fiscal year ended May 31, 1997.

     (c)          See Exhibit Index at page 63 of this Form 10-K.

     (d)          See Index to Consolidated  Financial  Statements and Financial
                  Statement Schedule at page 36 of this Form 10-K.


                                       62
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number   Description

3.1      Amended and Restated  Articles of  Incorporation  (Exhibit 19.1 to Form
         10-Q) (5)

3.2      Certificate  of  Amendment  of the  Amended  and  Restated  Articles of
         Incorporation (Exhibit 3.2 to Form 10-K) (9)

3.3      Bylaws, as amended and restated (Exhibit 4.2 to Form S-8) (7)

3.4      Certificate  of  Amendment  of the  Amended  and  Restated  Articles of
         Incorporation (Exhibit 4.1 to Form S-8) (13)

3.5      Certificate  of  Amendment  of the  Amended  and  Restated  Articles of
         Incorporation, dated October 4, 1996, as filed on October 9, 1996 (16)

4.1      Reference is made to Exhibit 3.1 (Exhibit 4.1 to Form 10-K) (9)

4.2      Indenture  Agreement  between 3Com  Corporation  and The First National
         Bank of Boston for the private  placement of  convertible  subordinated
         notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (10)

4.3      Placement   Agreement   for  the  private   placement  of   convertible
         subordinated  notes dated  November 8, 1994  (Exhibit  5.1 to Form 8-K)
         (10)

4.4      Amended and Restated Rights  Agreement dated December 31, 1994 (Exhibit
         10.27 to Form  10-Q)  (10)

10.1     1983 Stock Option  Plan,  as amended  (Exhibit  10.1 to Form 10-K) (6)*

10.2     Amended and  Restated  Incentive  Stock  Option Plan (3)*

10.3     License  Agreement  dated March 19,  1981 (1)

10.4     Second  Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit
         10.5 to Form 10-Q)(14)*

10.5     License Agreement dated as of June 1, 1986 (Exhibit 10.16 to Form 10-K)
         (2)

10.6     Amended 3Com  Corporation  Director  Stock Option Plan (Exhibit 10.8 to
         Form  10-Q)(14)* 

10.7     Ground Lease dated July 5, 1989  (Exhibit  10.19 to Form 10-K) (4)

10.8     Sublease  Agreement dated February 9, 1989 (Exhibit 10.20 to Form 10-K)
         (4) 

10.9     3Com  Corporation  Restricted  Stock Plan, as Amended (Exhibit 10.17 to
         Form 10-Q)(14)* 

10.10    Form of Escrow and Indemnification Agreement for Directors and Officers
         (Exhibit 10.15 to Form 10-Q) (8)

10.11    1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (9)*

10.12    Agreement  and Plan of  Merger  dated as of July 26,  1995  among  3Com
         Corporation,  Chipcom  Acquisition  Corporation and Chipcom Corporation
         (Exhibit 2.1 to Form S-4) (12)

10.13    Lease Agreement between BNP Leasing Corporation,  as Landlord, and 3Com
         Corporation,  as Tenant,  effective  as of November  20, 1996  (Exhibit
         10.37 to Form 10-Q) (16)

10.14    Purchase   Agreement   between   BNP  Leasing   Corporation   and  3Com
         Corporation,  effective as of November 20, 1996 (Exhibit  10.38 to Form
         10-Q) (16)

10.15    Agreement and Plan of Reorganization  among 3Com Corporation,  OnStream
         Acquisition Corporation and OnStream Networks, Inc. dated as of October
         5, 1996 (Exhibit 2.1 to Form S-4) (15)

                                       63
<PAGE>

10.16    Lease Agreement between BNP Leasing Corporation,  as Landlord, and 3Com
         Corporation,  as  Tenant,  effective  as of  February  3,  1997 for the
         Combined Great America  Headquarters site (Exhibit 10.19 to Form 10-Q).
         (18)

10.17    Purchase   Agreement   between   BNP  Leasing   Corporation   and  3Com
         Corporation,  effective as of February 3, 1997 for the  Combined  Great
         America Headquarters site (Exhibit 10.20 to Form 10-Q). (18)

10.18    Credit Agreement dated as of December 20, 1996 among 3Com  Corporation,
         Bank of America National Trust and Savings  Association,  as Agent, and
         the  Other   Financial   Institutions   Party  Hereto  Arranged  by  BA
         Securities, Inc. (Exhibit 10.21 to Form 10-Q. (18)

10.19    Amended  and  Restated  Agreement  and Plan of Merger by and among 3Com
         Corporation, TR Acquisitions Corporation,  3Com (Delaware) Corporation,
         and U.S.  Robotics  Corporation,  dated  as of  February  26,  1997 and
         amended as of March 14, 1997(17)

21.1     Subsidiaries of the Registrant

23.1     Deloitte & Touche LLP Consent

23.2     Consent of Price Waterhouse LLP

23.3     Report of Independent Accountants on Financial Statement Schedule

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

*        Indicates a management contract or compensatory plan.

(1)      Incorporated by reference to the corresponding Exhibit previously filed
         as an Exhibit to Registrantis  Registration Statement on Form S-1 filed
         January 25, 1984 (File No. 2-89045)
 
(2)      Incorporated by reference to the  corresponding  Exhibit or the Exhibit
         identified   in   parentheses   previously   filed  as  an  Exhibit  to
         Registrantis Form 10-K filed August 29, 1987 (File No. 0-12867)

(3)      Incorporated by reference to Exhibit 10.2 to Registrant's  Registration
         Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850)

(4)      Incorporated by reference to the  corresponding  Exhibit or the Exhibit
         identified   in   parentheses   previously   filed  as  an  Exhibit  to
         Registrantis Form 10-K filed on August 28, 1989 (File No. 0-12867)

(5)      Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form 10-Q  filed on
         January 2, 1991 (File No. 0-12867)

(6)      Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form 10-K  filed on
         August 27, 1991 (File No. 0-12867)

(7)      Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis  Registration  Statement
         on Form S-8, filed on November 24, 1993 (File No. 33-72158)

(8)      Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form 10-Q  filed on
         January 14, 1994 (File No. 0-12867)

                                       64
<PAGE>

(9)      Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form 10-K  filed on
         August 31, 1994 (File No. 0-12867)

(10)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form  8-K  filed on
         November 16, 1994 (File No. 0-12867)

(11)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrant's  Form 10-Q  filed on
         January 13, 1995 (File No. 0-12867)

(12)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis  Registration  Statement
         on Form S-4, originally filed on August 31, 1995 (File No. 33-62297)

(13)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis  Registration  Statement
         on Form S-8, filed on October 19, 1995 (File No. 33-63547)

(14)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an Exhibit  to  Registrantis  Form 10-Q,  filed on
         January 15, 1996 (File No. 0-12867)

(15)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis  Registration  Statement
         on Form S-4, originally filed on October 11, 1996 (File No. 333-13993)

(16)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously  filed as an  Exhibit  to  Registrantis  Form 10-Q  filed on
         January 13, 1997 (File No. 0-12867)

(17)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis  Registration  Statement
         on Form S-4, filed on March 17, 1997 (File No. 333-23465)

(18)     Incorporated  by reference  to the Exhibit  identified  in  parentheses
         previously filed as an Exhibit to Registrantis Form 10-Q filed on April
         11, 1997 (File No. 0-12867)

                                       65
<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 26th day of
August, 1997.

                              3Com Corporation
                                (Registrant)

                              By   /s/ Eric A. Benhamou
                                 -----------------------------------------------
                                       Eric A. Benhamou
                                 Chairman, President and 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 26th day of August, 1997.

             Signature                          Title

   /s/ Eric A. Benhamou                Chairman of the Board, President and
----------------------------------            Chief Executive Officer    
      (Eric A. Benhamou)                   (Principal Executive Officer)    
                                                                    

   /s/ Casey Cowell                         Vice Chairman of the Board
----------------------------------
      (Casey Cowell)

                                           Senior Vice President, Finance
   /s/ Christopher B. Paisley               and Chief Financial Officer
----------------------------------  (Principal Financial and Accounting Officer)
      (Christopher B. Paisley)                           

   /s/ James L. Barksdale                            Director
----------------------------------
      (James L. Barksdale)                          
                                                    
   /s/ Gordon A. Campbell                            Director
----------------------------------
      (Gordon A. Campbell)                          
                                                    
   /s/ James E. Cowie                                Director
----------------------------------
      (James E. Cowie)                              
                                                    
   /s/ David W. Dorman                               Director
----------------------------------
      (David W. Dorman)                             
                                                    
   /s/ Jean-Louis Gassee                             Director
----------------------------------
      (Jean-Louis Gassee)                           
                                                    
   /s/ Stephen C. Johnson                            Director
----------------------------------
      (Stephen C. Johnson)                          
                                                    
   /s/ Philip C. Kantz                               Director
----------------------------------
      (Philip C. Kantz)                             
                                                    
   /s/ Paul Yovovich                                 Director
----------------------------------
      (Paul Yovovich)                               
                                                    
   /s/ William F. Zuendt                             Director
----------------------------------
      (William F. Zuendt)                           
                                                 
                                       66
<PAGE>

<TABLE>

                                                                                                        SCHEDULE II

                                3Com Corporation

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                 For the Years Ended May 31, 1995, 1996 and 1997
                             (Dollars in thousands)

<CAPTION>

                                                   Additions  Reclassifications
                                       Balance at  charged to    and charges                   Pooled       Balance at
                                        beginning  costs and      to other                    Business-       end of
Description                             of period  expenses       accounts     Deductions       Net           period
-----------                             --------   --------       --------      --------      --------       --------
<S>                                     <C>        <C>            <C>           <C>           <C>      <C>   <C>     
Year ended May 31, 1995:
Allowance for doubtful accounts         $ 12,130   $  7,113       $  1,214(5)   $    409(3)   $    (26)(1)   $ 20,022
Product return reserve                     5,939     13,306            430(5)      7,682          --           11,993
Accrued product warranty                  15,016     23,014            185(5)     15,674           215(1)      22,756

Restructuring reserves:
    Inventory reserve                        925       --             --             925          --             --
    Property and equipment reserve            93        (93)(4)       --            --            --             --
    Accrued restructuring costs            2,736     (1,007)(4)       --           1,729          --             --
                                        --------   --------       --------      --------      --------       --------
        Total restructuring reserves    $  3,754   $ (1,100)      $   --        $  2,654      $   --         $   --
                                        --------   --------       --------      --------      --------       --------

Year ended May 31, 1996:
Allowance for doubtful accounts         $ 20,022   $ 11,638       $     10(5)   $  4,016(3)   $   (733)(2)   $ 26,921
Product return reserve                    11,993     51,485           --          41,260        (2,957)(2)     19,261
Accrued product warranty                  22,756     36,086             40(5)     28,491           183 (2)     30,574

Acquisition-related reserves:
    Inventory reserve                       --       27,057           --          12,433          --           14,624
    Property and equipment reserve          --        9,451           --           1,593          --            7,858
    Non-current asset reserve               --        7,812           --           7,812          --             --
    Accrued acquisition-related costs       --       24,680           --          13,477          --           11,203
                                        --------   --------       --------      --------      --------       --------
        Total acquisition-related
            reserves                    $   --     $ 69,000       $   --        $ 35,315      $   --         $ 33,685
                                        --------   --------       --------      --------      --------       --------

Year ended May 31, 1997:
Allowance for doubtful accounts         $ 26,921   $ 17,016       $   --        $  6,678(3)   $   --         $ 37,259
Product return reserve                    19,261     52,069           --          37,004          --           34,326
Accrued product warranty                  30,574     48,783           --          34,370          --           44,987

Acquisition-related reserves:
    Inventory reserve                     14,624       --             --           4,158          --           10,466
    Property and equipment reserve         7,858       --             --           7,472          --              386
    Accrued acquisition-related costs     11,203       --             --           5,089          --            6,114
                                        --------   --------       --------      --------      --------       --------
        Total acquisition-related
            reserves                    $ 33,685   $   --         $   --        $ 16,719      $   --         $ 16,966
                                        ========   ========       ========      ========      ========       ========
<FN>

(1)      Pooled  business - net  represents  activity of Primary  Access for the
         period for  October  1, 1995  through  May 31,  1995 (see Note 3 to the
         Consolidated Financial Statements).

(2)      Pooled business - net represents activity of Chipcom for the period for
         January 1, 1995  through May 31,  1995 (see Note 3 to the  Consolidated
         Financial Statements).

(3)      Accounts written off - net of recoveries.

(4)      Reduction  in  restructuring  reserves  based on current  estimates  of
         future costs.

(5)      Adjustments relating to purchased businesses.
</FN>
</TABLE>

                                       S-1