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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, 1998               COMMISSION FILE NO. 0-12867

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

                 FOR THE TRANSITION PERIOD FROM           TO
                                               ----------    ---------

                                3COM CORPORATION
             (Exact name of registrant as specified in its charter)

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

       5400 BAYFRONT PLAZA
     SANTA CLARA, CALIFORNIA                                        95052
(Address of principal executive offices)                          (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE  (408) 326-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE

SECURITIES  REGISTERED  PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.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 JULY 27,
1998,   AS  REPORTED  BY  THE  NASDAQ   NATIONAL   MARKET,   WAS   APPROXIMATELY
$9,205,886,000.  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 JULY 27, 1998,  358,558,817  SHARES OF THE REGISTRANT'S  COMMON STOCK WERE
OUTSTANDING.

THE   REGISTRANT'S   DEFINITIVE  PROXY  STATEMENT  FOR  THE  ANNUAL  MEETING  OF
STOCKHOLDERS  TO BE HELD ON SEPTEMBER 24, 1998 IS  INCORPORATED  BY REFERENCE IN
PART III OF THIS FORM 10-K TO THE EXTENT STATED HEREIN.
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<PAGE>
                                3COM CORPORATION
                                    FORM 10-K
                     FOR THE FISCAL YEAR ENDED MAY 31, 1998
                                TABLE OF CONTENTS

PART I                                                                      PAGE
-------                                                                     ----
   Item 1.   Business......................................................   1
   Item 2.   Properties....................................................  10
   Item 3.   Legal Proceedings.............................................  11
   Item 4.   Submission of Matters to a Vote of Security Holders...........  13
             Executive Officers of the Registrant .........................  13
PART II
-------
   Item 5.   Market for Registrant's Common Stock and Related 
               Stockholder Matters.........................................  17
   Item 6.   Selected Financial Data.......................................  18
   Item 7.   Management's Discussion and Analysis of Financial Condition 
               and Results of Operations...................................  19
   Item 7A.  Quantitative and Qualitative Disclosures About Market Risk....  32
   Item 8.   Financial Statements and Supplementary Data...................  34
   Item 9.   Changes in and Disagreements with Accountants on Accounting 
               and Financial Disclosure....................................  61
PART III
--------
   Item 10.  Directors and Executive Officers of 3Com Corporation..........  61
   Item 11.  Executive Compensation........................................  61
   Item 12.  Security Ownership of Certain Beneficial Owners and
               Management..................................................  61
   Item 13.  Certain Relationships and Related Transactions................  61

PART IV
--------
   Item 14.  Exhibits, Financial Statement Schedule, and Reports on 
               Form 8-K....................................................  61

             Exhibit Index.................................................  62
             Signatures....................................................  65
             Financial Statement Schedule.................................. S-1


3Com, 3ComImpact,  AccessBuilder,  EtherLink,  HotSync,  Megahertz,  NETBuilder,
OfficeConnect,  Palm Computing, Parallel Tasking, SuperStack, Transcend and U.S.
Robotics are  registered  trademarks of 3Com  Corporation  or its  subsidiaries.
Bigpicture,  CoreBuilder,  Courier,  DynamicAccess,  HiPer, Palm III, PalmPilot,
PathBuilder,  Total Control,  and x2 are  trademarks of 3Com  Corporation or its
subsidiaries.  Other  product and brand names may be  trademarks  or  registered
trademarks of their respective owners.

                                       i
<PAGE>
This Annual Report on Form 10-K contains  forward-looking  statements within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21(e) of the  Securities  Exchange  Act of 1934,  as amended.  These  statements
include,  but are not limited to statements  concerning  expected price erosion,
the Company's plans to make acquisitions or strategic investments, the Company's
expectations of progress  toward the long-term  financial  model,  the Company's
expectation  of increased  sales to original  equipment  manufacturers,  and the
Company's  plans to improve  and  enhance  existing  products  and  develop  new
products.

The  forward-looking  statements  of 3Com  Corporation  are subject to risks and
uncertainties. Some of the factors that could cause future results to materially
differ  from  the   Company's   recent   results  or  those   projected  in  the
forward-looking   statements  include,  but  are  not  limited  to,  significant
increases  or  decreases  in  demand  for  the  Company's  products,   increased
competition,  lower  prices and  margins,  failure to  successfully  develop and
market new products and technologies, competitors introducing superior products,
continued  industry  consolidation,  failure to effectively  integrate  acquired
companies and products,  declining industry growth rates, failure to effectively
manage sales of the  Company's  products  through  distributors,  resellers  and
original equipment manufacturers (OEMs), failure to manage the amount of product
in  distributors'  and  resellers'  inventory,  failure to secure  supply of key
component parts, instability and currency fluctuations in international markets,
failure to fulfill  product  orders in a timely and  effective  manner,  product
defects,  failure to secure intellectual property rights, results of litigation,
and failure to retain and recruit key employees.  For a more detailed discussion
of certain  risks  associated  with the  Company's  business,  see the "Business
Environment and Risk Factors" section of this Form 10-K. The Company  undertakes
no  obligation  to  update  forward-looking  statements  to  reflect  events  or
circumstances occurring after the date of this Form 10-K.

                                     PART I
ITEM 1.   BUSINESS

3Com  Corporation  was  founded  on June 4, 1979 and  pioneered  the  networking
industry.  Over the years,  3Com and its subsidiaries  ("3Com" or "the Company")
have evolved from a supplier of discrete  networking  products to a  broad-based
supplier of local area network (LAN) and wide area network (WAN)  systems.  With
an  emphasis  on  connectivity  from the edge to the core of the  network,  3Com
offers  customers a broad range of networking  solutions that include  switches,
hubs,  remote access systems,  routers,  network  management  software,  network
interface  cards  (NICs),  modems and handheld  connected  organizers.  3Com has
structured  its  business,  products,  marketing  and sales to address  four key
customer  markets:  large  enterprise  -  typically  with more  than 500  users,
including the corporate,  education, retail, health care and government sectors;
small/medium enterprise - those organizations with 25-500 users;  consumer/small
office, home office (SOHO); and carrier/service provider - including traditional
telecommunication  providers,  competitive  local exchange carriers and Internet
service providers.

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
across the  enterprise  or the Internet  quickly and  reliably.  Currently,  the
networking  industry is  undergoing a profound  shift of emphasis  from parallel
networks - separate data, voice and video infrastructures running side by side -
to converged  networks that integrate all  communications  onto a single network
infrastructure.  The  Company  intends to be the leading  provider of  converged
networking  technologies and solutions.  A key element of the Company's strategy
is to make  networks  faster,  more  intelligent,  and  fundamentally  easier to
design, install, maintain and upgrade.

Since 1992, 3Com has augmented its internal growth by actively pursuing a course
of strategic acquisitions to expand its distribution capabilities,  technologies
and product offerings. From fiscal years 1993 through 1997, the Company acquired
several  companies  to further  its  technological  growth and market  position,
primarily in enterprise  networking.  Of particular  note, the  acquisitions  of
Synernetics,  Inc., NiceCom, Ltd., Chipcom Corporation,  AXON Networks, Inc. and
OnStream  Networks,  Inc.  enhanced  3Com's  product  offerings  in LAN  and WAN
Asynchronous  Transfer Mode (ATM),  Fiber  Distributed Data Interface (FDDI) and
Ethernet  switching,  enterprise remote access and remote network management and
monitoring (RMON2).
                                       1
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In the first  quarter of fiscal  1998,  the Company  merged  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 merger was accounted for as a pooling-of-interests  and was
valued at approximately  $6.6 billion on the date the acquisition was announced.
The two companies'  complementary  capabilities and leadership position in their
respective  areas has created a single  networking  company  with the ability to
deliver  integrated  end-to-end  LAN and WAN  solutions  to the  broadest set of
customers in the industry.

In  the  fourth   quarter  of  fiscal  1998,  the  Company   acquired   Lanworks
Technologies,  Inc.,  a leading  provider of PC network  boot  technologies  and
products.   PC  network  boot  technologies  are  critical  for  remote  desktop
management,  which includes  activities such as automated  configuration  of PCs
upon start-up.  This  acquisition  was valued at $13.0 million and was accounted
for as a purchase.

The  Company's  acquisition  strategy is  consistent  with the current  trend of
consolidation  in the networking  industry.  Such  consolidation  is expected to
continue.

During  fiscal 1998 the Company  announced a joint  development  agreement  with
Siemens  AG's  (Siemens)  Public  Communications  Networks  Group to  produce  a
multi-service central office switch for carriers and service providers,  as well
as the industry's first stackable voice/data networking solutions for enterprise
environments.  In  addition,  each  company  will  resell  certain  of the other
company's products. In 1998, the Company also entered into a strategic agreement
with  Newbridge   Networks   Corporation   (Newbridge)  to  develop  and  deploy
next-generation,  end-to-end networks supporting converged voice, video and data
applications  that  employ   standards-based   techniques  for  network  traffic
prioritization  and policy control.  The agreement with Newbridge  provides 3Com
with industry-leading ATM WAN switching capabilities.  In addition,  3Com's Palm
Computing(R)  business  unit  established  strategic  relationships  with IBM to
manufacture  the WorkPad PC  companion  and with  QUALCOMM  to develop  wireless
communications products that are compatible with the Palm Computing platform.

3Com's products are primarily  distributed and serviced  worldwide  through 3Com
and systems integrators,  value-added  resellers (VARs),  national resellers and
dealers,  distributors and OEMs.  Certain  products,  such as analog and digital
modems,  NICs, handheld connected  organizers,  hubs, low-end switches,  and the
Network Starter Kit, are also sold through  electronics  catalogs and retailers.
The Company also has a direct sales organization focused on large enterprise and
carrier/service provider customers worldwide.

The Company's  objective is to maintain a leading  market share  position in the
product  areas in which it competes.  In fiscal 1998 the Company  maintained  or
extended  its  leadership  as the number one global  provider  of NICs,  modems,
workgroup  switches,  remote access  concentrators,  hubs and handheld connected
organizers, according to various industry sources.

In fiscal 1998 the Company  announced and/or introduced a number of new products
and  enhancements  to  refresh  its  traditional  product  lines  as  well  as a
significant number of new offerings  incorporating  emerging  technologies.  New
products and  enhancements  address each of the Company's four primary  markets,
and include:

     Large Enterprise
     +   CoreBuilder(TM) line of High-Function Layer 3 switches
     +   SuperStack(R)  II line of switches and hubs that support  migration to
         Fast Ethernet  (100  megabits per second  (Mbps)  Ethernet) and Gigabit
         Ethernet (1000 Mbps Ethernet)
     +   PathBuilder(TM) ATM WAN access switches
     +   A single-chip version of the 3Com Fast EtherLink(R) 10/100 Mbps NIC
     +   3Com Policy-Based  Management  Solution,  an  enterprise-wide  network
         traffic  prioritization  package  based on the  Company's  Transcend(R)
         network management and control solutions
     +   Hardware and software  enhancements to NETBuilder(R) routers to enable
         next-generation intranets and Virtual Private Networks (VPNs)

                                       2
<PAGE>
     Small/Medium Enterprise
     +   SuperStack II hubs and switches for price-sensitive, entry-level users
     +   PathBuilder ATM WAN access switches A single-chip  version of the 3Com
     +   Fast EtherLink 10/100 Mbps NIC
     +   OfficeConnect(R)  small office solutions  including Fast Ethernet hubs
         and switches,  an Integrated Services Digital Network (ISDN) LAN modem,
         low port-count LAN switches, and NETBuilder routers

     Consumer/SOHO
     +   New   modems,    including   the   industry's   first    International
         Telecommunications  Union (ITU)  standard-based  V.90 56  kilobits  per
         second  (Kbps)   modems,   the   OfficeConnect   ISDN  LAN  modems  and
         telephone-return cable modems
     +   Palm  III(TM)  handheld  connected  organizer  and Network  HotSync(R)
         remote synchronization capabilities for the PalmPilot(TM) Professional
     +   Bigpicture(TM)   video   phone   camera   and   Peripheral   Component
         Interconnect  (PCI)  capture card system for  high-quality  video calls
         over the Internet or regular telephone lines

     Carrier/Service Provider
     +   Cable head-end equipment
     +   Additions to the Total  Control(TM)  product  line,  including the new
         higher-density Total Control HiPer(TM) Access System, HiPer Arc routing
         software, and next-generation  application capabilities,  such as Voice
         over Internet Protocol (IP)
     +   New VPN  systems,  comprised of 3Com  Transcend  software and multiple
         3Com  network  hardware  products  
     +   PathBuilder  WAN ATM  carrier-class switch

The Company's principal  competitive  advantages lie in the depth and breadth of
its product lines, its ability to recognize and quickly respond to new trends in
networking  (such as converged  voice,  video and data  networks),  its focus on
making all aspects of networking easier for customers, and a strong yet flexible
business  infrastructure.  3Com has strong brand recognition  across most of its
key markets,  including NICs, modems,  handheld connected organizers,  workgroup
switches and hubs and remote  access  concentrators,  which 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's  low-cost  manufacturing,   worldwide  presence,  strong  distribution
channel and  comprehensive  service and  support  capabilities  allow it to take
advantage of market trends to extend the reach, scope and performance of current
networks.

INDUSTRY SEGMENT INFORMATION

3Com operates in one industry segment as described above.

PRODUCTS

3Com is committed to making  networking  pervasive.  The Company strives to make
the complexities of networks  invisible to end users and make networks easier to
design,  install,  maintain and upgrade.  As the  cornerstone of its commitment,
3Com  has  developed  Transcend   networking,   a  unique  framework  that  uses
distributed   intelligence  embedded  in  products  throughout  the  network  to
cost-effectively  manage  networks  for  greater  performance,  scalability  and
reliability.

With an emphasis on connectivity from the edge to the core of the network,  3Com
offers  customers a broad range of networking  solutions that include  switches,
hubs,  remote  access  systems,  routers,  NICs,  modems and handheld  connected
organizers.  During fiscal 1998,  3Com refreshed a majority of its product lines
by upgrading  platforms,  introducing  new  technologies  and extending  product
families. Additionally, the Company committed to a unifying strategy to lead the
industry's  evolution  towards the  convergence of voice and video onto a single
data network infrastructure.

The Company  reports its  business by two main product  categories:  Systems and
Client Access.  Systems products include  switches,  hubs,  routers,  and remote
access  products.  Client  Access  products  include  NICs and modems.  Handheld
connected  organizers  are included in the reported  results of both the Systems
and Client Access categories.
                                       3
<PAGE>
SYSTEMS PRODUCTS

LAN Switching Platforms:  In the large enterprise  environment where the network
connects hundreds or thousands of users,  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. In small/medium-sized  enterprises,  switches
provide additional bandwidth to help businesses leverage information to maximize
productivity and support growth.

The Company incorporates  internally  developed  application specific integrated
circuits  (ASICs)  into its  switches as a central  component  of its  switching
product  strategy  and  believes  this  enables it to  dramatically  improve the
performance and reliability of its switches while reducing costs.  3Com switches
are available in either chassis (one box) or stackable (i.e. additional capacity
added with additional  boxes) form factors and support the industry's  migration
to higher speed switching technologies.

3Com  offers a variety of  switches  tailored  to suit the  requirements  of any
organization.   The  Company's  OfficeConnect  Ethernet/Fast  Ethernet  switches
combine   simplicity  of  design,   installation  and  operation  with  advanced
functionality and outstanding  speed at a low cost. The Company's  award-winning
SuperStack II switches include multiple  products,  each with appropriate  port,
media and  connectivity  specifications  to meet the needs of the network at the
workgroup, data center or backbone level.

To meet the  requirements  of the large  enterprise  LAN  network  backbone  for
high-density connectivity,  scalable capacity,  reliability and network control,
the Company  offers  High-Function  switches in its  CoreBuilder  product  line.
CoreBuilder   switches  include  the  CoreBuilder  3500  Layer  3  switch,   the
CoreBuilder 5000 multi-technology switching platform,  CoreBuilder 2500 and 6000
Ethernet to FDDI, Fast Ethernet and ATM backbone  switch,  CoreBuilder  7000 and
7000HD  ATM  switches,   and  the  flagship   CoreBuilder  9000   high-bandwidth
aggregation switch.

WAN Switching Platform:  For the large enterprise,  carrier or service provider,
building or  extending  current  networks to carry  voice,  video and data,  the
Company's  PathBuilder  (formerly  AccessBuilder(R)  9000) line of WAN  switches
provides ATM multi-services integration.

Hub Platforms:  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  in  any  enterprise
environment. 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 hubs for customers
of all sizes. For the small office or branch office,  OfficeConnect Ethernet and
Fast  Ethernet  hubs offer  simple,  plug and play  connectivity.  The Company's
SuperStack  II hubs  offer a range  of  options  for  small,  medium  and  large
enterprises,  including:  entry-level  unmanaged hubs for small and medium-sized
offices; and flexible,  mixed Ethernet,  Fast Ethernet, and Token Ring workgroup
hubs and Gigabit Ethernet workgroup hubs for small to large-sized LANs.

Routers:  Routers  are  protocol-dependent  devices  that  connect  sub-networks
together.  3Com  offers a variety of backbone  and remote  office  routers  that
facilitate  enterprise  internetworking.   For  remote  offices,  SuperStack  II
NETBuilder and OfficeConnect NETBuilder routers provide scalable, multi-protocol
links to remote branch offices of any size. For companies  deploying  extranets,
3Com has recently begun offering product  bundles,  which include the SuperStack
II  NETBuilder  routers and bridges and the  OfficeConnect  NETBuilder  routers;
these bundles facilitate the deployment of VPNs. VPNs support large-scale access
for  suppliers,  partners,  customers and branch  offices at a substantial  cost
savings over traditional WAN access charges.

                                       4
<PAGE>
Remote  Access  Platforms:  Remote  access  products  bring the  benefits of the
network to remote users,  including  telecommuters,  Internet and on-line users,
corporate  suppliers,  and a host of other users that access the network  from a
distance.  The Company's  remote access  products  leverage 3Com's HiPer Digital
Signaling   Processing  (DSP)  technology,   a  multi-function   digital  signal
processing engine that integrates sophisticated  functionality on a single chip.
HiPer  DSP  enables  the   Company's   remote   access   platforms   to  achieve
industry-leading  port densities,  (particularly  critical in space  constrained
carrier  environments).  HiPer DSP also  provides the ability to  reprogram  the
Company's  remote  access  systems  to  support  new  applications  -  including
encryption,  video compression, LAN telephony and Voice over IP - without costly
hardware  upgrades.  3Com's remote access offerings  include three product lines
for carrier-class and enterprise remote access.

The   SuperStack   II  Remote   Access  3000  and  1500   product   lines  offer
high-performance  remote  access  support for mid-sized  enterprises  or service
providers  with  multiple  numbers of smaller  points of  presence  (POPs).  The
stackable format provides scalable,  economical remote access  connectivity with
full   functionality.   The  SuperStack  II  remote  access  products  are  also
hot-swappable  (i.e. the ability to add or exchange  modules  without taking the
system out of service) and incorporate multiple system-resiliency features.

The  AccessBuilder  7000 Access  Concentrator is a  chassis-based,  high-density
platform for service  providers with large dial-up  networks and for enterprises
building large-scale  corporate intranets.  It supports  high-bandwidth links to
Ethernet  LANs and  offers  hot-swappable  modules  and a robust  fault-tolerant
architecture.

The Total Control Remote Access Concentrator is a very high-density platform for
carriers and large enterprises that offers channelized  bandwidth supporting all
major analog and digital dial up  techniques in a single  chassis.  Designed for
applications   where  network   downtime  must  be  minimized  and  remote  user
performance  maximized,  the Total Control system offers hot-swappable  modules,
dual redundant power supplies,  standby modems,  and a host of other reliability
features.  Uses of Total Control range from providing central site or 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.

CLIENT ACCESS PRODUCTS

3Com's Client Access Products include NICs and modems. In both categories,  3Com
is the worldwide market leader according to various industry sources.

NICs:  Network  interface  cards,  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 NICs provide complete solutions for
a full range of network  applications  and  environments.  3Com  offers NICs for
Ethernet,   Fast  Ethernet,   Gigabit   Ethernet,   Token  Ring,  FDDI  and  ATM
connectivity.  Many NICs are available with combined connectivity to support the
networking  industry's  migration  from  Ethernet to Fast Ethernet for increased
bandwidth.

All 3Com NICs feature patented Parallel Tasking(R) architecture,  which improves
network performance, and DynamicAccess(TM) software, which provides the NIC with
intelligence  to help  optimize  overall  network  performance,  management  and
control.

Modems:  Modems provide  dial-up access to the Internet,  enterprise  LANs and a
host of communications  services including fax. 3Com provides modems for desktop
and mobile users. The Company was first to market with modems that are compliant
with the ITU V.90 standard for 56 Kbps download capabilities.  The V.90 standard
applies to pulse code modulation technology permitting  downloading of data over
regular analog  telephone  lines at speeds up to 56 Kbps per second and requires
compatible phone lines and modems at server sites. All V.90 products are capable
of 56 Kbps downloads;  however, due to Federal  Communications  Commission (FCC)
regulations,  current download speeds are limited to 53 Kbps.  Actual speeds may
vary.  The  Company  also  provides  software  to  facilitate   upgrade  to  new
technologies  and capabilities and is designed to be easy to install and easy to
use.  They have  received  numerous  awards for reliable  connectivity  and high
performance.  3Com's  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.
Desktop  modem  products   include  the  U.S.   Robotics(R),   Courier(TM)   and
3ComImpact(R) brands.

                                       5
<PAGE>
Today, portable laptop and notebook computers have the processing power, storage
and  displays  that make them the primary  computer  for many  users.  For these
devices,  3Com offers  smaller  form-factor  PC cards,  which are  available  in
configurations  for LAN access (NICs),  WAN access (modems) and combined LAN+WAN
access (NIC and modem),  as well as for wireless and ISDN  connectivity.  3Com's
portable  LAN and WAN PC card  products  are sold  under  the 3Com  Megahertz(R)
brand.

HANDHELD CONNECTED ORGANIZERS

3Com's handheld connected  organizers are a new category of computing:  handheld
devices designed to work as companion  products to desktop and laptop computers,
allowing  information  management both remotely and on the desktop.  Individuals
may utilize the organizers to track a variety of information  from  appointments
and  phone  numbers  to more  specialized  data,  such  as  patient  records  or
construction  specifications.  In the enterprise setting,  the organizers can be
used to enhance  productivity,  for example by providing mobile retrieval of key
data from corporate  business  applications  such as finance,  manufacturing  or
sales automation systems. In addition, with add-on components such as a wireless
modem, these devices can be used by both consumer and enterprise users to access
information on the Internet.

The organizers include a docking cradle, which is connected to the user's mobile
or desktop computer, providing automatic back-up and seamless synchronization of
information  between the handheld device and the larger computer,  thus ensuring
that both systems have the most current  information.  The products also include
character  recognition  software  that allows users to add and edit  information
with a stylus, while away from the desktop.

The Company's market-leading handheld connected organizers include the PalmPilot
and Palm III models. Both the PalmPilot and the Palm III products are based upon
the  Palm  Computing  operating  system,   which  is  supported  by  over  7,500
independent software developers  producing a variety of applications,  utilities
and games for the organizer products.

PRODUCT DEVELOPMENT

The Company  develops its products in a manner  consistent with its goal to make
networking  pervasive by providing  solutions that combine high performance with
ease of use. The Company's  research and  development  expenditures  were $581.6
million,  $502.5 million and $337.8 million in fiscal years 1998, 1997 and 1996,
respectively.

3Com's  ownership  of core  networking  technologies  creates  opportunities  to
leverage its engineering  investments  and develop more integrated  products for
simpler, more powerful and more innovative networking solutions for customers in
each  of  its  target  markets:  large  enterprise,   small/medium   enterprise,
consumer/SOHO,  and  carrier/service  provider.  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  useful  lives,  reduce
manufacturing costs and increase functionality.

The Company has a strong  history of  incorporating  ASICs into its  products to
provide key  functions  and the  capacity  for future  upgrades.  Customers  are
thereby  able  to  realize  the  benefits  of  new   technologies  and  enhanced
capabilities   through   inexpensive,   simple  software  upgrades  rather  than
expensive, disruptive hardware replacement. In addition, ASICs facilitate higher
density platforms - critical in certain applications, such as high-speed Layer 3
switching - and are less costly to manufacture.  The Company  incorporates  ASIC
technology into many of its products,  including NICs,  switches,  hubs, routers
and remote access equipment.

In addition to the development of custom ASICs to improve performance,  increase
reliability  and reduce  costs,  the Company is investing in the  following  key
areas:  network  management;  Fast  Ethernet,  Gigabit  Ethernet,  ATM,  Layer 3
switching  and other  high-speed  networking  technologies;  virtual  local area
network (VLAN) capabilities; convergence solutions such as Voice over IP and LAN
telephony;  WAN  access,  ISDN and other  remote-access  technologies;  enhanced
connectivity in major operating environments,  including Windows and Windows NT;
and remote  access for single and mobile users  (including  data-over-cable  and
Asymmetric Digital Subscriber Line (ADSL) technologies).

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

                                       6
<PAGE>
MARKETS AND CUSTOMERS

3Com's  customers  range from  individual  consumers of personal  electronics to
large  global  corporations,  and  encompass  companies  in a  wide  variety  of
industries,  including finance, health care, manufacturing,  telecommunications,
government,  education, and retail. The Company's merger with U.S. Robotics gave
3Com a broader reach and more  leverage  across its four target  markets:  large
enterprise,   small/medium   enterprise,   consumer/SOHO,   and  carrier/service
provider.

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 works 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.  As
of and for the year ended May 31,  1998,  the  Company  had one  customer  which
accounted  for 14  percent  of total  sales  and 14  percent  of total  accounts
receivable.  The same customer  accounted for 13 percent and 12 percent of total
sales for the fiscal years ended May 31, 1997 and 1996, respectively.

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.  During  fiscal  1998,  the  Company
increased off-shore  manufacturing  capacity by opening a new plant in Singapore
and  installing  additional  manufacturing  lines in its Ireland  facility.  The
Company maintains  approximately 190 sales offices in 48 countries.  The Company
markets its  products  internationally  primarily  through  subsidiaries,  sales
offices and  relationships  with OEMs and  distributors  with local  presence in
Europe,  Canada,  Asia  Pacific and Latin  America  (see Note 15 of the Notes to
Consolidated Financial Statements).

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 7-by-24 customer support.
3Com customer services include design,  installation and maintenance on-site, by
phone,   or  across  the   Internet.   The   Company   also   offers   web-based
customer-specific support.  Additionally, the Company provides a wide variety of
training services,  including on-site training and  computer-based  courses that
allow customers to learn networking  technologies at their own pace. The Company
supports its customers  internationally  from more than 140 different locations,
including eight technical call centers communicating with customers in more than
15 languages.

BACKLOG

3Com  manufactures  its products  based upon its forecast of worldwide  customer
demand and builds 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.
                                       7
<PAGE>
MANUFACTURING

3Com has manufacturing facilities in Santa Clara, California; Mount Prospect and
Morton Grove, Illinois;  Boxborough and Southborough,  Massachusetts;  Salt Lake
City, Utah;  Blanchardstown,  Ireland;  and Changi,  Republic of Singapore.  The
Singapore  manufacturing  facility began operations in fiscal 1998 and is 3Com's
first  production  site in the Asia  Pacific  region.  The plant is the first in
Singapore to manufacture networking equipment and will produce 3Com's full range
of  high-volume  products  from  NICs and  modems  to  sophisticated  enterprise
systems. Purchasing,  mechanical assembly, burn-in, testing, final assembly, and
quality  assurance  functions  are  performed  at all 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 1997, the Company commenced
construction of 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 the new manufacturing facility in Singapore.  Both
facilities  were completed and occupied  during fiscal 1998. In fiscal 1998, the
Company commenced construction of a 525,000 square foot research and development
and  manufacturing  facility in Marlborough,  Massachusetts,  which will replace
several  existing  facilities,  and is  expected  to be  occupied  in the fourth
quarter  of  fiscal  1999.   The  Company  also  began   consolidation   of  two
manufacturing plants in the Chicago area into one facility.

COMPETITION

Networking  is a  fast-paced  market  within the  information  systems  industry
encompassing both LAN and WAN technologies that enable communications and access
to  information  over  data  and  voice  network  infrastructures.  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,  ATM,  xDSL,  cable and Layer 3 switching has
changed the  competitive  landscape and resulted in shorter product life cycles,
as well as the creation of new standards  and  competitors.  3Com's  competitors
typically  compete  in  one  or  more  segments  of the  LAN/WAN  sector  of the
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 and
strategic  partnering  activity as companies seek to provide broader  networking
solutions.

Large Enterprise Market:  Competition in the large enterprise market is centered
primarily  around three areas:  network  interface,  LAN systems and high-speed,
broadband networking.

The market for NICs is highly competitive, with companies offering products that
support a range of  Ethernet,  Fast  Ethernet,  Token Ring,  ATM and FDDI media.
Traditional   competitors  in  the  NIC  market  include  Intel,  IBM,  Standard
Microsystems and Xircom. However, as the trend from Ethernet to Fast Ethernet to
Gigabit  Ethernet  accelerates,  the competitive  landscape is changing to favor
companies that have a strong position in these faster technologies,  namely 3Com
and Intel.

The LAN systems market is characterized by a few 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,  as reflected by the  emergence  of new entrants  including  Lucent
Technologies and Northern Telecom.  Principal competitors in the network systems
large enterprise market include Bay Networks, Cabletron and Cisco Systems.

The market for  high-speed,  broadband  networking  products has grown  rapidly,
driven by companies' implementations 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,  Cisco  Systems  and Lucent  Technologies  have  network  access
switching products that are competitive with 3Com.

                                       8
<PAGE>
Small/Medium  Enterprise  Market:  Competition  in the  small/medium  enterprise
market is characterized by a large number of suppliers, ranging from small firms
with a limited number of products to very large firms from other industries with
only a few  networking  product  offerings.  The market  for  small/medium-sized
organizations  encompasses  products  ranging  from  NICs to  workgroup  hubs to
high-density switches.  Principal competitors of the Company in the small/medium
enterprise market include Bay Networks,  Cisco Systems,  Dlink,  Hewlett-Packard
and Intel.

Consumer/SOHO  Market:  The  consumer/SOHO  market is  characterized  by a large
number of suppliers and a dependence on brand awareness.  Products sold into the
consumer  and SOHO areas  include  modems,  entry-level  hubs and  switches  and
handheld connected organizers.

The Company's  primary  competitors  with respect to desktop modems include Boca
Research,  Hayes  Microcomputer  Products and Zoom. The Company was the first to
begin commercial  volume shipments of V.90 standard 56 Kbps technology  products
in  February  1998.  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 V.90 56 Kbps technology to market. The majority of these  manufacturers have
implemented  or intend to implement  this  high-speed  technology  with chipsets
provided by Lucent Technologies or Rockwell International.

In the emerging  high-speed  modem markets,  the Company's  primary  competitors
include: Alcatel/Hayes, Cisco Systems, Efficient, and Flowpoint for xDSL modems,
and Bay Networks, General Instruments, Motorola, RCA, and Sony for cable modems.

Handheld  connected  organizers  are an emerging  product  area.  The  Company's
competitors in this arena include Casio,  Hewlett-Packard,  Phillips,  Psion and
Sharp. During fiscal 1998, Microsoft  Corporation entered the handheld connected
organizer market as a licensor of the Windows CE operating system.

Carrier/Service   Provider  Market:  The  carrier/service   provider  market  is
characterized by intense  competition to sell remote access  concentrators  that
handle both  digital  and analog  signals for POP  connectivity.  3Com  competes
against  various   manufacturers  of  integrated  remote  access  concentrators,
including  Ascend  Communications,   Bay  Networks,  Cisco  Systems  and  Lucent
Technologies.

The carrier/service provider market is also characterized by competition to sell
head-end  equipment for emerging  high-speed  xDSL and cable  technologies.  The
Company's  competitors  for xDSL  head-end  equipment  include:  Alcatel,  Cisco
Systems,  Fujitsu/Orkit,  Lucent  Technologies and Northern  Telecom.  For cable
head-end equipment,  competitors include: Bay Networks, Cisco Systems, Com21 and
Motorola.

INTELLECTUAL PROPERTY 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 U.S. 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 147 U.S.
patents (including 141 utility patents and 6 design patents) and has been issued
39 foreign patents.  Numerous patent  applications are currently  pending in the
U.S. and other countries 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.

3Com has  registered 92  trademarks  in the United States and has  registered 64
trademarks in one or more of 75 foreign  countries.  Numerous  applications  for
registration of domestic and foreign trademarks are currently pending.

                                       9
<PAGE>
EMPLOYEES

As of May 31, 1998, 3Com had approximately 12,920 full-time  employees,  of whom
3,165 were  employed in  engineering,  3,980 in sales,  marketing  and  customer
service, 3,575 in manufacturing and 2,200 in finance and administration. None of
3Com's  employees  is  represented  by a labor  organization,  and  the  Company
considers its employee relations to be satisfactory.

ITEM 2.   PROPERTIES

The Company  operates in a number of locations  worldwide.  In fiscal 1998,  the
Company entered into a number of property transactions, as follows:

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease,  for 300,000  square feet of office and research
and  development  space and a data  center to be built on land  adjacent  to the
Company's  headquarters  site in Santa Clara,  California.  The lease expires in
August 2002, 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 $83.6
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  $83.6  million,  subject  to  certain
provisions of the lease.  Construction  of the buildings began in July 1997, and
the  Company  anticipates  that it will  occupy  the  facility  and begin  lease
payments in the second quarter of fiscal 1999.

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease, for 525,000 square feet of office,  research and
development  and  manufacturing  space  to be  built  on  land  in  Marlborough,
Massachusetts for the consolidation  and expansion of existing  operations.  The
lease  expires in August  2002,  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 $86.0  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 $86.0  million,  subject to
certain  provisions of the lease.  Construction  of the  buildings  began in the
first quarter of fiscal 1998,  and the Company  anticipates  that it will occupy
the  facility  and begin lease  payments in the fourth  quarter of fiscal  1999.
Adjacent to this property is a leased facility consisting of 100,000 square feet
of office space. This lease expires in December 1999.

During the fourth quarter of fiscal 1998,  the Company  notified the lessor of a
58-acre  parcel of land near its  existing  headquarters  in Santa  Clara of its
intention  to exercise  its option to purchase  the land for $49.5  million.  On
March 26,  1998 the option was  exercised,  and the Company  immediately  sold a
portion of the land to a third party.  Terms of the transaction  resulted in the
Company reporting a net gain of $15.8 million on the sale of the property during
the fourth  quarter of fiscal  1998.  An  additional  gain of $4.2  million  was
deferred pending the resolution of certain contingencies. The Company retained a
25-acre parcel of land for future  development.  This parcel of land is adjacent
to a 14-acre parcel of land previously purchased by the Company.

During the fourth  quarter of fiscal  1998,  the Company  paid $38.3  million to
purchase  property in Rolling Meadows,  Illinois,  which was previously under an
operating  lease.  The  property  consists  of 40 acres of land and an  existing
400,000  square foot  facility.  3Com is  expanding  the  building to a total of
510,000  square  feet and  will use the new  facility  to  consolidate  existing
operations in the Chicago area.  Construction of this facility is expected to be
completed in the first quarter of fiscal 1999.

                                       10
<PAGE>
At the end of fiscal 1998,  the Company's  primary  locations,  including  those
under construction, were as follows:

LOCATION           SQ. FT.    OWNED/LEASED    PRIMARY USE
--------           -------    ------------    -----------

United States -     120,000       Owned       Office and customer service
San Francisco
Bay Area (1)

                  1,283,000      Leased       Office, research and development,
                                              data center, distribution and
                                              manufacturing

United States -   1,800,000       Owned       Office, research and development,
Chicago Area                                  customer service and manufacturing

United States -     489,000       Owned       Office, research and development, 
Other(2)                                      and manufacturing

                    788,000      Leased       Office, research and development,
                                              distribution and manufacturing

Europe -            307,000       Owned       Office, research and development,
Ireland                                       and manufacturing


Europe -            230,000       Owned       Office, research and development
UK                                            and customer service

                     73,000      Leased       Office

Asia Pacific -      325,000      Leased       Office, distribution  and 
Singapore                                     manufacturing

(1)  The Company also holds  approximately 39 acres of land in the San Francisco
     Bay Area for development.

(2)  Includes  Salt  Lake  City,   Utah;   and   Boxborough,   Marlborough   and
     Southborough, Massachusetts.

ITEM 3.   LEGAL PROCEEDINGS

The  Company is a party to lawsuits in the normal  course of its  business.  The
Company  believes 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  intellectual  property and  securities  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.

Securities Litigation

On  March  24 and  May 5,  1997,  putative  securities  class  action  lawsuits,
captioned  Hirsch  v.  3Com  Corporation,  et al.,  Civil  Action  No.  CV764977
(Hirsch),  and Kravitz v. 3Com  Corporation,  et al., Civil Action No.  CV765962
(Kravitz),  respectively,  were filed  against  the  Company  and certain of its
officers and directors in the California Superior Court, Santa Clara County. The
complaints  allege  violations  of  Sections  25400 and 25500 of the  California
Corporations Code and seek unspecified damages on behalf of a purported class of
purchasers  of 3Com  common  stock  during the period  from  September  24, 1996
through February 10, 1997. The actions are in discovery.  No trial date has been
set.
                                       11
<PAGE>
On February 10, 1998, a putative securities class action, captioned Euredjian v.
3Com Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian),  was filed
against  3Com and several of its present and former  officers  and  directors in
United States District Court for the Northern  District of California  asserting
the same class period and factual allegations as the Hirsch and Kravitz actions.
The complaint alleges  violations of the federal  securities laws,  specifically
Sections  10(b)  and 20(a) of the  Securities  Exchange  Act of 1934,  and seeks
unspecified damages. The Company has not responded to the complaint. The Hirsch,
Kravitz  and  Euredjian  actions  were filed  after  Intel  Corporation  sharply
decreased prices on its Fast Ethernet network interface cards, which resulted in
3Com  decreasing  its prices on similar  products.  The Company  believes it has
meritorious defenses to the claims in the Hirsch,  Kravitz and Euredjian actions
and intends to contest the lawsuits vigorously. An unfavorable resolution of the
actions  could  have a  material  adverse  effect on the  business,  results  of
operations or financial condition of the Company.

Several  securities  actions have been filed  against the Company and certain of
its current and former  officers and directors  following  the Company's  merger
with U.S.  Robotics.  In December  1997,  a putative  securities  class  action,
captioned  Reiver v. 3Com  Corporation,  et al.,  Civil Action No.  C-97-21083JW
(Reiver),  was  filed in the  United  States  District  Court  for the  Northern
District  of  California.  The  complaint  alleges  violations  of  the  federal
securities  laws,  specifically  Sections  10(b)  and  20(a)  of the  Securities
Exchange  Act of 1934,  and seeks  unspecified  damages on behalf of a purported
class of  purchasers  of 3Com common  stock  during the period from May 19, 1997
through  November 6, 1997.  In December  1997 and January  1998,  seven  similar
shareholder class action lawsuits were filed in the United States District Court
for the Northern  District of Illinois and the United States  District Court for
the Northern District of California. The cases filed in the Northern District of
Illinois have been transferred to the Northern  District of California,  and the
cases  have been  consolidated  in the Reiver  action.  A  consolidated  amended
complaint will be filed shortly.

On April 3, 1998, a complaint,  captioned  Florida State Board of Administration
and Teachers  Retirement System of Louisiana v. 3Com Corporation,  et al., Civil
Action No.  C-98-1355  (Florida  State  Board),  was filed in the United  States
District Court for the Northern  District of California.  The complaint  alleges
violations of the federal securities laws,  violations of the Florida securities
laws,  common  law  fraud  and  negligent  misrepresentation  based  on  factual
allegations  similar to those asserted in the Reiver action. The Company has not
responded to the complaint.  The Company believes it has meritorious defenses to
the claims in the Reiver and Florida  State Board actions and intends to contest
the lawsuits vigorously.  An unfavorable  resolution of the actions could have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

In January 1998, two purported shareholder  complaints relating to the Company's
June  1997  merger  with  U.S.  Robotics,  captioned  Stanley  Grossman  v. 3Com
Corporation,  et al., Civil Action No. CV771335,  and Jason v. 3Com Corporation,
et al.,  Civil Action No.  CV771713,  were filed in California  Superior  Court,
Santa Clara County.  The actions  allege that 3Com,  several of its officers and
directors, and several former U.S. Robotics officers violated Sections 11 and 15
of the Securities Act of 1933 by making alleged misrepresentations and omissions
in a May 8, 1997  registration  statement.  The  complaints  seek  damages in an
unspecified  amount on behalf of a purported  class of persons who  received the
Company's stock during the merger pursuant to the  registration  statement.  The
Company has not responded to the  complaints.  The Company has filed a motion in
Delaware  Chancery  Court  seeking  an  injunction  preventing  plaintiffs  from
proceeding, on the basis that plaintiffs' claims are barred by a settlement in a
prior action. The Company believes it has meritorious defenses to the claims and
intends to contest the lawsuits  vigorously.  An  unfavorable  resolution of the
actions  could  have a  material  adverse  effect on the  business,  results  of
operations or financial condition of the Company.

In February 1998, a shareholder  derivative action  purportedly on behalf of the
Company,  captioned,  Wasserman v. Benhamou,  et al., Civil Action No. 16200-NC,
was filed in Delaware  Chancery Court. The complaint  alleges that the Company's
directors  breached their fiduciary duties to the Company by engaging in alleged
wrongful  conduct from mid-1996  through  November  1997,  including the conduct
complained of in the securities litigation described above. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company  and the  individual  defendants  have  filed a motion  to  dismiss  the
complaint.
                                       12
<PAGE>
Intellectual Property Litigation

On  April  28,  1997,  Xerox   Corporation  filed  suit  against  U.S.  Robotics
Corporation  and U.S.  Robotics Access Corp. in the United States District Court
for  the  Western  District  of  New  York.  The  case  is now  entitled:  Xerox
Corporation v. U.S.  Robotics  Corporation,  U.S.  Robotics  Access Corp.,  Palm
Computing,  Inc.  and  3Com  Corporation,  Civil  Action  No.  97-CV-6182T.  The
complaint  alleges  willful  infringement  of a United States patent relating to
computerized  interpretation  of  handwriting.  The complaint  further prays for
unspecified  damages and injunctive  relief.  Xerox has asserted that "Graffiti"
software and certain products of Palm Computing,  Inc. infringe the patent.  The
Company believes it has meritorious defenses to the claims and is contesting the
lawsuit  vigorously.  An  unfavorable  resolution  of the  action  could  have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

By an agreement  effective  February 27, 1998,  the Company and  Motorola,  Inc.
settled the patent lawsuit  pending  between  Motorola,  Inc. and U.S.  Robotics
Corporation,  U.S. Robotics Access Corp. and U.S. Robotics Mobile Communications
Corp. in the United  States  District  Court for the District of  Massachusetts,
Civil Action No. 97-10339RCL. This case was dismissed on March 31, 1998. None of
the parties  admitted fault. In connection with the settlement,  the Company and
Motorola, Inc. entered into a cross-license of their respective patents relating
to high-speed  analog modem  technologies  for  implementation  of international
standard data  communication  protocols.  The terms of the  settlement  were not
material to the business,  results of  operations or financial  condition of the
Company.

During February 1998 the Company and Livingston  Enterprises,  Inc. (Livingston)
agreed to settle the cases pending between  Livingston and U.S.  Robotics in the
United States  District  Court for the Northern  District of  California,  Civil
Action Nos. C-97-3551CRB and C-97-3487CRB. These actions were dismissed on March
4,  1998.  Neither  party  admitted  fault in the  settlement.  The terms of the
settlement, which were not disclosed, were not material to the business, results
of operations, or financial condition of the Company.

Consumer Litigation

A putative  consumer class action pending against the Company and U.S.  Robotics
in the California Superior Court, Marin County, Bendall, et al. v. U.S. Robotics
Corporation,  et al.,  Civil  Action No.  170441  (Bendall),  arising out of the
purchase of x2TM products and products upgradeable to x2, was coordinated with a
previously  filed  individual  action  in the  California  Superior  Court,  San
Francisco County,  Intervention Inc. v. U.S. Robotics Corporation,  Civil Action
No. 984352.  Two putative  consumer class action  lawsuits  pending  against the
Company and U.S.  Robotics  in state  court of Illinois  arising out of the same
facts as those alleged in the California  cases are stayed.  Lippman,  et al. v.
3Com, Civil Action No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics Access
Corporation,  et al., Civil Action No. 97 CH 14417.  In June,  1998, the Company
filed a demurrer to the First Amended  Complaint  filed in Bendall.  The Company
believes it has  meritorious  defenses to these  lawsuits and intends to contest
the lawsuits vigorously.  An unfavorable  resolution of the actions could have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

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

Eric A. Benhamou       42      Chairman and Chief Executive Officer

Bruce L. Claflin       46      President and Chief Operating Officer

Richard L. Edson       44      Senior Vice President, New Business Initiatives

                                       13
<PAGE>

    NAME               AGE      POSITION
    ----               ---      --------

Debra J. Engel         46      Senior Vice President, Corporate Services

Ralph B. Godfrey       58      Senior Vice President, Sales for the Americas

John H. Hart           52      Senior Vice President and Chief Technical Officer

Randy R. Heffner       48      Senior Vice President, Operations

Richard W. Joyce       42      Senior Vice President, Worldwide Sales

Alan J. Kessler        41      Senior Vice President, Global Customer Service

Ross W. Manire         46      Senior Vice President, Carrier Systems
                               Business Unit

Edgar Masri            40      Senior Vice President and General Manager,
                               Small to Medium Enterprise Business Unit

Mark D. Michael        47      Senior Vice President, General Counsel
                               and Secretary

Eileen Nelson          51      Senior Vice President, Human Resources

Christopher B. Paisley 46      Senior Vice President, Finance and Chief
                               Financial Officer

Janice M. Roberts      42      Senior Vice President, Global Marketing
                               and Business Development

Ronald A. Sege         41      Senior Vice President, Enterprise Systems
                               Business Unit

Douglas C. Spreng      54      Senior Vice President, Client Access
                               Business Unit

Thomas L. Thomas       49      Senior Vice President, Global Information
                               Systems and Chief Information Officer

Eric A. Benhamou has been the Company's Chief Executive  Officer since September
1990 and served as the  Company's  President  from April 1990 through July 1998.
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.  Mr.  Benhamou
serves as Chairman of the Board of Directors of Cypress Semiconductor,  Inc. and
as a director of Legato Systems, Inc. and Netscape Communications Corporation.

Bruce L. Claflin has been  President and Chief  Operating  Officer of 3Com since
August  1998.  Prior to joining  the  Company,  Mr.  Claflin  worked for Digital
Equipment  Corporation  beginning in November 1995, most recently as Senior Vice
President  and General  Manager,  Sales and  Marketing and prior to that as Vice
President  and  General  Manager of  Digital  Equipment  Corporation's  Personal
Computer  Business  Unit.  For 22 years  prior to working  at Digital  Equipment
Corporation,  Mr.  Claflin  held a number of  senior  management  and  executive
positions at International Business Machines Corporation.

                                       14
<PAGE>
Richard L. Edson has been Senior Vice President,  New Business Initiatives since
June 1997. Prior to joining the Company,  Mr. Edson worked for U.S.  Robotics as
Vice President and General Manager,  Manufacturing  beginning in July 1995. From
1987 to 1995, Mr. Edson worked for Thinking Machines Corporation,  where he held
the position of Chief Operating  Officer from 1994 to 1995, and other management
positions,  including  Vice  President  of  Core  Products,  Vice  President  of
Manufacturing, and Director of Manufacturing from 1987 to 1993.

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.  Ms.  Engel serves as a
director of Aspect Telecommunications.

Ralph B. Godfrey has been Senior Vice  President,  Sales for the Americas  since
June 1998.  From June 1997 to June 1998, Mr. Godfrey was Senior Vice  President,
Client Access  Products,  Americas Sales. Mr. Godfrey was Senior Vice President,
Global Channel Sales from August 1996 to May 1997.  From June 1993 to July 1996,
Mr.  Godfrey was Vice  President,  Channel Sales - North  America.  Mr.  Godfrey
joined  3Com in June 1990 as Vice  President  of 3Com USA,  a  position  he held
through  May 1993.  Mr.  Godfrey  serves as a  director  of  Interlink  Computer
Sciences, Inc.

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 his most recent position was Vice President of Network Products.

Randy R.  Heffner has been Senior Vice  President,  Operations  since June 1997.
From  July  1992  through  May  1997,  Mr.  Heffner  was the Vice  President  of
Manufacturing for 3Com's Personal Connectivity Operations.  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,  Worldwide  Sales since June
1998.  Previously,  Mr.  Joyce had 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. From January 1990 to June 1995, Mr. Joyce served as President,  3Com Europe
Limited.

Alan J. Kessler has been Senior Vice President,  Global  Customer  Service since
June 1998.  From June 1997 to June 1998, Mr. Kessler was Senior Vice  President,
Enterprise Systems Business Unit, Global Sales and Service.  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 to 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.

Ross W. Manire has been Senior Vice  President,  Carrier  Systems  Business Unit
since June 1997.  Prior to  joining  the  Company,  Mr.  Manire  worked for U.S.
Robotics in a variety of management  roles,  most  recently as General  Manager,
Network  Systems from April 1995 until June 1997, and as Senior Vice  President,
Operations  from  August  1992  through  March  1995.  He  also  served  as Vice
President,  Finance  beginning in August 1991 until he was named Chief Financial
Officer in March 1992,  a position he held until  March  1995.  Mr.  Manire also
served as Secretary of U.S. Robotics from March 1993 to February 1994. From 1989
to 1991, Mr. Manire was Vice President of Ridge Capital  Corporation,  a private
equity investment firm. Mr. Manire serves as a director of Cerion  Technologies,
Inc. and EA Industries, Inc.

Edgar Masri has been Senior Vice President and General Manager,  Small to Medium
Enterprise  Business Unit since June 1998.  From September 1995 to May 1998, Mr.
Masri  served as Vice  President  and  General  Manager,  Premises  Distribution
Division.  Mr. Masri was Director of Marketing,  Premises  Distribution Division
for two years prior to becoming General Manager.  He has held several  marketing
director  positions for 3Com product lines and management roles in the fields of
business development, engineering and project management.

                                       15
<PAGE>
Mark D. Michael has been the Company's  Senior Vice  President,  General Counsel
and Secretary  since  September  1997. Mr. Michael joined the Company in 1984 as
Counsel,  was named Assistant Secretary in 1985, and General Counsel in 1986. In
1989, Mr. Michael was named Corporate 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 in San
Francisco, California from 1981 to 1984.

Eileen Nelson has been Senior Vice  President,  Human Resources since July 1998.
From  April  1997  until July 1998,  Ms.  Nelson  served as the  Company's  Vice
President,  Enterprise Systems, Human Resources. From 1988 until April 1997, Ms.
Nelson held various Human Resources  director level roles at the Company.  Prior
to joining the Company,  Ms.  Nelson  served as Director,  Human  Resources  for
Tandon Corporation from 1985 to 1988. From 1983 to 1985, Ms. Nelson was the Vice
President, Human Resources and Administration at Davong Systems.

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 1985 until July 1996, he was Vice  President,  Finance and
Chief  Financial  Officer.  From 1982 to 1985, Mr. Paisley was Vice President of
Finance of Ridge  Computers.  From 1977 to 1982,  Mr.  Paisley held a variety of
finance and accounting positions at Hewlett-Packard  Company. Mr. Paisley serves
as a director of Applied Digital Access, Inc.

Janice M. Roberts has been Senior Vice President,  Global 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,  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.

Ronald  A.  Sege has been  3Com's  Senior  Vice  President,  Enterprise  Systems
Business Unit 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 September  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.

Douglas C. Spreng has been Senior Vice  President,  Client Access  Business Unit
since June 1998.  From August 1996 to May 1998,  Mr. Spreng was  Executive  Vice
President,  3Com  Interface  Products.  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,  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.  Previously,  Mr. Spreng spent 23 years
with Hewlett-Packard Company in a variety of senior marketing, manufacturing and
general management positions.

Thomas L. Thomas has been Senior Vice President,  Global Information Systems and
Chief  Information  Officer since August 1996.  From September 1995 through July
1996,  Mr.  Thomas was Vice  President,  Global  Information  Systems  and Chief
Information Officer.  From 1993 to 1995, Mr. Thomas was Vice President and Chief
Information Officer of Dell Computer Corporation.  From 1987 to 1993, Mr. Thomas
served as Vice  President of  Management  Information  Systems at Kraft  General
Foods. Mr. Thomas serves as a director of ATL Products, Inc.

                                       16
<PAGE>
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

FISCAL 1998         HIGH          LOW       FISCAL 1997         HIGH      LOW
-----------         ----          ---       -----------         ----      ---

First Quarter     $59 11/16     $43 3/16    First Quarter     $50 7/8    $33 1/2
Second Quarter     56 3/4        28 1/2     Second Quarter     76 1/2     45
Third Quarter      39 1/8        28 3/8     Third Quarter      81 3/8     33
Fourth Quarter     38            25 1/4     Fourth Quarter     51 1/8     24

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. As of May 31, 1998, the
Company had approximately 7,100 stockholders of record.  3Com's credit agreement
permits payment of cash dividends  subject to certain  limitations  based on net
income levels of the Company. However, 3Com has not paid and does not anticipate
it will pay cash dividends on its common stock.

                                       17
<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA

The following selected  financial  information has been derived from the audited
Consolidated  Financial  Statements.  The  information  set  forth  below is not
necessarily  indicative  of results of future  operations  and should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
                                             Years ended May 31,
(Dollars in thousands, except
per share and employee data) 
                           1998          1997        1996         1995         1994
--------------------------------------------------------------------------------------
<S>                     <C>          <C>          <C>          <C>          <C>       
Sales                   $5,420,367   $5,606,077   $4,284,508   $2,479,760   $1,510,608
Net income                  30,214      500,533      347,875      210,510       24,251
Net income per share:
   Basic                      0.09         1.51         1.10         0.72         0.09
   Diluted                    0.08         1.42         1.02         0.66         0.08
--------------------------------------------------------------------------------------

Total assets            $4,080,520   $3,565,841   $2,592,400   $1,734,433    $ 937,965
Working capital          1,950,757    1,574,223    1,242,095      938,672      495,940
Long-term obligations       40,358      170,652      169,536      181,872       74,106
Retained earnings        1,079,775    1,049,561      691,850      348,647      162,155
Stockholders' equity     2,807,495    2,228,344    1,650,675    1,058,119      609,839

Number of employees         12,920       13,639       11,503        7,395        4,970
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Net income for fiscal  1998  included  a pre-tax  charge of  approximately  $8.4
million  ($0.02 per share)  related to  purchased  in-process  technology  and a
pre-tax   charge  of   approximately   $253.7  million  ($0.57  per  share)  for
merger-related  costs and disposition of real estate. Net income for fiscal 1997
included a pre-tax charge of  approximately  $54.0 million ($0.15 per share) for
purchased in-process technology,  a pre-tax charge of approximately $6.6 million
($0.02 per share) for  merger-related  costs, and a tax benefit of approximately
$17.9 million ($0.05 per share) related to an acquisition. Net income for fiscal
1996 included a pre-tax charge of approximately $106.4 million ($0.31 per share)
for purchased  in-process  technology,  a pre-tax charge of approximately  $69.0
million  ($0.14 per share) for  merger-related  costs,  and a pre-tax  charge of
approximately  $1.0 million (no per share  impact) for a litigation  settlement.
Net income for fiscal  1995  included a pre-tax  charge of  approximately  $68.7
million ($0.13 per share) for purchased in-process technology,  a pre-tax charge
of approximately $40.7 million ($0.10 per share) for merger-related costs, and a
pre-tax  credit  of  approximately  $1.1  million  (no per share  impact)  for a
reduction in accrued  restructuring costs. Net income for fiscal 1994 included a
pre-tax charge of  approximately  $134.5 million ($0.44 per share) for purchased
in-process technology,  a pre-tax gain of approximately $17.7 million ($0.04 per
share) on the sale of an  investment,  and a tax benefit of  approximately  $1.2
million (no per share impact) resulting from tax law changes. See Notes 3 and 12
to the Consolidated Financial Statements for additional information on the above
transactions for fiscal years 1998, 1997, and 1996.  Excluding the non-recurring
items noted above,  net income and net income per share on a diluted basis would
have been as follows:

<CAPTION>                                                                             
                                             Years ended May 31,                      
(Dollars in thousands,
except per share data)                                                          
                           1998          1997        1996         1995         1994   
--------------------------------------------------------------------------------------
<S>                      <C>           <C>          <C>         <C>          <C>       
Net income excluding
    non-recurring items  $246,060      $543,196     $504,054    $284,699     $139,834
Net income per share
   excluding non-
   recurring items          $0.67         $1.54        $1.47       $0.89        $0.48
</TABLE>

                                       18
<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.

BUSINESS COMBINATIONS

For the year ended May 31, 1998. On June 12, 1997,  3Com  Corporation  completed
the merger with U.S. Robotics Corporation (U.S. Robotics),  the leading supplier
of products and systems for accessing  information  across the wide area network
(WAN),  including modems and remote access  products.  This merger was accounted
for as a  pooling-of-interests.  The Company  issued  approximately  158 million
shares of its common stock in exchange for all outstanding  common stock of U.S.
Robotics. The Company also assumed all options to purchase U.S. Robotics' stock,
which were converted into options to purchase approximately 31 million shares of
the Company's common stock, pursuant to the terms of the merger.

All financial  data of 3Com  Corporation  and its  subsidiaries  ("3Com" or "the
Company")  presented  in this  Form  10-K  have been  restated  to  include  the
historical  financial  information of U.S. Robotics in accordance with generally
accepted  accounting  principles  and  pursuant  to  Regulation  S-X.  The  3Com
statement  of income for the fiscal  year ended May 31,  1996 has been  combined
with the U.S.  Robotics  statement of income for the fiscal year ended September
29,  1996.  The 3Com  statement of income for the fiscal year ended May 31, 1997
has been combined with the U.S. Robotics statement of income for the period from
July 1, 1996 through May 25, 1997. This combining  methodology includes the last
three reported quarters of U.S. Robotics, ended September 29, 1996, December 29,
1996,  and March 30,  1997,  and the months of April and May 1997.  To reflect a
complete  12-month year and a  three-month  fourth  quarter and thereby  enhance
comparability of periodic reported results, U.S. Robotics' results of operations
for the month ended March 30, 1997 are included in both the  three-month  period
ended  March  30,  1997 and the  three-month  period  ended May 25,  1997.  This
presentation  has the effect of including U.S.  Robotics'  results of operations
for the  three-month  period ended September 29, 1996 in both the combined years
ended May 31, 1997 and 1996, and reflects sales of $611.4 million and net income
of $13.5 million.  The aggregate of net income for the three-month  period ended
September  29, 1996 of $13.5  million and the  one-month  period ended March 30,
1997 of $112.9  million has been reported as a decrease to the Company's  fiscal
1997  retained  earnings.  3Com's  balance sheet as of May 31, 1997 was combined
with U.S.  Robotics' balance sheet as of May 25, 1997. The combining periods are
as follows:

                FISCAL 1996         FISCAL 1997 QUARTERLY PERIODS
                -----------         -----------------------------

                YEAR ENDED       Q1'97      Q2'97       Q3'97       Q4'97
                ----------       -----      -----       -----       -----
3Com              May `96       Aug `96    Nov `96     Feb `97     May `97
U.S. Robotics    Sept `96      Sept `96    Dec `96     Mar `97     May `97*

*Three-month period which includes March, April, and May.

The results of  operations  for the fiscal  year ended May 31, 1998  contain the
combined results of both 3Com and U.S. Robotics for the entire 12 months.

During the  fourth  quarter  of fiscal  1998,  the  Company  purchased  Lanworks
Technologies,   Inc.   (Lanworks),   a  leading  provider  of  PC  network  boot
technologies   and   products,   for   approximately   $13.0  million  in  cash.
Approximately  $8.4 million of the total  purchase price  represented  purchased
in-process technology that had not yet reached technological feasibility and had
no alternative  future use. This amount was charged to the Company's  operations
in the fourth quarter of fiscal 1998.

For the year  ended May 31,  1997.  To extend  its  leadership  position  in the
enterprise  Asynchronous  Transfer Mode (ATM) market,  on October 31, 1996,  the
Company  acquired  OnStream  Networks,  Inc.  (OnStream),  a provider of ATM and
broadband  WAN and access  products.  The  acquisition  was  accounted  for as a
pooling-of-interests.   In   addition,   to   increase   its   market   presence
internationally, U.S. Robotics acquired distributors in Korea, Japan, Australia,
and Sweden,  for an aggregate  purchase  price of $13.4 million in cash,  net of
cash acquired,  and issuance of stock with a fair value of $0.1 million,  all of
which were accounted for as purchases.

                                       19
<PAGE>
For the year ended May 31, 1996. To enhance its product offerings and accelerate
its time-to-market in new technologies, the Company acquired Chipcom Corporation
(Chipcom), a provider of computer networking multi-function platforms, 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.  The acquisitions of Chipcom and
Primary Access were accounted for as  poolings-of-interests.  The acquisition of
AXON was a purchase transaction.  In addition, U.S. Robotics acquired Amber Wave
Systems, Inc. (Amber Wave) in a pooling-of-interests transaction, a developer of
local  area   network   (LAN)   switching   products,   and   acquired   Scorpio
Communications,   Ltd.  (Scorpio)  in  a  purchase   transaction,   a  designer,
manufacturer  and  marketer of scalable,  fully  redundant,  fault-tolerant  ATM
switches  that  targeted  workgroup  LAN,  corporate  backbone  and  WAN  access
environments.

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


SUPPLEMENTAL OPERATING INFORMATION FOR U.S. ROBOTICS

Following  is  supplemental  information  regarding  U.S.  Robotics'  results of
operations for the three-month period ended May 25, 1997 (in thousands). Results
for these  periods  exclude  reclassifications  made to conform to the Company's
financial statement presentation.

                                                                       Three
                                          March      April/May     Months Ended
                                          1997         1997        May 25, 1997
                                          ----         ----        ------------

Sales                                    $541,662    $  15,277      $ 556,939
Gross margin                              279,411      (49,204)       230,207

Total operating expenses                   97,457      187,557        285,014
                                         --------    ---------      ---------

Operating income (loss)                   181,954     (236,761)       (54,807)

Income (loss) before income taxes         179,647     (242,929)       (63,282)
Income tax provision (benefit)             66,720      (82,625)       (15,905)
                                         --------    ---------      ---------

Net income (loss)                        $112,927    $(160,304)     $ (47,377)
                                         ========    =========      =========

U.S.  Robotics'  sales for the month  ended  March 30,  1997  (March  1997) were
approximately  $541.7  million,  reflecting  strong market demand  worldwide for
information  access devices  including the  introduction and initial high volume
shipments of products incorporating x2TM technology (x2 products). x2 technology
increases the potential  speed for  downloading  data from 28.8 or 33.6 Kilobits
per second  (Kbps) for  standard  V.34 modems to 56 Kbps.  Consistent  with U.S.
Robotics' non-linear  quarterly sales pattern,  sales in the first two months of
the quarter were  relatively  low and in the third month of the  quarter,  which
March 1997 represents, were significantly higher.

Gross margin for March 1997 was approximately $279.4 million, or 51.6 percent of
sales.  The overall gross margin  reflected the initial high volume shipments of
x2  products,  which  generated  higher  gross  margins  due to U. S.  Robotics'
temporary  "first to market"  advantage  over  competitors  in the 56 Kbps modem
market.  Also, to a lesser  extent,  the overall gross margin  reflected  higher
margins on the initial sales of newer generation  handheld  connected  organizer
products introduced during the month.

                                       20
<PAGE>
Total operating  expenses for March 1997 were  approximately  $97.5 million,  or
18.0  percent  of sales.  Sales and  marketing  expenses  reflected  significant
spending  related to the introduction of x2 products,  other marketing  programs
designed to  generate  continuing  growth in sales and efforts to expand  market
share, and continuing investments to increase the worldwide sales force with the
intent  of  increasing   sales  of  network   systems   products.   General  and
administrative   expenses  and  research  and  development   expenses  reflected
continuing  investments  in  personnel  and systems  necessary  to support  U.S.
Robotics'  expanded level of business activity and its commitment to new product
and technology  development.  As a percentage of sales, total operating expenses
for March 1997 were low due to the non-linear sales pattern described above.

Gross  sales for the two months  ended May 25,  1997 were  approximately  $200.3
million.  Net sales after  provisions,  primarily  for  product  returns of $143
million and price protection of $33 million,  were approximately  $15.3 million.
These  results  principally  reflect  the  following  factors:   U.S.  Robotics'
non-linear sales pattern,  as described above;  lower than anticipated sales out
of the channel,  due in part to confusion about the new 56 Kbps technologies and
concerns  regarding  the absence of an  industry  standard  for 56 Kbps  modems;
efforts to reduce levels of channel inventory,  including  increased emphasis on
sales out of the channel via price reductions and other promotions;  and product
returns from channel partners whose sales out had been lower than anticipated.

Returns  during  the two  months  ended  May 25,  1997  totaled  $82.3  million,
reflecting  primarily  desktop  modems  and  remote  access  concentrators.  The
majority of the desktop modem returns  consisted of older  generation  products,
which were heavily impacted by the March 1997 introduction of U.S.  Robotics' 56
Kbps modem with x2 technology.  Returns of remote access  concentrators were due
primarily to lower than anticipated sales out of the distribution channel. Based
on negotiations with individual customers,  U.S. Robotics allowed returns during
this  period in  excess  of  customers'  contractual  rights  due to the 56 Kbps
technology transition and the desire to reduce channel inventory. Returns during
this period  exceeded  the March 30,  1997  balance in the  allowance  for sales
returns of $48.9 million by $33.4 million.

The  price  protection  provision  of $33  million  related  primarily  to price
reductions  effective subsequent to March 30, 1997 for desktop modems and remote
access concentrator product lines.

Gross margin for this period was affected  adversely by the  provision for price
protection  described  above,  a provision for  potentially  excess and obsolete
inventory of approximately $15.4 million, and unabsorbed manufacturing costs.

Operating  expenses  for the two months  ended May 25,  1997 were  approximately
$187.6 million.  Sales and marketing  expenses  reflected  significant  spending
related  to the  introduction  of x2  products  and  newer  generation  handheld
connected  organizer  products,  other marketing  programs  designed to generate
continuing  growth in sales and expand market share, and continuing  investments
to increase the  worldwide  sales force with the intent of  increasing  sales of
network systems products.  General and administrative  expenses and research and
development expenses reflected  continuing  investments in personnel and systems
necessary to support U.S. Robotics' anticipated growth and its commitment to new
product and technology  development.  As a percentage of sales,  total operating
expenses for the two months  ended May 25, 1997 were high due to the  non-linear
sales pattern described above.

Other  expenses,  net, for the two months ended May 25, 1997 were  approximately
$6.2 million.  Such expenses  reflected higher interest expense due to increased
short-term  borrowing.  During these two months,  U.S.  Robotics  increased  its
short-term  borrowings  from  approximately  $61 million to  approximately  $135
million,  comprised  of $10  million  under an existing  $90 million  short-term
borrowing  arrangement and $125 million under an existing $300 million revolving
credit  facility.  Such  borrowings  were  primarily  necessary  to fund ongoing
operating  expenses,  including  costs  associated with the launch of the new x2
technology, as well as capital expenditures.  The Company repaid such short-term
borrowing  shortly after the closing of the merger in June 1997 between 3Com and
U.S. Robotics, and the use of these borrowing arrangements is no longer expected
to be required.

The  provision  for income taxes for the two months ended May 25, 1997 was a net
benefit of  approximately  $82.6 million,  resulting in an effective tax rate of
34.0 percent.

                                       21
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years  indicated,  the percentage
of  total  sales  represented  by the  line  items  reflected  in the  Company's
consolidated statements of income:
                                                        Years Ended May 31,
                                                ------------------------------
                                                 1998        1997        1996
                                                 ----        ----        ----
Sales ......................................    100.0%      100.0%      100.0%
Cost of sales ..............................     54.6        52.1        53.4
                                                 ----        ----        ----
Gross margin ...............................     45.4        47.9        46.6
Operating expenses:
  Sales and marketing ......................     23.0        19.3        16.6
  Research and development .................     10.7         9.0         7.9
  General and administrative ...............      5.0         4.4         4.0
  Non-recurring charges:
     Purchased in-process technology .......      0.2         1.0         2.5
     Merger-related charges and other ......      4.7         0.1         1.6
                                                 ----        ----        ----
Total operating expenses ...................     43.6        33.8        32.6
                                                 ----        ----        ----
Operating income ...........................      1.8        14.1        14.0
Other income, net ..........................      0.3         0.2         0.2
                                                 ----        ----        ----
Income before income taxes .................      2.1        14.3        14.2
Income tax provision .......................      1.6         5.4         6.1
                                                 ----        ----        ----
Net income .................................      0.5%        8.9%        8.1%
                                                 ====        ====        ====
Excluding non-recurring charges:
  Total operating expenses .................     38.7%       32.7%       28.5%
  Operating income .........................      6.7        15.2        18.1
  Net income ...............................      4.5         9.7        11.7

Comparison of fiscal years ended May 31, 1998 and 1997

SALES

Fiscal 1998 sales totaled $5.42 billion,  a decline of three percent from fiscal
1997 sales of $5.61  billion.  Sales of client access  products  (e.g.,  network
interface cards (NICs) and modems) in fiscal 1998 were $2.89 billion, a decrease
of eight percent from fiscal 1997 sales of $3.15 billion. Sales of client access
products  represented  53 percent of total sales in fiscal  1998  compared to 56
percent in fiscal  1997.  Sales of network  systems  products  (e.g.,  switches,
routers, hubs, and remote access products) in fiscal 1998 were $2.53 billion, an
increase of three percent compared to fiscal 1997 sales of $2.46 billion.  Sales
of network  systems  products  represented  47 percent of total  sales in fiscal
1998,  compared  to 44  percent a year  ago.  Sales in the U.S.  represented  55
percent of total sales for fiscal 1998 and fiscal 1997. The Company  experienced
a decline from fiscal 1997 in domestic and  international  sales of four and two
percent, respectively.

Fiscal 1998 sales were affected by the following factors:

Industry  Growth Rates.  Networking  industry growth rates have slowed since the
beginning of calendar  1997.  While the industry had grown at rates in excess of
30 percent in prior years,  recent reports indicate that the networking industry
worldwide  grew by less  than 20  percent  during  1997,  and this  pattern  has
continued into 1998.

Channel  Inventory.  In the second quarter of fiscal 1998, the Company adopted a
new inventory  business model,  which generally calls for fewer weeks' supply of
inventory in the distribution  channel.  The Company  transitioned to this model
during the second and third  quarters of fiscal 1998. As a result,  sales during
these periods were adversely affected.

                                       22
<PAGE>
Modems.  Fiscal 1998 sales of modem products  decreased compared to fiscal 1997.
In January  1998,  the  International  Telecommunications  Union  (ITU)  finally
determined the V.90 standard for 56 Kbps  technology.  The Company believes that
the  previous  lack of such a  standard  contributed  to  delays  in  customers'
purchasing  decisions for higher-speed  modems and remote access  concentrators.
Although  the Company  began  shipping  V.90  standard  modems late in the third
quarter of fiscal 1998, the Company  believes  these delays,  as well as product
transitions,  adversely  affected  sales.  In  addition,  the  delay in the V.90
standard caused aggressive pricing in older generation modem products,  which in
connection with the channel inventory reduction mentioned above,  contributed to
a year-over-year decrease in sales.

Pricing.  The pricing  environment has been very  competitive,  and although the
Company experienced significant  year-over-year unit growth in key products such
as Fast Ethernet NICs and workgroup switches,  these gains were partially offset
by declines in average selling prices. For example,  in fiscal 1998, the Company
experienced price decreases between 15 and 39 percent compared to fiscal 1997 in
a number of product segments,  including modems,  workgroup  switches,  hubs and
remote access concentrators. While the trend of declining average selling prices
is  expected  to continue in future  periods,  the Company  believes  that price
erosion will be less than that experienced in fiscal 1998.

Remote Access  Concentrators.  Fiscal 1998 sales of remote access  concentrators
decreased  compared to fiscal 1997.  Factors  affecting  this decrease  included
aggressive price  competition,  including the introduction of new higher-density
products at prices  similar to the older  lower-density  products.  In addition,
sales of remote  access  concentrators  were  impacted by the channel  inventory
reduction described above.

Asia Pacific  Economic  Turmoil.  During fiscal 1998,  sales in the Asia Pacific
region  increased only four percent compared to fiscal 1997. Sales growth was 48
percent in fiscal 1997 compared to fiscal 1996.  Historically,  the Asia Pacific
region  had  been a high  growth  region  for the  networking  industry  and the
Company.  During fiscal 1998,  however,  several Asian  countries  experienced a
weakening of their local  currencies and turmoil in their financial  markets and
institutions,  which the Company believes  adversely  affected financial results
during fiscal 1998.

Handheld  Connected  Organizer  and  Switching  Products.  Fiscal  1998 sales of
handheld connected  organizer products more than doubled compared to fiscal 1997
and  achieved  growth in market  share,  according to recent  industry  reports.
Growth rates and market share gains in the handheld  connected  organizer market
may not be sustainable in the face of increasing  competition  from new entrants
to  the  market.  In  addition,   the  Company's  workgroup  switching  products
experienced   significant  unit  volume  growth  and  increased  sales,  despite
significant  declines  in average  selling  prices and the effect of the channel
inventory reduction, as described in the above paragraphs.

GROSS MARGIN

Gross margin as a percentage of sales was 45.4 percent in fiscal 1998,  compared
to 47.9 percent in fiscal 1997. In addition to the factors  mentioned above, the
Company's  year-over-year  gross margin decline was affected by several factors,
including product mix, increased price competition, and higher period costs. The
Company's  product  mix  included  higher  sales of certain  NICs and  workgroup
switching  products,  as well as an  increase  in  sales to  original  equipment
manufacturers  (OEMs),  which carry lower gross margins. The U.S. Robotics brand
modems with x2  technology  were  introduced in the third quarter of fiscal 1997
with significantly higher margins,  reflecting  first-to-market  pricing. During
the past twelve months,  increased product and price competition in this product
segment resulted in a decline in gross margin percent. Additionally, the Company
experienced  aggressive  pricing of remote access products,  as described above,
which resulted in a decline in gross margin percent.  Fixed  manufacturing costs
and period costs were a higher percentage of sales, primarily as a result of the
decrease in sales in the second and third  quarters of fiscal 1998, but also due
to excess  manufacturing  capacity.  The Company is  continuing  to  consolidate
manufacturing and distribution sites in fiscal 1999.

OPERATING EXPENSES

Operating expenses in fiscal 1998 were $2.36 billion,  or 43.6 percent of sales,
compared to $1.89  billion,  or 33.8 percent of sales in fiscal 1997.  Operating
expenses as a percentage of sales were higher than  historical  levels,  in part
due to the reduced level of sales for fiscal 1998, as discussed above. Excluding
a purchased in-process  technology charge of $8.4 million and merger-related and
other charges of $253.7  million  primarily  associated  with the U.S.  Robotics
merger,  operating  expenses would have been $2.10  billion,  or 38.7 percent of
sales for fiscal 1998.  Excluding a purchased  in-process  technology  charge of
$54.0 million  associated with the  acquisition of Scorpio and a  merger-related
charge of $6.6 million  associated with the  acquisition of OnStream,  operating
expenses  would have been  $1.83  billion,  or 32.7  percent of sales for fiscal
1997.
                                       23
<PAGE>
Sales and  marketing  expenses in fiscal  1998  increased  $165.9  million or 15
percent from fiscal 1997. Sales and marketing  expenses as a percentage of sales
increased  to 23.0  percent of sales in fiscal 1998 from 19.3  percent in fiscal
1997.  The  year-over-year  increase is  attributable  to the expansion of field
sales  and  marketing  activities  worldwide,  primarily  internationally,   and
increased  spending for the Company's  customer service  programs.  In addition,
spending  on  the  Company's   global  branding   campaign  during  fiscal  1998
contributed to increased marketing expenses from the prior year.

Research and  development  expenses in fiscal 1998 increased $79.1 million or 16
percent  compared  to  fiscal  1997.  Research  and  development  expenses  as a
percentage of sales  increased to 10.7 percent of sales  compared to 9.0 percent
of sales in fiscal 1997. The year-over-year increase in research and development
expenses in absolute  dollars and dollars as a percentage of sales was primarily
attributable  to the cost of developing  the Company's new products in the areas
of client access and  switching,  and its expansion  into new  technologies  and
markets, such as xDSL. For example,  during fiscal 1998, the Company developed a
fully-integrated  (single-chip)  Fast  Ethernet NIC, the  CoreBuilderTM  Layer 3
Switch, the Palm IIITM handheld connected  organizer,  as well as many other key
new products.  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.

General and  administrative  expenses in fiscal 1998 increased  $18.2 million or
seven  percent  from  fiscal  1997.  As  a  percentage  of  sales,  general  and
administrative  expenses  increased to 5.0  percent,  compared to 4.4 percent in
fiscal 1997. The year-over-year  increase in general and administrative expenses
in absolute dollars and dollars as a percentage of sales primarily reflected the
expansion of the Company's  infrastructure,  including personnel,  as well as an
increased provision for bad debts.

During  the fourth  quarter of fiscal  1998,  the  Company  recorded a charge of
approximately $8.4 million for purchased in-process  technology  associated with
the  Lanworks  acquisition.  See  Note 12 of  Notes  to  Consolidated  Financial
Statements.

During fiscal 1998,  the Company  recorded  merger-related  and other charges of
$253.7 million.  These charges  consisted of a  merger-related  charge and other
charges  associated with past merger  activities and disposition of real estate.
The merger-related  charge of approximately $260.7 million related to the merger
with  U.S.   Robotics.   During  the  fourth  quarter,   the  Company   reversed
approximately $10.6 million of previously recorded merger accruals.  The Company
also sold a parcel  of land near its  headquarters  site in Santa  Clara,  which
resulted in a net gain of  approximately  $15.8 million.  Also during the fourth
quarter of fiscal  1998,  the Company  made a decision to close a  manufacturing
site  in  Illinois  in  order  to  consolidate  two  Chicago-area  manufacturing
facilities into one location.  The Company  recognized a charge of approximately
$19.4 million associated with this closure. See Note 12 of Notes to Consolidated
Financial Statements.

OTHER INCOME, NET

Other income, net increased $8.4 million compared to fiscal 1997, primarily as a
result of higher  interest  income due to higher  average cash  balances.  Other
income,  net for fiscal 1998  included a charge of  approximately  $4.7  million
related to an early call premium and  write-off  of  unamortized  issuance  fees
associated with the redemption of $110 million of convertible  notes in December
1997.

The majority of the  Company's  sales are  denominated  in U.S.  Dollars.  Where
available,  the Company enters into foreign exchange forward  contracts to hedge
certain  balance  sheet  exposures  and  intercompany  balances  against  future
movements in foreign  exchange  rates.  Fiscal 1998 other  income,  net includes
foreign currency losses of  approximately  $12.3 million,  primarily  related to
Korean  operations,  where foreign  exchange hedges were not available,  or were
available only to a limited extent.

TAXES

The Company's effective income tax rate was approximately 74.1 percent in fiscal
1998  compared to 37.5  percent in fiscal  1997.  Excluding  the  non-deductible
portion of merger-related and other charges primarily associated with the merger
with U.S.  Robotics,  the pro forma  income tax rate was 35.0 percent for fiscal
1998.  Excluding a charge for purchased  in-process  technology of approximately
$54.0 million and tax benefit of approximately $17.9 million associated with the
acquisition  of Scorpio  and the  non-deductible  portion of the  merger-related
charge  associated with the merger with OnStream,  the pro forma income tax rate
was 36.9 percent for fiscal 1997.
                                       24
<PAGE>
NET INCOME

Net income for fiscal 1998 was $30.2  million,  or $0.08 per share,  compared to
net income of $500.5  million,  or $1.42 per share for fiscal 1997.  Excluding a
charge for purchased in-process  technology and merger-related and other charges
mentioned above,  net income would have been $246.1 million,  or $0.67 per share
for fiscal 1998. Excluding the purchased in-process  technology and tax benefit,
and the  merger-related  charge,  net income would have been $543.2 million,  or
$1.54 per share for fiscal 1997.

Comparison of fiscal years ended May 31, 1997 and 1996

SALES

Fiscal 1997 sales totaled $5.61  billion,  an increase of 31 percent from fiscal
1996 sales of $4.28 billion. Sales of client access products in fiscal 1997 were
$3.15  billion,  an  increase  of 30  percent  from  fiscal  1996 sales of $2.43
billion.  Sales of client access products in fiscal 1997  represented 56 percent
of total sales compared to 57 percent in fiscal 1996.  Sales of network  systems
products in fiscal 1997 were $2.46 billion,  an increase of 32 percent  compared
to  fiscal  1996  sales of $1.86  billion.  Sales of  network  systems  products
represented 44 percent of total sales in fiscal 1997,  compared to 43 percent in
fiscal 1996.  Fiscal 1997 sales growth was  particularly  strong in the areas of
Fast  Ethernet  NICs,  stackable  hubs  and  switches,   modems,  remote  access
concentrators, ATM high-function switches and handheld connected organizers.

Sales in the U.S. represented 55 percent of total sales for fiscal 1997 compared
to 60 percent for fiscal 1996. U.S. and international  sales increased 21 and 45
percent,  respectively,  compared to fiscal 1996. The increase in  international
sales was a result of strong growth in the European and Asia Pacific regions due
to the Company's  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.

GROSS MARGIN

Gross margin as a percentage  of sales was 47.9 percent in fiscal 1997  compared
to 46.6  percent  in  fiscal  1996.  The  U.S.  Robotics  brand  modems  with x2
technology   were   introduced  in  the  third  quarter  of  fiscal  1997,  with
significantly higher margins,  reflecting first-to-market pricing. The Company's
year-over-year  gross margin increase  primarily  reflected an improved  product
mix,  specifically  higher sales of certain modems,  workgroup switching and hub
products  and lower  sales of network  access  concentrators  and lower  product
material  costs of certain  NICs.  The increase in gross  margins was  partially
offset by a higher sales mix of certain lower margin NICs and increased  pricing
pressures on remote  access  products.  During the third quarter of fiscal 1997,
the  Company  reduced  its  average  selling  prices  on Fast  Ethernet  NICs by
approximately  40 percent in response to increased  competition,  thus causing a
decline in gross margins, which was not completely reflected in fiscal 1997.

OPERATING EXPENSES

Operating expenses in fiscal 1997 were $1.89 billion,  or 33.8 percent of sales,
compared to $1.39 billion, or 32.6 percent of sales in fiscal 1996.  Excluding a
purchased  in-process  technology  charge of $54.0 million  associated  with the
Scorpio acquisition and a merger-related  charge of $6.6 million associated with
the OnStream  acquisition,  operating expenses would have been $1.83 billion, or
32.7  percent  of sales  for  fiscal  1997.  Excluding  a  purchased  in-process
technology charge of $106.4 million  associated with the acquisitions of Scorpio
and AXON and  merger-related  and  other  charges  of  $70.0  million  primarily
associated with the acquisition of Chipcom,  operating  expenses would have been
$1.22 billion, or 28.5 percent of sales for fiscal 1996.

Sales and  marketing  expenses in fiscal  1997  increased  $372.4  million or 53
percent from fiscal 1996. Sales and marketing  expenses as a percentage of sales
increased  to 19.3  percent of sales in fiscal 1997 from 16.6  percent in fiscal
1996.  The  year-over-year  increase is  attributable  to the expansion of field
sales and marketing activities and personnel  worldwide,  as well as an increase
in spending for the  Company's  customer  service  programs.  In  addition,  the
Company increased  spending on advertising and marketing  incentive programs and
promotions associated with the introduction of the x2 products.

Research and development  expenses in fiscal 1997 increased $164.7 million or 49
percent  compared  to  fiscal  1996.  Research  and  development  expenses  as a
percentage of sales increased to 9.0 percent of sales compared to 7.9 percent of
sales in fiscal 1996. The  year-over-year  increase in research and  development
expenses in absolute  dollars and dollars as a percentage of sales was primarily
attributable  to the cost of  developing  new  products  in the  areas of client
access,   switching,   and  network   management  and  its  expansion  into  new
technologies and markets.

                                       25
<PAGE>
General and administrative expenses in fiscal 1997 increased $79.6 million or 47
percent from fiscal 1996. As a percentage of sales,  general and  administrative
expenses  increased to 4.4 percent,  compared to 4.0 percent in fiscal 1997. The
year-over-year  increase  in general  and  administrative  expenses  in absolute
dollars and dollars as a percentage of sales  primarily  reflected the expansion
of  the  Company's  infrastructure,  including  facilities,  personnel,  and  an
increased provision for bad debts.

OTHER INCOME, NET

Other income,  net was 0.2 percent of sales in both fiscal 1997 and fiscal 1996.
Other income,  net for fiscal 1997 reflected  increased  interest  income due to
higher cash and investment balances,  which was offset by increased interest and
other  expense due to higher  levels of  short-term  debt.  The  majority of the
Company's sales are denominated in U.S.  Dollars.  Where available,  the Company
enters into foreign  exchange  forward  contracts to hedge certain balance sheet
exposures and intercompany balances against future movements in foreign exchange
rates.  The impact of foreign  exchange was not  significant  for fiscal 1997 or
1996.

TAXES

The Company's effective income tax rate was approximately 37.5 percent in fiscal
1997  compared to 43.0 percent in fiscal 1996.  Excluding a charge for purchased
in-process  technology  of  approximately  $54.0  million  and  tax  benefit  of
approximately  $17.9 million  associated with the acquisition of Scorpio and the
non-deductible  portion of the merger-related  charge associated with the merger
with  OnStream,  the pro forma income tax rate was 36.9 percent for fiscal 1997.
Excluding  the  non-deductible   purchased   in-process   technology  charge  of
approximately  $106.4 million  associated  with the  acquisitions of Scorpio and
AXON, and merger-related and other charges,  primarily  associated with Chipcom,
the pro forma income tax rate was 35.9 percent for fiscal 1996.

NET INCOME

Net income for fiscal 1997 was $500.5 million,  or $1.42 per share,  compared to
net income of $347.9 million, or $1.02 per share for fiscal 1996.  Excluding the
purchased  in-process  technology and related tax benefit and the merger-related
charge,  net  income  was $543.2  million,  or $1.54 per share for fiscal  1997.
Excluding the  purchased  in-process  technology  and  merger-related  and other
charges  mentioned above, net income was $504.1 million,  or $1.47 per share for
fiscal 1996.

BUSINESS ENVIRONMENT AND RISK FACTORS

Financial Model. In managing its business,  the Company  annually  establishes a
long-term financial model based on observed and anticipated trends in technology
and the  marketplace.  The  model,  which  includes  ranges  for  gross  margin,
operating  expenses and operating  income, is not intended to be a prediction of
future financial results,  rather, it is used to assist the Company's management
in making  decisions  about the  allocation  of resources and  investments.  The
current model is as follows:

         Gross margin                          45.5 - 47.5%
         Operating expenses                    27.5 - 29.5%
         Operating income                      16.0 - 20.0%

The gross margin and operating  expenses ranges of the model were reduced during
fiscal 1998 to reflect,  in part,  increasing sales attributable to PC OEMs, the
emerging  importance  of the consumer and small  enterprise  market  segment and
increased price competition.  The Company is not currently  operating within the
ranges of the model  and does not  expect  that its  financial  results  will be
within  these  ranges in the  short-term.  While  the  Company  expects  to make
progress toward these ranges in fiscal 1999,  there can be no assurance that the
Company  will do so or that actual  results in any  particular  period will fall
within the ranges stated in the long-term model above.

Competition and Pricing.  The Company participates in a highly volatile industry
characterized  by  vigorous  competition  for market  share,  rapid  product and
technology  development,  uncertainty  over  adoption of industry  standards and
declining  prices.  The Company's  competition  comes from  start-up  companies,
well-capitalized  computer  systems  and  communications  companies,  and  other
technology  companies.  Many of the Company's current and potential  competitors
have greater financial, marketing and technical resources than the Company.

                                       26
<PAGE>
The effects of intense  competition in the Company's industry include aggressive
pricing practices and declining product prices, which have directly impacted the
Company's operating results.  For example,  the Company's results in fiscal 1998
were negatively  impacted by decreasing  prices in the modem market resulting in
part from  increased  competition  for  market  share,  particularly  in the OEM
channel,  and the  availability  of  low-priced  components.  In  addition,  the
introduction  of the new V.90 56 Kbps  technology  placed  significant  downward
price pressure on older products.  Significant competition and decreasing prices
have also impacted  other product  lines,  including  switches,  hubs and remote
access concentrators.

There  can  be no  assurance  that  intense  competition  in  the  industry  and
particular actions of the Company's  competitors will not have an adverse effect
on the  Company's  business,  operating  results  and  financial  condition.  In
particular,  the  Company  expects  that  prices  on many of its  products  will
continue  to decrease  in the future and that such price  decreases  may have an
adverse  impact on the  results of  operations  or  financial  condition  of the
Company.

Development and Introduction of New Products. The Company is actively engaged in
the research and  development of new  technologies  and products.  The Company's
success depends,  in substantial  part, on the  identification of new market and
product opportunities and the development and market acceptance of new products,
such as the recently  introduced  CoreBuilder  Layer 3 Switches.  The  Company's
business, operating results, or financial condition may be adversely affected by
a change in one or more of the technologies affecting network communications,  a
change in market demand for products based on a particular technology, a failure
to develop new products,  delays in shipping new products, or technical problems
with new products.

With the highly competitive nature of the Company's  industry,  new products are
routinely introduced by competitors.  For example, Microsoft Corporation and its
licensees  recently entered the handheld  connected  organizer market to compete
with the Palm  Computing(R)  platform,  the Company's  fastest  growing  product
category. The Company's business may be adversely impacted by the development by
competitors  of products and  technologies  that render the  Company's  products
obsolete or noncompetitive.

The  Company's  success  also  depends,  in part,  on the  adoption  of industry
standards,  the timely  introduction of new  standards-compliant  products,  and
market  acceptance of these  products.  For example,  the V.90 Kbps standard was
established  in January  1998,  and the  Company  introduced  V.90  products  in
February 1998. The Company's  results have been and will continue to be affected
by the extent to which the V.90  technology  is  deployed  by  Internet  service
providers and adopted by Internet and other modem users.  Slow market acceptance
of new technologies and industry standards, such as the V.90 technology, can and
will have an adverse impact on the Company's  results of operations or financial
condition.

Industry  Consolidation  and Integration of Acquired  Companies.  The networking
industry is in a period of significant consolidation. For example, during fiscal
1998,  the Company  merged  with U.S.  Robotics,  Cisco  Systems  acquired  nine
companies,  Bay Networks acquired four companies,  Lucent Technologies  acquired
four  companies,  and  Northern  Telecom  announced  that it would  acquire  Bay
Networks.  The Company  expects  that  networking  industry  consolidation  will
continue,    including    combinations   between   traditional    suppliers   of
telecommunications  or voice  networking and data networking  companies.  Future
business  combinations may result in companies with strong competitive positions
and products.  Continued consolidation may have a material adverse effect on the
Company's business, operating results or financial condition.

During  fiscal  1998,  the  Company  completed  the merger  with U.S.  Robotics.
Achieving  the  benefits of an  acquisition  depend,  in part,  upon whether the
integration of the acquired business,  products or technology is accomplished in
an efficient and effective manner.  There can be no assurance with the Company's
recent acquisitions or any future acquisitions that the products,  technologies,
distribution  channels,  customer  support  operations,  management  information
systems,  research  and  development  efforts and key  personnel of the acquired
companies will be effectively assimilated into the Company's business or product
offerings.  The failure to effectively  integrate  acquired  companies and their
products  could  have a  material  adverse  effect  on the  Company's  business,
operating results, or financial condition.

Declining Industry Growth Rates. The Company's success is dependent, in part, on
the overall  growth  rate of the  networking  industry.  In 1997 and early 1998,
industry growth was well below historical rates.  There can be no assurance that
the  networking  industry  will  continue to grow or that it will again  achieve
higher growth  rates.  The Company's  business,  operating  results or financial
condition may be adversely  affected by any further decrease in industry growth.
In addition,  there can also be no assurance  that the Company's  results in any
particular  period  will fall  within the ranges for growth  forecast  by market
researchers.
                                       27
<PAGE>
Reliance on  Distributors,  Resellers and OEMs.  The Company sells a significant
portion of its products to  distributors,  resellers  and OEMs. In recent years,
the  percentage  of products  sold through  these  channels has  increased.  The
Company's  reliance on distributors,  resellers and OEMs subjects the Company to
many risks, including inventory, credit and business concentration.

The Company's  distributors  and resellers  maintain  significant  levels of the
Company's  products in their  inventories.  The Company  attempts to ensure that
appropriate  levels of products are  available  to end users by working  closely
with  distributors  and  resellers  to manage  inventory  levels.  In the second
quarter of fiscal 1998,  the Company  adopted a new  inventory  business  model,
which  generally  calls for fewer weeks'  supply of inventory in the channel and
the Company  accepting  some inventory  risk  previously  held by its customers.
There can be no  assurance  that the Company  will be  successful  in efforts to
manage  the  inventory  levels of its  distributors  and  resellers  or that the
Company will be able to  successfully  operate its business within its inventory
business model.  Any failure by the Company to do so could adversely  affect the
Company's business,  operating results or financial condition.  In addition, the
Company's results could be negatively impacted if the Company's distributors and
resellers implement a different channel inventory model.

The distribution and reseller  channels utilized by the Company have undergone a
significant  level of consolidation.  As a result,  the Company has an increased
concentration  of credit risk. While the Company monitors and attempts to manage
this risk,  financial  difficulties  on the part of one or more of the Company's
distributors  or resellers may have a material  adverse  effect on the Company's
results of operations or financial condition.

The Company derives an increasing  portion of its sales from OEMs,  including PC
companies that bundle 3Com NICs and modems,  and incorporate  3Com chipsets into
their products.  The Company expects that the trend toward  increasing OEM sales
will  continue.  As  a  result,  the  Company's  future  operating  results  are
dependent,  in  part,  on the  Company's  ability  to  establish,  maintain  and
strengthen relationships with OEMs. Because sales to OEMs are typically at lower
prices and result in lower margins to the Company, the Company's sales and gross
margins may be adversely  impacted if, as the Company expects,  OEMs continue to
become a larger percentage of the business.

Product  Integration.  Certain OEMs in the PC industry have,  from time to time,
chosen to integrate  networking and modem functions on the PC  motherboard.  For
example,  the Company currently sells networking chipsets to Dell Computer which
are integrated directly onto the PC motherboard of Dell's high-end Optiplex line
of PCs. While no clear long-term trend has emerged,  should integration become a
trend, the Company's future sales growth could be adversely impacted.

Reliance  on  Suppliers.  Some key  components  of the  Company's  products  are
currently available only from single or limited sources. In addition, certain of
the Company's  suppliers are  competitors of the Company.  While the Company has
generally  been able to obtain  adequate  supplies of  components  from existing
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  business,  operating  results,  financial
condition or customer  relationships  could be  adversely  affected by either an
increase  in prices  for,  or an  interruption  or  reduction  in supply of, key
components.

International  Markets.  The Company operates  internationally  and expects that
international  markets will continue to account for a significant  percentage of
the Company's sales.  Many  international  markets are characterized by economic
and political  instability and currency  fluctuations  that can adversely affect
the Company's operating results or financial condition.

The recent  instability in the Asian financial  markets has negatively  impacted
the Company's sales in those markets by, among other things, decreasing end-user
purchases, increasing competition from local competitors offering sales terms in
local currencies,  and reducing access to sources of capital needed by customers
to make  purchases.  In addition to reducing  sales,  difficulties  in Asia have
subjected the Company's resellers to financial difficulties and may increase the
Company's  credit risk as customers  become  insolvent  or otherwise  have their
ability to meet obligations  impaired.  Should the economic  environment in Asia
fail to improve,  the Company may consider  continuing to expand its exposure to
foreign currencies to preserve long-term customer relationships.

There can be no assurance that the instability in Asia will not continue to have
an adverse effect on the Company's operating results.  In addition,  there is no
assurance that similar  situations in other markets will not occur and adversely
impact the Company. In particular,  significant fluctuations in foreign currency
could have an adverse  impact on the  Company's  sales and/or  foreign  currency
exchange exposures.
                                       28
<PAGE>
Ability to Satisfy Product Orders.  The timing and amount of the Company's sales
are  dependent on a number of factors  that make  estimating  operating  results
prior to the end of any period  uncertain.  For  example,  the Company  does not
typically maintain a significant backlog and, as a result,  product sales in any
quarter are dependent on orders booked and shipped in that quarter. In addition,
the Company's  customers  historically  request fulfillment of orders in a short
period of time,  resulting in limited  visibility to sales trends.  As a result,
the Company's  operating  results  depend on the volume and timing of orders and
the Company's  ability to fulfill the orders in a timely  manner.  The Company's
results of  operations  or financial  condition  would be adversely  affected if
incoming order rates decline, if ordered products are not readily available,  or
if the Company is not able to immediately fill orders.

From time to time,  the  Company  has shipped a  significant  percentage  of its
products in the third month of a fiscal  quarter.  This  subjects the Company to
risks such as unexpected disruptions in functions including manufacturing, order
management,  information systems and shipping. Should the percentage of sales in
the third month of a quarter escalate, or should a significant disruption in the
Company's  functions  occur,  there could be an adverse  affect on the Company's
results of operations or financial condition.

Inventory.  In recent  periods,  the  Company's  inventory  has been higher than
historical levels. High levels of inventory increase the exposure to the Company
when products in inventory become obsolete or otherwise not saleable.  While the
Company expects to reduce the level of its inventory over time,  there can be no
assurance  that it will be  successful  in doing  so,  or that  products  in the
Company's  inventory will not become obsolete.  Failure to adequately manage the
levels of inventory could adversely  impact the Company's  operating  results or
financial condition.

Product  Warranties.  The Company's products are covered by warranties,  and the
Company is subject to contractual  commitments to perform under such warranties.
If unexpected  circumstances arise such that products do not perform as intended
and the Company is not  successful in resolving  product  quality or performance
issues,  there could be an adverse impact on the operating  results or financial
condition of the Company.

Intellectual  Property  Rights.  The Company has  received,  and may continue to
receive,  notice of claims of infringement of other parties' proprietary rights.
Many   of   the   Company's   competitors,   in   particular   the   traditional
telecommunications  companies,  have large patent portfolios.  The Company, from
time to time, must negotiate  licenses or  cross-licenses  with third parties to
obtain   rights  to   incorporate   proprietary   technologies,   protocols   or
specifications.  Any failure by the Company to obtain and maintain licenses,  on
favorable terms, for intellectual  property rights required for the manufacture,
sale and use of its products, particularly those which must comply with industry
standard  protocols and specifications to be commercially  viable,  could have a
material  adverse  effect on the  Company's  business,  results of operations or
financial condition.

The Company may be subject to litigation  based on claimed  infringement  of the
rights of others or to  determine  the  scope and  validity  of the  proprietary
rights of others.  Any such  litigation  could be costly and cause  diversion of
management's attention,  either of which could have a material adverse effect on
the Company's business,  results of operations or financial  condition.  Adverse
determinations  in such  litigation  could  subject the  Company to  significant
liabilities,  require the Company to seek licenses  from others,  or prevent the
Company from manufacturing and selling its products, any one of which could have
a material adverse effect on the Company.

Electronic  Commerce  and  Electronic  Data  Interchange  (EDI).  Many  vendors,
distributors  and resellers have been  successful in the direct sale of products
to customers  who wish to order  products on the Internet or through EDI.  These
trends have enabled  manufacturers  to increase  business volume and lower their
cost  structures.  There can be no assurance that the Company will  successfully
implement or continue to expand such systems in a timely  manner,  and a failure
to do so could adversely affect results of operations or financial condition.

Dependence  on Key  Personnel  and  Recruiting.  The success of the Company will
depend to a  significant  extent upon a number of key  technical  employees  and
management.  The loss of the  services  of key  employees  could have a material
adverse  effect  on the  Company's  business,  operating  results  or  financial
condition.  In addition,  recruiting and retaining skilled personnel,  including
qualified engineers,  is highly competitive.  If the Company cannot successfully
recruit and retain skilled  personnel,  the Company's  financial  results may be
adversely affected.
                                       29
<PAGE>
Year 2000  Compliance.  As is true for most  companies,  the Year 2000  computer
issue  creates a risk for 3Com.  If  systems  do not  correctly  recognize  date
information  when the year changes to 2000,  there could be an adverse impact on
the Company's  operations.  The risk for 3Com exists in four areas: systems used
by the Company to run its  business,  systems used by the  Company's  suppliers,
potential  warranty  or other  claims  from 3Com  customers,  and the  potential
reduced  spending by other  companies  on  networking  solutions  as a result of
significant  information systems spending on Year 2000 remediation.  The Company
is currently evaluating its exposure in all of these areas.

3Com is in the process of conducting a comprehensive inventory and evaluation of
the information systems used to run its business.  3Com has a number of projects
underway to replace older systems that are known to be Year 2000  non-compliant.
Other  systems,  which are  identified  as  non-compliant,  will be  upgraded or
replaced.  For the Year 2000 non-compliance  issues identified to date, the cost
of  remediation  is not  expected  to be  material  to the  Company's  operating
results.  However,  if implementation of replacement  systems is delayed,  or if
significant new non-compliance  issues are identified,  the Company's results of
operations or financial condition could be materially adversely affected.

3Com is also in the process of  contacting  its critical  suppliers to determine
that the  suppliers'  operations  and the products and services they provide are
Year 2000 compliant. Where practicable,  3Com will attempt to mitigate its risks
with respect to the failure of suppliers  to be Year 2000 ready.  However,  such
failures  remain a possibility and could have an adverse impact on the Company's
results of operations or financial condition.

The Company  believes  its current  products are Year 2000  compliant;  however,
since  all  customer  situations  cannot  be  anticipated,   particularly  those
involving third party  products,  3Com may see an increase in warranty and other
claims  as a  result  of the  Year  2000  transition.  In  addition,  litigation
regarding  Year  2000  compliance  issues is  expected  to  escalate.  For these
reasons,  the impact of customer claims could have a material  adverse impact on
the Company's results of operations or financial condition.

Year 2000  compliance is an issue for virtually all  businesses,  whose computer
systems and applications may require significant  hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a  substantial  portion  of their  information  systems'  spending  to fund such
upgrades and modifications  and divert spending away from networking  solutions.
Such  changes in  customers'  spending  patterns  could have a material  adverse
impact on the Company's sales, operating results or financial condition.

Fluctuations  in Quarterly  Results.  The  Company's  operating  results for any
particular  quarter are  difficult  to predict and may continue to be subject to
significant fluctuations.  These fluctuations can be caused by a wide variety of
factors,  including  the  volume  and timing of  orders,  the  introduction  and
acceptance  of  new  products  and  technologies,   price  competition,  general
conditions  and  trends  in  the  networking  industry  and  technology  sector,
disruption  in  international   markets,   general  economic   conditions,   and
extraordinary   events  such  as  industry   consolidation,   acquisitions,   or
litigation.  For example, the first quarter of the fiscal year has traditionally
been the Company's lowest sales quarter,  as it includes the three summer months
of June,  July and August.  These  factors,  and  accompanying  fluctuations  in
periodic  operating  results,  could have a  significant  adverse  impact on the
market price of the Company's common stock.

LIQUIDITY AND CAPITAL RESOURCES

Cash and  equivalents  and  short-term  investments  at May 31,  1998  were $1.1
billion, increasing $186.1 million from May 31, 1997. At the end of fiscal 1997,
cash and equivalents and short-term investments were $889.9 million.

For the fiscal  year  ended May 31,  1998,  net cash  generated  from  operating
activities  was $626.2  million.  Accounts  receivable at May 31, 1998 decreased
$109.5 million from May 31, 1997 to $849.6  million.  Days sales  outstanding in
receivables decreased to 56 days at May 31, 1998, compared to 63 days at May 31,
1997.  Inventory levels at May 31, 1998 increased $90.1 million,  of which $70.1
million was finished  goods,  from the prior fiscal  year-end to $644.8 million.
Average  inventory  turnover  was 4.4 turns for the quarter  ended May 31, 1998,
compared to 6.2 turns for the quarter ended May 31, 1997.

                                       30
<PAGE>
During the fiscal year ended May 31, 1998,  the Company  made $508.3  million in
capital expenditures. Major capital expenditures included upgrades and expansion
of the Company's facilities in the U.S., the U.K., Ireland and Singapore and the
continuing development of the Company's worldwide information systems. As of May
31, 1998,  the Company had  approximately  $138  million in capital  expenditure
commitments outstanding primarily associated with the construction and expansion
of  facilities  in  the  U.S.  and  Singapore.  In  addition,  the  Company  has
commitments related to operating lease arrangements in the U.S., under which the
Company has an option to purchase  the  properties  for an  aggregate  of $322.2
million,  or arrange for the sale of the  properties  to a third  party.  If the
properties are sold to a third party at less than the option price,  the Company
retains an obligation for the difference,  subject to certain  provisions of the
lease.

In April 1998, the Company purchased the property in Rolling Meadows,  Illinois,
which was previously  under an operating lease, and paid the owner $38.3 million
pursuant to its purchase rights.

During fiscal 1998, the Company received cash of $297.2 million from the sale of
approximately  24 million  shares of its common stock to  employees  through its
employee stock purchase and option plans.  These cash inflows related  primarily
to the exercise of stock options by former employees of U.S. Robotics.  Pursuant
to a  change-in-control  feature of the U.S.  Robotics'  employee  stock  option
plans,  substantially all outstanding options held by employees of U.S. Robotics
became fully vested and exercisable upon closing of the merger in June 1997.

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease,  for 300,000  square feet of office and research
and  development  space and a data  center to be built on land  adjacent  to the
Company's  headquarters  site in Santa Clara,  California.  The lease expires in
August 2002, 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 $83.6
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  $83.6  million,  subject  to  certain
provisions of the lease.  Construction  of the buildings began in July 1997, and
the  Company  anticipates  that it will  occupy  the  facility  and begin  lease
payments in the second quarter of fiscal 1999.

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease, for 525,000 square feet of office,  research and
development  and  manufacturing  space  to be  built  on  land  in  Marlborough,
Massachusetts for the consolidation  and expansion of existing  operations.  The
lease  expires in August  2002,  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 $86.0  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 $86.0  million,  subject to
certain  provisions of the lease.  Construction  of the  buildings  began in the
first quarter of fiscal 1998,  and the Company  anticipates  that it will occupy
the  facility  and begin lease  payments in the fourth  quarter of fiscal  1999.
Adjacent to this property is a leased facility consisting of 100,000 square feet
of office space. This lease expires in December 1999.

The  two  aforementioned  leases  require  the  Company  to  maintain  specified
financial  covenants,  all of which the Company was in compliance with as of May
31, 1998.

During the fourth quarter of fiscal 1998,  the Company  notified the lessor of a
58-acre  parcel of land near its  existing  headquarters  in Santa  Clara of its
intention  to exercise  its option to purchase  the land for $49.5  million.  On
March 26,  1998 the option was  exercised,  and the Company  immediately  sold a
portion of the land to a third party.  Terms of the transaction  resulted in the
Company reporting a net gain of $15.8 million on the sale of the property during
the fourth  quarter of fiscal  1998.  An  additional  gain of $4.2  million  was
deferred pending the resolution of certain contingencies. The Company retained a
25-acre  parcel for future  development.  This  parcel of land is  adjacent to a
14-acre parcel previously purchased by the Company.

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,  1998,  there  were no
outstanding  borrowings  under the  credit  agreement,  and the  Company  was in
compliance with all required  covenants.  During fiscal 1998, the Company repaid
approximately  $185 million of short-term and long-term  borrowings  incurred by
U.S. Robotics prior to the merger.
                                       31
<PAGE>
On December 23, 1997, the Company  redeemed all of its convertible  subordinated
notes totaling $110 million. Under the terms of the note agreement,  the Company
paid cash of approximately  $115 million for principal,  accrued interest and an
early call  premium.  Included in other  income,  net for the year ended May 31,
1998 is a charge of  approximately  $4.7  million for the early call premium and
write-off of unamortized issuance fees.

As of May 31,  1998  approximately  $50.5  million of the U.S.  Robotics  merger
accrual was  remaining.  Of this amount,  approximately  $18 million  relates to
anticipated cash expenditures associated with the merger, of which approximately
$6 million  relates to  severance  and  outplacement  costs,  which the  Company
expects  will be paid in the first six  months  of fiscal  1999.  See Note 12 of
Notes to the Consolidated Financial Statements.

During the fourth  quarter of fiscal 1998,  the Company  purchased  Lanworks for
approximately  $13.0 million in cash. This  acquisition  resulted in a charge of
approximately $8.4 million during the year ended May 31, 1998, which represented
purchased  in-process   technology  that  had  not  yet  reached   technological
feasibility and had no alternative future use.

In June 1998, the Company's  Board of Directors  authorized the repurchase of up
to 10 million shares of the Company's stock.  Such purchases will be made in the
open market from time to time.

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

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS 130, "Reporting  Comprehensive  Income." This
Statement  establishes  standards for the reporting and display of comprehensive
income and its components.  SFAS 130 will be effective for the Company's  fiscal
year 1999 and requires  restatement of all previously  reported  information for
comparative purposes. This Statement will require additional disclosure but will
not have a  material  impact on the  Company's  financial  position,  results of
operations or cash flows.

In June 1997,  the FASB  issued  SFAS 131,  "Disclosures  About  Segments  of an
Enterprise  and Related  Information."  This  Statement  requires that financial
information  be reported on the basis used  internally  for  evaluating  segment
performance and deciding how to allocate resources to segments. SFAS 131 will be
effective for the  Company's  fiscal year 1999 and requires  restatement  of all
previously  reported  information  for comparative  purposes.  Management of the
Company has not yet  evaluated  the effects of this change on its  reporting  of
segments.

In June 1998, the FASB issued SFAS 133,  "Accounting for Derivative  Instruments
and Hedging Activities." This Statement requires companies to record derivatives
on the balance sheet as assets or liabilities,  measured at fair value. Gains or
losses  resulting  from  changes  in the  values of those  derivatives  would be
accounted  for depending on the use of the  derivative  and whether it qualifies
for hedge  accounting.  SFAS 133 will be effective for the Company's fiscal year
ending May 31, 2001.  Management  believes that this  Statement  will not have a
significant impact on the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest  Rate  Sensitivity.  The  Company  maintains  a  short-term  investment
portfolio  consisting  mainly of income  securities with an average  maturity of
less than two years. These available-for-sale securities are subject to interest
rate risk and will fall in value if market  interest rates  increase.  If market
interest  rates were to increase  immediately  and  uniformly by 10 percent from
levels at May 31,  1998,  the fair value of the  portfolio  would  decline by an
immaterial  amount.  The  Company  has the  ability  to hold  its  fixed  income
investments  until  maturity,  and  therefore  the Company  would not expect its
operating results or cash flows to be affected to any significant  degree by the
effect of a sudden change in market interest rates on its securities portfolio.

                                       32
<PAGE>
At May 31,  1998,  the Company had  approximately  $200  million of  outstanding
obligations  under certain real estate lease  arrangements with monthly payments
tied to short-term interest rates. If short-term interest rates were to increase
10 percent,  the increased  lease payments  associated  with these  arrangements
would not have a material  impact on the Company's net income or cash flows.  In
addition,  the Company also had fixed rate long-term debt of  approximately  $48
million, and a hypothetical 10 percent decrease in interest rates would not have
a material  impact on the fair market  value of this debt.  The Company does not
hedge any interest rate exposures.

Foreign Currency Exchange Risk. 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
forward  contracts  are  largely  offset by gains and  losses on the  underlying
exposure. A hypothetical 10 percent appreciation of the U.S. Dollar from May 31,
1998 market rates would increase the unrealized  value of the Company's  forward
contracts by $11.8 million.  Conversely,  a hypothetical 10 percent depreciation
of the U.S.  Dollar from May 31, 1998 market rates would decrease the unrealized
value of the Company's forward  contracts by $11.8 million.  In either scenario,
the gains or losses on the forward  contracts are largely offset by the gains or
losses on the underlying  transactions  and consequently a sudden or significant
change in foreign  exchange rates would not have a material impact on future net
income or cash flows.

Equity Price Risk.  The Company  holds a small  portfolio  of  marketable-equity
traded  securities  that are subject to market  price  volatility.  Equity price
fluctuations of plus or minus 15 percent would not have a material impact on the
Company.

                                       33
<PAGE>
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                                                                            Page
                                                                            ----
Financial Statements:
  Independent Auditors' Reports:
    Report of Deloitte & Touche LLP........................................   35
    Report of Grant Thornton LLP...........................................   36
  Consolidated Statements of Income for the years ended May 31, 1998, 
     1997 and 1996.........................................................   37
  Consolidated Balance Sheets at May 31, 1998 and 1997.....................   38
  Consolidated Statements of Stockholders' Equity for the years ended 
     May 31, 1998, 1997 and 1996...........................................   39
  Consolidated Statements of Cash Flows for the years ended May 31, 
     1998, 1997 and 1996...................................................   40
  Notes to Consolidated Financial Statements...............................   41
  Quarterly Results of Operations (Unaudited)..............................   60
Financial Statement Schedule:
     Schedule II - Valuation and Qualifying Accounts and Reserves..........  S-1

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.


                                       34
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the  consolidated  balance  sheets of 3Com  Corporation  and its
subsidiaries  (the  Company)  as of May 31,  1998  and  1997,  and  the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period  ended May 31, 1998.  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 1998
merger  of 3Com  Corporation  and  U.S.  Robotics  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 earnings,  stockholders'  equity, and cash flows of U.S. Robotics Corporation
for  the  year  ended  September  29,  1996,   which  were  combined  with  3Com
Corporation's  statements for the year ended May 31, 1996, and reflect  revenues
of $1,977,512,000,  and net earnings of $170,020,000.  We also did not audit the
information  in the  financial  statement  schedule  relating  to U.S.  Robotics
Corporation for the year ended September 29, 1996, which information is included
in 3Com Corporation's  schedule for the year ended May 31, 1996. Those financial
statements and financial statement schedule were audited by other auditors whose
report has been  furnished to us, and our opinion,  insofar as it relates to the
amounts  included  for U.S.  Robotics  for fiscal  1996,  is based solely on the
reports of such  other  auditors.  As  described  in Note 3 to the  consolidated
financial  statements,  subsequent  to the  issuance  of the report of the other
auditors,  the consolidated financial statements of U.S. Robotics for the fiscal
year ended  September  29,  1996 were  restated to more  closely  conform to the
fiscal year of 3Com Corporation for the year May 31, 1997.

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, 1998 and 1997, and the results of their  operations and
their cash flows for each of the three years in the period ended May 31, 1998 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 referenced to above, when considered in relation to the basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.


/s/ Deloitte & Touche LLP

San Jose, California
June 23, 1998

                                       35
<PAGE>

REPORT OF GRANT THORNTON LLP

Board of Directors of U.S. Robotics Corporation

We have audited the consolidated statement of earnings, stockholders' equity and
cash flows of U.S. Robotics Corporation and Subsidiaries (U.S. Robotics) for the
year ended  September 29, 1996. Our audit also included the financial  statement
schedule for the year ended September 29, 1996.  These financial  statements are
the  responsibility  of U.S.  Robotics'  management.  Our  responsibility  is to
express  an  opinion  on these  financial  statements  and  financial  statement
schedule based on our audit.

We conducted our audit 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 our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the results of operations and cash flows of U.S. Robotics
Corporation and Subsidiaries for the year ended September 29, 1996 in conformity
with generally accepted accounting  principles.  Also, in our opinion,  based on
our audit, such financial statement schedule, when considered in relation to the
basic  consolidated  statements  as a whole,  presents  fairly,  in all material
respects, the information set forth therein.


/s/ Grant Thornton  LLP

Chicago, Illinois
November 4, 1996


                                       36
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
                                                     YEARS ENDED MAY 31,
                                              ----------------------------------
(In thousands, except per share data)           1998         1997        1996
                                              ----------  ----------  ----------

Sales                                         $5,420,367  $5,606,077  $4,284,508

Cost of sales                                  2,961,164   2,918,966   2,289,682
                                              ----------  ----------  ----------

Gross margin                                   2,459,203   2,687,111   1,994,826
                                              ----------  ----------  ----------
Operating expenses:
     Sales and marketing                       1,247,755   1,081,846     709,413
     Research and development                    581,613     502,503     337,785
     General and administrative                  268,115     249,941     170,317
     Purchased in-process technology               8,433      54,000     106,353
     Merger-related charges and other            253,722       6,600      69,950
                                              ----------  ----------  ----------

     Total operating expenses                  2,359,638   1,894,890   1,393,818
                                              ----------  ----------  ----------

Operating income                                  99,565     792,221     601,008
Other income, net                                 16,908       8,480       9,352
                                              ----------  ----------  ----------

Income before income taxes                       116,473     800,701     610,360

Income tax provision                              86,259     300,168     262,485
                                              ----------  ----------  ----------

Net income                                    $   30,214  $  500,533  $  347,875
                                              ==========  ==========  ==========
Net income per share:

     Basic                                    $     0.09  $     1.51  $     1.10
     Diluted                                  $     0.08  $     1.42  $     1.02

Weighted average common shares outstanding       351,154     330,517     316,115
Effect of potentially dilutive common shares:
     Employee stock options                        8,958      22,429      26,260
     Restricted stock                                150         323         273
                                              ----------  ----------  ----------
Weighted average common shares outstanding, 
  assuming dilution                              360,262     353,269     342,648
                                              ==========  ==========  ==========

See Notes to Consolidated Financial Statements.

                                       37
<PAGE>
CONSOLIDATED BALANCE SHEETS
                                                               May 31,
                                                     --------------------------
(In thousands, except par value)
                                                         1998           1997
                                                     -----------    -----------
ASSETS

Current assets:
    Cash and equivalents                             $   528,981    $   351,237
    Short-term investments                               547,097        538,706
    Accounts receivable, less allowance for
      doubtful accounts ($72,297 and $59,079
      in 1998 and 1997, respectively)                    849,640        959,142
    Inventories, net                                     644,771        554,718
    Deferred income taxes                                430,182        196,875
    Other                                                134,001        115,058
                                                     -----------    -----------
         Total current assets                          3,134,672      2,715,736

Property and equipment, net                              858,779        731,301
Deposits and other assets                                 87,069        118,804
                                                     -----------    -----------

Total assets                                         $ 4,080,520    $ 3,565,841
                                                     ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Short-term debt                                  $      --      $   134,700
    Accounts payable                                     332,992        308,581
    Other accrued liabilities                            661,303        516,976
    Income taxes payable                                 177,612        168,942
    Current portion of long-term obligations              12,008         12,314
                                                     -----------    -----------
         Total current liabilities                     1,183,915      1,141,513

Long-term debt                                            35,878        163,945
Other long-term obligations                                4,480          6,707
Deferred income taxes                                     48,752         25,332

Stockholders' equity:
    Preferred stock, no par value, 10,000 shares
         authorized; none outstanding                       --             --
    Common stock, $.01 par value, 990,000 shares
         authorized; shares outstanding:
         1998--358,870 1997--334,944                   1,730,676      1,183,926
    Unamortized restricted stock grants                   (4,157)        (5,165)
    Retained earnings                                  1,079,775      1,049,561
    Unrealized gain on investments, net                      827          2,320
    Accumulated translation adjustments                      374         (2,298)
                                                     -----------    -----------
         Total stockholders' equity                    2,807,495      2,228,344
                                                     -----------    -----------

Total liabilities and stockholders' equity           $ 4,080,520    $ 3,565,841
                                                     ===========    ===========

See Notes to Consolidated Financial Statements.

                                       38
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                           Unrealized
                                                                 Unamortized                 Gain/     Accumulated
(In thousands)                                 Common Stock      Restricted    Retained    (Loss) On   Translation
                                           Shares       Amount  Stock Grants   Earnings   Investments  Adjustments   Total
                                           ------       ------  ------------   --------   -----------  -----------   -----
<S>                                       <C>       <C>          <C>         <C>           <C>          <C>       <C>
BALANCES, JUNE 1, 1995 AS
   PREVIOUSLY REPORTED                    160,912   $  435,922   $  (2,037)  $   200,030   $     (22)   $  (169)  $  633,724
Restatement for pooling of interests-
   U.S. Robotics                          147,676      274,361        --         148,617        --        1,417      424,395
                                         --------   ----------   ---------   -----------   ---------    -------   ----------
AS RESTATED                               308,588      710,283      (2,037)      348,647         (22)     1,248    1,058,119

Common stock issued under stock plans      13,028       96,808      (3,502)                                           93,306
Repurchase of common stock                    (23)         (52)                     (923)                               (975)
Tax benefit from employee stock
   transactions                                        134,234                                                       134,234
Amortization of restricted stock grants                              1,052                                             1,052
Stock options assumed in connection with
   acquisitions                             1,215        9,675                    (5,706)                              3,969
Adjustment to conform fiscal year of
   pooled entity - Chipcom                    292        3,489                     2,396         151                   6,036
Stock split - U.S. Robotics                                439                      (439)                                 --
Unrealized gain on available-for-
   sale securities                                                                             7,030                   7,030
Accumulated translation adjustments                       (277)                                            306            29
Net income                                                                       347,875                             347,875
                                         --------   ----------   ---------   -----------   ---------   -------    ----------
BALANCES, MAY 31, 1996                    323,100      954,599      (4,487)      691,850       7,159     1,554     1,650,675

Common stock issued under stock plans       9,049       94,746      (2,412)                                           92,334
Tax benefit from employee stock
   transactions                                        117,088                                                       117,088
Amortization of restricted stock grants                              1,734                                             1,734
Stock options assumed in connection with
   acquisitions                                          2,192                                                         2,192
Redemption of stock rights                                 220                                                           220
Adjustment to conform fiscal year of
   pooled entity - OnStream                 3,292       25,698                   (16,427)                              9,271
Adjustment to conform fiscal year of
   pooled entity - U.S. Robotics             (497)     (10,289)                 (126,395)                  939      (135,745)
Unrealized loss on available-for-
   sale securities                                                                            (4,839)                 (4,839)
Accumulated translation adjustments                       (328)                                         (4,791)       (5,119)
Net income                                                                       500,533                             500,533
                                         --------   ----------   ---------   -----------   ---------   -------    ----------
BALANCES, MAY 31, 1997                    334,944    1,183,926      (5,165)    1,049,561       2,320    (2,298)    2,228,344

Common stock issued under stock plans      23,926      297,693        (445)                                          297,248
Tax benefit from employee stock
   transactions                                        249,057                                                       249,057
Amortization of restricted stock grants                              1,453                                             1,453
Unrealized loss on available-for-
   sale securities                                                                            (1,493)                 (1,493)
Accumulated translation adjustments                                                                      2,672         2,672
Net income                                                                        30,214                              30,214
                                         --------   ----------   ---------   -----------   ---------   -------    ----------
BALANCES, MAY 31, 1998                    358,870   $1,730,676   $  (4,157)  $ 1,079,775   $     827   $   374    $2,807,495
                                         ========   ==========   =========   ===========   =========   =======    ==========
</TABLE>

See Notes to Consolidated Financial Statements.

                                       39
<PAGE>
<TABLE>
cCONSOLIDATED STATEMENTS OF CASH FLOWS                     Years Ended May 31,
--------------------------------------             --------------------------------
(Dollars in thousands)                               1998        1997         1996
                                                     ----        ----         ----
<S>                                                <C>         <C>         <C>
Cash flows from operating activities:
  Net income                                       $  30,214   $ 500,533   $ 347,875
  Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                   300,254     187,924     121,433
     Deferred income taxes                          (228,154)    (58,062)    (26,175)
     Pooling of interests: Chipcom                      --          --        (3,048)
                           OnStream                     --         4,850        --
                           U.S. Robotics                --       (83,729)       --
     Purchased in-process technology                   8,433      54,000     106,353
     Merger-related charges and other                253,722       6,600      69,950
     Changes in assets and liabilities, net of 
       effects of acquisitions:
        Accounts receivable                          109,502    (295,533)   (452,019)
        Inventories                                 (156,535)    (46,605)   (163,506)
        Other current assets                         (22,502)    (64,787)    (27,066)
        Accounts payable                              24,411      85,396      64,974
        Other accrued liabilities                     30,103     135,953      93,183
        Income taxes payable                         276,735     170,298     168,143
                                                   ---------   ---------   ---------
Net cash provided by operating activities            626,183     596,838     300,097
                                                   ---------   ---------   ---------
Cash flows from investing activities:
   Purchase of short-term investments               (367,784)   (479,249)   (477,858)
   Proceeds from short-term investments              352,854     289,376     503,802
   Purchase of property and equipment               (508,328)   (404,890)   (368,951)
   Retirements of property and equipment              49,566        --          --
   Businesses acquired in purchase transactions         --       (66,547)   (139,496)
   Other, net                                         (9,468)    (49,000)     (8,628)
                                                   ---------   ---------   ---------
Net cash used for investing activities              (483,160)   (710,310)   (491,131)
                                                   ---------   ---------   ---------
Cash flows from financing activities:
   Issuance of common stock                          297,248      95,072      99,309
   Repurchase of common stock                           --          --          (975)
   Repayments of short-term debt, notes payable
             and capital lease obligations          (168,230)     (1,740)     (3,269)
   Repayments of long-term borrowings               (128,067)       (225)       (441)
   Net proceeds from issuance of debt                 33,300     134,703      33,243
   Other, net                                            470       3,326          29
                                                   ---------   ---------   ---------
Net cash provided by financing activities             34,721     231,136     127,896
                                                   ---------   ---------   ---------

Increase (decrease) in cash and equivalents          177,744     117,664     (63,138)
Cash and equivalents, beginning of period            351,237     233,573     296,711
                                                   ---------   ---------   ---------

Cash and equivalents, end of period                $ 528,981   $ 351,237   $ 233,573
                                                   =========   =========   =========
Other cash flow information:
   Interest paid                                   $  18,293   $  18,305   $  17,930
   Income taxes paid, net                              5,135     116,050     120,524
   Non-cash investing and financing activities:
     Tax benefit on stock option transactions        249,057     117,088     134,234
     Unrealized gain (loss) on investments, net       (1,493)     (4,839)      7,030
     Fair value of stock issued and options assumed
        in business combinations                        --         2,192       3,969
</TABLE>

See Notes to Consolidated Financial Statements.

                                       40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  DESCRIPTION OF BUSINESS

Description of business. 3Com Corporation, founded in 1979, and its subsidiaries
("3Com" or "the Company") is committed to providing  customers  global access to
critical  information  through  high-speed  networks  designed  to  serve  large
enterprises,  small/medium  enterprises,   consumer/small  office,  home  office
(SOHO),  and  carrier/service  providers.  3Com offers a broad range of products
which include switches,  hubs,  remote access  concentrators,  routers,  network
interface  cards,  modems and network  management  software for  Ethernet,  Fast
Ethernet,  Token Ring,  Fiber  Distributed Data Interface  (FDDI),  Asynchronous
Transfer Mode (ATM),  Digital Subscriber Line (xDSL), cable and other high-speed
technologies,  and handheld connected organizers.  Headquartered in Santa Clara,
California,   3Com  has  worldwide  research  and  development,   manufacturing,
marketing, sales and support capabilities.

NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES

Fiscal year.  Effective  June 1, 1997,  the Company  adopted a 52-53 week fiscal
year ending on the Sunday nearest to May 31. Effective June 1, 1998, the Company
adopted a 52-53 week  fiscal  year  ending on the Friday  nearest to May 31. The
Company  does  not  expect  this  change  to have a  significant  effect  on the
Company's consolidated financial statements.

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.  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.

Short-term investments consist of investments acquired with maturities exceeding
three months but less than two years. 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 stockholders' 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 accounts  receivable.  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.

Due to consolidation in the  distribution and reseller  channels,  the Company's
increased  volume  of sales  into  these  channels,  and the  merger  with  U.S.
Robotics, the Company has experienced an increased concentration of credit risk,
and, as a result, may maintain individually significant receivable balances with
such  distributors  and  resellers.  While the Company  frequently  monitors and
manages  this  risk,  financial  difficulties  on the part of one or more of the
Company's  distributors  and resellers may have a material adverse effect on the
Company. As of and for the year ended May 31, 1998, the Company had one customer
which  accounted for 14 percent of total sales and 14 percent of total  accounts
receivable.  The same customer  accounted for 13 percent and 12 percent of total
sales for the fiscal years ended May 31, 1997 and 1996, respectively.

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.

                                       41
<PAGE>
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 2-15 years,  except for buildings
which are depreciated over 25 years.

Intangible  assets.  Purchased  technology  and  goodwill  are included in other
assets.  Purchased  technology is amortized over the useful life, generally four
years. Goodwill is amortized over 10 years.

Revenue  recognition.  The Company generally  recognizes a sale 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.  The Company  warrants  products for periods
ranging from 90 days to life, depending upon the product.

Foreign  currency   translation.   The  majority  of  the  Company's  sales  are
denominated in U.S. Dollars.  For foreign  operations with the local currency as
the  functional  currency,  assets and  liabilities  are  translated at year-end
exchange rates,  and statements of 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 stockholders' 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.  Foreign currency losses were $12.3 million for
the year ended May 31, 1998 and were not significant for the years ended May 31,
1997 and 1996.

Where available,  the Company enters into foreign exchange forward  contracts to
hedge certain balance sheet exposures and  intercompany  balances against future
movements in foreign exchange rates.

Stock-based  compensation.  The Company  accounts for its  employee  stock plans
under the intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."

Net income per share. In 1997, the Financial  Accounting  Standards Board (FASB)
issued SFAS 128, "Earnings Per Share." SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share is computed using the weighted average number of
common shares. Diluted earnings per share is computed using the weighted average
number of common  shares and  potentially  dilutive  common  shares  outstanding
during the period.  Potentially dilutive common shares consist of employee stock
options,  restricted stock, warrants, and convertible  securities.  All earnings
per share  amounts for all periods  have been  presented,  and where  necessary,
restated to conform to SFAS 128 requirements.

Effects of recent accounting pronouncements.  In June 1997, the FASB issued SFAS
130, "Reporting  Comprehensive Income." This Statement establishes standards for
the reporting and display of comprehensive  income and its components.  SFAS 130
will be effective for the Company's fiscal year 1999 and requires restatement of
all previously  reported  information for comparative  purposes.  This Statement
will require  additional  disclosure but will not have a material  impact on the
Company's financial position, results of operations or cash flows.

In June 1997,  the FASB  issued  SFAS 131,  "Disclosures  About  Segments  of an
Enterprise  and Related  Information."  This  Statement  requires that financial
information  be reported on the basis used  internally  for  evaluating  segment
performance and deciding how to allocate resources to segments. SFAS 131 will be
effective for the  Company's  fiscal year 1999 and requires  restatement  of all
previously  reported  information  for comparative  purposes.  Management of the
Company has not yet  evaluated  the effects of this change on its  reporting  of
segments.
                                       42
<PAGE>
In June 1998, the FASB issued SFAS 133,  "Accounting for Derivative  Instruments
and Hedging Activities." This Statement requires companies to record derivatives
on the balance sheet as assets or liabilities,  measured at fair value. Gains or
losses  resulting  from  changes  in the  values of those  derivatives  would be
accounted  for depending on the use of the  derivative  and whether it qualifies
for hedge  accounting.  SFAS 133 will be effective for the Company's fiscal year
ending May 31, 2001.  Management  believes that this  Statement  will not have a
significant impact on the Company.

Reclassifications.  Certain prior year amounts have been reclassified to conform
to the current year presentation.

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, 1998.  On June 12, 1997,  the Company  completed  the
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.  This merger was accounted for as a
pooling-of-interests. The Company issued approximately 158 million shares of its
common stock in exchange for all outstanding common stock of U.S. Robotics.  The
Company also assumed all options to purchase U.S.  Robotics'  stock,  which were
converted  into  options to  purchase  approximately  31  million  shares of the
Company's common stock, pursuant to the terms of the merger.

All financial  data of the Company have been restated to include the  historical
financial  information of U.S.  Robotics in accordance  with generally  accepted
accounting  principles  and pursuant to  Regulation  S-X. The 3Com  statement of
income for the fiscal  year ended May 31, 1996 has been  combined  with the U.S.
Robotics  statement of income for the fiscal year ended  September 29, 1996. The
3Com  statement  of income  for the  fiscal  year  ended  May 31,  1997 has been
combined with the U.S. Robotics  statement of income for the period from July 1,
1996 through May 25, 1997.  This combining  methodology  includes the last three
reported quarters of U.S. Robotics, ended September 29, 1996, December 29, 1996,
and March 30, 1997,  and the months of April and May 1997. To reflect a complete
12-month year and a three-month fourth quarter and thereby enhance comparability
of periodic reported results, U.S. Robotics' results of operations for the month
ended March 30, 1997 are included in both the three-month period ended March 30,
1997 and the three-month  period ended May 25, 1997. This  presentation  has the
effect of including U.S.  Robotics'  results of operations  for the  three-month
period ended  September  29, 1996 in both the combined  years ended May 31, 1997
and 1996,  and reflects sales of $611.4 million and net income of $13.5 million.
The aggregate of net income for the three-month  period ended September 29, 1996
of $13.5 million and the one-month period ended March 30, 1997 of $112.9 million
has been reported as a decrease to the Company's fiscal 1997 retained  earnings.
3Com's balance sheet as of May 31, 1997 was combined with U.S. Robotics' balance
sheet as of May 25, 1997. The combining periods are as follows:

                FISCAL 1996          FISCAL 1997 QUARTERLY PERIODS
               -----------     -------------------------------------------
                YEAR ENDED       Q1'97     Q2'97        Q3'97      Q4'97
                ----------       -----     -----        -----      -----

3Com              May `96       Aug `96   Nov `96      Feb `97    May `97
U.S. Robotics    Sept `96      Sept `96   Dec `96      Mar `97    May `97*

*Three-month period which includes March, April, and May.

The results of  operations  for the fiscal  year ended May 31, 1998  contain the
combined results of both 3Com and U.S. Robotics for the entire 12 months.

                                       43
<PAGE>
The combined results reflect  reclassifications  to conform financial  statement
presentation, as follows:

(In thousands, except per share amounts)                Years Ended May 31,
                                                        1997           1996
                                                    ---------------------------
Sales:
     3Com                                           $ 3,147,106     $ 2,327,101
     U.S. Robotics                                    2,503,945       1,977,512
     Reclassifications to conform
        financial statement presentation                (44,974)        (20,105)
                                                    -----------     -----------
     Combined                                       $ 5,606,077     $ 4,284,508
                                                    ===========     ===========
Net income:
     3Com                                           $   373,950     $   177,855
     U.S. Robotics                                      126,583         170,020
                                                    -----------     -----------
     Combined                                       $   500,533     $   347,875
                                                    ===========     ===========
Net income per share (on a diluted basis):
     3Com                                           $      2.01     $      1.00
     U.S. Robotics (1)                                     0.75            1.02
                                                    -----------     -----------
     Combined                                       $      1.42     $      1.02
                                                    ===========     ===========

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

On March 2,  1998,  the  Company  acquired  substantially  all of the assets and
assumed  substantially  all of the  liabilities of Lanworks  Technologies,  Inc.
(Lanworks).  The aggregate  purchase  price of $13.0  million  consisted of cash
which was paid using funds from the  Company's  working  capital.  Approximately
$8.4  million  of the total  purchase  price  represented  purchased  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  1998.  The  acquisition  was  accounted  for as a  purchase.
Lanworks developed,  manufactured, and marketed PC network boot technologies and
products,  which  are  critical  components  of a  complete  desktop  management
environment.

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 ATM and
broadband wide area network (WAN) and access products.

During the year ended May 31, 1997, U.S. Robotics acquired  substantially all of
the  assets  and  assumed   substantially   all  of  the   liabilities  of  four
international distributors in Korea, Japan, Australia, and Sweden. The aggregate
purchase price of $13.4 million  consisted of cash, net of cash acquired,  which
was paid with funds from  working  capital,  and  issuance  of stock with a fair
value of $0.1 million.  These  purchases  resulted in $14.0 million of goodwill,
which is currently being  amortized over the expected useful life,  estimated at
10 years.
                                       44
<PAGE>
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  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.  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  merger-related
charges  of  approximately  $69.0  million.   See  Note  12.  Chipcom  designed,
manufactured and distributed computer networking multifunction platforms.

On February 29, 1996, U.S. Robotics issued  approximately  694,000 shares of its
common stock (approximately 1.2 million shares,  adjusted for effect of exchange
ratio of 1.75 shares of 3Com common stock for each share of U.S. Robotics common
stock)  in  exchange  for all of the  outstanding  capital  stock of Amber  Wave
Systems,   Inc.   (Amber  Wave).   The   transaction  was  accounted  for  as  a
pooling-of-interests.  Since the aggregated  historical operations of Amber Wave
prior to the date of combination were not material to the Company's consolidated
results of operations and financial position,  prior period financial statements
have not been restated.  Amber Wave developed  technology  related to local area
network (LAN) switching products.

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  purchased  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.

On  August  29,  1996,  U.S.  Robotics  completed  the  acquisition  of  Scorpio
Communications Ltd. (Scorpio).  The purchase price of $74.5 million consisted of
tangible  and  identifiable   intangible  net  assets  of  $750,000,   developed
technology of $16 million,  purchased in-process  technology of $54 million, and
goodwill of $3.8 million. The purchased in-process  technology was expensed upon
acquisition.   The  aggregate   purchase  price,   including   direct  costs  of
acquisition,  was paid  through  available  cash  resources  and  proceeds  from
short-term borrowings.  The acquisition was accounted for as a purchase. Scorpio
designed,  manufactured and sold scalable,  fully redundant,  fault-tolerant ATM
switches  that  targeted  workgroup  LAN,  corporate  backbone  and  WAN  access
environments.

                                       45
<PAGE>
NOTE 4:  INVESTMENTS

Available-for-sale securities consist of:

                                                May 31, 1998
                                ------------------------------------------------
                                             Gross         Gross
                                Amortized   Unrealized   Unrealized    Estimated
(Dollars in thousands)            Cost        Gains        Losses     Fair Value
                                ------------------------------------------------

State and municipal securities  $509,702      $1,368      $  --        $511,070
Corporate debt securities         36,018           9         --          36,027
                                --------      ------      -----        --------
Short-term investments           545,720       1,377         --         547,097

Corporate equity securities        9,326         718       (523)          9,521
                                --------      ------      -----        --------

Total                           $555,046      $2,095      $(523)       $556,618
                                ========      ======      =====        ========

                                                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
                                --------     ------       -----        --------
Short-term investments           538,595        593        (482)        538,706

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

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

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, 1998 and 1997 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, 1998
are as follows:

                                  Amortized         Estimated
(Dollars in thousands)              Cost           Fair Value
                                  ---------------------------

Within one year                    $306,140          $306,825
Over one year to two years          239,580           240,272
                                  ---------         ---------

Short-term investments             $545,720          $547,097
                                   ========          ========

                                       46
<PAGE>
NOTE 5:  INVENTORIES

Inventories, net at May 31 consist of:

(Dollars in thousands)                      1998           1997
                                          --------       --------

Finished goods                            $457,726       $387,609
Work-in-process                             51,510         31,606
Raw materials                              135,535        135,503
                                          --------       --------

Total                                     $644,771       $554,718
                                          ========       ========

NOTE 6:  PROPERTY AND EQUIPMENT

Property and equipment, net at May 31 consists of:

(Dollars in thousands)                       1998             1997
                                          ----------       ----------

Land                                      $   81,136       $   51,054
Land held for development                     36,497             --
Buildings                                    183,318          165,482
Property and equipment held
     for sale                                 32,235             --
Machinery and equipment                      828,290          679,525
Furniture and fixtures                       102,008           83,418
Leasehold improvements                        64,435           55,456
Construction in progress                     173,090          106,019
                                          ----------       ----------

Total                                      1,501,009        1,140,954
Accumulated depreciation and
     amortization                           (642,230)        (409,653)
                                          ----------       ----------

Property and equipment, net               $  858,779       $  731,301
                                          ==========       ==========

In the fourth  quarter of fiscal  1998,  the Company  committed to a strategy to
consolidate  its  manufacturing  operations  in the Chicago area. As a result of
this  decision,  the Company  decided to dispose of its Morton  Grove office and
manufacturing  facility.  Although this asset's  carrying cost of  approximately
$32.2 million had been deemed recoverable through the operations of the division
that  previously  occupied  the  facility,  the decision to dispose of the asset
resulted in the recognition of a loss of approximately $19.4 million, reflecting
the difference between the estimated net realizable value and the carrying value
of the plant.

In March 1998,  the Company  acquired a 58-acre parcel of land near its existing
headquarters in Santa Clara pursuant to its purchase rights under a pre-existing
operating  lease of the land. The Company entered into a cash sale for a portion
of the land and recognized a gain of approximately  $15.8 million on the sale of
the  property.  An  additional  $4.2  million  gain  was  deferred  pending  the
resolution of certain  contingencies.  The remaining 25-acre portion of land, in
addition to a 14-acre parcel of land already owned by the Company,  will be held
for future development.

The aggregate loss of $3.6 million  associated with these two  transactions  was
included as a component of merger-related charges and other. See Note 12.

                                       47
<PAGE>

NOTE 7:  OTHER ACCRUED LIABILITIES

Other accrued liabilities at May 31 consist of:

(Dollars in thousands)                           1998          1997
                                               --------      --------

Accrued payroll and related expenses           $112,190      $102,815
Accrued product warranty                         87,278        73,267
Accrued distributor rebates                      95,163        66,479
Deferred revenue                                 78,846        37,490
Other                                           287,826       236,925
                                               --------      --------

Other accrued liabilities                      $661,303      $516,976
                                               ========      ========

NOTE 8:  BORROWING ARRANGEMENTS AND COMMITMENTS

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease,  for 300,000  square feet of office and research
and  development  space and a data  center to be built on land  adjacent  to the
Company's  headquarters  site in Santa Clara,  California.  The lease expires in
August 2002, 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 $83.6
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  $83.6  million,  subject  to  certain
provisions of the lease.  Construction  of the buildings began in July 1997, and
the Company  anticipates  that it will  occupy and begin  lease  payments in the
second quarter of fiscal 1999.

During the first  quarter of fiscal  1998,  the  Company  signed a lease,  which
replaced a previous land lease, for 525,000 square feet of office,  research and
development  and  manufacturing  space  to be  built  on  land  in  Marlborough,
Massachusetts for the consolidation  and expansion of existing  operations.  The
lease  expires in August  2002,  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 $86.0  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 $86.0  million,  subject to
certain  provisions of the lease.  Construction  of the  buildings  began in the
first quarter of fiscal 1998,  and the Company  anticipates  that it will occupy
and begin lease payments in the fourth quarter of fiscal 1999.  Adjacent to this
property is a leased facility consisting of 100,000 square feet of office space.
This lease expires in December 1999.

The  two  aforementioned  leases  require  the  Company  to  maintain  specified
financial  covenants,  all of which the Company was in compliance with as of May
31, 1998. Future minimum lease payments are included in the table below.

The Company  leases  certain of its  facilities  and equipment  under  operating
leases.  Leases expire at various  dates from 1998 to 2021 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)
--------------------------------------------------
1999                                     $ 53,158
2000                                       45,055
2001                                       38,976
2002                                       29,302
2003                                       11,701
Thereafter                                 41,508
                                         --------
Total                                    $219,700
                                         ========

Rent expense was $53.4  million,  $42.7  million,  and $31.6  million for fiscal
years ended May 31, 1998, 1997 and 1996, respectively.

                                       48
<PAGE>
As of May 31,  1998,  the  Company  had  approximately  $138  million in capital
expenditure   commitments,   primarily  associated  with  the  construction  and
expansion of office and manufacturing space in the United States and Singapore.

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,  1998,  there  were no
outstanding  borrowings  under the  credit  agreement,  and the  Company  was in
compliance with all required covenants.

As of May 31,  1997,  short term  borrowings  under an  unsecured  $300  million
syndicated  revolving line of credit with a group of banks totaled $125 million.
On June 13,  1997,  the  Company  paid all  outstanding  borrowings  under  this
revolving line of credit,  totaling $80 million and immediately  terminated this
agreement.

As of May 31, 1997, short-term borrowings under $90 million of uncommitted lines
of credit from a group of banks totaled  approximately $10 million.  On June 13,
1997, the Company paid all outstanding  borrowings under these uncommitted lines
of credit, totaling $88 million and immediately terminated these agreements.

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.  Beginning  in  November  1997,  the notes  became
redeemable  at the  option of the  Company  at an  initial  redemption  price of
102.929% of the principal amount. On December 23, 1997, the Company redeemed all
of the convertible  subordinated  notes.  Under the terms of the note agreement,
the Company  paid cash of  approximately  $115  million for  principal,  accrued
interest  and early call  premium.  Included in other  income,  net for the year
ended May 31, 1998 is a charge of approximately  $4.7 million for the early call
premium and write-off of unamortized  issuance  fees. As of May 31, 1997,  there
was $110 million outstanding under this arrangement.

On July 7, 1994,  the  Company  arranged a private  placement  of $60 million in
7.52%  Unsecured  Senior  Notes with three  insurance  companies.  The notes are
payable in five equal  installments  beginning in June 1997.  As of May 31, 1998
and 1997, borrowings under these notes totaled approximately $48 million and $60
million, respectively. $12 million of this debt is classified as current portion
of long-term obligations as of May 31, 1998 and 1997.

The Company had a $5 million loan with a bank at an interest  rate of 8.61%.  As
of May 31, 1998, there was no outstanding balance under this loan. As of May 31,
1997, borrowings under this loan totaled approximately $5 million.

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-
to five-year period, and expire ten years after the grant date.

                                       49
<PAGE>
On December 17, 1997, the Company's Board of Directors approved the repricing of
certain  employee  stock  options  with an exercise  price in excess of the fair
market value of the  Company's  common  stock on January 12, 1998.  The exercise
price for 20.9 million  shares of employee  stock  options was reset to $29.375,
the closing  market  price on January 12, 1998.  All such  options  retain their
original  vesting  schedules  but are  subject to a  nine-month  period in which
exercises are prohibited. Stock options held by executive officers and directors
were not eligible for such repricing.

A summary of option transactions under the plans follows:

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

Outstanding, May 31, 1995        54,939        $   7.43           $0.02-$46.93

Granted and assumed              15,494           32.80           4.65-  56.36
Exercised                       (11,948)           6.17           0.02-  46.13
Canceled                         (2,296)          18.42           0.02-  51.00
                               --------        --------           ------------
Outstanding, May 31, 1996        56,189           13.42           0.02-  56.36

Granted and assumed              13,271           45.27           1.72-  80.13
Exercised                        (7,615)           7.89           0.02-  62.88
Canceled                         (1,789)          31.37           0.02-  80.13
                               --------        --------           ------------
Outstanding, May 31, 1997        60,056           20.82           0.02-  80.13

Granted and assumed              15,701           50.37           0.01-  58.38
Exercised                       (22,627)          12.07           0.01-  57.50
Canceled                         (5,509)          39.37           0.02-  80.13
                               --------        --------           ------------
Outstanding, May 31, 1998        47,621        $  23.39           $0.02-$75.50
                               ========        ========           ============

As of May 31, 1998, there were 16.5 million shares available for future grant.
<TABLE>
<CAPTION>
                               Outstanding options as of May 31, 1998            Exercisable at May 31, 1998
                 -----------------------------------------------------------   -------------------------------
Range of             Number      Weighted average        Weighted average         Number      Weighted average
exercise prices:    of shares     exercise price    remaining contractual life   of shares     exercise price
                    ---------     --------------    --------------------------   ---------     --------------
                 (in thousands)                             (in years)         (in thousands)
<S>    <C>           <C>               <C>                   <C>                  <C>              <C>    
$ 0.02-$ 7.44        10,236            $ 3.92                4.6                  10,023           $  3.95
  7.47- 25.38         9,310             18.67                6.7                   8,404             18.60
 25.46- 29.38        20,220             29.30                8.8                   7,870             29.28
$29.44-$75.50         7,855             39.14                8.2                   3,362             38.05
                     ------            ------                ---                  ------           -------
Total                47,621            $23.39                7.4                  29,659            $18.69
                     ======            ======                ===                  ======            ======
</TABLE>
There were 25.3 million and 21.4 million options exercisable as of May 31, 1997,
and 1996 with weighted  average  exercise  prices of $10.83 and $6.45 per share,
respectively.

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.
                                       50
<PAGE>
Common Stock  Reserved for Issuance.  As of May 31, 1998, the Company had common
stock reserved for issuance as follows:

    (In thousands)

    Shareholder Rights Plan                          358,870
    Stock Option Plans                                63,449
    Employee Stock Purchase Plan                       4,015
    Restricted Stock Plan                                629
                                                    --------
    Total shares reserved for issuance               426,963
                                                    ========

Stock  Repurchase  Program.  In June  1998,  the  Company's  Board of  Directors
authorized  the  repurchase of up to 10 million  shares of the Company's  stock.
Such purchases will be made in the open market from time to time.

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.
<TABLE>
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 1998, 1997
and 1996  reported  below  has been  estimated  at the date of grant  using  the
Black-Scholes option pricing model with the following assumptions:

<CAPTION>
                          Employee Stock Option Plans    Employee Stock Purchase Plan
                          ---------------------------    ----------------------------
                           1998       1997       1996      1998       1997       1996
                          -----------------------------------------------------------
<S>                       <C>        <C>        <C>       <C>        <C>        <C>
Risk-free interest rate    5.5%       6.1%       5.4%      5.5%       5.4%       5.4%
Volatility                56.0%      54.0%      54.0%     56.0%      54.0%      54.0%
Dividend yield             0.0%       0.0%       0.0%      0.0%       0.0%       0.0%
</TABLE>

As of May 31, 1998,  the  expected  lives of options  under the  Employee  Stock
Option Plan are  estimated at  approximately  three years after the vesting date
for   directors  and   approximately   one  year  after  the  vesting  date  for
non-directors.  As of May 31, 1997 and 1996,  the expected life of options under
the Employee  Stock Option Plan is estimated at one year after the vesting date.
As of May 31,  1998,  1997 and 1996,  the  expected  life of  options  under the
Employee Stock Purchase Plan was estimated at six months.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options  that have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions,  including the expected stock price volatility.  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 1998, 1997 and 1996 was $17.97, $26.99
and $19.39 per share, respectively. The weighted average estimated fair value of
shares  granted under the Employee Stock Purchase Plan during fiscal years 1998,
1997, and 1996 was $10.56, $12.46, and $12.84, respectively.

                                       51
<PAGE>
<TABLE>
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  (in  thousands,  except  per  share
amounts):
<CAPTION>
                                                    1998         1997       1996
                                                  --------     --------   --------
<S>                                               <C>          <C>        <C>
Net income (loss):         As reported            $ 30,214     $500,533   $347,875
                           Pro forma               (61,628)     446,253    327,285

Earnings (loss) per share: As reported - basic    $   0.09     $   1.51   $   1.10
                           Pro forma - basic         (0.18)        1.35       1.04

                           As reported - diluted  $   0.08     $   1.42   $   1.02
                           Pro forma - diluted       (0.18)        1.26       0.96
</TABLE>

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

The Company does not use derivative  financial  instruments  for  speculative or
trading  purposes.  Where  available,  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 exchange foreign currencies for U.S. Dollars or
vice versa,  and generally  mature in one month.  At May 31, 1998 and 1997,  the
Company had outstanding foreign exchange forward contracts of $159.3 million and
$27.7 million which have remaining  maturities of one month. At May 31, 1998 and
1997,  the  Company  did not  have  any  outstanding  foreign  exchange  forward
contracts with maturities greater than one month.

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.

                                       52
<PAGE>

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 to the Company.
<TABLE>
<CAPTION>
                                      May 31, 1998             May 31, 1997
                                 ----------------------  -------------------------
                                 Carrying     Estimated    Carrying      Estimated
(Dollars in thousands)             Amount    Fair Value      Amount     Fair Value
                                 -------------------------------------------------
<S>                              <C>           <C>         <C>            <C>
Assets:
  Cash and equivalents           $528,981      $528,981    $351,237      $ 351,237
  Short-term investments          547,097       547,097     538,706        538,706
  Corporate equity securities       9,521         9,521      13,084         13,084

Liabilities:
  Short-term debt                $     --      $    --     $134,700      $135,218
  Fixed rate debt                  47,886       48,907       66,259        66,698
  Convertible subordinated notes       --           --      110,000       161,425

Commitments:
  Foreign exchange contracts     $159,318      $159,345    $ 27,653      $ 27,627
</TABLE>

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

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

Short-term  investments,  corporate  equity  securities,  debt  and  convertible
subordinated notes, and foreign exchange contracts. The fair value of short-term
investments,  corporate  equity  securities,  debt and convertible  subordinated
notes, and foreign exchange contracts are based on quoted market prices.

NOTE 12:  PURCHASED IN-PROCESS TECHNOLOGY, MERGER-RELATED CHARGES AND OTHER

Purchased In-Process Technology

During the fourth  quarter of fiscal 1998,  the Company  purchased  Lanworks for
approximately  $13.0  million in cash.  Approximately  $8.4 million of the total
purchase price  represented  purchased  in-process  technology  that had not yet
reached technological feasibility and had no alternative future use. This amount
was charged to the Company's operations in the fourth quarter of fiscal 1998.

During the fiscal year ended May 31, 1997, U.S.  Robotics  acquired  Scorpio for
$74.5  million,  which was  accounted  for as a  purchase.  Approximately  $54.0
million of the total purchase price represented  purchased in-process technology
that had not yet reached technological feasibility and had no alternative future
use. This amount was charged to the Company's operations in the first quarter of
fiscal 1997.

During the fiscal  year ended May 31,  1996,  the  Company  incurred a charge of
$106.4  million  for  purchased   in-process   technology   relating  to  3Com's
acquisition of AXON and U.S. Robotics' acquisition of Scorpio. Both transactions
were  accounted  for as  purchases.  Purchased  in-process  technology  of $52.4
million  and  $54.0  million  for AXON and  Scorpio,  respectively,  had not yet
reached  technological  feasibility,  had no  alternative  future  use,  and was
charged to operations during the fourth quarter of fiscal 1996.

                                       53
<PAGE>
Merger-Related Charges

During the fiscal year ended May 31, 1998, the Company  recorded  merger-related
charges  of $260.7  million,  which  includes  approximately  $217.1  million of
integration  expenses and $43.6 million of direct  transaction costs (consisting
primarily  of  investment  banking  and other  professional  fees).  Integration
expenses included:

       +   $48.3 million  related to the closure and  elimination  of owned and
           leased facilities,  primarily  duplicate  corporate  headquarters and
           domestic and European sales offices;
       +   $61.8 million for severance  and  outplacement  costs related to the
           merger,  including amounts related to termination benefits associated
           with  employment  agreements.  Employee groups impacted by the merger
           include   personnel   involved  in  duplicate   corporate   services,
           manufacturing and logistics, product organizations and sales;
       +   $41.8 million  associated with certain long-term  assets,  primarily
           including duplicate finance, manufacturing,  human resource and other
           management  information systems,  and capitalized  purchased research
           and development costs related to a discontinued product; and
       +   $65.2  million   primarily   associated  with  the  elimination  and
           phase-out of duplicate wide area networking  products  (i.e.,  3Com's
           AccessBuilder(R)   2000,  4000,  5000  and  8000  products  and  U.S.
           Robotics'(R)  TOTALswitch,  ATM switch,  LANLinker  and related small
           office  home  office  products),   and  the  discontinuance  of  U.S.
           Robotics' telephony products. The charge primarily includes inventory
           write-offs and noncancelable purchase commitments.

The remaining  merger-related  accrual at May 31, 1998 was  approximately  $50.5
million.  Total  expected  cash  expenditures  relating to the merger charge are
estimated to be approximately $120 million,  of which approximately $102 million
was disbursed prior to May 31, 1998.  Termination benefits paid to 838 employees
terminated  through May 31, 1998  (approximately 89 percent of the total planned
severances)  were  approximately  $55  million.   The  remaining  severance  and
outplacement  amounts  are  expected  to be paid  within the first six months of
fiscal 1999.

Merger-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.

Merger-related  charges for the year ended May 31, 1996 consisted of acquisition
costs of $69.0 million related to the acquisition of Chipcom.  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.

Other Charges

During fiscal 1998, the Company  recorded a net gain of $7.0 million  associated
with past merger activities and disposition of real estate. The Company reversed
approximately $10.6 million of previously recorded merger accruals.  The Company
also sold land in Santa Clara near its  headquarters  resulting in a net gain of
$15.8  million.  In addition,  consistent  with the Company's  consolidation  of
manufacturing activities, a decision to close one of two manufacturing plants in
Chicago  resulted  in  a  one-time  charge  of  $19.4  million,  reflecting  the
difference  between the estimated net realizable value and the carrying value of
the plant.

See Note 3 for additional information.

                                       54
<PAGE>
NOTE 13: OTHER INCOME, NET

Other income, net consists of:
                                              Years ended May 31,
                                     ------------------------------------------
(Dollars in thousands)                 1998             1997             1996
                                     --------         --------         --------

Interest income                      $ 46,175         $ 36,263         $ 30,060
Interest expense                      (16,685)         (20,451)         (17,606)
Other                                 (12,582)          (7,332)          (3,102)
                                     --------         --------         --------

Total                                $ 16,908         $  8,480         $  9,352
                                     ========         ========         ========

NOTE 14:  INCOME TAXES

The provision for income taxes consists of:
                                               Years ended May 31,
                                      -----------------------------------------
 (Dollars in thousands)                 1998            1997             1996
                                     ---------        --------        --------
Current:
   Federal                           $ 257,853        $ 213,969       $ 185,368
   State                                     8           54,115          43,592
   Foreign                              37,641           54,201          58,376
                                     ---------        ---------       ---------

Total current                          295,502          322,285         287,336
                                     ---------        ---------       ---------
Deferred:
   Federal                            (218,528)         (21,811)        (20,312)
   State                                 2,537           (7,412)         (6,433)
   Foreign                               6,748            7,106           1,894
                                     ---------        ---------       ---------

Total deferred                        (209,243)         (22,117)        (24,851)
                                     ---------        ---------       ---------

Total                                $  86,259        $ 300,168       $ 262,485
                                     =========        =========       =========

The components of the net deferred tax assets at May 31 consist of:

(Dollars in thousands)                                   1998            1997
                                                         ----            ----
Deferred tax assets:
   Reserves not recognized for tax purposes            $ 212,026      $ 187,760
   Net operating loss carryforwards                      237,100         16,667
   Amortization and depreciation                          16,988          8,499
   Other                                                  44,608         35,838
   Valuation allowance                                   (46,587)       (17,546)
                                                       ---------      ---------

Total deferred tax assets                                464,135        231,218
                                                       ---------      ---------
Deferred tax liabilities:
   Unremitted earnings                                   (81,960)       (57,863)
   Unrealized gain on investments, net                      (745)        (1,546)
   Other                                                    --             (266)
                                                       ---------      ---------

Net deferred tax assets                                $ 381,430      $ 171,543
                                                       =========      =========

                                       55
<PAGE>
The  valuation  allowance  relates  primarily  to the  remaining  portion of 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 increased $29.0 million
in fiscal 1998 and increased $1.0 million in fiscal 1997.

The Company's income taxes payable for federal, state, and foreign purposes have
been reduced by the tax benefits  associated with the exercise of employee stock
options and with disqualifying  dispositions of stock options. The amount of the
benefit  is the tax effect of the  difference  between  the market  value of the
stock  issued  at the time of  option  exercise  and the  exercise  price of the
option.

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,
                                                    --------------------------
                                                    1998      1997       1996
                                                    ----      ----       ----
Tax computed at federal statutory rate              35.0%     35.0%      35.0%
State income taxes, net of federal effect            1.4       3.4        3.6
Foreign sales corporation                             -       (0.5)      (0.7)
Tax exempt investment income                        (5.5)     (0.5)      (0.5)
Provision for combined foreign and U.S. taxes on
   certain foreign income at rates greater than
   (less than) U.S. rates                            0.6      (1.6)      (2.3)
Research tax credits                                (5.5)     (1.1)      (0.3)
Non-deductible purchased in-process technology
   and merger-related charges                       44.2       2.0        7.1
Other                                                3.9       0.8        1.1
                                                    ----      ----       ----

Total                                               74.1%     37.5%      43.0%
                                                    ====      ====       ====

Income  before  income taxes for the fiscal  years ended May 31, 1998,  1997 and
1996 includes  income of $170.5  million,  $316.9  million,  and $218.3 million,
respectively  from the  Company's  foreign  subsidiaries.  The  Company  has not
provided  for  federal   income  taxes  on   approximately   $299.5  million  of
undistributed  earnings of its  foreign  subsidiaries.  The  Company  intends to
reinvest in foreign subsidiary operations indefinitely. It is not practicable to
estimate the income tax liability  that might be incurred upon the remittance of
such earnings.

The  Company  has  operating  loss  carryforwards   related  to  various  taxing
jurisdictions,   the  total  of  which  is  approximately  $604  million.  These
carryforwards expire through the year 2013.

                                       56
<PAGE>
NOTE 15: GEOGRAPHIC AREA INFORMATION

The Company  operates in a single  industry  segment:  the design,  manufacture,
marketing,  and support of converged networks.  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 (loss) and identifiable assets,  classified by the major
geographic areas in which the Company operates, are as follows:

(Dollars in thousands)                       1998           1997        1996
                                           ----------    ----------  ----------


Sales to unaffiliated customers:
United States operations                   $2,962,759    $3,091,097  $2,549,813
Export sales from United States operations    687,199       688,875     661,290
European operations                         1,628,698     1,662,074   1,072,552
Other                                         141,711       164,031         853
                                           ----------    ----------  ----------

Total                                      $5,420,367    $5,606,077  $4,284,508
                                           ==========    ==========  ==========

Transfers from geographic areas 
(eliminated in consolidation):
United States operations                   $  500,324    $  516,033  $  400,095
European operations                           624,865       573,181     300,482
Other                                          31,227        25,461      28,154
                                           ----------    ----------  ----------

Total                                      $1,156,416    $1,114,675  $  728,731
                                           ==========    ==========  ==========

Operating income (loss):
United States operations                   $ (141,836)   $  300,733  $  362,513
European operations                           400,335       428,278     292,564
Other                                        (114,998)       60,558      21,185
Eliminations                                  (43,936)        2,652     (75,254)
                                           ----------    ----------  ----------

Total                                      $   99,565    $  792,221  $  601,008
                                           ==========    ==========  ==========

Identifiable assets:
United States operations                   $2,878,310    $2,604,001
European operations                         1,145,365       824,827
Other                                         157,110       143,563
Eliminations                                 (100,265)       (6,550)
                                           ----------    ----------

Total                                      $4,080,520    $3,565,841
                                           ==========    ==========

Purchased  in-process  technology  charges of $8.4 million  associated  with the
acquisition  of Lanworks  are  included  in  operating  income  (loss) for other
operations  for the year ended May 31,  1998.  Purchased  in-process  technology
charges of $54.0 million and $106.4 million  associated with the acquisitions of
Scorpio and AXON are included in operating income (loss) for European operations
for the years ended May 31, 1997 and 1996, respectively.  In connection with the
acquisitions  of U.S.  Robotics  in fiscal  year 1998 and Chipcom in fiscal year
1996,  approximately  $217.5 million and $63.0 million of  merger-related  costs
were  charged  to  the  United  States  operations  in  fiscal  1998  and  1996,
respectively.  Transfers  between  geographic  areas are accounted for at prices
representative of unaffiliated party transactions. See Note 3 and Note 12.

                                       57
<PAGE>
NOTE 16: LITIGATION

The  Company is a party to lawsuits in the normal  course of its  business.  The
Company  believes 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  intellectual  property and  securities  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.

Securities Litigation

On  March  24 and  May 5,  1997,  putative  securities  class  action  lawsuits,
captioned  Hirsch  v.  3Com  Corporation,  et al.,  Civil  Action  No.  CV764977
(Hirsch),  and Kravitz v. 3Com  Corporation,  et al., Civil Action No.  CV765962
(Kravitz),  respectively,  were filed  against  the  Company  and certain of its
officers and directors in the California Superior Court, Santa Clara County. The
complaints  allege  violations  of  Sections  25400 and 25500 of the  California
Corporations Code and seek unspecified damages on behalf of a purported class of
purchasers  of 3Com  common  stock  during the period  from  September  24, 1996
through February 10, 1997. The actions are in discovery.  No trial date has been
set.

On February 10, 1998, a putative securities class action, captioned Euredjian v.
3Com Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian),  was filed
against  3Com and several of its present and former  officers  and  directors in
United States District Court for the Northern  District of California  asserting
the same class period and factual allegations as the Hirsch and Kravitz actions.
The complaint alleges  violations of the federal  securities laws,  specifically
Sections  10(b)  and 20(a) of the  Securities  Exchange  Act of 1934,  and seeks
unspecified damages. The Company has not responded to the complaint. The Hirsch,
Kravitz  and  Euredjian  actions  were filed  after  Intel  Corporation  sharply
decreased prices on its Fast Ethernet network interface cards, which resulted in
3Com  decreasing  its prices on similar  products.  The Company  believes it has
meritorious defenses to the claims in the Hirsch,  Kravitz and Euredjian actions
and intends to contest the lawsuits vigorously. An unfavorable resolution of the
actions  could  have a  material  adverse  effect on the  business,  results  of
operations or financial condition of the Company.

Several  securities  actions have been filed  against the Company and certain of
its current and former  officers and directors  following  the Company's  merger
with U.S.  Robotics.  In December  1997,  a putative  securities  class  action,
captioned  Reiver v. 3Com  Corporation,  et al.,  Civil Action No.  C-97-21083JW
(Reiver),  was  filed in the  United  States  District  Court  for the  Northern
District  of  California.  The  complaint  alleges  violations  of  the  federal
securities  laws,  specifically  Sections  10(b)  and  20(a)  of the  Securities
Exchange  Act of 1934,  and seeks  unspecified  damages on behalf of a purported
class of  purchasers  of 3Com common  stock  during the period from May 19, 1997
through  November 6, 1997.  In December  1997 and January  1998,  seven  similar
shareholder class action lawsuits were filed in the United States District Court
for the Northern  District of Illinois and the United States  District Court for
the Northern District of California. The cases filed in the Northern District of
Illinois have been transferred to the Northern  District of California,  and the
cases  have been  consolidated  in the Reiver  action.  A  consolidated  amended
complaint will be filed shortly.

On April 3, 1998, a complaint,  captioned  Florida State Board of Administration
and Teachers  Retirement System of Louisiana v. 3Com Corporation,  et al., Civil
Action No.  C-98-1355  (Florida  State  Board),  was filed in the United  States
District Court for the Northern  District of California.  The complaint  alleges
violations of the federal securities laws,  violations of the Florida securities
laws,  common  law  fraud  and  negligent  misrepresentation  based  on  factual
allegations  similar to those asserted in the Reiver action. The Company has not
responded to the complaint.  The Company believes it has meritorious defenses to
the claims in the Reiver and Florida  State Board actions and intends to contest
the lawsuits vigorously.  An unfavorable  resolution of the actions could have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

In January 1998, two purported shareholder  complaints relating to the Company's
June  1997  merger  with  U.S.  Robotics,  captioned  Stanley  Grossman  v. 3Com
Corporation,  et al., Civil Action No. CV771335,  and Jason v. 3Com Corporation,
et al.,  Civil Action No.  CV771713,  were filed in California  Superior  Court,
Santa Clara County.  The actions  allege that 3Com,  several of its officers and
directors, and several former U.S. Robotics officers violated Sections 11 and 15
of the Securities Act of 1933 by making alleged misrepresentations and omissions
in a May 8, 1997  registration  statement.  The  complaints  seek  damages in an
unspecified  amount on behalf of a purported  class of persons who  received the
Company's stock during the merger pursuant to the  registration  statement.  The
Company has not responded to the  complaints.  The Company has filed a motion in
Delaware  Chancery  Court  seeking  an  injunction  preventing  plaintiffs  from
proceeding, on the basis that plaintiffs' claims are barred by a settlement in a
prior action. The Company believes it has meritorious defenses to the claims and
intends to contest the lawsuits  vigorously.  An  unfavorable  resolution of the
actions  could  have a  material  adverse  effect on the  business,  results  of
operations or financial condition of the Company.

                                       58
<PAGE>
In February 1998, a shareholder  derivative action  purportedly on behalf of the
Company,  captioned,  Wasserman v. Benhamou,  et al., Civil Action No. 16200-NC,
was filed in Delaware  Chancery Court. The complaint  alleges that the Company's
directors  breached their fiduciary duties to the Company by engaging in alleged
wrongful  conduct from mid-1996  through  November  1997,  including the conduct
complained of in the securities litigation described above. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company  and the  individual  defendants  have  filed a motion  to  dismiss  the
complaint.

Intellectual Property Litigation

On  April  28,  1997,  Xerox   Corporation  filed  suit  against  U.S.  Robotics
Corporation  and U.S.  Robotics Access Corp. in the United States District Court
for  the  Western  District  of  New  York.  The  case  is now  entitled:  Xerox
Corporation v. U.S.  Robotics  Corporation,  U.S.  Robotics  Access Corp.,  Palm
Computing,  Inc.  and  3Com  Corporation,  Civil  Action  No.  97-CV-6182T.  The
complaint  alleges  willful  infringement  of a United States patent relating to
computerized  interpretation  of  handwriting.  The complaint  further prays for
unspecified  damages and injunctive  relief.  Xerox has asserted that "Graffiti"
software and certain products of Palm Computing,  Inc. infringe the patent.  The
Company believes it has meritorious defenses to the claims and is contesting the
lawsuit  vigorously.  An  unfavorable  resolution  of the  action  could  have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

By an agreement  effective  February 27, 1998,  the Company and  Motorola,  Inc.
settled the patent lawsuit  pending  between  Motorola,  Inc. and U.S.  Robotics
Corporation,  U.S. Robotics Access Corp. and U.S. Robotics Mobile Communications
Corp. in the United  States  District  Court for the District of  Massachusetts,
Civil Action No. 97-10339RCL. This case was dismissed on March 31, 1998. None of
the parties  admitted fault. In connection with the settlement,  the Company and
Motorola, Inc. entered into a cross-license of their respective patents relating
to high-speed  analog modem  technologies  for  implementation  of international
standard data  communication  protocols.  The terms of the  settlement  were not
material to the business,  results of  operations or financial  condition of the
Company.

During February 1998 the Company and Livingston  Enterprises,  Inc. (Livingston)
agreed to settle the cases pending between  Livingston and U.S.  Robotics in the
United States  District  Court for the Northern  District of  California,  Civil
Action Nos. C-97-3551CRB and C-97-3487CRB. These actions were dismissed on March
4,  1998.  Neither  party  admitted  fault in the  settlement.  The terms of the
settlement, which were not disclosed, were not material to the business, results
of operations, or financial condition of the Company.

Consumer Litigation

A putative  consumer class action pending against the Company and U.S.  Robotics
in the California Superior Court, Marin County, Bendall, et al. v. U.S. Robotics
Corporation,  et al.,  Civil  Action No.  170441  (Bendall),  arising out of the
purchase of x2(TM) products and products upgradeable to x2, was coordinated with
a previously  filed  individual  action in the California  Superior  Court,  San
Francisco County,  Intervention Inc. v. U.S. Robotics Corporation,  Civil Action
No. 984352.  Two putative  consumer class action  lawsuits  pending  against the
Company and U.S.  Robotics  in state  court of Illinois  arising out of the same
facts as those alleged in the California  cases are stayed.  Lippman,  et al. v.
3Com, Civil Action No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics Access
Corporation,  et al., Civil Action No. 97 CH 14417.  In June,  1998, the Company
filed a demurrer to the First Amended  Complaint  filed in Bendall.  The Company
believes it has  meritorious  defenses to these  lawsuits and intends to contest
the lawsuits vigorously.  An unfavorable  resolution of the actions could have a
material  adverse  effect on the  business,  results of  operations or financial
condition of the Company.

                                       59
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                     Fiscal 1998 Quarters Ended                               Fiscal 1997 Quarters Ended
                          --------------------------------------------------     --------------------------------------------------
(Dollars in thousands,     May 31,      Mar. 1,      Nov. 30,       Aug. 31,       May 31,     Feb. 28,    Nov. 30,      Aug. 31,
except per share data)      1998         1998          1997          1997           1997         1997        1996          1996
                            ----         ----          ----          ----           ----         ----        ----          ----
<S>                      <C>          <C>          <C>            <C>            <C>          <C>          <C>          <C>       
Sales                    $1,375,471   $1,250,191   $ 1,197,189    $ 1,597,516    $1,371,743   $1,462,891   $1,459,939   $1,311,504
                         ----------   ----------   -----------    -----------    ----------   ----------   ----------   ----------

Gross margin                598,268      543,003       551,845        766,087       628,402      737,775      703,023      617,911

Gross margin %                 43.5%        43.4%         46.1%          48.0%         45.8%        50.4%        48.2%        47.1%
                         ----------   ----------   -----------    -----------    ----------   ----------   ----------   ----------

Operating income (loss)      87,066       25,743        (1,503)       (11,741)       76,777      248,281      273,518      193,645
                         ----------   ----------   -----------    -----------    ----------   ----------   ----------   ----------


Net income (loss)            63,568       13,858         4,021        (51,233)       41,787      179,104      174,598      105,044
Net income (loss) %             4.6%         1.1%          0.3%          (3.2)%         3.0%        12.2%        12.0%         8.0%
                         ----------   -----------    -----------    ----------   ----------   ----------   ----------   ----------
Diluted net income
   (loss) per share      $     0.17   $     0.04   $      0.01    $     (0.15)   $     0.12   $     0.50   $     0.49   $     0.30
                         ----------   ----------   -----------    -----------    ----------   ----------   ----------   ----------
</TABLE>

Net income for the  quarter  ended May 31,  1998,  included a pre-tax  charge of
approximately  $8.4 million  ($0.02 per share)  associated  with the purchase of
Lanworks  and a net pre-tax  credit of  approximately  $4.9  million  ($0.01 per
share)  associated  with past merger  activities and disposition of real estate.
Net income for the quarters ended March 1, 1998, and November 30, 1997, included
pre-tax credits of approximately $9.9 million ($0.02 per share) and $1.2 million
(no per  share  effect),  respectively,  associated  with the  merger  with U.S.
Robotics.  Net loss for the quarter  ended  August 31,  1997  included a pre-tax
charge of  approximately  $269.8 million ($0.62 per share)  associated  with the
merger with U.S.  Robotics.  Net income for the quarter ended  February 28, 1997
included a tax benefit of approximately  $17.9 million ($0.05 per share) related
to U.S.  Robotics'  acquisition  of Scorpio.  Net income for the  quarter  ended
November 30, 1996 included a pre-tax charge of approximately $6.6 million ($0.02
per share) related to 3Com's acquisition of OnStream. Net income for the quarter
ended August 31, 1996 included a pre-tax charge of  approximately  $54.0 million
($0.15 per share)  associated with U.S.  Robotics'  acquisition of Scorpio.  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 diluted basis would have been as follows:
<TABLE>
<CAPTION>
                                       Fiscal 1998 Quarters Ended               Fiscal 1997 Quarters Ended
                            ----------------------------------------    ------------------------------------------
(Dollars in thousands,       May 31,   Mar. 1,   Nov. 30,   Aug. 31,    May 31,     Feb. 28,    Nov. 30,   Aug. 31,
except per share data)        1998      1998      1997       1997        1997         1997       1996       1996
------------------------------------------------------------------------------------------------------------------
<S>                         <C>        <C>       <C>       <C>          <C>         <C>         <C>        <C>
Net income excluding
    non-recurring items     $65,859    $7,406    $3,189    $169,606     $41,787     $161,167    $181,198   $159,044
Net income per share
    excluding non-
    recurring items         $  0.18    $ 0.02    $ 0.01    $   0.47     $  0.12     $   0.45    $   0.51   $   0.45
                            -------    ------    ------    --------     -------     --------    --------   --------
</TABLE>
                                       60
<PAGE>
ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

Not applicable.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF 3COM CORPORATION

The information  required by Item 10 of Form 10-K with respect to identification
of directors is incorporated by reference from the information  contained in the
section  captioned  "Election of Directors" in 3Com's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held September 24, 1998 (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 34 of this
                Form 10-K.

         (2)    Financial   Statement  Schedule  -  See  Index  to  Consolidated
                Financial Statements and Financial Statement Schedule at page 34
                of this Form 10-K.

         (3)    Exhibits - See Exhibit Index at page 62 of this Form 10-K.

     (b) The Registrant  filed one report on Form 8-K during the last quarter of
         the fiscal year ended May 31, 1998, as follows:

                (i) A report on Form 8-K filed on March 5, 1998, reporting under
                    Item 5 the announcement that the Company revised  previously
                    reported   financial  results  relating  to  the  accounting
                    combination and merger related charges for the June 12, 1997
                    merger of 3Com and U.S. Robotics.

     (c) See Exhibit Index at page 62 of this Form 10-K.

     (d) See Index to Consolidated  Financial Statements and Financial Statement
         Schedule at page 34 of this Form 10-K.

                                       61
<PAGE>
                                  EXHIBIT INDEX
EXHIBIT
NUMBER           DESCRIPTION

3.1   Certificate of Incorporation (14)
3.2   Certificate  of  Correction  Filed  to Correct  a  Certain  Error  in  the
      Certificate of Incorporation (14)
3.3   Certificate of Merger (14)
3.4   Bylaws of 3Com Corporation, As Amended (14)
4.1   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) (6)
4.2   Placement Agreement for the private placement of convertible  subordinated
      notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (6)
4.3   Amended and Restated  Rights  Agreemen  dated  December 31, 1994  (Exhibit
      10.27 to Form 10-Q) (7)
4.4   Amended and  Restated  Senior  Notes  Agreement   between  U.S.   Robotics
      Corporation, Metropolitan Life Insurance Company,  The Northwestern Mutual
      Life Insurance Company,  and Metropolitan  Property and Casualty Insurance
      Company (8)
10.1  1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K) (3)*
10.2  Amended and Restated Incentive Stock Option Plan (2)*
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) (9)*
10.5  3Com Corporation  Director Stock Option Plan, as amended  (Exhibit 19.3 to
      Form 10-Q) (4)*
10.6  Amended 3Com Corporation  Director Stock Option Plan (Exhibit 10.8 to Form
      10-Q) (9)*
10.7  3Com Corporation  Restricted Stock Plan, as amended (Exhibit 10.17 to Form
      10-Q) (9)*
10.8  1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)*
10.9  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) (11)
10.10 Purchase Agreement between BNP Leasing Corporation,  and 3Com Corporation,
      effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (11)
10.11 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) (10)
10.12 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) (13)
10.13 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) (13)
10.14 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) (13)
10.15 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 (12)
10.16 Lease Agreement  between BNP Leasing  Corporation,  as Landlord,  and 3Com
      Corporation,  as  Tenant,  effective  as of July 25,  1997  for the  Great
      America Phase III (PAL) site (14)
10.17 Purchase  Agreement between BNP Leasing  Corporation and 3Com Corporation,
      effective as of July 25, 1997 for the Great  America  Phase III (PAL) site
      (14)
                                       62
<PAGE>
10.18 Lease Agreement  between BNP Leasing  Corporation,  as Landlord,  and 3Com
      Corporation,  as Tenant, effective as of July 29, 1997 for the Marlborough
      site (14)
10.19 Purchase  Agreement between BNP Leasing  Corporation and 3Com Corporation,
      effective as of July 29, 1997 for the Marlborough site (14)
10.20 Lease Agreement  between BNP Leasing  Corporation,  as Landlord,  and 3Com
      Corporation,  as Tenant,  effective  as of August 11, 1997 for the Rolling
      Meadows site (14)
10.21 Purchase Agreement between BNP Leasing Corporation,  and 3Com Corporation,
      effective as of August 11, 1997 for the Rolling Meadows site (14)
10.22 First Amendment to Credit Agreement (14)
21.1  Subsidiaries of the Registrant
23.1  Consent of Deloitte & Touche LLP
23.2  Consent of Grant Thornton LLP
27    Financial Data Schedule
--------------------------------------------------------------------------------
*     Indicates a management contract or compensatory plan.

(1)   Incorporated by reference to the corresponding Exhibit previously filed as
      an Exhibit to  Registrant's  Registration  Statement  on Form S-1 filed on
      January 25, 1984 (File No. 2-89045)
(2)   Incorporated  by reference to Exhibit  10.2 to  Registrant's  Registration
      Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850)
(3)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously  filed as an Exhibit to Registrant's  Form 10-K filed on August
      27, 1991 (File No. 0-12867)
(4)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Form 10-Q filed on January
      10, 1992 (File No. 0-12867)
(5)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously  filed as an Exhibit to Registrant's  Form 10-K filed on August
      31, 1994 (File No. 0-12867)
(6)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Form 8-K filed on November
      16, 1994 (File No. 0-12867)
(7)   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)
(8)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Form 10-Q filed on May 16,
      1995 (File No. 0-19550)
(9)   Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Form 10-Q filed on January
      15, 1996 (File No. 0-12867)
(10)  Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Registration  Statement on
      Form S-4 filed on October 11, 1996 (File No. 333-13993)
(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, 1997 (File No. 0-12867)
(12)  Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Registration  Statement on
      Form S-4 filed on March 17, 1997 (File No. 333-23465)
(13)  Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously  filed as an Exhibit to  Registrant's  Form 10-Q filed on April
      11, 1997 (File No. 0-12867)
(14)  Incorporated  by  reference  to  the  Exhibit  identified  in  parentheses
      previously filed as an Exhibit to Registrant's  Form 10-Q filed on October
      14, 1997 (File No. 0-12867)
                                       63
<PAGE>
      (b)  Reports on Form 8-K

      The   Company  filed one  report on Form 8-K  during  the  fiscal  quarter
      covered by this report, as follows:

      (i)   Report on Form 8-K filed on March 5,  1998,  reporting  under Item 5
            the  announcement  that  the  Company  revised  previously  reported
            financial results relating to the accounting  combination and merger
            restructuring  charge for the June 12,  1997 merger of 3Com and U.S.
            Robotics.


                                       64
<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 10TH DAY OF
AUGUST, 1998.

                                3Com Corporation
                                  (Registrant)

                                 By  /s/ Eric A. Benhamou
                                   ------------------------------------------
                                         Eric A. Benhamou
                                 Chairman of the Board 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 10TH DAY OF AUGUST, 1998.

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

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

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

/s/ James L. Barksdale                               Director
-------------------------------
    (James L. Barksdale)

/s/ Gordon A. Campbell                               Director
-------------------------------
    (Gordon A. Campbell)

/s/ Casey Cowell                                     Director
-------------------------------
    (Casey Cowell)

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

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

/s/ William F. Zuendt                                Director
-------------------------------
    (William F. Zuendt)
                                       65
<PAGE>
<TABLE>

                                                                                                          SCHEDULE II
                                3Com Corporation

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                 For the Years Ended May 31, 1996, 1997 and 1998
                             (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>    
Year ended May 31, 1996:
Allowance for doubtful accounts      $ 27,376       $  19,104     $     -       $  7,253 (3)  $    (733)(1)   $38,494
Product return reserve                 13,990          84,845           -          61,083        (2,957)(1)    34,795
Accrued product warranty               28,129          57,857           -          38,367           183 (1)    47,802
Acquisition-related reserves:
  Chipcom                                -             69,000           -          35,315          -           33,685

Year ended May 31, 1997:
Allowance for doubtful accounts      $ 38,494       $  27,880     $     -       $  8,212 (3)  $     917 (2)   $59,079
Product return reserve                 34,795         118,656           -         68,200         (7,777)(2)    77,474
Accrued product warranty               47,802          84,006           -         58,082           (459)(2)    73,267
Acquisition-related reserves:
  Chipcom                              33,685           -               -         16,719           -           16,966


Year ended May 31, 1998:
Allowance for doubtful accounts      $ 59,079       $  33,182     $     -       $ 19,964 (3)  $    -          $72,297
Product return reserve                 77,474          98,785           -         87,365           -           88,894
Accrued product warranty               73,267          73,832           -         59,821           -           87,278
Acquisition-related reserves:
  Chipcom                              16,966           -               -         11,705           -            5,261
Acquisition-related reserves:
  U.S. Robotics
   Inventory reserve                     -             63,858           -         57,429           -            6,429
   Property and equipment reserve        -             49,166           -         24,276           -           24,890
   Non-current asset reserve             -             28,134           -         26,619           -            1,515
   Accrued acquisition-related costs     -            119,605           -        101,927           -           17,678
                                     --------       ---------     ---------     --------      ---------       -------
    Total acquisition-related
     reserves                        $   -          $ 260,763     $     -       $210,251      $    -          $50,512
                                     ========       =========     =========     ========      =========       =======
<FN>
(1)   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).
(2)   Pooled business - net represents  activity of U.S. Robotics for the period
      for July 1, 1996 through  September 29, 1996 and for the month ended March
      30, 1997 (see Note 3 to the Consolidated Financial Statements).
(3)   Accounts written off - net of recoveries.
</FN>
</TABLE>

                                       S-1