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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended November 29, 2002

or

For the transition period from                              to                             

Commission File No. 0-12867

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

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

Former name, former address and former fiscal year, if changed since last report: N/A

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 ý                No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes ý                No o

As of December 27, 2002, 361,204,619 shares of the Registrant's Common Stock were outstanding.

This report contains a total of 46 pages of which this page is number 1.

3Com Corporation

Table of Contents

3Com, CommWorks, and Megahertz are registered trademarks and XRN is a trademark of 3Com Corporation or its subsidiaries. Palm is a trademark of Palm, Inc.

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

3Com Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

See notes to condensed consolidated financial statements.

3

3Com Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par value)

See notes to condensed consolidated financial statements.

4

3Com Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See notes to condensed consolidated financial statements.

5

3Com Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared by 3Com Corporation (3Com), pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of 3Com's financial position as of November 29, 2002, and results of operations and cash flows for the three and six months ended November 29, 2002 and November 30, 2001. Certain amounts from the prior period have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net loss as previously reported.

3Com uses a 52- or 53-week fiscal year ending on the Friday nearest to May 31. The results of operations for the three and six months ended November 29, 2002 may not be indicative of the results to be expected for the fiscal year ending May 30, 2003. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in 3Com's Annual Report on Form 10-K for the fiscal year ended May 31, 2002.

Revenue Recognition

3Com generally recognizes a sale when the product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. 3Com accrues related allowances for product returns, warranty, other post-contract support obligations, and royalty expenses in the period of sale. A limited warranty is provided on 3Com products for periods ranging from 90 days to the lifetime of the product, depending upon the product. Sales of service and maintenance are recognized upon delivery and completion of the service or, in the case of maintenance contracts, ratably over the contract term, provided that all other revenue recognition criteria have been met. 3Com provides limited product return and price protection rights to certain distributors and resellers. Product return rights are generally limited to a percentage of sales over a one to three month period.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, "Business Combinations," which addresses the financial accounting and reporting for business combinations and supersedes Accounting Principles Board (APB) Opinion 16, "Business Combinations," and SFAS 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 141 requires that all business combinations be accounted for by the purchase method, modifies the criteria for recognizing intangible assets, and expands disclosure requirements. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001. 3Com adopted SFAS 141 on June 1, 2002. The adoption of SFAS 141 did not have a material impact on the Company's results of operations or statements of financial position.

In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, SFAS 142 expands the disclosure requirements about goodwill and other

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intangible assets in the years subsequent to their acquisition. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS 142 are to be reported as a change in accounting principle.

3Com adopted SFAS 142 on June 1, 2002 and ceased amortization of net goodwill totaling $66.5 million, which included $0.7 million of acquired workforce intangible assets previously classified as purchased intangible assets; amortization continues on net finite-lived intangible assets with remaining useful lives of generally two to three years and totaling $15.2 million as of November 29, 2002 as discussed in Note 7. In the first quarter of fiscal 2003, 3Com completed the first phase of the SFAS 142 analysis, which indicated that an impairment might have existed for goodwill associated with the Company's Enterprise Networking and CommWorks segments. In the second quarter of fiscal 2003, 3Com completed the transitional goodwill impairment evaluation and recorded a charge totaling $65.6 million as a change in accounting principle effective June 1, 2002 to write off goodwill of $45.4 million in the Enterprise Networking segment and $20.2 million in the CommWorks segment. The remaining recorded goodwill for 3Com after this impairment charge was $0.9 million as of November 29, 2002, and related solely to the Connectivity segment. A reconciliation of previously reported net loss and net loss per share to the amounts adjusted for the exclusion of goodwill and acquired workforce amortization follows (in thousands, except per share amounts):

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS 144 on June 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's results of operations or financial position.

In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability initially should be measured and recorded at fair value. 3Com will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002.

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The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. 3Com has not yet determined the impact of the adoption of FIN 45 on the Company's results of operations or financial position.

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The EITF will be effective for fiscal years beginning after June 15, 2003. 3Com has not yet determined the impact of the adoption of EITF 00-21 on the Company's results of operations or financial position.

2.

Restructuring Charges

In fiscal 2001, 3Com began the restructuring of its business to enhance the focus and cost effectiveness of its business units in serving their respective markets. 3Com implemented a reduction in workforce and other actions aimed at reducing costs, expenses and assets; exited its consumer Internet appliance and cable and digital subscriber line (DSL) modem product lines; and outsourced the manufacturing of certain high volume server, desktop and mobile connectivity products in a contract manufacturing arrangement as part of this restructuring effort.

In the first quarter of fiscal 2003, 3Com announced it would merge its Business Connectivity Company (BCC) into its Business Networks Company (BNC) to leverage common infrastructure in order to drive additional cost out of the business, resulting in three ongoing operating segments as listed in Note 9—Enterprise Networking, Connectivity, and CommWorks. Additionally, the Company entered into an agreement to outsource certain information technology (IT) functions, and continued its efforts to consolidate its real estate portfolio. Components of accrued restructuring charges, which are included in accrued liabilities and other in the accompanying balance sheet, and changes in accrued amounts related to this restructuring program as of November 29, 2002 were as follows (in thousands):

Employee separation expenses are comprised of severance pay, outplacement services, medical and other related benefits. Affected employee groups include corporate services, manufacturing and logistics, product organizations, research and development, sales, customer support and administrative positions. The total reduction in workforce since the inception of this restructuring program through November 29, 2002 includes approximately 6,100 employees who have been separated or were in the separation process. There were approximately 200 additional employees who have been notified but have not yet worked their last day. Included in the $10.6 million provision in the second quarter of fiscal 2003 were credits of approximately $0.5 million relating to revisions of previous estimates. Since the inception of this restructuring program, $157.4 million of separation payments have been made.

Long-term asset write downs include items identified as no longer needed to support ongoing operations for 3Com. During the second quarter of fiscal 2003, 3Com recorded a charge of

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$3.1 million, primarily for excess manufacturing equipment being sold at a price below the Company's original estimate.

Facilities-related charges include write downs of land and buildings held for sale and lease terminations. In the second quarter of fiscal 2003, 3Com recorded $56.4 million in facilities-related charges, including a $31.2 million loss on the sale of its Marlborough, Massachusetts campus; $9.0 million of accelerated depreciation of facilities in Santa Clara, California; and $7.5 million and $6.6 million in write downs of facilities in Ireland and the U.K., respectively, both of which have been reclassified as held for sale in the second quarter of fiscal 2003.

Other restructuring costs include expenses associated with terminating other contractual arrangements. The net benefit in the second quarter of fiscal 2003 includes $0.5 million of revisions of previous estimates of restructuring costs.

3.

Comprehensive Loss

The components of comprehensive loss, net of tax, are as follows (in thousands):

4.

Net Loss Per Share

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

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Employee stock options and restricted stock totaling 2.8 million shares, 3.0 million shares, 4.2 million shares, and 5.1 million shares for the three and six months ended November 29, 2002 and the three and six months ended November 30, 2001, respectively, were not included in the diluted weighted average shares calculation as the effects of these securities were antidilutive.

5.

Inventories

Inventories consist of (in thousands):

6.

Sale of Facilities

In July 2002, 3Com sold its 639,000 square foot manufacturing and office facility in Mount Prospect, Illinois that was classified as held for sale as of May 31, 2002. The estimated net realizable value of this property as of May 31, 2002 was $17.4 million. Net proceeds from the sale were $17.8 million, resulting in a $0.4 million credit that was recorded against restructuring charges in the first quarter of fiscal 2003. Additionally, as a portion of 3Com's term loan was collateralized by the Mount Prospect facility, 3Com repaid approximately $7.5 million of the term loan balance with the proceeds of this sale as was required under the terms of the financing agreement.

In October 2002, 3Com sold its 185,000 square foot office and research and development facility in Salt Lake City, Utah that was classified as held for sale prior to the inception of its restructuring programs. Net proceeds from the sale were $4.2 million, resulting in a gain of approximately $0.3 million that was recorded in (gain) loss on land and facilities, net, in the second quarter of fiscal 2003, resulting in a net loss of $0.9 million for the six months ended November 29, 2002 related to this property.

In November 2002, 3Com sold its 550,000 square foot Marlborough campus, and will lease back approximately 168,000 square feet of the campus at prevailing market rates. Net proceeds from the sale were $56.6 million, resulting in a loss of $31.2 million that was recorded in restructuring charges in the second quarter of fiscal 2003.

7.

Intangible Assets, Net

Intangible assets, net, consist of (in thousands):

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In the second quarter of fiscal 2003, 3Com recorded an impairment of intangible assets associated with its Enterprise Networking and CommWorks segments. For each segment, 3Com determined the amount of the impairments by comparing the carrying value against the fair value, which was estimated using discounted cash flows. As a result of this analysis, 3Com recorded a write down of $3.2 million for the Enterprise Networking segment relating to the NBX Corporation acquisition, and write offs of $4.4 million and $0.1 million for the CommWorks segment relating to the Call Technologies, Inc. and LANSource Technologies, Inc. acquisitions, respectively. These impairments are recorded in amortization and write down of intangibles and are components of contribution margin in the three and six months ended November 29, 2002, as reported in Note 9.

8.

Stock Repurchase Program

In September 2002, 3Com's Board of Directors approved a stock repurchase program providing for expenditures of up to $40.0 million and authorized a twelve-month time limit on such repurchases. In the second quarter of fiscal 2003, 3Com repurchased 0.4 million shares of its own common stock for $1.5 million.

9.

Business Segment Information

The following tables display information on 3Com's reportable segments (in thousands):

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

(1)

Indirect operating expenses include expenses that are not directly attributable to a reporting segment, such as corporate marketing and general and administrative expenses.

(2)

As discussed in Note 1, the cumulative effect of a change in accounting principle for the six months ended November 29, 2002 related to the transitional goodwill impairment analysis that resulted in a write off of $45.4 million and $20.2 million of goodwill in the Enterprise Networking and CommWorks segments, respectively. These impairment charges were not included as a component of contribution margin (loss) as presented above.

10.

Litigation

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

Securities Litigation

In November 2000, a shareholder derivative and class action lawsuit, captioned Shaev v. Claflin, et al., No. CV794039, was filed in California Superior Court. The complaint alleges that 3Com's directors and officers made misrepresentations and/or omissions and breached their fiduciary duties to the Company in connection with the adjustment of employee and director stock options in connection with the separation of 3Com and Palm Inc. (Palm). It is unclear whether the plaintiff is seeking recovery from 3Com or if 3Com was named solely as a nominal defendant, against whom the plaintiff seeks no recovery. On November 29, 2001, the Superior Court granted the defendants' demurrer with leave to amend. The plaintiff filed a First Amended Complaint to which defendants again demurred. On July 9, 2002, the Superior Court again granted the defendants' demurrer to the plaintiff's First Amended Complaint with leave to amend. On or about December 13, 2002, the plaintiff filed a Second Amended Complaint. 3Com's response to such Second Amended Complaint is currently due by January 13, 2003.

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Intellectual Property

On May 26, 2000, 3Com filed suit against Xircom, Inc. (Xircom) in the United States District Court for the District of Utah, Civil Action No. 2:00-CV-0436C alleging infringement of U.S. Patents Nos. 6,012,953, 5,532,898, 5,696,660, and 5,777,836, accusing Xircom of infringement of one or more of the claims of the patents-in-suit by reason of the manufacture, sale, and use of the RealPort and RealPort2 families of PC Cards, as well as a number of Xircom's Type II PC Modem Cards. On November 14, 2000, 3Com amended its complaint to assert infringement of then-newly issued U.S. Patent No. 6,146,209, also asserted against Xircom's RealPort and RealPort2 families of products. Xircom counter-claimed for a declaratory judgment that the asserted claims of the patents-in-suit were invalid and/or not infringed. On July 19, 2002 the Honorable Tena Campbell granted 3Com's motion for a preliminary injunction on the 6,146,209 patent prohibiting Xircom from manufacturing, using, selling, offering to sell within the United States or importing into the United States 26 RealPort and RealPort2 products as identified in the Court's order pending the final outcome of the lawsuit. Xircom appealed this ruling to the Court of Appeals for the Federal Circuit. In the second quarter of fiscal 2003, 3Com and Xircom announced the settlement of all litigation between them. Under the terms of the settlement, 3Com received $15.0 million for a paid-up technology license, which was recorded as royalty revenue; a consent judgment acknowledging the validity of 3Com patents and infringement by Xircom products, including RealPort and RealPort2, has been entered; cross licensing of the patents in suit has been agreed upon and the Xircom lawsuit against 3Com has been dismissed with prejudice. 3Com, Xircom and Intel Corporation, Xircom's parent company, have also agreed upon a two-year limited covenant not to sue each other with respect to any patent infringement claims.

On September 21, 2000, Xircom filed an action against 3Com Corporation in the United States District Court for the Central District of California, Case No.: 00-10198 MRP, accusing 3Com of infringement of U.S. Patents Nos. 5,773,332, 5,940,275, 6,115,257, and 6,095,851, accusing 3Com of infringement by reason of the manufacture, sale, and use of the 3Com® 10/100 LAN+Modem CardBus Type III PC Card, the 3Com 10/100 LAN CardBus Type III PC Card, the 3Com Megahertz® 10/100 LAN CardBus PC Card, the 3Com Megahertz 10/100 LAN+56K Global Modem CardBus PC Card and the 3Com Megahertz 56K Global GSM and Cellular Modem PC Card.    On July 6, 2001, Xircom filed a second action against 3Com, Case No. 01-05902 GAF JTLX, also filed in the United States District Court for the Central District of California, alleging infringement of U.S. Patent No. 6,241,550. The 6,241,550 patent was asserted against the 3Com 10/100 LAN+Modem CardBus Type III PC Card and the 3Com 10/100 LAN CardBus Type III PC Card products. This second action asserting the 6,241,550 patent was consolidated with the first action, with both cases being heard by the Honorable Mariana R. Pfaelzer. 3Com counter-claimed for declaratory judgment that the asserted claims of the patents-in-suit were not infringed and/or invalid and that the claims of the 5,940,275 and 6,241,550 patents were unenforceable. Xircom filed a motion for preliminary injunction seeking to enjoin 3Com from the continued manufacture and sale of its Type III PC card products. The motion was heard on March 26, 2001 and was denied by the Court. Xircom subsequently filed a motion for preliminary injunction on the 6,241,550 patent. Xircom's second motion was resolved by agreement between the parties. 3Com continues to sell its type III PC cards, without the light pipe, which does not adversely affect the functionality of the cards. As discussed above, 3Com and Xircom settled all outstanding patent-related litigation in the second quarter of fiscal 2003.

On April 28, 1997, Xerox Corporation (Xerox) filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corporation in the United States District Court for the Western District of New York. The case is now captioned Xerox Corporation v. 3Com Corporation, U.S. Robotics Corporation, U.S. Robotics Access Corporation, Palm Computing, Inc., and Palm, Inc. (Civil Action Number 97-CV-6182T). Xerox alleged willful infringement of United States Patent Number 5,596,656, entitled "Unistrokes for Computerized Interpretation of Handwriting." Xerox sought to recover damages and to permanently enjoin the defendants from infringing the patent in the future. In 2000, the District Court

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dismissed the case, ruling that there was no infringement. On appeal, the Court of Appeals for the Federal Circuit affirmed-in-part, reversed-in-part and remanded the case to the District Court. On December 20, 2001, the District Court granted Xerox's motion for summary judgment that the patent is valid, enforceable, and infringed. The defendants then filed a Notice of Appeal. On February 22, 2002, the District Court denied Xerox's motion for an injunction prohibiting further alleged infringement during the appeal and ordered the defendants to post a bond in the amount of $50 million. Xerox then appealed the denial of the injunction. The appeal has been fully briefed by both sides but oral argument on the appeal has not yet been scheduled. In connection with the separation of Palm from 3Com, pursuant to the terms of the Indemnification and Insurance Matters Agreement, dated February 26, 2000, between 3Com and Palm, Palm agreed to indemnify and hold 3Com harmless for any damages or losses that might arise out of the Xerox litigation.

On August 14, 2001, 3Com filed suit against Broadcom Corporation (Broadcom) in California Superior Court, captioned 3Com Corporation v. Broadcom Corporation, CV800685, seeking to recover from Broadcom, pursuant to a promissory note, the principal amount of $21.1 million together with interest thereon and attorney fees. On January 8, 2002, Broadcom filed its answer denying that any sums are due and asserting numerous affirmative defenses. In the second quarter of fiscal 2003, 3Com and Broadcom settled this suit. Under the terms of the settlement agreement, Broadcom will pay 3Com $22.0 million dollars, representing principal and a portion of prior periods' accrued interest, plus additional interest as it accrues during the repayment period. Broadcom will make five quarterly installments, beginning in November 2002, of $4.4 million, plus additional accrued interest. Broadcom also agreed to entry of a stipulated judgment in 3Com's favor for $22.0 million, plus interest. 3Com agreed to extend the terms of the warrant held by Broadcom to purchase 7.1 million shares of 3Com common stock for an additional 12 months to December 4, 2003.

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3Com Corporation

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.

This quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:

•

Balance sheet, results of operations, and financial position;



•

Cash position and cash requirements;



•

Sales and margins;



•

Sources, amounts and concentration of revenue;



•

Costs and expenses;



•

Accounting estimates, including treatment of goodwill and intangible assets, doubtful accounts, inventory, restructuring, and warranty, and product returns;



•

Operations, including international operations, supply chain, quality control, manufacturing capacity and facilities, and direct ship program;



•

Products, price of products, product lines, and product and sales channel mix;



•

Relationship with customers, suppliers and strategic partners;



•

Acquisition activity;



•

Credit facility and ability to raise financial capital;



•

Real estate arrangements;



•

Activities of 3Com Ventures;



•

Global economic conditions;



•

Ability to identify and respond to trends;



•

Tax position;



•

Employees;



•

Sources of competition;



•

Protection of intellectual property;



•

Outcome and effect of current and potential future litigation;



•

Adoption of accounting pronouncements; and



•

Trading price of our common stock.

You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Business Environment and Industry Trends. All

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forward-looking statements included in this document are based on our assessment of information available to us at this time. We undertake no obligation to update any forward-looking statements.

Critical Accounting Policies

Our significant accounting policies require us to make estimates and assumptions that affect the amounts reported by us. The following items require the most significant judgment and often involve complex estimation:

Revenue recognition: We generally recognize a sale when the product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after our normal payment terms. If we determine that the fee is not fixed or determinable, we recognize revenue at the time the fee becomes due, provided that all other revenue recognition criteria have been met. Also, sales arrangements, particularly with CommWorks customers, may contain product acceptance requirements that can impact the timing of the recognition of the related revenue.

We assess collectibility based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the credit-worthiness of the customer. We do not typically request collateral from our customers. If we determine that collection of the fee is not probable, then we will defer the fee and recognize revenue upon receipt of payment.

A significant portion of our sales are to distributors and value-added resellers. Revenue is generally recognized when title and risk of loss pass to the customer, assuming all other revenue recognition criteria have been met. Sales to these customers are recorded net of appropriate allowances, including estimates for product returns, price protection, and potentially excess channel inventory levels.

Sales of service and maintenance revenue are recognized upon delivery and completion of the service or, in the case of maintenance contracts, ratably over the contract term, provided that all other revenue recognition criteria have been met. Royalty revenue from licensing is recognized as earned.

Allowance for doubtful accounts: We continuously monitor payments from our customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When we evaluate the adequacy of our allowances for doubtful accounts, we take into account various factors including our accounts receivable aging, customer credit-worthiness, historical bad debts, and geographic and political risk. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of November 29, 2002, our net accounts receivable balance was $137.8 million.

Inventory: Inventory is stated at the lower of standard cost, which approximates cost, or net realizable value. Cost is based on a first-in, first-out basis. We review the net realizable value of inventory, both on hand as well as for inventory that we are committed to purchase, in detail on an on-going basis, with consideration given to deterioration, obsolescence, and other factors. If actual market conditions differ from those projected by management, and our estimates prove to be inaccurate, benefits or additional write downs or adjustments to cost of sales may be required. As of November 29, 2002, our inventory balance was $44.0 million.

Goodwill and intangible assets: We review the value of our long-lived assets, including goodwill, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. During fiscal 2002, we recognized $70.1 million of write downs of goodwill and intangible assets, and in the first half of fiscal 2003 we recorded $7.7 million of additional intangible asset write downs, as well as a $65.6 million write off of goodwill in our Enterprise Networking and CommWorks segments resulting from the transitional goodwill impairment evaluation under Statement of Financial

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Accounting Standards (SFAS) 142. As of November 29, 2002, we had $15.2 million of net intangible assets and $0.9 million of goodwill remaining on the balance sheet, which we believe to be realizable based on the estimated future cash flows of the associated products and technology. However, it is possible that the estimates and assumptions used, such as future sales and expense levels, in assessing the carrying value of these assets may need to be reevaluated in the case of continued market deterioration, which could result in further impairment of these assets.

Restructuring charges: Over the last several years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities. These plans have required us to utilize significant estimates related to held for sale properties, which resulted in both accelerated depreciation charges and write downs of those properties. In addition, we have had to record estimated expenses for severance and outplacement costs, lease cancellations, long-term asset write downs, and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. The accounting for restructuring costs and asset impairments requires us to record provisions and charges when we have a formal and committed plan. Our policies require us to continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As management continues to evaluate the business, there may be additional charges for new restructuring activities as well as changes in estimates to amounts previously recorded.

Warranty: A limited warranty is provided on our products for periods ranging from 90 days to the lifetime of the product, depending upon the product, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required.

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Results of Operations

The following table sets forth, for the periods indicated, the percentage of total sales represented by the line items reflected in 3Com's condensed consolidated statements of operations:

Sales

Sales in the second quarter of fiscal 2003 totaled $303.2 million, a decrease of $90.7 million, or 23 percent, compared to the same quarter one year ago. Sales in the first half of fiscal 2003 were $607.9 million, a decrease of $175.5 million, or 22 percent, compared to the same period one year ago.

Enterprise Networking. Sales of Enterprise Networking products (switches, hubs, networked telephony, wireless Local Area Networks (LANs) and wireless Network Interface Cards (NICs), and customer service and support) in the second quarter of fiscal 2003 were $190.2 million, a decrease of $8.1 million, or four percent, compared to the same quarter one year ago. Sales of Enterprise Networking products in the first half of fiscal 2003 were $386.0 million, a decrease of $8.5 million, or two percent, compared to the first half of fiscal 2002. The decline in sales from the same periods one year ago was due primarily to a decline in sales of DSL routers, a decrease in our shared hub product lines in line with a general technology shift towards switching, and lower service maintenance contract revenue due to fewer maintenance contract renewals. Partially offsetting the second quarter and first half declines were increases in the sales of Layer 3 fixed Gigabit switches and LAN Telephony products, both of which benefited from market growth, new product introductions, and increased investment in sales and marketing. Layer 2 fixed-configuration products also grew moderately during the first half of fiscal 2003 versus the same period last year. Sales of Enterprise Networking products in

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both the second quarter and first half of fiscal 2003 represented 63 percent of total sales, compared to 50 percent in both the second quarter and first half of fiscal 2002.

Connectivity. Sales of Connectivity products (wired NICs, PC Cards, LAN On Motherboard (LOM) application-specific integrated circuits (ASICs), and Mini-PCI) in the second quarter of fiscal 2003 were $81.3 million, a decrease of $51.6 million, or 39 percent, compared to the same quarter one year ago. Sales of Connectivity products in the first half of fiscal 2003 were $149.2 million, a decrease of $108.1 million, or 42 percent, compared to the first half of fiscal 2002. The decline in sales from the same periods one year ago was due largely to lower volumes. This decline was partially offset by the recognition of $15.0 million in royalty revenue from a paid-up license resulting from the settlement of patent litigation with Xircom Inc. (Xircom) as discussed in Note 10 of the condensed consolidated financial statements.

Factors that reduced volumes were a shift in the market from NICs, PC Cards and Mini-PCI form factors to silicon-based alternatives where we have lower market share, and lower sales to our original equipment manufacturer (OEM) partners. While declining average selling prices (ASPs) resulting from competition placed further downward pressure on revenues, this was mitigated by a favorable product mix shift, including a decrease in sales to OEMs, which normally have lower ASPs, as well as increased sales of our Gigabit Ethernet products and security fiber cards, which have higher ASPs. Sales of Connectivity products in the second quarter and first half of fiscal 2003 represented 27 percent and 25 percent of total sales, respectively, compared to 34 and 33 percent in the second quarter and first half of fiscal 2002, respectively.

CommWorks. Sales of CommWorks® products (carrier-class Internet Protocol (IP)-based multi-service access and service creation hardware platforms for wired and wireless access, software and softswitch elements that enable telecommunications services to be delivered over these platforms, and professional services) in the second quarter of fiscal 2003 were $31.0 million, a decrease of $33.1 million, or 52 percent compared to the same quarter one year ago. For the first half of fiscal 2003, sales were $66.6 million, a decrease of $56.9 million, or 46 percent, compared to the first half of fiscal 2002. Sales declined across all product lines and markets, as carriers and service providers continue to curtail capital spending in response to the weakened telecommunications industry environment. Sales of CommWorks products in the second quarter and first half of fiscal 2003 represented 10 percent and 11 percent of total sales, respectively, compared to 16 percent in both the second quarter and first half of fiscal 2002.

Exited Product Lines. Sales of exited product lines (analog-only modems and high-end LAN and WAN chassis products, internet appliances, and consumer cable and DSL modem products) were negligible in the second quarter of both fiscal 2003 and 2002. Sales of exited products for the first half of fiscal 2003 were $6.2 million, compared to $8.1 million for the same period one year ago. Sales of exited product lines were substantially eliminated by the second quarter of fiscal 2002 resulting from our business restructuring and change in strategic focus, and the sales in the first half of fiscal 2003 resulted mainly from the first quarter recognition of revenue that was deferred as of May 31, 2002. Sales of exited products as a percentage of total sales in the second quarter of both fiscal 2003 and 2002 were nil. Sales of exited products in the first half of both fiscal 2003 and 2002 were one percent of total sales.

Geographic

In the second quarter and first half of fiscal 2003, U.S. sales decreased 16 percent and 22 percent, respectively, as compared to the same periods one year ago. International sales for the second quarter and first half of fiscal 2003 decreased 27 percent and 23 percent, respectively. U.S. sales represented 39 percent of total sales in the second quarter of fiscal 2003, compared to 36 percent in the second quarter of fiscal 2002, and represented 41 percent of total sales in the first half of both fiscal 2003 and 2002. The decline in international sales spanned all major geographic regions.

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Gross Margin

Gross margin as a percentage of sales was 51.4 percent in the second quarter of fiscal 2003, compared to 33.8 percent in the second quarter of fiscal 2002. Gross margin improved ten percentage points due largely to component cost improvements and a mix shift towards higher margin products primarily in our Enterprise Networking and Connectivity segments. Included in the mix shift of Connectivity products is a decline in sales to OEM customers, which generally have lower ASPs. Also impacting Connectivity margins was the recognition of the $15.0 million in royalty revenue associated with the Xircom settlement discussed above that had no associated cost of goods sold, and resulted in an additional improvement in gross margin of approximately three percentage points. Gross margin improved two percentage points due to a reduction of underutilized capacity in our manufacturing plants. Gross margin improved a combined three percentage points from a one-time duty refund of $4.4 million, lower provision for excess and obsolete inventory, and lower post-sales support expenses. The sale or disposition of inventory that had previously been written off totaling $1.5 million did not materially improve gross margin in the second quarter of fiscal 2003.

Gross margin as a percentage of sales was 49.6 percent and 25.0 percent for the first six months of fiscal 2003 and fiscal 2002, respectively. As compared to the same period one year ago, gross margin increased 12 percentage points due largely to component cost improvements and mix shift towards higher margin products primarily in our Enterprise Networking and Connectivity segments as described above. Gross margin benefited approximately one percentage point in the first half of fiscal 2003 due to the second quarter's $15.0 million of royalty revenue in the Connectivity segment. Gross margin increased five percentage points due mainly to the prior period's excess and obsolete inventory provisions. These prior period provisions were largely the result of reduced demand and product transition of certain Connectivity products. Gross margin increased four percentage points for the reduction of underutilized capacity in our manufacturing plants. Gross margin improved a combined three percentage points from one-time duty refunds totaling approximately $8.1 million, the sale or disposition of inventory that had previously been written off totaling $4.6 million, and lower post-sales support expenses.

Operating Expenses

Operating expenses in the second quarter of fiscal 2003 were $217.2 million, or 71.7 percent of sales, compared to $231.5 million, or 58.8 percent of sales, in the second quarter of fiscal 2002. Operating expenses in the second quarter of fiscal 2003 included amortization and write down of intangibles of $10.0 million, restructuring charges of $69.5 million, and net gains on land and facilities of $0.3 million. Operating expenses in the second quarter of fiscal 2002 included amortization and write down of intangibles of $12.9 million and restructuring charges of $31.5 million. Excluding these items, operating expenses for the second quarter of fiscal 2003 were $137.9 million, or 45.5 percent of sales, compared to $187.0 million, or 47.5 percent of sales, in the second quarter of fiscal 2002.

Operating expenses in the first six months of fiscal 2003 were $388.8 million, or 64.0 percent of sales, compared to $538.6 million, or 68.8 percent of sales, in the first six months of fiscal 2002. Operating expenses in the first six months of fiscal 2003 included amortization and write down of intangibles of $12.5 million, restructuring charges of $92.7 million, and net losses on land and facilities of $0.9 million. Operating expenses in the first six months of fiscal 2002 included amortization and write down of intangibles of $29.4 million and restructuring charges of $89.1 million. Excluding these items, operating expenses for the first half of fiscal 2003 were $282.7 million, or 46.5 percent of sales, compared to $420.1 million, or 53.6 percent of sales, in the first half of fiscal 2002.

Sales and Marketing. Sales and marketing expenses in the second quarter of fiscal 2003 decreased $17.4 million, or 20.4 percent, compared to the second quarter of fiscal 2002, and increased to 22.3 percent of total sales for the second quarter of fiscal 2003, compared to 21.6 percent of total sales

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for the second quarter of fiscal 2002. Sales and marketing expenses in the first half of fiscal 2003 decreased $56.6 million, or 29.6 percent, compared to the first half of fiscal 2002. The decreases as compared to the same periods in the prior year were primarily due to significantly lower sales force expenses in the first two quarters of fiscal 2003 resulting from headcount reductions, and decreased spending on marketing and advertising. Additionally, our IT outsourcing and facilities consolidation efforts have produced further savings, a portion of which benefited sales and marketing functions.

Research and Development. Research and development expenses in the second quarter of fiscal 2003 decreased $28.6 million, or 39.1 percent, compared to the second quarter of fiscal 2002, and decreased to 14.7 percent of total sales in the second quarter of fiscal 2003 compared to 18.6 percent of total sales in the second quarter of fiscal 2002. Research and development expenses in the first half of fiscal 2003 decreased $63.6 million, or 40.0 percent, compared to the first half of fiscal 2002. The decrease in research and development costs compared to the same periods one year ago was primarily due to headcount reductions as we focus on a smaller number of projects. Expense reductions also resulted from decreased depreciation expense associated with engineering assets that were disposed of as part of our restructuring efforts, as well as a decrease in project materials used in research and development efforts. In addition, research and development functions also benefited from the company-wide savings in IT and facilities spending.

General and Administrative. General and administrative expenses in the second quarter of fiscal 2003 decreased $3.2 million, or 11.0 percent, compared to the second quarter of fiscal 2002, and increased to 8.5 percent of total sales as compared to 7.3 percent of total sales in the second quarter of fiscal 2002. General and administrative expenses in the first six months of fiscal 2003 decreased $17.2 million, or 24.7 percent, compared to the first six months of fiscal 2002. The decrease in general and administrative expenses compared to the same periods one year ago was due primarily to headcount reductions. In addition, general and administrative functions also benefited from the company-wide savings in IT and facilities spending. These expense reductions were partially offset by credits for bad debt in the second quarter and first half of fiscal 2002 and increased legal expenses in the second quarter of fiscal 2003.

Amortization and Write Down of Intangibles. Amortization and write down of intangibles in the second quarter of fiscal 2003 decreased $2.8 million, or 22.0 percent, compared to the second quarter of fiscal 2002. Amortization and write down of intangibles in the first half of fiscal 2003 decreased $16.9 million, or 57.4 percent, compared to the first half of fiscal 2002. Due to the adoption of SFAS 142 on June 1, 2002, we stopped amortizing goodwill, resulting in reductions in amortization of $9.0 million and $18.0 million for the second quarter and first half of fiscal 2003, respectively. Additionally, the first half of fiscal 2002 included a $3.5 million write down of intangible assets and associated goodwill related to the LANSource Technologies, Inc. (LANSource) acquisition. These declines were partially offset in the second quarter and first half of fiscal 2003 by write downs of $3.2 million of intangible assets in our Enterprise Networking segment relating to the NBX Corporation acquisition, and $4.4 million and $0.1 million of intangible assets in our CommWorks segment relating to the Call Technologies, Inc. and LANSource acquisitions, respectively.

Restructuring Charges. Restructuring charges in the second quarter and first half of fiscal 2003 were $69.5 million and $92.7 million, respectively. Expenses for the second quarter of fiscal 2003 were composed primarily of charges for write downs of facilities, severance and outplacement costs, and long-term asset write downs. The facilities charges in the second quarter and first half of fiscal 2003 included a $31.2 million loss on the sale of our Marlborough, Massachusetts campus, $9.0 million of accelerated depreciation of buildings in Santa Clara, California, and write downs of properties in Ireland and the U.K. of $7.5 million and $6.6 million, respectively. None of these properties were classified as held for sale as of May 31, 2002 or August 30, 2002. In addition to these items, restructuring charges for the first half of fiscal 2003 also included a credit of $0.4 million related to the sale of our Mount Prospect, Illinois facility. Restructuring charges for the first half of fiscal 2003 were

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the result of the consolidation of our real estate portfolio, the integration of our Business Connectivity Company and Business Networks Company, IT outsourcing efforts, and continued cost reduction actions. Restructuring charges in the second quarter and first half of fiscal 2002 were $31.5 million and $89.1 million, respectively. Expenses for both periods were composed primarily of charges for accelerated depreciation of facilities, severance and outplacement costs, and long-term asset write downs. These charges were the result of both cost reduction actions we took to restructure our operations that were announced on December 21, 2000, as well as consolidation of our manufacturing facilities and the discontinuation of our consumer cable and DSL modem product lines as announced during June 2001. As the consolidation of our operations continues, we expect to incur additional expenses related to the consolidation of facilities in fiscal 2003.

(Gain) Loss on Land and Facilities, Net. The net gain on land and facilities in the second quarter of fiscal 2003 was $0.3 million and related to the sale of our Salt Lake City, Utah facility. The net loss on land and facilities was $0.9 million for the first six months of fiscal 2003, and included a $1.2 million write down of our Salt Lake City facility that was recorded in the first quarter of fiscal 2003. This facility was classified as held for sale prior to the inception of our restructuring programs.

Loss on Investments, Net

Net loss on investments in the second quarter of fiscal 2003 was $7.1 million, due primarily to market value adjustments of limited partner venture funds and write downs of long term equity investments. Net loss on investments in the second quarter of fiscal 2002 was $4.6 million, due primarily to sales of marketable equity securities and declines in the value of publicly-traded equity securities determined to be other-than-temporary. Net loss on investments in the first half of fiscal 2003 was $18.6 million, due primarily to market value adjustments and sale of investments in limited partner venture funds. Net loss on investments in the first half of fiscal 2002 was $7.3 million, due primarily to losses on the sales of marketable equity securities and declines in the value of publicly-traded equity securities determined to be other-than-temporary and in limited partnership venture capital funds.

Interest and Other Income, Net

Interest and other income, net, in the second quarter of fiscal 2003 was $3.9 million, a decrease of $22.7 million compared to the second quarter of fiscal 2002. In the first six months of fiscal 2003, interest and other income, net, was $13.5 million, a decrease of $32.3 million compared to the first six months of fiscal 2002. The decrease in interest and other income, net, compared to the same quarter one year ago was due primarily to the receipt of $12 million of interest income on a tax refund received in the second quarter of fiscal 2002, as well as lower interest income as a result of lower interest rates and increased borrowing costs associated with our term loan and revolving line of credit. These same factors contributed to the decrease in interest and other income, net, in the first half of fiscal 2003 as compared to the first half of 2002, partially offset by the collection in the first quarter of fiscal 2003 of approximately $5.1 million of interest income that primarily related to a tax refund received in fiscal 2002.

Income Tax Provision

Our income tax provision was $4.0 million for the second quarter of fiscal 2003 and $8.0 million for the first half of fiscal 2003, compared to a $27.2 million provision for the second quarter of fiscal 2002 and a $31.8 million provision for the first half of fiscal 2002. The tax provision in the first quarter and first half of fiscal 2003 was the result of providing for taxes in foreign and state jurisdictions. The tax provision in the second quarter and first half of fiscal 2002 was the result of a write down of a deferred tax asset that previously had been supported by the appreciation in our real estate portfolio and providing for taxes in foreign and state jurisdictions.

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Cumulative Effect of Change in Accounting Principle

We adopted SFAS 142 effective June 1, 2002. In accordance with SFAS 142, we conducted a transitional goodwill impairment evaluation of the $66.5 million of goodwill recorded as of May 31, 2002. In the first quarter of fiscal 2003, we completed the first phase of the SFAS 142 analysis, which indicated that an impairment might have existed for the goodwill associated with our Enterprise Networking and CommWorks segments. In the second quarter of fiscal 2003, we completed the evaluation and recorded a charge totaling $65.6 million as a change in accounting principle effective June 1, 2002 to write off goodwill of $45.4 million in the Enterprise Networking segment and $20.2 million in the CommWorks segment.

Liquidity and Capital Resources

Cash and equivalents and short-term investments at November 29, 2002 were $1,433.6 million, an increase of approximately $51.6 million compared to the balance of $1,382.0 million at May 31, 2002.

For the six months ended November 29, 2002, net cash provided by operating activities was $58.7 million. Accounts receivable at November 29, 2002 decreased $9.3 million from May 31, 2002 to $137.8 million. Days sales outstanding in receivables increased to 41 days at November 29, 2002, compared to 39 days at May 31, 2002 primarily due to a deterioration in sales linearity throughout the second quarter of fiscal 2003 as compared to the fourth quarter of fiscal 2002. Inventory at November 29, 2002 decreased $12.6 million from May 31, 2002 to $44.0 million. Annualized inventory turnover was 12.8 turns for the quarter ended November 29, 2002, compared to 11.3 turns for the quarter ended May 31, 2002. Other assets at November 29, 2002 decreased $15.9 million from May 31, 2002, primarily due to collections of non-trade receivables. Accounts payable and accrued liabilities and other at November 29, 2002 decreased $54.8 million from May 31, 2002, and includes the final payment related to excess manufacturing capacity. Income taxes payable, net, increased $10.8 million due mainly to our $8.0 million tax provision for the first half of fiscal 2003 and the receipt of a $5.0 million income tax refund.

3Com Ventures selectively makes strategic investments in privately-held companies and in limited partnership venture capital funds, which in turn invest in privately-held companies. This may include a strategic commercial or technology relationship, such as a component supply agreement or technology license arrangement, with these privately-held companies. We believe these investments complement our business strategies and research and development efforts. In the first half of fiscal 2003 we sold our interest in several limited partnership venture capital funds. We collected proceeds of $4.4 million associated with the sale of these funds and, as part of this transaction, transferred the obligations of future capital calls associated with such funds. 3Com Ventures has made strategic investments of $2.2 million over the last six months and has committed to make additional capital contributions to certain venture capital funds totaling $22.9 million. We estimate that we will pay approximately $7.0 million over the next twelve months as capital calls are made.

During the six months ended November 29, 2002, we made $10.8 million in capital expenditures, primarily for projects relating to facilities consolidations projects and information systems and new product introductions. Additionally, we collected $79.9 million from sales of property and equipment, including facilities in Marlborough, Mount Prospect, and Salt Lake City for net proceeds of $56.6 million, $17.8 million, and $4.2 million, respectively. As of November 29, 2002, capital expenditure commitments outstanding were approximately $4.7 million. Additionally, we have commitments relating to royalty and patent licenses whose technologies are incorporated into our products that extend through May 2005. As of November 29, 2002, these commitments were approximately $31.9 million, $9.3 million of which are expected to be paid over the next 12 months.

We have several agreements whereby we have sold product to resellers who have, in turn, sold the product to end users, and we have guaranteed the payments of the end users to our customers. If all

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end users under these agreements were to default on their payments, as of November 29, 2002 we would be required to pay approximately $14.3 million. As deferred revenue associated with such sales approximates the guaranteed amounts, any payments resulting from end user defaults would not have a material impact on our results of operations.

As of November 29, 2002, we had $75.1 million outstanding on our term loan and no amounts outstanding on our revolving line of credit. During the first half of fiscal 2003 we repaid the entire $70.0 million line of credit balance and $22.5 million on our term loan. Included in the term loan repayments are two quarterly repayments of $7.5 million each, plus an additional $7.5 million due to the sale of our Mount Prospect facility as was required under the terms of the financing agreement.

During the six months ended November 29, 2002, we collected $4.2 million plus interest on the note receivable from the sale of warrants to Broadcom Corporation (Broadcom). This note was previously the subject of litigation between us and Broadcom, which was settled in the second quarter of fiscal 2003, as discussed in Note 10 of the condensed consolidated financial statements.

During the six months ended November 29, 2002, we repurchased 0.4 million shares of common stock for $1.5 million, and received net cash of $10.6 million from the sale of approximately 3.5 million shares of common stock to employees through our employee stock purchase and option plans. Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our option program critical to our operation and productivity; essentially all of our employees participate. The program consists of three plans: one under which officers and key employees may be granted options to purchase shares of our stock, one under which non-employee directors are granted options, and a broad-based plan under which options may be granted to all employees other than officers and directors.

As of November 29, 2002, our outstanding stock options as a percentage of outstanding shares was 29 percent. This potential dilutive effect of stock options to existing stockholders is an area of attention of senior management, and is mainly the result of the effect of our distribution of Palm, Inc. common stock in the first quarter of fiscal 2001. As a result of the distribution, the number of shares subject to option grants was adjusted to preserve the intrinsic value of the stock options, resulting in an increase of 134 million options, and bringing the total option shares outstanding to 169 million at the time of the distribution. As a result of employee reductions and management of new grants, we have been able to reduce the number of outstanding options 37 percent since the Palm distribution.

Stock option activity during the first half of fiscal 2003 and stock option detail as of November 29, 2002, were as follows:

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There are no assurances that we can reduce losses from operations and avoid future negative cash flow or raise capital as needed to fund the operations of 3Com. However, based on current plans and business conditions, but subject to the discussion in the Business Environment and Industry Trends, we believe that our existing cash and equivalents, short-term investments, revolving line of credit, and cash generated from operations will be sufficient to satisfy anticipated cash requirements for at least the next twelve months.

Effects of Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations" which addresses the financial accounting and reporting for business combinations and supersedes Accounting Principles Board (APB) Opinion 16, "Business Combinations," and SFAS 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 141 requires that all business combinations be accounted for by the purchase method, modifies the criteria for recognizing intangible assets, and expands disclosure requirements. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001. We adopted SFAS 141 on June 1, 2002. The adoption of SFAS 141 did not have a material impact on our results of operations or statements of financial position.

In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, SFAS 142 expands the disclosure requirements about goodwill and other intangible assets in the years subsequent to their acquisition. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS 142 are to be reported as a change in accounting principle.

We adopted SFAS 142 on June 1, 2002 and ceased amortization of net goodwill totaling $66.5 million, which included $0.7 million of acquired workforce intangible assets previously classified as purchased intangible assets; amortization continues on net finite-lived intangible assets, with remaining useful lives of generally two to three years and totaling $15.2 million as of November 29, 2002 as discussed in Note 7 of the condensed consolidated financial statements. In the first quarter of fiscal 2003, we completed the first phase of the SFAS 142 analysis, which indicated that an impairment might have existed for the goodwill associated with our Enterprise Networking and CommWorks segments. In the second quarter of fiscal 2003, we completed the transitional goodwill impairment evaluation and recorded a charge totaling $65.6 million as a change in accounting principle effective June 1, 2002 to write off goodwill of $45.4 million in the Enterprise Networking segment and $20.2 million in the

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CommWorks segment. The remaining recorded goodwill for the Connectivity segment after this impairment charge was $0.9 million as of November 29, 2002. A reconciliation of previously reported net loss and net loss per share to the amounts adjusted for the exclusion of goodwill and acquired workforce amortization follows (in thousands, except per share amounts):