UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended May 30, 2008

o		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.)
350 Campus Drive
Marlborough, Massachusetts		01752
(Address of principal executive offices)		(Zip Code)

(508) 323-1000
(Registrant’s telephone number, including area code)

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

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

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value per share		The NASDAQ Global Select Market
Preferred Stock Purchase Rights		The NASDAQ Global Select Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ

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 þ No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,723,402,811 based on the closing sale price as reported on The NASDAQ Global Select Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at July 18, 2008
Common Stock, $0.01 par value per share		405,288,012 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held September 24, 2008 (Proxy Statement)		Part III, to the extent stated herein

 

 

3Com Corporation
Form 10-K Annual Report
For the Fiscal Year Ended May 30, 2008
Table of Contents

		Page
Part I
Item 1. Business			3
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			25
Item 2. Properties			25
Item 3. Legal Proceedings			26
Item 4. Submission of Matters to a Vote of Security Holders			26
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			26
Item 6. Selected Financial Data			28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation			29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			47
Item 8. Financial Statements and Supplementary Data			48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			86
Item 9A. Controls and Procedures			86
Item 9B. Other Information			89
Part III
Item 10. Directors, Executive Officers and Corporate Governance			89
Item 11. Executive Compensation			89
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			89
Item 13. Certain Relationships and Related Transactions, and Director Independence			89
Item 14. Principal Accounting Fees and Services			90
Part IV
Item 15. Exhibits and Financial Statement Schedules			90
Exhibit Index			90
Signatures			96
Financial Statement Schedule			97
EX-10.2 3COM Corporation 1984 Employee Stock Purhcase Plan
EX-10.32 Stand Alone Stock Option Agreement dated May 6, 2008
EX-10.33 Stand Alone Restricted Stock Agreement dated May 6, 2008
EX-10.54 First Amendment to A&R Credit Agreement dated June 18, 2008
EX-21.1 Subsidiaries of Registrant
EX-23.1 Consent of Independent Registered Public
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO & CFO

We use a 52 or 53 week fiscal year ending on the Friday nearest to May 31, with each fiscal quarter ending on the Friday generally nearest August 31, November 30 and February 28. For presentation purposes, the periods are shown as ending on August 31, November 30, February 28 and May 31, as applicable.

We acquired majority (51 percent) ownership of Huawei-3Com Co., Ltd. n/k/a H3C Technologies Co., Limited (“H3C”), a China-based networking equipment business, on January 27, 2006 and determined it was then appropriate to consolidate H3C’s results. For convenience of close purposes we consolidated the results of H3C as of February 1, 2006. H3C follows a calendar year basis of reporting and therefore results are consolidated on a two-month time lag. In fiscal 2006, we recorded equity income for the period April 1, 2005 through January 31, 2006 and consolidated H3C’s results for the period February 1, 2006 through March 31, 2006.

We acquired the remaining 49 percent minority interest of H3C on March 29, 2007.

3Com, the 3Com logo, Digital Vaccine, IntelliJack, NBX, OfficeConnect, TippingPoint and TippingPoint Technologies are registered trademarks and H3C and VCX are trademarks of 3Com Corporation or one of its wholly owned subsidiaries. Other product and brand names may be trademarks or registered trademarks of their respective owners.

This Annual Report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the following aspects of our business: H3C strategy, growth, dependence, expected benefits, tax rate, sales from China, and resources needed to comply with Sarbanes-Oxley and manage operations; impact of recent accounting regulations; expected annual amortization expense; environment for enterprise networking equipment; challenges relating to sales growth; trends and goals for each of our segments and regions; expectation of license fees totaling $70 million and other resolutions in connection with agreement with Realtek; intent to pursue termination fee; supply of components; research and development focus; future sales of connectivity products; execution of our “go-to-market” strategy; strategic product and technology development plans; goal of profitability; dependence on China; ability to satisfy cash requirements for at least the next twelve months; restructuring activities and expected charges to be incurred; expected cost savings from restructuring activities and integration; potential acquisitions and strategic relationships; future contractual obligations; recovery of deferred tax assets; reserves; market risk; outsourcing; competition and pricing pressures; expectation regarding base interest rates; impact of foreign currency fluctuations; belief regarding meritorious defenses to litigation claims and effect of litigation; and you can identify these and other forward-looking statements by the use of words such as “may,” “can,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any forward-looking 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 Part I Item 1A Risk Factors. All forward-looking statements included in this document are based on our assessment of information available to us at the time this report is filed. We do not intend, and disclaim any obligation, to update any forward-looking statements.

In this Form 10-K we refer to the People’s Republic of China as China or the PRC.

PART I

ITEM 1. BUSINESS

GENERAL

We provide secure, converged networking solutions on a global scale to organizations of all sizes. Our products and solutions enable customers to manage business-critical voice, video, data and other advanced networking technologies in a secure, scalable, reliable and efficient network environment. We deliver networking products and services for enterprises that view their networks as mission critical, and value cost-effective superior performance. Our products form integrated solutions and function in multi-vendor environments based upon open, not proprietary, platforms. Our objective and strategy is to be one of the leading enterprise networking companies by delivering innovative, secure, feature-rich networking products and solutions built on open platform technology.

3Com was incorporated in California on June 4, 1979 and reincorporated in Delaware on June 12, 1997. Our corporate headquarters are located in Marlborough, Massachusetts. We have offices and sales capabilities in 35 countries and 60 locations worldwide. Our Web site address is www.3Com.com. We make available on our Web site, free of charge, our SEC filings (including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 filings on Forms 3, 4 and 5, and any amendments to those reports) as soon as reasonably practicable after we electronically file with or furnish such material to the Securities and Exchange Commission (SEC). The information contained on our Web site is not incorporated by reference in this Annual Report on Form 10-K. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.

MARKETS AND CUSTOMERS

We design and market our offerings to enterprises that vary in size from small business to large multi-national entities. These organizations range across a number of vertical industries, including education, finance, government, healthcare, insurance, manufacturing and real estate. We offer our customers solutions for mission-critical network environments on an open platform design.

Our product designs recognize that enterprise networking customers face the following fundamental challenges:

	•		Performance — Enterprise networks have increasing performance requirements with the expansion of internet protocol, or IP, traffic driven by newer applications such as voice and video over IP.
	•		Security — The threat environment for today’s enterprises is rapidly changing and requires pervasive network solutions that help control access, quarantine malicious data, and restore data.
	•		Application delivery — Enterprise customers have evolving needs for increased application solutions tied to their networks. Customers benefit from best-in-class solutions for needs such as wide area network, or WAN optimization and voice solutions integrated directly into their networking solutions.
	•		Cost effectiveness — Enterprise customers value solutions which are affordable to acquire and operate and offer long-term scalability.

We believe that open platform technology offers our customers a more versatile environment for the increasing use of applications over network infrastructures. We further believe it offers a more cost-effective solution as it works in multi-vendor environments on a non-proprietary basis. Our open platform technology is designed into our switch and router products to directly deliver applications over networking capability. We believe that our customers benefit from the flexibility to interface best-in-class applications with our products and we therefore actively develop partnerships to deliver this value.

We focus on delivering superior networking solutions that offer a cost advantage to our customers to own and operate. Our products provide superior value through features such as lower power requirements, and inter-operability in multi-vendor networks. We believe that our global presence, brand identity, strong development organization and intellectual property portfolio provide a solid foundation for achieving our objectives.

Our products are sold on a worldwide basis through a combination of value added partners, distributors and direct sales representatives. We also work with service providers to deliver managed networking solutions for enterprise customers.

In support of the above vision we co-founded a Chinese joint-venture called H3C in 2003 to penetrate the developing China market as well as to create a strong development and operational base for building our networking solutions. In fiscal year

2007 we completed our acquisition of H3C. In fiscal 2008 we organized our operations into four reporting segments: H3C, Data Voice Business Unit (DVBU), TippingPoint, and Corporate Expenses (Corporate). Our H3C segment is our core for engineering and product development of a broad array of networking products and solutions, and it sells into the China market. Our DVBU segment designs and markets networking solutions targeted at customers in developed networking markets, and sells H3C’s products and H3C-sourced networking gear on a worldwide basis. TippingPoint offers customers purpose built appliance security solutions through intrusion prevention systems, or IPS, technology and related virus protection services we call “Digital Vaccine.”

PRODUCTS AND SERVICES

H3C SEGMENT PRODUCTS AND SERVICES

H3C develops global products that address the global market. H3C products can generally be classified in the following categories:

	§		Networking – LAN Switches, Routers, and Network Management Software;
	§		Emerging Technology – IP Storage and IP Video Surveillance;
	§		Security – Firewalls; and
	§		Services.

Networking

In order to meet the business and technology needs of our customers, our networking infrastructure products focus on the requirements for a secure, converged network: availability, performance, scalability and ease-of-use. We focus on reducing complexity and cost of ownership by making management and configuration of secure, converged voice and data networking much easier, and we continue to innovate around a standards-based, open architecture that supports multi-vendor environments.

LAN Switches

Switches are multi-port devices, located in the network core and at the network edge, that join multiple computers and peripheral devices and serve as the foundation for transporting voice, video and data over a network. We offer a number of fixed-configuration and modular chassis switches that we believe provide the performance and flexibility required by our customers.

Our switching products represent a broad offering, including full-featured modular, stackable and stand-alone switches ranging from 10 Megabits per second (Mbps) to near Terabit per second performance. Our switches are available as managed units, which are typically found in enterprise environments and unmanaged, standalone units, typically used by small and medium-sized organizations. We design our enterprise-class switches to share a common operating system and user interface that work together to lower the cost of ownership and management and enable customers to easily upgrade their network solution as their business and network requirements grow. Our switches also include robust network security features, and are built to support the convergence of data, voice and video. H3C’s principal switch products are as follows:

	§		Core Routing Switches. The S9500 Series 10G Multi-service Core Routing Switch is a new generation high performance switch. The S9500 series is designed to fully satisfy the requirements of end-users seeking its high capability, high reliability and multiple services. It is extensively applied as the core layer of E-government networks, campus networks, education networks and other enterprise networks and core layer or aggregation layer of carriers’ IP Metro Area Networks (MANs).
	§		Multi-Service Switches. The S7500 Series high-end multi-service switch features high performance, high port density and high flexibility. It can be applied to the core layer of enterprise networks, campus networks and education MANs, to the convergence layer of carriers’ IP MANs, and to the access layer of data centers.
	§		Layer 3 Gigabit Stackable Switches – The 5500 series offers excellent security, reliability and multi-service support capability, making it an excellent choice for the convergence layer of large enterprise networks or campus networks, the core layer of medium- and small-sized enterprise

			networks, and the edge layer of MANs.
	§		Layer2 and Layer 3 Intelligent and Resilient Switches. The Layer 2 series offers wire-speed Gigabit Ethernet switching products that provide high capacity with a full range of features. The Layer 3 series represents the next generation of desktop switches, which can help customers implement a gigabit Ethernet core network or aggregation layer with high availability as well as scalability.

Routers

Our routers, in combination with our other networking infrastructure products, provide a means of transporting converged voice and data traffic across an IP wide area network or WAN while preserving the quality of service or QoS required for mission critical applications.

Our H3C segment offers a full portfolio of router products from carrier-class core routers to modular routers to small business access routers designed to scale as these businesses grow. H3C router products are classified as SR, MSR and AR Series Routers. All SR routers are IPv6 ready and include carrier-class availability with redundancy in all key modules. MSR routers are oriented to support multiple-service applications, delivering wire speed and concurrent services of data, voice and video. The AR Series Routers are easy to manage, offer VPN functionality and support multiple security products.

	§		SR series Routers. The SR family consists of core routers ranging from products that support a super-large capacity core router, which can be applied in national backbone networks, provincial backbone networks and other super-large networks (including those serving at the backbone network edge and MAN core), to those working at the core networks of industries and enterprises.
	§		Intelligent Multi-Service Enterprise Core Routers. The MSR Series Routers support multiple services, integrating data, voice and video in one device. MSR adopts an optimized hardware and software structure to guarantee embedded security and significant performance while providing the services such as voice over IP or VoIP, business video and network analysis etc.
	§		Fixed Port Branch Routers. The AR Series Access Routers are fixed-port products for small-sized enterprises and branch offices. They feature enhanced security, superior reliability and advanced QoS services.

Network and Access Management System

H3C offers a comprehensive network management solution designed to offer clients an end-to-end business management tool by providing a complete solution that integrates applications, resources and users. The Intelligent Management Center is a suite of scalable tools for simplifying network and access management on an open technology platform.

Emerging Technology

IP Storage

Our H3C segment is a leading developer of IP storage area network or IP SAN offerings in China. IP SAN is a third generation of technology for storage, and is based on the most advanced architecture and open, standard IP protocol. With the goal of storage virtualization and data management standardization, H3C integrates industry leading data management technology and application service technology on standard IP architecture, delivering a unified IP storage architecture.

IP Video Surveillance

IP video surveillance allows our customers to leverage existing network installations to cost effectively deliver video security features. The features of our switches, routers and network management – such as power over Ethernet to power video devices and network management capabilities controlling access, are leveraged with surveillance equipment to deliver effective video surveillance solutions. Our H3C business unit sells integrated surveillance offerings to targeted vertical customers focused on integrated security solutions.

Security

Firewalls

SecPath Firewalls are new-generation firewalls designed to provide a flexible, high-performance security solution for large and medium-enterprise central sites and service providers.

Services

H3C service offerings cover key aspects of support that customers need to keep their data networking solutions operating effectively, including telephone support, hardware replacement, software updates, dedicated on-site engineers and spare parts. H3C also offers high-end professional services and training to provide complete product plus service solutions for its customers. The portfolio of professional services includes assessment and design, project management, training and certifications, installation, and integration services that are especially important to customers that purchase higher-end switches, routers and IP telephony communications systems.

DATA AND VOICE BUSINESS UNIT (“DVBU”) SEGMENT PRODUCTS AND SERVICES

Our DVBU segment provides scalable, feature-rich, high performance, reliable, and secure standards-based networking solutions for customers on a global basis. Specifically, we believe our products appeal to enterprises and public sector organizations migrating to secure IP-based infrastructures that deliver converged voice and data applications. DVBU leverages our high-quality H3C developed offerings complemented with feature-specific designs oriented at the needs of customers globally. Our DVBU segment also supplements the H3C offerings with products purpose-built for globally targeted customers. DVBU products and services can generally be classified in the following categories:

	§		Networking;
	§		IP Telephony; and
	§		Services.

Networking

Our DVBU segment markets H3C developed and manufactured networking equipment on a global scale. In addition to the offerings described above in our H3C segment products, DVBU carries a custom-developed product set of fixed configuration switches and routers designed to address the specific needs of our targeted verticals. All of our infrastructure platforms are based on open standards, which allows for interoperability as well as the ability to integrate emerging technologies and applications. Products include:

	§		Ethernet Switching. We offer a full range of fixed-configuration and modular Ethernet switches that deliver performance and flexibility to the edge and core IP networks. At the edge, DVBU offerings include enterprise-class offerings such as the Switch 5500 family, Switch 4500 and Switch 4200 families of products, as well as our OfficeConnect® and Baseline series targeted at small and medium businesses. At the core, DVBU offers fully resilient, high-capacity and feature-rich modular switching products. These include our high-density Switch 8800 and our cost-effective Switch 7750 products.
	§		Wireless LAN. We offer wireless networking products and solutions that enable users to stay connected to the network while at their desks or roaming within an enterprise or a large campus environment. The productivity increase associated with this ease of information access in a secure manner is driving many businesses to deploy wireless networks. We offer a complete portfolio of high-performance, standards-based wireless solutions, including 802.11 a/b/g wireless standards, along with wireless security and policy enforcement.
	§		Routers. We offer routing solutions that bring enterprise-class WAN routing features, redundancy and performance to the regional offices of large enterprise customers and to the headquarters of medium-sized businesses. We also offer router products which provide fixed configuration solutions to securely connect small offices and remote offices of large enterprises.

	§		Security. Leveraging the award winning TippingPoint Intrusion Prevention System (IPS), DVBU has a complete line of unified threat management (UTM) products that protect enterprises from the myriad of threats. The X-family of products complements the switching and wireless solutions to provide a fully secured network solution.
	§		Network Management. We offer flexible and comprehensive network management application packages for advanced IT environments. Our network management applications help our customers manage large and small wired and wireless networks with tools for network monitoring, device control and fast problem resolution.

Internet Protocol (IP) Telephony

Voice communications are a mission critical function for businesses of all kinds and sizes around the world. IP is ubiquitous today both within an enterprise and outside of it, providing the ability for software applications and computers to communicate in an efficient manner. We offer a broad portfolio of IP telephony products that work together to deliver business-focused applications, including: next-generation dial tone, IP messaging, IP presence, IP conferencing, IP mobility and IP customer contact center services. Our secure, Session Initiation Protocol (SIP) based platform and applications are designed to meet the performance expectations of today’s business environments: cost effectiveness, increased user productivity and strengthened customer interactions. Our IP telephony products fall within the following categories:

	§		IP Telephony Platforms
	§		Convergence Application Suite
	§		IP Phones

Services

Our DVBU segment provides our channel partners and customers a single point of accountability for service performance and quality. Our global service offerings cover key aspects of support that customers need to keep their data networking and voice solutions operating effectively, including telephone support, hardware replacement, software updates, dedicated on-site engineers and spare parts. We also offer high-end professional services and training to provide complete product plus service solutions for our customers. Our portfolio of professional services includes assessment and design, project management, training and certifications, installation, and integration services that are especially important to our customers that purchase higher-end switches, routers and IP telephony communications systems.

To deliver our services, we employ a team of highly skilled and professional in-house services experts and also partner with select third party service providers. We also offer customers the benefits of virtually integrated services resources. Additionally, we have agreements with local and regional professional services providers to augment our onsite coverage and meet the demand for our services.

TIPPINGPOINT SECURITY DIVISION (“TIPPINGPOINT”) SEGMENT PRODUCTS

Security

We have a comprehensive security portfolio that includes end-to-end solutions for core-to-edge protection. Organizations can choose to implement overlaid or embedded security solutions that are automatic and centrally manageable and which provide adaptive and dynamic protection.

Our security products include the following:

	§		Intrusion Prevention Systems;
	§		Security Services; and
	§		Network Access Control.

Intrusion Prevention Systems

Our TippingPoint™ line of intrusion prevention systems or IPS are hardware-based products designed to analyze incoming data and prevent viruses and malicious traffic from entering the network. The TippingPoint IPS utilizes high-speed network processors that can operate at multi-Gigabit speeds. Our hardware platform is complemented by a robust security-oriented operating system and suite of vulnerability filters that can be dynamically updated. Our TippingPoint IPS offers bandwidth management, peer-to-peer protection, and default “Recommended Settings” to accurately block malicious traffic automatically upon installation without tuning.

The TippingPoint IPS provides application protection, performance protection and infrastructure protection through total packet inspection, which means that our system reviews all data processed through it for viruses and other malicious traffic. Application protection capabilities provide fast, accurate, reliable protection from internal and external cyber attacks. Through its infrastructure protection capabilities, the TippingPoint IPS protects IP telephony infrastructure, routers, switches, and other critical infrastructure from targeted attacks and traffic anomalies. Our performance protection capabilities enable customers to throttle non-mission critical applications that hijack valuable bandwidth and IT resources, thereby aligning network resources and business-critical application performance.

The switch-like performance characteristics of the TippingPoint IPS allow it to be placed at the core, in-line at the perimeter, on internal network segments, and at remote site locations with minimal or no adverse network impact. Additionally, our IPS solutions are deployed and managed using a scalable, tiered Security Management System (SMS). Using SMS, customers implement and manage coherent, enterprise-wide security policies based on rules and thresholds set within the SMS. The SMS offers a rich reporting system, allowing customized reports to be generated and distributed automatically on a scheduled basis. Support for multiple user profiles allows a range of users, such as administrators and executives, access to this management system.

Security Services

We provide a real-time update service, called the Digital Vaccine^® service, which automatically and rapidly delivers vulnerability filters against the latest threats. To facilitate the creation of Digital Vaccine filters, our Threat Management Center monitors and collects security intelligence from customers and security agencies around the world. Based on this intelligence, we perform investigations of new software vulnerabilities and create antidotes that are delivered directly to our products. Additionally we offer installation, training and high-touch maintenance programs for our IPS equipment. Maintenance programs are offered as a bundled solution with our Digital Vaccine updates.

Network Access Control

We offer Network Access Control (NAC) features which enable enterprises to enforce device and user policies to ensure endpoint compliance, through our TippingPoint NAC Enforcer offering. NAC enables enterprises to verify the identity of users before allowing them to access different levels of the network. We are developing additional products for NAC functionality as well as investigating the integration of this technology into other network offerings.

SALES, MARKETING AND DISTRIBUTION

We use a broad distribution channel to bring our products and solutions to our customers. Our two-tier distribution channel comprises distributors and resellers.

Although a majority of our sales of enterprise networking products are made through our two-tier distribution channel, we also work with global systems integrators, service providers and direct marketers. Additionally, we maintain a field sales organization targeting small, medium and large enterprise accounts in conjunction with our partners.

COMPETITION

We compete in the networking infrastructure market, providing a broad portfolio of secure, converged voice and data networking products to small, medium, and large size organizations and, through our H3C segment’s OEM sales, carrier customers. The market for our products is competitive, fragmented and rapidly changing. We expect competition to continue to intensify. Many of our competitors are bringing new solutions to market, focusing on specific segments of our target markets and establishing alliances and original equipment manufacturers (OEM) relationships with larger companies, some of which are our partners as well.

Our principal competitors include Alcatel Lucent, Avaya Inc., Cisco Systems, Inc., D-Link Systems, Inc., Enterasys Networks, Inc., Extreme Networks, Inc., F5 Networks, Inc., Foundry Networks, Inc., Hewlett-Packard Company, Juniper Networks, Inc., Mitel Networks Corporation, NETGEAR, Inc., and Nortel Networks Corporation. In addition, H3C also competes with key regional competitors such as Allied Telsis, Inc. (formerly Allied Telesyn), Buffalo Inc., Digital China, Hitachi, Huawei, and ZTE Corporation. TippingPoint’s principal competitors are Cisco Systems, Inc., Internet Security Systems, Inc. (acquired by IBM), McAfee, Inc., and Sourcefire, Inc. Many of our competitors are larger than us and possess greater financial resources.

We believe the primary competitive factors in the enterprise networking infrastructure market are as follows:

	§		Maintain tier-one capability and presence. To maintain tier-one capability and presence, a provider must have a comprehensive distribution channel and a strong financial position. In addition, that provider must have a globally-recognized and preferred brand and provide strong service and support capabilities.
	§		Offer innovative products and solutions. To be considered innovative, a provider must deliver a broad line of products and solutions and maintain a substantial intellectual property portfolio.

RESEARCH AND DEVELOPMENT

Our research and development approach is to focus on activities that deliver differentiated products and solutions and drive reductions in product costs. Our current areas of focus include security, convergence of applications over IP, advanced switching, routing solutions and other advanced technologies. For activities such as mature technologies or widely available product design components, we work with contract developers and third parties. We believe this two-part approach increases our ability to bring products to market in a timely and cost effective manner and ensures that we focus on those products that matter most to our customers and clearly differentiate the products.

Our DVBU segment relies on H3C’s engineering talent for new product development of enterprise switches and routers and on certain third party developers for small and medium size networking offerings. Our DVBU segment develops its voice offerings. Our TippingPoint segment develops the TippingPoint Intrusion Prevention Systems and Digital Vaccine security products and services. H3C develops its H3C core product portfolio.

Our research and development expenditures were $206.7 million in fiscal 2008, $215.6 million in fiscal 2007, and $101.9 million in fiscal 2006.

SIGNIFICANT CUSTOMERS AND PRODUCTS

For information regarding customer and product concentration for each of the last three fiscal years, see Note 19 to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

FINANCIAL INFORMATION ABOUT SEGMENT, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT

SALES

Segment financial data are set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and in Note 19 of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8 of this Annual Report on Form 10-K for the fiscal year ended May 31, 2008. A significant portion of our revenues are derived from overseas operations. The profitability of our segments is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies, particularly the Chinese Renminbi. See the Geographic Information portion of Note 20 for further information relating to sales and long-lived assets by geographic area and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We market our products in all significant global markets, primarily through subsidiaries, sales offices, sales representatives, and relationships with OEMs and distributors with local presence. Outside the U.S., we have several research and development groups, with the two most significant being in China and the U.K. We also use contract developers in India. We maintain sales offices in 31 countries outside the U.S.

BACKLOG

Our backlog as of May 30, 2008, the last day of our 2008 fiscal year, was approximately $71.0 million (including $56.0 million of H3C backlog as of March 31, 2008), compared with backlog of approximately $65.7 million (including $54.8 million of H3C backlog as of March 31, 2007) as of June 1, 2007, the last day of our 2007 fiscal year. We include in our backlog purchase orders for which a delivery schedule has been specified for product shipment within one year. Generally, orders are placed by our customers on an as-needed basis and may be canceled or rescheduled by the customers without significant penalty to the customer. Accordingly, backlog as of any particular date is not necessarily indicative of our future sales.

SEASONALITY

Our H3C segment’s calendar first quarter generally experiences some seasonal effect on sales, due to the Chinese New Year which typically falls during that quarter. Our DVBU and TippingPoint segments revenues and earnings have not been impacted by seasonality to any significant degree.

MANUFACTURING AND COMPONENTS

For the DVBU and TippingPoint segments we outsource the majority of our manufacturing and our supply chain management operations to contract manufacturers and original design manufacturer suppliers, with our H3C segment handling the remainder of these functions. This is part of our strategy to maintain global manufacturing capabilities and to reduce our costs. This subcontracting includes activities such as material procurement, assembly, test, shipment to our customers and repairs. We believe this approach enables us to reduce fixed costs and to quickly respond to changes in market demand. We have contract manufacturing arrangements with several companies, of which Jabil Circuits and Accton Technology Corp. were the two most significant during fiscal 2008 and fiscal 2007. Based on current and forecasted demand, our contract manufacturers are expected to have an adequate supply of components required for the production of our products.

We determine the components that are incorporated in our products and design the supply chain solution. Our suppliers manufacture based on rolling forecasts. Each of the suppliers procures components necessary to assemble the products in our forecast and test the products according to our specifications. Products are then shipped directly to our logistics provider. We generally do not own the components and our customers take title to our products upon shipment from the logistics provider or, in certain jurisdictions, upon payment. In certain circumstances, we may be liable to our suppliers for carrying costs and obsolete material charges for excess components purchased based on our forecasts.

For the H3C segment, a significant portion of self-designed products are also manufactured by contract manufacturers, mainly Flextronics, System Integration Electronics and Flash Electronics. However, H3C does retain an in-house manufacturing capability and capacity for pilot run, low volume production, as well as special projects, and this capability includes a state-of-the-art SMT (surface mount technology) line, backend assembly and test lines and distribution facilities. H3C typically takes title to the product directly from the contract manufacturer, builds an inventory position for forecasted sales and ships to the customer’s designated delivery hub.

Although we have contracts with our manufacturers, those contracts set forth a framework within which the supplier may accept purchase orders from us. The contracts do not require them to manufacture our products on a long-term basis.

We use standard parts and components for our products where it is appropriate. We purchase certain key components used in the manufacture of our products from single or limited sources.

Purchase commitments with our single- or limited-source suppliers are generally on a purchase order basis. A number of vendors supply standard product integrated circuits and microprocessors for our products.

INTELLECTUAL PROPERTY AND RELATED MATTERS

Through our research and development activities over many years, we have developed a substantial portfolio of patents covering a wide variety of networking technologies. This ownership of core networking technologies creates opportunities to leverage our engineering investments and develop more integrated, powerful, and innovative networking solutions for customers.

We rely on U.S. and foreign patents, copyrights, trademarks, and trade secrets to establish and maintain proprietary rights in our technology and products. We have an active program to file applications for and obtain patents in the U.S. and in selected foreign countries where potential markets for our products exist. Our general policy has been to seek to patent those patentable inventions that we expect to incorporate in our products or that we expect will be valuable otherwise. As of May 30, 2008, our DVBU segment had 1,425 issued U.S. patents (including 1,393 utility patents and 32 design patents) and 403 foreign issued patents. As of May 30, 2008, our TippingPoint segment had 7 issued U.S. patents (all of which are utility patents). Numerous patent applications that relate to our research and development activities are currently pending in the U.S. and other countries. We also have patent cross license agreements with other companies. As of March 31, 2008, the H3C portfolio includes 180 issued Chinese patents, over 1,050 pending Chinese applications, and 35 pending foreign applications. During fiscal 2008, we continued our patent licensing program, through which we identify potential sources of licensing revenue, including investigation of situations in which we believe that other companies may be improperly using our patented technology.

Our DVBU segment has 37 registered trademarks in the U.S. and has a total of 524 registered trademarks in 77 foreign jurisdictions. Our TippingPoint segment has 9 registered trademarks in the U.S. and has a total of 25 registered trademarks in 9 foreign jurisdictions. H3C has 10 registered trademarks in China and has a total of 58 registered trademarks in 14 foreign jurisdictions. Numerous applications for registration of domestic and foreign trademarks are currently pending for our DVBU, TippingPoint and H3C segments.

EMPLOYEES

		Total
Sales and marketing			1,826
Customer service and supply chain operations			983
Research and development			2,772
General and administrative			522
Total			6,103

The H3C segment has 4,684 employees, the DVBU segment has 920 employees, the TippingPoint segment has 287 employees and the Corporate segment has 212 employees.

Our employees are not represented by a labor organization and we consider our employee relations to be satisfactory. The DVBU, TippingPoint, and Corporate segments employee data is as of May 30, 2008 and the H3C segment employee data is as of March 31, 2008, the date of the H3C balance sheet we consolidated into our 2008 fiscal year end balance sheet.

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of certain restructuring actions affecting DVBU employee headcount.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists the names, ages and positions held by all executive officers of 3Com as of July 25, 2008. There are no family relationships between any director (or nominee) or executive officer and any other director (or nominee) or executive officer of 3Com.

Name		Age				Position
Robert Y. L. Mao			64			Chief Executive Officer
Ronald A. Sege			51			President and Chief Operating Officer
Jay Zager			58			Executive Vice President, Chief Financial Officer
Neal D. Goldman			57			Executive Vice President, Chief Administrative and Legal Officer and Secretary
Dr. Shusheng Zheng			41			Executive Vice President, Chief Operating Officer, H3C

In addition, the foregoing individuals serve on the Boards of Directors of various subsidiaries of 3Com.

Robert Y. L. Mao has been our Chief Executive Officer since April 2008 and a member of our Board of Directors since March 2007. Prior to his appointment as Chief Executive Officer, Mr. Mao was most recently our Executive Vice President, Corporate Development from August 2006 to March 2007. Mr. Mao has over 30 years of experience in the telecommunications and IT industries. Before joining 3Com, Mr. Mao was President and Chief Executive Officer of Greater China for Nortel Networks from September 1997 to May 2006 and Regional President of Greater China for Alcatel from September 1995 to September 1997. Nortel and Alcatel are global suppliers of communication equipment serving both service provider and enterprise customers. At these positions, Mr. Mao managed operations in the People’s Republic of China, Taiwan, Hong Kong and Macao. Mr. Mao also held senior managerial and technical positions at Alcatel and ITT in Asia and the U.S. Mr. Mao holds a Master’s degree from Cornell University in Material Science and Metallurgical Engineering and earned a Master’s in Management from MIT. Mr. Mao is the past Vice Chairman of the Board of Governors of the Pacific Telecommunication Council (from 2003 to 2005). Mr. Mao serves on the Board of Hurray! Holding Co., Ltd., a wireless value-added services provider.

Ronald A. Sege has been our President and Chief Operating Officer and a member of our Board of Directors since April 2008. Mr. Sege most recently served as President and Chief Executive Officer of Tropos Networks, Inc. a provider of wireless broadband networks, from 2004 to 2008. He is currently a member of Tropos’ Board of Advisors. Prior to Tropos, Mr. Sege was President and Chief Executive Officer of Ellacoya Networks, Inc. a provider of broadband service optimization solutions based on deep packet inspection technology, from 2001 to 2004. Prior to Ellacoya, Mr. Sege was Executive Vice President of Lycos, Inc., an internet search engine, from 1998 to 2001. Prior to Lycos, Mr. Sege spent nine years at 3Com Corporation, from 1989 to 1998, serving in a variety of senior management roles including Executive Vice President, Global Systems Business Unit. Mr. Sege holds an MBA from Harvard University and a BA from Pomona College.

Jay Zager has been our Executive Vice President, Chief Financial Officer since June 2007. Immediately prior to joining 3Com, Mr. Zager was an executive at Gerber Scientific, Inc., a leading international supplier of sophisticated automated manufacturing systems for sign making and specialty graphics, apparel and flexible materials, and ophthalmic lens processing. Mr. Zager joined Gerber in February 2005 as Senior Vice President and Chief Financial Officer and was appointed Executive Vice President and Chief Financial Officer in April 2006, a position he held until he left the company in June 2007. As a member of the senior management team of Gerber, he was responsible for financial reporting, accounting, treasury operations, business planning, corporate development, investor relations, tax/pension administration and information technology. Prior to joining Gerber, Mr. Zager was Senior Vice President and Chief Financial Officer of Helix Technology Corp., a semiconductor equipment manufacturer, from February 2002 to February 2005. Earlier, from 2000 to 2001, he was Executive Vice President and Chief Financial Officer of Inrange Technologies Corp., a storage networking company. Before Inrange, he was with the Compaq/Digital Equipment organization for 14 years, holding a number of senior financial and business management positions including Vice President, Business Development and Vice President, Chief Financial Officer of Worldwide Engineering & Research. Mr. Zager received a Master’s degree in Finance and Strategic Planning from the Sloan School of Management, Massachusetts Institute of Technology and a Bachelor of Science degree in Operations Research from the Massachusetts Institute of Technology.

Neal D. Goldman has been 3Com’s Executive Vice President, Chief Administrative and Legal Officer and Secretary since March 2007, and he served as our Senior Vice President, Management Services, General Counsel and Secretary from September 2003 until March 2007. Prior to joining 3Com, Mr. Goldman worked for Polaroid Corporation from August 1997 to September 2003. From March 2003 to September 2003, he was Executive Vice President, Business Development and Chief Legal Officer of Polaroid and prior to that Mr. Goldman served as Executive Vice President, Chief Administrative and Legal Officer from July 2001 to June 2002. From August 1997 to July 2001, Mr. Goldman held a number of senior management and executive positions at Polaroid, including Senior Vice President, General Counsel and Secretary and Deputy General Counsel. Before joining Polaroid, Mr. Goldman served as Vice President, General Counsel and Secretary at Nets, Inc. from March 1996 to June 1997. Before joining Nets, Inc., Mr. Goldman held a number of positions with Lotus Development Corporation, including Vice President and General Counsel from November 1995 to February 1996 and Deputy General Counsel and Assistant Secretary from April 1990 to November 1995.

Dr. Shusheng Zheng has served as our Executive Vice President since May 2008 and as the Chief Operating Officer of our China-based H3C subsidiary since its inception in the fall of 2003. Previously, Dr. Zheng worked at Huawei Technologies, a leading telecommunications equipment provider based in China, from 1993 to 2003. At Huawei, Dr. Zheng held several senior management positions, including manager in the research and development department, Director of Manufacturing and Customer Service, Head of Sales and Marketing for the datacom business, and President of the switching business unit. Dr. Zheng holds a PhD in Telecommunication Science from Zhejiang University in China.

ITEM 1A. RISK FACTORS

Risk factors may affect our future business and results.  The matters discussed below could cause our future results to materially differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, results of operations and stock price.
 

Risks Related to Historical Losses, Financial Condition and Substantial Indebtedness

We have incurred significant net losses in recent fiscal periods, including $228.8 million for the fiscal year ended May 30, 2008, and we may not be able to return to profitability.

We cannot provide assurance that we will return to profitability. While we continue to take steps designed to improve our results of operations, we have incurred significant net losses in recent periods. We face a number of challenges that have affected our operating results during the current and past several fiscal years. Specifically, we have experienced, and may continue to experience, the following:

	•		declining sales due to price competition and reduced incoming order rate;
	•		operating expenses that, as a percentage of sales, have exceeded our desired financial model;
	•		significant senior leadership and other management changes;
	•		disruptions and expenses resulting from our workforce reductions and employee attrition; and
	•		interest expense resulting from our senior secured loan.

If we do not increase our sales, we may need to further reduce costs in order to achieve profitability. As we have implemented significant cost reduction programs over the last several years, it may be difficult to make significant further cost reductions without in turn impacting our sales. Restructuring activity could also make it more difficult for us to address all of our legal and regulatory obligations in an effective manner, which could lead to penalties. In addition, we may choose to reinvest some or all of our realized cost savings in future growth opportunities or in our H3C integration efforts. Any of these events or occurrences will likely cause our expense levels to continue to be at levels above our desired model.

If we cannot overcome these challenges, reduce our expenses and/or increase our revenue, we may not become profitable (and if we become profitable, to sustain such profitability).

Our substantial debt could adversely affect our financial condition; and the related debt service obligations may adversely affect our cash flow and ability to invest in and grow our businesses.

We now have, and for the foreseeable future will continue to have, a significant amount of indebtedness. As of May 30, 2008, our total debt balance was $301 million, of which $48 million is due within one year and was classified as a current liability. In addition, despite current debt levels, the terms of our indebtedness allow us or our subsidiaries to incur more debt, subject to certain limitations.

While our senior secured loan is outstanding, we will have annual debt obligations of between approximately $48 million and $137 million. The interest rate on this loan is floating based on the LIBOR rate; accordingly, if the LIBOR rate is increased, these amounts could be higher. The maturity date on this loan is September 28, 2012. We intend to fulfill our debt service obligations primarily from cash generated by our H3C segment operations, if any, and, to the extent necessary, from its existing cash and investments. Because we anticipate that a substantial portion of the cash generated by our operations will be used to service this loan during its term, such funds will not be available to use in future operations, or investing in our businesses. Further, a significant portion of the excess cash flow generated by our H3C segment, if any, must be used annually to prepay principal on the loan. The foregoing may adversely impact our ability to expand our businesses or make other investments. In addition, if we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce, curtail or terminate other activities of our businesses.

Our indebtedness could have significant negative consequences to us. For example, it could:

	•		increase our vulnerability to general adverse economic and industry conditions;
	•		limit our ability to obtain additional financing;
	•		require the dedication of a substantial portion of any cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund growth, working capital, capital expenditures and other general corporate purposes;
	•		limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
	•		place us at a competitive disadvantage relative to our competitors with less debt.

The restrictions imposed by the terms of our senior secured loan facility could adversely impact our ability to invest in and grow our H3C business.

Covenants in the agreements governing our senior secured loan materially restrict our H3C operations, including H3C’s ability to incur debt, pay dividends, make certain investments and payments, make acquisitions of other businesses and encumber or dispose of assets. These negative covenants restrict our flexibility in operating our H3C business. In addition, in the event our H3C segment’s financial results do not meet our plans, the failure to comply with the financial covenants contained in the loan agreements could lead to a default. Our lenders may attempt to call defaults for violations of financial covenants (or other items, even if the underlying financial performance of H3C is satisfactory) in an effort to extract waiver or consent fees from us or to force a refinancing. A default and acceleration under one debt instrument or other contract may also trigger cross-acceleration under other debt instruments or other agreements, if any. An event of default, if not cured or waived, could have a material adverse effect on us because the lenders will be able to accelerate all outstanding amounts under the loan or foreclose on the collateral (which consists primarily of the assets of our H3C segment and could involve the lenders taking control over our H3C segment). Any of these actions would likely result in a material adverse effect on our business and financial condition.

Risks Related to H3C Segment and Dependence Thereon

We are significantly dependent on our H3C segment; if H3C is not successful we will likely experience a material adverse impact to our business, business prospects and operating results.

For the fiscal year ended May 30, 2008, H3C accounted for approximately 60 percent of our consolidated revenue and approximately 65 percent of our consolidated gross profit. In addition to China-related risks discussed elsewhere in this filing, H3C is subject to specific risks relating to its ability to:

	•		maintain a leading position in the networking equipment market in China;
	•		build profitable operations in other emerging markets throughout the world, but particularly in the Asia Pacific region;
	•		offer new and innovative products and services to attract and retain a larger customer base;
	•		increase awareness of the H3C brand and continue to develop customer loyalty;
	•		respond to rapidly changing competitive market conditions;
	•		respond to changes in the regulatory environment;
	•		manage risks associated with intellectual property rights, particularly in China;
	•		maintain effective control of costs and expenses; and
	•		attract, retain and motivate qualified personnel.

H3C has been growing and profitable since inception, and maintains a leading position in many market categories in China. It has experienced growth in recent periods in part due to the growth in China’s technology industry, which may not be representative of future growth or be sustainable. Companies that have leading positions may find it more challenging to grow in their markets. We cannot therefore assure you that H3C’s historical financial information is indicative of its future operating results or future financial performance, or that its profitability will be sustained.

H3C faces competition from domestic Chinese industry participants, and as a foreign-owned business, may not be as successful in selling to Chinese customers, particularly those in the public sector, to the extent that such customers favor Chinese-owned competitors.

Given the significance of H3C to our financial results, if H3C is not successful, our business will likely be adversely affected.

We are dependent to a large extent on sales in China, and may face difficulty growing our China business in the future due to our existing leading market share in China and the economic, political and social risks inherent in that country.

Our sales are significantly dependent on China, with approximately 47 percent of our consolidated revenues attributable to sales in China for the fiscal year ended May 30, 2008. We expect that a significant portion of our sales will continue to be derived from China for the foreseeable future. As a result, our business, financial condition and results of operations are to a significant degree subject to economic, political, legal and social developments and other events in China and surrounding areas. In addition, because we already have a significant percentage of the market share in China for enterprise networking products (and together with Cisco represent a substantial portion of that market), our opportunities to grow market share in China are more limited than in the past. We discuss risks related to the PRC in further detail below.

We are dependent on Huawei Technologies (“Huawei”) in several material respects, including as an important customer; we expect Huawei to reduce its business with H3C, which could materially adversely affect our business results.

H3C derives a material portion of its sales from Huawei, which formerly held a significant investment in H3C. In the three months ended May 30, 2008, which includes results from H3C’s March 31, 2008 quarter, Huawei accounted for approximately 26 percent of the revenue for our H3C segment and approximately 15 percent of our consolidated revenue. In the twelve months ended May 30, 2008, Huawei accounted for approximately 29 percent of the revenue for our H3C segment and approximately 17 percent of our consolidated revenue. Huawei’s percentage of H3C’s revenues has been trending downward from 41 percent, during the three months ended November 30, 2006, to the current level, and we expect this downward trend to continue. We further expect that Huawei will in the future reduce its business with H3C and, accordingly, that its purchases in absolute dollars will decrease. Huawei does not have any minimum purchase requirements under our existing OEM agreement, which expires in November 2008. While we are seeking a renewal of that agreement, we may not be able to renew it. In sum, we risk the possibility that Huawei sources products from another vendor or internally develops these products. We need to develop additional channels within China and in other regions, including channels to the carrier market, and we believe in any case that increasing our DVBU segment’s sales of H3C products is highly important to H3C’s global growth opportunities. If we fail in these efforts,

our business will suffer. Further, we have and expect to continue to incur costs relating to transition matters with respect to support that Huawei previously provided for H3C when it was a shareholder. In addition, our China headquarters in Hangzhou, PRC is owned by Huawei and leased to us under a lease agreement that expires in January 2009; if we cannot renew this lease on terms favorable to us or find alternate facilities, we may suffer disruption in our H3C business. If any of the above risks occur, it will likely have an adverse impact on H3C’s sales and business performance.

We must execute on a global strategy to leverage the benefits of our H3C acquisition, including integration activities to operate more effectively as “one” company; if we are not successful in these efforts, our business will suffer.

Our acquisition of H3C presents unique challenges that we must address. We must successfully execute on managing our operating segments, and, to the extent we so choose, integrating these businesses, in order to fully benefit from this acquisition. As a joint venture owned by two separate companies until March 2007, H3C historically operated in many ways independently from 3Com and Huawei. H3C’s business is largely based in the PRC and therefore significant cultural, language, business process and other differences exist between our other segments and H3C. In order to more closely manage and integrate our legacy 3Com and H3C businesses, we expect to incur significant transition costs, including management retention costs and other related items. There may also be business disruption as management and other personnel focus on global management activities and integration matters.

In order to realize the full benefits of this acquisition, we will need to manage our operating segments and employ strategies to leverage H3C. These efforts will require significant time and attention of management and other key employees at 3Com and H3C. Depending on the decisions we make on various strategic alternatives available to us, we may develop new or adjusted global design and development initiatives, go-to-market strategies, branding tactics, unified back office, supply chain and IT systems, streamlined engineering efforts or other strategies that take advantage and leverage H3C’s and our other segments’ respective strengths. The terms of our existing H3C senior secured indebtedness may make these efforts more difficult to the extent they limit or prohibit our ability to fully integrate H3C. If we do not execute on a global strategy that enables us to leverage the benefits of this acquisition, our business will be substantially harmed.

If we cannot continue to increase our DVBU segment’s sales of H3C products outside of China, we will likely find it increasingly difficult to grow our overall business.

We believe that increasing our DVBU segment’s sales of H3C products is highly important to 3Com’s global growth opportunities and ultimately to our consolidated growth. If we fail in these efforts, our business will suffer.

Risk Related to Personnel

Our success is dependent on continuing to hire and retain qualified managers and other personnel, including at our H3C segment, and reducing senior management turnover in our other segments; if we are not successful in attracting and retaining these personnel, our business will suffer.

Competition for qualified employees is intense. If we fail to attract, hire, or retain qualified personnel, our business will be harmed. We have experienced significant turnover in our senior management team in the last several years and we may continue to experience change at this level. If we cannot retain qualified senior managers and provide stability in the senior management team to enable them to work together for an extended period of time, our business may not succeed.

The senior management team at H3C has been highly effective since H3C’s inception in 2003. We need to continue to incentivize and retain H3C management. We cannot be sure that we will be successful in these efforts. If we are not successful, our H3C business may suffer, which, in turn, will have a material adverse impact on our consolidated business. Many of these senior managers, and other key H3C employees, originally worked for Huawei prior to the inception of H3C. Subject to non-competition agreements with us (if applicable), these employees could return to work for Huawei at any time. Huawei is not subject to any non-solicitation obligations in respect of H3C or 3Com. Further, former Huawei employees that work for H3C may retain financial interests in Huawei.

In addition, due to our recent merger transaction with affiliates of Bain Capital Partners, LLC that did not close, and the recent decline in our stock price, we believe it will be substantially more difficult to retain key employees and we will likely need to take significant actions to retain these individuals over time. If we are not successful in these retention efforts, our business will likely suffer.

Risks Related to Competition

Intense competition in the market for networking solutions could prevent us from maintaining or increasing revenue and achieving profitability.

The market for networking solutions is intensely competitive. In particular, Cisco maintains a dominant position in this market and several of its products compete directly with our products. Cisco’s substantial resources and market dominance have enabled it to reduce prices on its products within a short period of time following the introduction of these products, which typically causes its competitors to reduce prices and, therefore, the margins and the overall profitability of its competitors. Purchasers of networking solutions may choose Cisco’s products because of its broader product line and strong reputation in the networking market. In addition, Cisco may have developed, or could in the future develop, new technologies that directly compete with our products or render our products obsolete. We cannot provide assurance that we will be able to compete successfully against Cisco, currently the leading provider in the networking market.

We also compete with several other significant companies in the networking industry. Some of our current and potential competitors have greater market leverage, longer operating histories, greater financial, technical, sales, marketing and other resources, more name recognition and larger installed customer bases. Additionally, we may face competition from unknown companies and emerging technologies that may offer new networking solutions. Furthermore, a number of these competitors may merge or form strategic relationships that would enable them to apply greater resources and sales coverage than we can, and to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or a combination of these and other factors.

In order to remain competitive, we must, among other things, invest significant resources in developing new products with superior performance at lower prices than our competitors, enhance our current products and maintain customer satisfaction. In addition, we must make certain our sales and marketing capabilities allow us to compete effectively against our competitors. If we fail to do so, our products may not compete favorably with those of our competitors and our revenue and profitability could suffer.

Our competition with Huawei in the enterprise networking market could have a material adverse effect on our sales and our results of operations; and after a contractual non-compete period expires, Huawei can increase its level of competition, which would likely materially and adversely affect our business.

As Huawei expands its international operations, there could be increasing instances where we compete directly with Huawei in the enterprise networking market. As an OEM customer of H3C, Huawei has had, and continues to have, access to H3C’s products for resale. This access enhances Huawei’s current ability to compete directly with us. We could lose a competitive advantage in markets where we compete with Huawei, which in turn could have a material adverse effect on our sales and overall results of operations. In addition, Huawei’s obligation not to offer or sell enterprise class, and small-to-medium size business (or SMB), routers and switches that are competitive with H3C’s products continues until September 29, 2008. After that date, we are subject to the risk of increased competition from Huawei, which could materially harm our results of operations. More specifically, after the non-compete period expires, Huawei may offer and sell its own enterprise or SMB routers and switches, or resell products that it sources from our competitors. Huawei is not prohibited from developing (but is prohibited from offering or selling) competing products during the non-compete period. Huawei is also not prohibited from currently selling products in ancillary areas—such as security, voice over internet protocol and storage products—that are also sold today by H3C. We compete in those ancillary product areas today. If Huawei chooses to increase its competition with us, or if we do not compete favorably with Huawei, it is likely that our H3C business results, particularly in the Asia Pacific region and specifically in China, will be materially and negatively affected.

Huawei’s incentive not to compete with H3C or us, and its incentive to assist H3C, is more likely to diminish now that Huawei does not own any interest in H3C and our merger transaction with affiliates of Bain Capital Partners, LLC (in which Huawei would have participated as a minority investor) was not consummated. In addition, Huawei maintains a strong presence within China and the Asia Pacific region and has significant resources with which to compete within the networking industry, including the assets of Harbour Networks, a China-based competitor of H3C that possesses enterprise networking products and technology. In sum, we risk the possibility that Huawei sources products from another vendor or internally develops these products. We cannot predict whether Huawei will compete with us. If competition from Huawei increases, our business will likely suffer.

Finally, if any of H3C’s senior managers, and other key H3C employees that originally worked for Huawei prior to the inception of H3C, return to work for Huawei, the competitive risks discussed above may be heightened. Subject to non-competition agreements with us (if applicable), these employees could return to work for Huawei at any time. Huawei is not subject to any non-solicitation obligations in respect of H3C or 3Com. Further, former Huawei employees that work for H3C may retain financial interests in Huawei.

Risks Related to Business and Technology Strategy

We may not be successful at identifying and responding to new and emerging market and product opportunities, or at responding quickly enough to technologies or markets that are in decline.

The markets in which we compete are characterized by rapid technology transitions and short product life cycles. Therefore, our success depends on our ability to do the following:

	•		identify new market and product opportunities;
	•		predict which technologies and markets will see declining demand;
	•		develop and introduce new products and solutions in a timely manner;
	•		gain market acceptance of new products and solutions, particularly in targeted emerging markets; and
	•		rapidly and efficiently transition our customers from older to newer enterprise networking technologies.

Our financial position or results of operations could suffer if we are not successful in achieving these goals. For example, our business would suffer if any of the following occurs:

	•		there is a delay in introducing new products;
	•		we lose certain channels of distribution or key partners;
	•		our products do not satisfy customers in terms of features, functionality or quality; or
	•		our products cost more to produce than we expect.

Because we will continue to rely on original design manufacturers to assist in product design of some of our products, we may not be able to respond to emerging technology trends through the design and production of new products as well as if we were working independently.

We expect to utilize strategic relationships and other alliances as key elements in our strategy. If we are not successful in forming desired ventures and alliances or if such ventures and alliances are not successful, our ability to achieve our growth and profitability goals could be adversely affected.

We have announced alliances with third parties. In the future, we expect to evaluate other possible strategic relationships, including joint ventures and other types of alliances, and we may increase our reliance on such strategic relationships to broaden our sales channels, complement internal development of new technologies and enhancement of existing products, and exploit perceived market opportunities. For example, we intend to seek additional channel partners for the Chinese carrier market.

If we fail to form the number and quality of strategic relationships that we desire, or if such strategic relationships are not successful, we could suffer missed market opportunities, channel conflicts, delays in product development or delivery, or other operational difficulties. Further, if third parties acquire our strategic partners or if our competitors enter into successful strategic relationships, we may face increased competition. Any of these difficulties could have an adverse effect on our future sales and results of operations.

Our strategy of outsourcing functions and operations may fail to reduce cost and may disrupt our operations.

We continue to look for ways to decrease cost and improve efficiency by contracting with other companies to perform functions or operations that, in the past, we have performed ourselves. We have outsourced the majority of our manufacturing and logistics for our non-H3C products. We now rely on outside vendors to meet the majority of our manufacturing needs as well as a significant portion of our IT needs for the non-H3C segments. Additionally, we outsource certain functions for technical support and product return services. If we do not provide our customers with a high quality of service, we risk losing customers and/or increasing our support costs.

Although we believe that outsourcing will result in lower costs and increased efficiencies, this may not be the case. Because these third parties may not be as responsive to our needs as we would be ourselves, outsourcing increases the risk of disruption to our operations. In addition, our agreements with these third parties sometimes include substantial penalties for terminating such agreements early or failing to maintain minimum service levels. Because we cannot always predict how long we will need the services or how much of the services we will use, we may have to pay these penalties or incur costs if our business conditions change.

Our reliance on industry standards, technological change in the marketplace, and new product initiatives may cause our sales to fluctuate or decline.

The enterprise networking industry in which we compete is characterized by rapid changes in technology and customer requirements and evolving industry standards. As a result, our success depends on:

	•		the convergence of technologies, such as voice, data and video on single, secure networks;
	•		the timely adoption and market acceptance of industry standards, and timely resolution of conflicting U.S. and international industry standards; and
	•		our ability to influence the development of emerging industry standards and to introduce new and enhanced products that are compatible with such standards.

Slow market acceptance of new technologies, products, or industry standards could adversely affect our sales or overall results of operations. In addition, if our technology is not included in an industry standard on a timely basis or if we fail to achieve timely certification of compliance to industry standards for our products, our sales of such products or our overall results of operations could be adversely affected.

We focus on enterprise networking, and our results of operations may fluctuate based on factors related entirely to conditions in this market.

Our focus on enterprise networking may cause increased sensitivity to the business risks associated specifically with the enterprise networking market and our ability to execute successfully on our strategies to provide superior solutions for larger and multi-site enterprise environments. To be successful in the enterprise networking market, we will need to be perceived by decision making officers of large enterprises as committed for the long-term to the high-end networking business. Also, expansion of sales to large enterprises may be disruptive in a variety of ways, such as adding larger systems integrators that may raise channel conflict issues with existing distributors, or a perception of diminished focus on the small and medium enterprise market.

Risks Related to Operations and Distribution Channels

A significant portion of our sales is derived from a small number of distributors. If any of these partners reduces its business with us, our business could be adversely affected.

We distribute many of our products through two-tier distribution channels that include distributors, systems integrators and value added resellers, or VARs. A significant portion of our sales is concentrated among a few distributors; our two largest distributors accounted for a combined 17 percent of our consolidated revenue for the twelve months ended May 30, 2008. If either of these distributors reduces its business with us, our sales and overall results of operations could be adversely affected.

We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of our products, our sales could be adversely affected.

We work closely with our distributors to monitor channel inventory levels and ensure that appropriate levels of products are available to resellers and end users. Our target range for channel inventory levels is between three and five weeks of supply on hand at our distributors. Partners with a below-average inventory level may incur “stock outs” that would adversely impact our sales. Our distribution agreements typically provide that our distributors may cancel their orders on short notice with little or no penalty. If our channel partners reduce their levels of inventory of our products, our sales would be negatively impacted during the period of change.

If we are unable to successfully develop relationships with system integrators, service providers, and enterprise VARs, our sales may be negatively affected.

As part of our sales strategy, we are targeting system integrators, or SIs, service providers, or SPs, and enterprise value-added resellers, or eVARs. In addition to specialized technical expertise, SIs, SPs and eVARs typically offer sophisticated services capabilities that are frequently desired by larger enterprise customers. In order to expand our distribution channel to include resellers with such capabilities, we must be able to provide effective support to these resellers. If our sales, marketing or services capabilities are not sufficiently robust to provide effective support to such SIs, SPs, and eVARs, we may not be successful in expanding our distribution model and current SI, SP, and eVAR partners may terminate their relationships with us, which would adversely impact our sales and overall results of operations.

We may pursue acquisitions of other companies that, if not successful, could adversely affect our business, financial position and results of operations.

In the future, we may pursue acquisitions of companies to enhance our existing capabilities. There can be no assurances that acquisitions we might consummate will be successful. If we pursue an acquisition but are not successful in completing it, or if we complete an acquisition but are not successful in integrating the acquired company’s technology, employees, products or operations successfully, our business, financial position or results of operations could be adversely affected.

We may be unable to manage our supply chain successfully, which would adversely impact our sales, gross margin and profitability.

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

	•		our ability to accurately forecast demand is diminished;
	•		our reliance on, and long-term arrangements with, third-party manufacturers places much of the supply chain process out of our direct control and heightens the need for accurate forecasting and reduces our ability to transition quickly to alternative supply chain strategies; and
	•		we may experience disruptions to our logistics.

We cannot be certain that in the future our suppliers, particularly those who are also in active competition with us, will be able or willing to meet our demand for components in a timely and cost-effective manner. There has been a trend toward consolidation of vendors of electronic components. Our reliance on a smaller number of vendors and the inability to quickly switch vendors increases the risk of logistics disruptions, unfavorable price fluctuations, or disruptions in supply, particularly in a supply-constrained environment. Supplies of certain key components have become tighter as industry demand for such components has increased. If the resulting increase in component costs and time necessary to obtain these components persists, we may experience an adverse impact to gross margin.

If overall demand for our products or the mix of demand for our products is significantly different from our expectations, we may face inadequate or excess component supply or inadequate or excess manufacturing capacity. This would result in orders for products that could not be manufactured in a timely manner, or a buildup of inventory that could not easily be sold. Either of these situations could adversely affect our market share, sales, and results of operations or financial position.

The inability of any contract manufacturer to meet our cost, quality or performance standards could adversely affect our sales and overall results from operations.

The cost, quality, performance, and availability of contract manufacturing operations are and will be essential to the successful production and sale of many of our products. We may not be able to provide contract manufacturers with product volumes that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of inventory. In addition, a significant component of maintaining cost competitiveness is the ability of our contract manufacturers to adjust their own costs and manufacturing infrastructure to compensate for possible adverse exchange rate movements. To the extent that the contract manufacturers are unable to do so, and we are unable to procure alternative product supplies, then our own competitiveness and results of operations could be adversely impacted.

In portions of our business we have implemented a program with our manufacturing partners to ship products directly from regional shipping centers to customers. Through this program, we are relying on these partners to fill customer orders in a timely manner. This program may not yield the efficiencies that we expect, which would negatively impact our results of operations. Any disruptions to on-time delivery to customers would adversely impact our sales and overall results of operations.

If we fail to adequately evolve our financial and managerial control and reporting systems and processes, including the management of our H3C segment, our ability to manage and grow our business will be negatively affected.

Our ability to successfully offer our products and implement our business plan in a rapidly evolving market depends upon an effective planning and management process. We will need to continue to improve our financial and managerial control and our reporting systems and procedures in order to manage our business effectively in the future. If we fail to implement improved systems and processes, our ability to manage our business and results of operations could be adversely affected. For example, now that we own all of H3C, we are spending additional time, resources and capital to manage its business, operations and financial results. If we are not able to successfully manage H3C, our business results could be adversely affected.

Risks Related to our Operations in the People’s Republic of China

China’s governmental and regulatory reforms and changing economic environment may impact our ability to do business in China.

As a result of the historic reforms of the past several decades, multiple government bodies are involved in regulating and administrating affairs in the enterprise networking industry in China. These government agencies have broad discretion and authority over all aspects of the networking, telecommunications and information technology industry in China; accordingly their decisions may impact our ability to do business in China. Any of the following changes in China’s political and economic conditions and governmental policies could have a substantial impact on our business:

	•		the promulgation of new laws and regulations and the interpretation of those laws and regulations;
	•		enforcement and application of rules and regulations by the Chinese government;
	•		the introduction of measures to control inflation or stimulate growth; or
	•		any actions that limit our ability to develop, manufacture, import or sell our products in China, or to finance and operate our business in China.

Due to our dependence on China, if China were to experience a broad and prolonged economic slowdown, our results of operations would suffer. The Chinese government has from time-to-time implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Uncertainties with respect to the Chinese legal system may adversely affect us.

We conduct our business in China primarily through H3C, a Hong Kong entity which in turn owns several Chinese entities. These entities are generally subject to laws and regulations applicable to foreign investment in China. In addition, there are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. Because many laws and regulations are relatively new and the Chinese legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform. Moreover, the interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Finally, enforcement of existing laws or contracts based on existing law may be uncertain, and it may be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgment by a court of another jurisdiction. Any litigation in China may be protracted and result in substantial costs and diversion of resources and management’s attention.

If PRC tax benefits available to H3C are reduced or repealed, our business could suffer.

Effective January 1, 2008, the PRC has enacted a new tax law, which introduces a new corporate income tax rate of 25 percent. Companies which benefited from preferential tax rates and rulings under the previous tax law can continue to enjoy those concessions, subject to transitional rules. Our H3C subsidiary in China was entitled to tax concessions which began in 2004 and exempted it from the PRC income tax for its initial two years and entitle it to a 50 percent reduction in income tax in the following three years. Calendar 2008 will be the final year of that 50 percent reduction. The new tax law provides for a reduced tax rate of 15 percent for companies which qualify as “new and high technology” enterprises. Based on the draft regulations, we believe that our H3C subsidiary in China will qualify for this reduced rate. If H3C is not entitled to “new and high technology” enterprise treatment under this new law (due to the publication of new regulations or the interpretation of existing law or regulation or otherwise), if other tax benefits currently enjoyed by H3C are withdrawn or reduced, or if new taxes are introduced which have not applied to H3C before, there would likely be a resulting increase to H3C’s statutory tax rates in the PRC. Increases to tax rates in the PRC, where our H3C segment is profitable, could adversely affect our results of operations and cash flow. If we do not qualify for the reduced rate, the statutory income tax rate in China will be 9% for 2008, 20% for 2009, 22% for 2010, 24% for 2011, and 25% thereafter.

H3C is subject to restrictions on paying dividends and making other payments to us.

Chinese regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with Chinese accounting standards and regulations. H3C does business primarily through a Chinese entity that is required to set aside a portion of its after-tax profits — currently 10 percent — according to Chinese accounting standards and regulations to fund certain reserves. The Chinese government also imposes controls on the conversion of Renminbi into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. These restrictions may in the future limit our ability to receive dividends or repatriate funds from H3C. In addition, the credit agreement governing our senior secured loan also imposes significant restrictions on H3C’s ability to dividend or make other payments to our other segments. Finally, the new PRC tax law, effective January 1, 2008, imposes a withholding tax on certain payments by entities resident in PRC to entities outside of the PRC (including Hong Kong). Regulations have now been issued which confirm that this withholding tax will apply to dividends and other distributions made by our H3C subsidiary in China. Consequently, all distributions of earnings realized from 2008 onwards from H3C’s PRC subsidiaries to our H3C subsidiary in Hong Kong will be subject to this withholding tax at a rate of 5%. H3C’s main PRC subsidiary generates the cash used to pay principal and interest on our H3C loan (through dividend flows from the PRC to Hong Kong and then to the Cayman Islands). Accordingly, we will in the future be required to earn proportionately higher profits in the PRC to service principal and interest on our loan, or be forced to fund any deficiencies from cash in our other segments (which do not currently have positive cash flow from operations).

We are subject to risks relating to currency rate fluctuations and exchange controls and we do not hedge this risk in China.

Approximately 47 percent of our sales and a portion of our costs are denominated in Renminbi, the Chinese currency. At the same time, our senior secured bank loan — which we intend to service and repay primarily through cash flow from H3C’s PRC operations — is denominated in US dollars. In July 2005, China uncoupled the Renminbi from the U.S. dollar and let it float in a narrow band against a basket of foreign currencies. The Renminbi could appreciate or depreciate relative to the U.S. dollar. Any movement of the Renminbi may materially and adversely affect our cash flows, revenues, operating results and financial position, and may make it more difficult for us to service our U.S. dollar-denominated senior secured bank loan. More specifically, if the Renminbi appreciates in value as compared with the U.S. dollar, our reported revenues will derive a beneficial increase due to currency translation; and if the Renminbi depreciates, our revenues will suffer due to such depreciation. This currency translation impacts our expenses as well, but to a lesser degree.

We do not currently hedge the currency risk in H3C through foreign exchange forward contracts or otherwise and China employs currency controls restricting Renminbi conversion, limiting our ability to engage in currency hedging activities in China. Various foreign exchange controls are applicable to us in China, and such restrictions may in the future make it difficult for H3C or us to repatriate earnings, which could have an adverse effect on our cash flows and financial position.

Risks Related to Intellectual Property

If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and could lose sales.

High technology products sometimes contain undetected software or hardware errors when new products or new versions or updates of existing products are released to the marketplace. Undetected errors could result in higher than expected warranty and service costs and expenses, and the recording of an accrual for related anticipated expenses. From time to time, such errors or component failures could be found in new or existing products after the commencement of commercial shipments. These problems may have a material adverse effect on our business by causing us to incur significant warranty and repair costs, diverting the attention of our engineering personnel from new product development efforts, delaying the recognition of revenue and causing significant customer relations problems. Further, if products are not accepted by customers due to such defects, and such returns exceed the amount we accrued for defect returns based on our historical experience, our operating results would be adversely affected.

Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our products, could result in the delay or loss of market acceptance of our products and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems would likely have a material adverse effect on our business, operating results and financial condition.

We may need to engage in complex and costly litigation in order to protect, maintain or enforce our intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong as the rights we enjoy in the U.S.

Whether we are defending the assertion of intellectual property rights against us, or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations because it may divert the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective and uncertain. In addition, such litigation may subject us to counterclaims or other retaliatory actions that could increase its costs, complexity, uncertainty and disruption to the business. Thus, the existence of this type of litigation, or any adverse determinations related to such litigation, could subject us to significant liabilities and costs. Any one of these factors could adversely affect our sales, gross margin, overall results of operations, cash flow or financial position.

In addition, the legal systems of many foreign countries do not protect or honor intellectual property rights to the same extent as the legal system of the United States. For example, in China, the legal system in general, and the intellectual property regime in particular, are still in the development stage. It may be very difficult, time-consuming and costly for us to attempt to enforce our intellectual property rights, and those of H3C, in these jurisdictions.

We may not be able to defend ourselves successfully against claims that we are infringing the intellectual property rights of others.

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

In the course of our business, we receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether to negotiate licenses or cross-licenses to incorporate or use the proprietary technologies, protocols, or specifications in our products, and whether we have rights of indemnification against our suppliers, strategic partners or licensors. If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those that must comply with industry standard protocols and specifications to be commercially viable, our financial position or results of operations could be adversely affected. In addition, if we are alleged to infringe the intellectual property rights of others, we could be required to seek licenses from others or be prevented from manufacturing or selling our products, which could cause disruptions to our operations or the markets in which we compete. Finally, even if we have indemnification rights in respect of such allegations of infringement from our suppliers, strategic partners or licensors, we may not be able to recover our losses under those indemnity rights.

OSN, our open source strategy, subjects us to additional intellectual property risks, such as less control over development of certain technology that forms a part of this strategy and a higher likelihood of litigation.

Our Open Services Networking, or OSN, strategy uses open source software, or OSS, licenses. The underlying source code for OSS is generally made available to the general public with either relaxed or no intellectual property restrictions. This allows users to create user-generated software content through either incremental individual effort, or collaboration. The use of OSS means that for such software we do not exercise control over many aspects of the development of the open source technology. For example, the vast majority of programmers developing OSS used by us are neither our employees nor contractors. Therefore, we cannot predict whether further developments and enhancements to OSS selected by us would be available. Furthermore, rival OSS applications often compete for market share. Should our choice of application fail to compete favorably, its OSS development may wane or stop. In addition, OSS has few technological barriers to entry by new competitors and it may be relatively easy for new competitors, who may have greater resources than us, to enter our markets and compete with us. Also, because OSS is often compiled from multiple components developed by numerous independent parties and usually comes “as is” and without indemnification, OSS is more vulnerable to third party intellectual property infringement claims. Finally, some of the more prominent OSS licenses, such as the GNU General Public License, are the subject of litigation. It is possible that a court could hold such licenses to be unenforceable or someone could assert a claim for proprietary rights in a program developed and distributed under them. Any ruling by a court that these licenses are not enforceable or that open source components of our product offerings may not be liberally copied, modified or distributed may have the effect of preventing us from selling or developing all or a portion of our products. If any of the foregoing occurred, it could cause a material adverse impact on our business.

Risks Related to the Trading Market

Fluctuations in our operating results and other factors may contribute to volatility in the market price of our stock.

Historically, our stock price has experienced volatility. We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors such as:

	•		fluctuations in our quarterly results of operations and cash flow;
	•		changes in our cash and equivalents and short term investment balances;
	•		our ability to execute on our strategic plan, including, without limitation, any integration activities we choose to undertake;
	•		variations between our actual financial results and published analysts’ expectations; and
	•		announcements by our competitors or significant customers.

For example, we experienced a decrease in our stock price around the same time that our proposed acquisition to be acquired by an entity controlled by affiliates of Bain Capital Partners, or Newco, was terminated. More specifically, on March 20, 2008, an affiliate of Bain Capital Partners, LLC sent a letter to us purporting to terminate our merger agreement dated September 28, 2007, or the Merger Agreement. We terminated the Merger Agreement, by letters dated April 25, 2008 and April 29, 2008, as a result of Newco’s failure to consummate the merger in accordance with the Merger Agreement. As previously disclosed, we intend to seek payment of the $66 million termination fee from Newco under the Merger Agreement payable under certain circumstances. We cannot assure you that we will be able to collect all or any portion of the termination fee, or that our efforts will not result in adverse consequences to us.

In addition, over the past several years, the stock market has experienced significant price and volume fluctuations that have affected the stock prices of many technology companies. These factors, as well as general economic and political conditions or investors’ concerns regarding the credibility of corporate financial statements and the accounting profession, may have a material adverse affect on the market price of our stock in the future.

We may be required to record additional significant charges to earnings if our goodwill or intangible assets become impaired, and the recent decline in our stock price heightens this risk.

Under accounting principles generally accepted in the United States, we review our amortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or amortizable assets may not be recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or in any of our business units. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, if one of our business units does not meet its near-term and longer-term forecasts, the goodwill assigned to the business unit could be impaired. Similarly, a significant decline in our stock price and/or market capitalization may result in goodwill impairment for one or more business units. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill or amortizable intangible assets is determined to exist, which may negatively impact our results of operations. In light of the recent decline in our stock price, the impairment risk described above is heightened. For example, in the three-month period ended May 30, 2008, we took a charge of $158.0 million relating to impairment of the goodwill of our TippingPoint segment.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease properties in the United States and a number of foreign countries. For information regarding property, plant and equipment by geographic region for each of the last two fiscal years, see Note 20 to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
The following table summarizes our significant leased real estate properties as of May 30, 2008:

Location		Sq. Ft.				Owned/Leased		Primary Use
United States—Boston Area			175,000			Leased		Corporate headquarters; DVBU office, research and development, and customer service.
United States—Austin Area			87,000			Leased		TippingPoint’s main office, research and development, and customer service.
Europe—U.K.			39,000			Leased		Corporate and DVBU offices; DVBU research and development, and customer service.
China—Hangzhou			1,682,000			Leased		H3C office, research and development, manufacturing, sales, and training. Lease expires January 2009 (under negotiation for renewal).
China—Beijing			508,412			Leased		H3C research and development, training, sales and customer service.

As part of our initiatives to maximize our efficiency, we are consolidating our operations wherever feasible and are actively engaged in efforts to dispose of excess facilities. As of May 30, 2008, we lease and sublease to third-party tenants approximately 2,850 square feet in one of our North America leased locations under a sub-lease that expires in 2010.

We believe that our facilities are adequate for our present needs in all material respects.

ITEM 3. LEGAL PROCEEDINGS

The material set forth in Note 22 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K is incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)		On March 21, 2008, the Company held a Special Meeting of Stockholders to vote on (1) a proposal to adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 28, 2007, by and among the Company, Diamond II Holdings, Inc. and Diamond II Acquisition Corp. and (2) a proposal to adjourn or postpone the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the Merger Agreement.
(b)		There were 402,388,726 shares eligible to vote as of the record date. A quorum was present. Both proposals were approved. The following are the voting results of the proposals:

Proposal		For				Against				Abstain
Adoption of Merger Agreement			281,553,408				7,536,916				4,206,408
Adjournment or postponement, if necessary			273,101,179				19,775,283				420,271

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The NASDAQ Global Select Market under the symbol COMS and has been traded on NASDAQ since our initial public offering on March 21, 1984. The following table sets forth the high and low sale prices as reported on NASDAQ during the last two fiscal years. As of July 18, 2008, we had approximately 4,459 stockholders of record. We have not paid, and do not anticipate that we will pay, cash dividends on our common stock.

Fiscal 2008		High				Low				Fiscal 2007				High				Low
First Quarter		$	4.81			$	3.24			First Quarter				$	5.31			$	3.95
Second Quarter			5.11				3.22			Second Quarter					5.24				3.95
Third Quarter			4.60				2.76			Third Quarter					4.24				3.73
Fourth Quarter			3.41				1.76			Fourth Quarter					4.79				3.60

The following table summarizes repurchases of our stock, including shares returned to satisfy tax withholding obligations, in the quarter ended May 30, 2008:

		Total Number				Average
		of Shares				Price Paid
Period		Purchased				per Share
March 1, 2008 through March 28, 2008			239,235	(1)		$	2.48
March 29, 2008 through April 25, 2008			50,743	(1)			2.46
April 26, 2008 through May 30, 2008			59,248	(1)			2.37
Total			349,226			$	2.46

COMPARISON OF STOCKHOLDER RETURN

Set forth on the next page is a line graph comparing the cumulative total return of our common stock with the cumulative total return of the Standard & Poor’s 500 Stock Index, our New Peer Group (1) and our Old Peer Group (1) for the period commencing on May 30, 2003 and ending on May 30, 2008 (fiscal year end)(2)(3). We historically have constructed our peer group based on comparable market offerings, revenue composition and size. In re-evaluating our peer group this year, we removed one peer that is no longer publicly-traded. We also added five new peers; in light of the evolving nature of our business, we believe these additions to the peer group provide a more meaningful comparison in terms of competition in several of our important product offerings. This information shall not be deemed to be “filed” with the Securities and Exchange Commission and shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless we specifically incorporate it by reference.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ^*
Among 3Com Corporation, The S&P 500 Index,
A New Peer Group And An Old Peer Group

		5/30/03				5/28/04				6/3/05				6/2/06				6/1/07				5/30/08
3Com Corporation			100.00				131.77				72.10				96.95				95.52				51.32
S&P 500			100.00				118.33				128.07				139.14				170.85				159.41
New Peer Group			100.00				128.34				117.83				137.10				182.20				171.17
Old Peer Group			100.00				135.18				119.23				125.25				165.16				163.31

ITEM 6. SELECTED FINANCIAL DATA

The data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Our fiscal year ends on the Friday closest to May 31. Fiscal 2008 consists of the 52 weeks ended May 30, 2008. Fiscal year 2007 consists of the 52 weeks ended June 1, 2007. Fiscal 2006 consisted of 52 weeks and ended on June 3, 2006. Fiscal year 2005 consisted of 53 weeks and ended on June 2, 2005. Fiscal year 2004 consisted of 52 weeks ended on June 3, 2004. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month. The following balance sheet data and statements of operations data for each of the five years ended May 31, 2008 were derived from our audited consolidated financial statements. Consolidated balance sheets as of May 31, 2008 and 2007 and the related consolidated statements of operations and cash flows for each of the three years in the period ended May 31, 2008 and notes thereto appear elsewhere in this Annual Report on Form 10-K.

During our fiscal 2006 we acquired a majority ownership of our then H3C joint-venture. Effective with the acquisition we began consolidating H3C’s results on a 2 month lag as H3C follows a calendar year end. We reflected a minority interest on the balance sheet and in the statement of operations for Huawei’s remaining interest. On March 29, 2007 we acquired Huawei’s remaining interest and therefore the minority interest was eliminated and no minority interest in our subsidiaries assets exists as of May 30, 2008.

Our acquisition of TippingPoint on January 31, 2005 was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance sheet as of May 31, 2005. The operating results of TippingPoint are included in the consolidated financial statements since the date of acquisition. Accordingly, fiscal 2006 and beyond contain full years of TippingPoint’s results compared to five months of results in fiscal 2005.

		Fiscal Year May 31,
(In thousands, except per share amounts)		2008				2007				2006				2005				2004
Sales		$	1,294,879			$	1,267,481			$	794,807			$	651,244			$	698,884
Net loss			(228,841	)			(88,589	)			(100,675	)			(195,686	)			(349,263	)
Loss from continuing operations			(228,841	)			(88,589	)			(100,675	)			(195,686	)			(346,863	)
Loss per share from continuing operations Basic and diluted		$	(0.57	)		$	(0.22	)		$	(0.26	)		$	(0.51	)		$	(0.91	)

		Balances as of May 31,
(In thousands)		2008				2007				2006				2005				2004
Cash, equivalents and short-term investments		$	503,644			$	559,217			$	864,347			$	844,104			$	1,383,356
Total assets			1,775,130				2,151,092				1,861,361				1,592,967				1,820,818
Working capital (1)			305,444				257,614				778,064				667,949				1,213,108
Deferred taxes and long-term obligations			22,367				23,725				13,788				8,484				15,135
Long term debt			253,000				336,000				—				—				—
Retained deficit			(1,405,247	)			(1,176,406	)			(1,087,512	)			(967,952	)			(755,244	)
Stockholders’ equity			995,302				1,151,299				1,202,362				1,274,923				1,499,114

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of Part II of this Annual Report on Form 10-K.

BUSINESS OVERVIEW

We are incorporated in Delaware. A pioneer in the computer networking industry, we provide secure, converged networking solutions, as well as maintenance and support services, for enterprises and public sector organizations of all sizes.

We design and market our offerings to enterprises that vary in size from small business to large multi-national entities. These organizations range across a number of vertical industries, including education, finance, government, healthcare, insurance, manufacturing and real estate. We offer our customers solutions for mission-critical network environments on an open platform design.

We believe that open platform technology offers our customers a more versatile solution for an environment of increasing use of applications over network infrastructures. We further believe it offers a more cost-effective solution as it works in multi-vendor environments on a non-proprietary basis. Our open platform technology is designed into our switch and router products as well as the applications which interface with our offerings to directly deliver applications over networking capability. We believe that our customers benefit from the flexibility to interface best-in-class applications with our products and we therefore actively develop partnerships to deliver this value.

We focus on delivering superior networking solutions that offer cost a cost advantage to our customers to own and operate. Our products are designed to provide superior value through capability design as well as other cost conscious features such as lower power requirements, and inter-operability in multi-vendor networks.

We believe that our global presence, brand identity, strong development organization and intellectual property portfolio provide a solid foundation for achieving our objectives.

Our products are sold on a worldwide basis through a combination of value added partners and direct sales representatives. We also work with service providers to deliver managed networking solutions for enterprise customers.

Headquartered in Marlborough, Massachusetts, we have worldwide operations, including sales, marketing, research and development, and customer service and support capabilities.

Our products and services can generally be classified in the following categories:

	§		Networking;
	§		Security;
	§		Voice;
	§		Services; and
	§		Legacy Connectivity Products.

We have undergone significant changes in recent years, including:

	§		Significant changes to our executive leadership;
	§		the formation and subsequent 100 percent acquisition of our China-based H3C subsidiary;
	§		financing a portion of the purchase price for our acquisition of H3C by entering into a $430 million senior secured credit agreement ;
	§		acquiring TippingPoint Technologies, Inc;
	§		restructuring activities, which included outsourcing of information technology, all manufacturing activity in our DVBU segment, significant headcount reductions in other functions, and selling excess facilities;
	§		the termination of the proposed acquisition of the Company by affiliates of Bain Capital Partners; and
	§		changing our reporting segments to align with the way we manage our business.

We believe an overview of some of these significant recent events is helpful to gain a clearer understanding of our operating results.

Significant Events

H3C

On November 17, 2003, we formed H3C, formerly known as the Huawei-3Com joint venture, with a subsidiary of Huawei Technologies, Ltd. (Huawei). H3C is domiciled in Hong Kong, and has its principal operating center in Hangzhou, China. Two years after formation of H3C, we entered into an agreement to purchase an additional two percent ownership interest in H3C from Huawei for an aggregate purchase price of $28.0 million. The acquisition occurred on January 27, 2006 at which time we owned a majority interest in the joint venture and, therefore, consolidated H3C’s financial statements (beginning February 1, 2006). On March 29, 2007, 3Com paid $882 million to purchase Huawei’s remaining interest in H3C. We financed a portion of the purchase price for the acquisition of Huawei’s 49 percent ownership in H3C through a $430 million senior secured credit agreement with several lenders. As such, H3C was a wholly owned subsidiary for 2008 as compared to the previous year when we owned 51 percent and Huawei had a minority ownership.

New Products

We have introduced multiple new products targeted at the small, medium and large enterprise markets, including modular and multi-service switches and routers; converged IP solutions such as voice, video and surveillance; security; and unified switching solutions. We have also announced our Open Services Networking, or OSN, strategy which provides customers with options to integrate best-of-breed application solutions directly into their networks.

Business Environment and Future Trends

Networking industry analysts and participants differ widely in their assessments concerning the prospects for near-term industry growth, especially in light of the current weakness in many of the major global economies. Industry factors and trends also present significant challenges in the medium-term with respect to our goals for sales growth, profitability and the generation of increased cash flow from operations. Such factors and trends include:

	§		Intense competition in the market for higher end, enterprise core routing and switching products;
	§		Aggressive product pricing by competitors targeted at gaining share in market segments where we have had a strong position historically, such as the small to medium-sized enterprise market; and
	§		The advanced nature and ready availability of merchant silicon, which allows low-end competitors to deliver competitive products and makes it increasingly difficult for us to differentiate our products.

We believe that long-term success in this environment requires us to be a global technology leader, increase our revenue and take market share from competitors. We believe that our differentiated product portfolio which offers end-to-end IP solutions based on open standards offers a compelling value proposition for customers. Our intention is to leverage our global footprint to more effectively sell these products.

We hope to achieve our goal of revenue growth by executing on three region-centric growth strategies as follows:

	•		China - In China, we have been successful in direct-touch sales to enterprise customers and selling our offerings to the carrier market through our Huawei OEM relationship. With the end of our joint-venture with Huawei we expect declining sales to Huawei, although we anticipate they will remain a strategic partner for sales into the carrier market. To maintain our market-leadership position in China we intend to increase our focus on direct-touch sales as well as pursue other channels into the carrier market. We believe that growing market share in China will be more challenging than in the past given that we already have a significant enterprise networking market share in China.
	•		Emerging markets outside of China - We expect to target growth opportunities outside of China in other developing markets. We believe that our successful penetration of the Chinese market has positioned us to grow sales in developing markets generally.
	•		Developed global markets - Our ability to achieve our goal of sales growth in developed markets depends to a substantial degree on our ability to take market share from our competitors. Our strategy in developed markets centers around leveraging targeted selling and marketing investments into the small (and increasingly the medium) business segment of the enterprise networking market. These sales efforts are currently expected to focus on our open source, open architecture platforms, and our comprehensive portfolio of differentiated networking offerings.

Finally, we believe that our success is dependent on our ability to increase our overall margins and cash generation. We believe that by accelerating the integration of our worldwide operations we can achieve further operational efficiencies which will allow us to support our continued investment in sales and marketing. We may require certain targeted investments in the integration of our business infrastructure designed to drive more profitable near and long-term growth.

For our TippingPoint business we plan to focus on growing its top line and improving operational efficiency and segment profitability. In addition, our current goal is to maximize TippingPoint’s value and continue it on its path to greater operational autonomy.

Termination of Proposed Acquisition of the Company

On September 28, 2007, we announced an agreement to be acquired by an entity controlled by affiliates of Bain Capital Partners, or Newco. On March 20, 2008, an affiliate of Bain Capital Partners, LLC sent a letter to us purporting to terminate our merger agreement dated September 28, 2007, or the Merger Agreement. We terminated the Merger Agreement, by letters dated April 25, 2008 and April 29, 2008, as a result of Newco’s failure to consummate the merger in accordance with the Merger Agreement. As previously disclosed, we intend to seek payment of the $66 million termination fee from Newco under the Merger Agreement payable under certain circumstances, although we cannot assure you that we will be able to collect all or any portion of the termination fee.

Segment Reporting

Based on the information provided to our chief operating decision-maker (CODM) for purposes of making decisions about allocating resources and assessing performance, we review the operations of the business by looking at four reporting segments. In prior fiscal years we reported two segments, SCN and H3C. In fiscal 2008, we have realigned our internal reporting and, as a result, we have changed our segment reporting to be in line with the way we are now internally managing our business. This change breaks-out the SCN segment into the Data and Voice business unit (“DVBU”), our TippingPoint security division (“TippingPoint”) and corporate expenses (“Corporate”).

BASIS OF PRESENTATION

Our fiscal year ends on the Friday closest to May 31. Fiscal 2008 consisted of 52 weeks and ended on May 30, 2008. Fiscal year 2007, consisted of 52 weeks ended on June 1, 2007, and fiscal year 2006 consisted of 52 weeks and ended on June 2, 2006. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month.

During fiscal 2006 we purchased an additional two percent ownership interest in H3C, giving us a 51 percent ownership interest. We determined it was then appropriate to consolidate H3C’s financial statements. From that time until we became a 100 percent owner, as discussed below, we also recorded Huawei’s proportionate share of the income of H3C as a minority interest in the income of consolidated joint venture. Prior to the additional 2 percent acquisition we accounted for our investment in H3C by the equity method. Under this method, we recorded our proportionate share of H3C’s net income or loss based on the most recently available quarterly financial statements of H3C under the caption “Equity interest in income of unconsolidated joint venture” in our consolidated financial statements.

Both joint venture partners subsequently had the right to offer to buy the other’s remaining ownership in H3C. Our 3Com Technologies subsidiary completed the purchase of Huawei’s remaining interest in H3C for $882 million in March 2007. Huawei-3Com Co., Limited is now known as H3C Technologies Co., Limited, or H3C.

On May 25, 2007, our subsidiary H3C Holdings Limited (“Borrower”) entered into an amended and restated credit agreement with various lenders, including Goldman Sachs Credit Partners L.P., as Mandated Lead Arranger, Bookrunner, Administrative Agent and Syndication Agent, and Industrial and Commercial Bank of China (Asia) Limited, as Collateral Agent (the “Credit Agreement”). Under the original credit agreement, the Borrower borrowed $430 million in the form of a senior secured term loan to finance a portion of the purchase price for 3Com’s acquisition of 49 percent of H3C discussed above.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are outlined in Note 2 to the Consolidated Financial Statements, which appear in Item 8 of Part II of this Annual Report on Form 10-K. Some of those 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 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 may contain customer-specific acceptance requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service and is recognized upon receipt of customer acceptance.

For arrangements that involve multiple elements that are not considered software arrangements, such as sales of hardware products that include maintenance or installation services, revenue is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element have been met. We use the residual method to recognize revenue when an arrangement includes one or more elements to be delivered at a future date and objective evidence of the fair value of all the undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair value of one or more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

We assess collectability based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. If we determine that collection of the fee is not reasonably assured, then we defer the fee and recognize revenue upon receipt of payment. We do not typically request collateral from our customers. In the H3C segment, certain customers pay accounts receivable with notes receivable from Chinese banks with maturities less than six months. These are also referred to as “bankers’ acceptances”.

A significant portion of our sales is made to distributors and value added resellers (VARs). 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 excess channel inventory levels. We maintain reserves for potential allowances and adjustments; if the actual level of returns and adjustments differ from the assumptions we use to develop those reserves, additional allowances and charges might be required.

For sales of products that contain software that is marketed separately, we apply the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition,” as amended. We generally sell our software products with maintenance services, which includes the rights to updates and enhancements, and, in some cases, also with consulting services. For these undelivered elements, we determine vendor-specific objective evidence (VSOE) of fair value to be the price charged when the undelivered element is sold separately. We determine VSOE for maintenance sold in connection with product based on the amount that will be separately charged for the maintenance renewal period. We determine VSOE for consulting services by reference to the amount charged for similar engagements when a software license sale is not involved.

We recognize revenue from software licenses sold together with maintenance and/or consulting services upon shipment using the residual method, provided that the above criteria have been met. Under the residual method, revenue associated with undelivered elements is deferred based on VSOE, and any remaining amounts are considered related to the delivered elements and recognized providing all other revenue recognition criteria are met. If VSOE of fair value for the undelivered elements cannot be established, we defer all revenue from the arrangement until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered.

We recognize maintenance revenue ratably over the term of the applicable agreement. Sales of services, including professional services, system integration, project management, and training, are recognized upon delivery of the service.

Royalty revenue is generally recognized when any performance by 3Com is complete and payment has been received.

Allowance for doubtful accounts: We monitor payments from our customers on an on-going basis 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 creditworthiness, 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 might be required.

Inventories: Inventory is stated at the lower of standard cost, which approximates cost, or net realizable value. We perform detailed reviews related to the net realizable value of inventory on an ongoing basis, for both inventory on hand and inventory that we are committed to purchase, giving consideration to deterioration, obsolescence, and other factors. If actual market conditions differ from those projected by management and our estimates prove to be inaccurate, additional write-downs or adjustments to cost of sales might be required; alternatively, we might realize benefits through cost of sales for sale or disposition of inventory that had been previously written off.

Goodwill and intangible assets: Carrying values of goodwill and other intangible assets with indefinite lives are reviewed for possible impairment in accordance with the applicable accounting literature. We test our goodwill for impairment annually during our third fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. We review the value of our intangible assets in accordance with the applicable accounting literature 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. In the fourth quarter of fiscal 2008 we conducted an additional impairment test of our goodwill and intangible assets due to the decline of our stock price which resulted in a $158.0 million impairment charge to our TippingPoint goodwill as discussed in Note 9. As of May 31, 2008, we had $609.3 million of goodwill and $278.4 million of net intangible assets remaining on our balance sheet, which we currently believe to be realizable based on the estimated fair value of these assets. We estimate the fair value of goodwill using third-party valuation reports and the fair value of our intangible assets using estimated future cash flows of the associated products and technology. It is possible that the estimates and assumptions used in assessing the carrying value of these assets, such as future sales and expense levels, may need to be re-evaluated in the case of continued market deterioration, which could result in further impairment of these assets.

Equity securities and other investments: We account for non-marketable equity securities and other investments at historical cost or, if we have the ability to exert significant influence over the investee, by the equity method. Investments accounted for by the equity method include investments in limited partnership venture capital funds and, prior to the acquisition of majority ownership on January 27, 2006, the investment in H3C. In accounting for these investments by the equity method, we record our proportionate share of the fund’s net income or loss, or H3C’s net income or loss, based on the most recently available quarterly financial statements. Since H3C has adopted a calendar year basis of reporting, we reported our equity in H3C’s net income or loss based on H3C’s most recent quarterly financial statements, two months in arrears. For the year ended May 31, 2006 we accounted for H3C under the equity method for ten months of the year. At May 31, 2008 we no longer held any equity securities.

Stock-based Compensation. In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), which requires all stock-based compensation to employees (as defined in SFAS No. 123(R)), including grants of employee stock options, restricted stock awards, and restricted stock units, to be recognized in the financial statements based on their fair values.

Estimates of the fair value of equity awards in future periods will be affected by the market price of our common stock, as well as the actual results of certain assumptions used to value the equity awards. These assumptions include, but are not limited to, the expected volatility of the common stock, the expected term of options granted, and the risk free interest rate.

The fair value of stock options and employee stock purchase plan shares is determined by using the Black-Scholes option pricing model and applying the single-option approach to the stock option valuation. The options generally have vesting on an annual basis over a vesting period of four years. We estimate the expected option term by analyzing the historical term period from grant to exercise and also considers the expected term for those options that are outstanding. The expected term of employee stock purchase plan shares is the average of the remaining purchase periods under each offering period. The volatility of the common stock is estimated using historical volatility.

The risk-free interest rate used in the Black-Scholes option pricing model is determined by looking at historical U.S. Treasury zero-coupon bond issues with terms corresponding to the expected terms of the equity awards. In addition, an expected dividend yield of zero is used in the option valuation model, because we do not expect to pay any cash dividends in the foreseeable future. Lastly, in accordance with SFAS No. 123(R), we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. In order to determine an estimated pre-vesting option forfeiture rate, we analyzed historical forfeiture data, which yielded a current forfeiture rate of 27 percent as of the end of the current fiscal year. We believe this historical forfeiture rate to be reflective of our anticipated rate on a go-forward basis. An estimated forfeiture rate has been applied to all unvested options and restricted stock outstanding as of June 1, 2006 and to all options and restricted stock granted since June 1, 2006. Therefore, stock-based compensation expense is recorded only for those options and restricted stock that are expected to vest.

Restructuring charges: Over the last several years we have undertaken significant restructuring initiatives. These initiatives have required us to record restructuring charges related to severance and outplacement costs, lease cancellations, accelerated depreciation and write-downs of held for sale properties, write-downs of other long-term assets, and other restructuring costs. Given the significance of our restructuring activities and the time required for execution and completion of such activities, the process of estimating restructuring charges 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 charges when we have taken actions or have the appropriate approval for taking action, and when a liability is incurred. Our policies require us to periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As we continue to evaluate the business, we might be required to record additional charges for new restructuring activities as well as changes in estimates to amounts previously recorded.

Product Warranty: A limited warranty is provided on most of our products for periods ranging from 90 days to limited lifetime, 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 might be required.

Income taxes: We are subject to income tax in a number of jurisdictions. A certain degree of estimation is required in recording the assets and liabilities related to income taxes, and it is reasonably possible those such assets may not be recovered and that such liabilities may not be paid or that payments in excess of amounts initially estimated and accrued may be required. We assess the likelihood that our deferred tax assets will be recovered from our future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. We consider historical taxable income, estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based on various factors, including our recent losses, retained deficit, operating performance in fiscal 2008, and estimates of future profitability, we have concluded that future taxable income will, more likely than not, be insufficient to recover most of net deferred tax assets as of May 31, 2008. Accordingly, we have established an appropriate valuation allowance to offset such deferred tax assets.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), that clarifies the accounting and recognition for income tax positions taken or expected to be taken in our tax returns. FIN 48 provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 on June 2, 2007, which resulted in no adjustment to the opening balance of retained earnings. As of May 31, 2008 the Company had unrecognized tax benefits of $18.2 million including interest, if recognized, all of which would affect our effective tax rate.

We recognize tax liabilities for uncertain items in accordance with FIN 48 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.

We recognize interest and penalties relating to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations. As of May 30, 2008, the amount of interest included in unrecognized tax benefits was $2.5 million, representing an increase of $0.4 million from the date of adoption. There were no penalties accrued in all periods presented.

We have net operating loss carryforwards related to the following income tax jurisdictions and expiration periods: U.S. federal loss carryforwards of approximately $2.6 billion expiring between fiscal years 2009 and 2028, substantially all of which expire between fiscal years 2021 and 2028; various state loss carryforwards of approximately $1.2 billion expiring between 2009 and 2028; and various foreign loss carryforwards of $2.9 million expiring between 2014 and 2018, and $319.0 million with an unlimited carryforward period.

RESULTS OF OPERATIONS
YEARS ENDED MAY 31, 2008, 2007, AND 2006

In prior fiscal years we reported two segments, SCN and H3C. In fiscal 2008, we have realigned our internal reporting and, as a result, we have changed our segment reporting, to four reporting segments, to be in line with the way we are now internally managing our business. This change breaks-out the SCN segment into the Data and Voice business unit (“DVBU”), our TippingPoint security division (“TippingPoint”) and corporate expenses (“Corporate”). We do not use any allocation methods to distribute these corporate expenses to our operating business units.

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

		2008				2007				2006
Sales			100.0	%			100.0	%			100.0	%
Cost of sales			49.5				54.4				58.7
Gross profit margin			50.5				45.6				41.3
Operating expenses:
Sales and marketing			24.4				25.2				34.6
Research and development			15.9				17.0				12.8
General and administrative			10.0				7.4				9.1
Amortization			8.0				3.4				2.6
Goodwill impairment			12.2				—				—
In-process research and development			—				2.8				0.1
Restructuring charges			0.3				0.3				1.8
Total operating expenses			70.8				56.1				61.0
Operating loss			(20.3	)			(10.5	)			(19.7	)
Gain on investments, net			0.0				0.1				0.5
Interest (expense) income, net			(1.0	)			3.2				3.6
Other income, net			3.4				3.1				1.0
Loss from operations before income taxes, equity interest in income of unconsolidated joint venture and minority interest in income of consolidated joint venture			(17.9	)			(4.1	)			(14.6	)
Income tax benefit (provision)			0.2				(0.8	)			1.9
Equity interest in income of unconsolidated joint venture			—				—				1.4
Minority interest in income of consolidated joint venture			—				(2.1	)			(1.4	)
Net loss			(17.7	)%			(7.0	)%			(12.7	)%

Comparison of fiscal 2008 and 2007

During the year ended May 30, 2008 we continued to experience increased performance in our H3C and TippingPoint segments offset by declines in our DVBU segment and we continued to reduce operating expenses in our DVBU business segment, offset in part by investment in DVBU services.

Sales

The following table shows our sales from products categories in absolute dollars and as a percentage of total sales for fiscal 2008 and fiscal 2007 (in millions):

		Fiscal Year
		2008								2007
Networking		$	1,058.5				81.7	%		$	1,028.1				81.1	%
Security			133.4				10.3				120.1				9.5
Voice			60.7				4.7				68.0				5.4
Services			39.6				3.1				35.9				2.8
Legacy connectivity products			2.7				0.2				15.4				1.2
Total		$	1,294.9							$	1,267.5

Networking revenue includes sales of our Layer 2 and Layer 3 stackable 10/100/1000 managed switching lines, our modular switching lines, routers, IP storage and our small to medium-sized enterprise market products. Sales of our networking products in fiscal 2008 increased $30.4 million, or 3 percent, from fiscal 2007. The increase in sales was primarily driven by expansion in our global sales of H3C-developed products, an appreciation on the Renminbi related to our sales in China, partially offset by reduced sales to Huawei and slower than expected sales in our North America region.

Security revenue includes our TippingPoint™ products and services, as well as other security products, such as our embedded firewall, or EFW and virtual private network, or VPN, products. Sales of our security products in fiscal 2008 increased $13.3 million, or 11 percent, from fiscal 2007. The increase is primarily attributable to increased sales of our TippingPoint products in our North America region due to certain significant customers wins and slightly increased sales on a global basis.

Voice revenue includes our VCX™ and NBX^® voice-over-internet protocol, or VoIP, product lines, as well as voice gateway offerings. Sales of our VoIP telephony products in fiscal 2008 decreased $7.3 million, or 11 percent, from fiscal 2007 due primarily to decreased sales in North America.

Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue in fiscal 2008 increased $3.7 million, or 10 percent, from fiscal 2007. The increase was driven primarily by increased service sales tied to growth in networking.

Legacy connectivity products revenue includes our legacy network interface card, personal computer card, and mini-peripheral component interconnect offerings. At the end of fiscal 2008 sales of these products are negligible with continued revenue only expected to be from royalty arrangements.

Sales by geographic region are as follows (in millions):

		Fiscal Year
		2008								2007
China		$	609.5				47.1	%		$	587.1				46.3	%
Europe, Middle East, and Africa			292.4				22.6				272.8				21.5
North America			202.2				15.6				233.7				18.4
Asia Pacific excluding China			106.8				8.2				103.5				8.2
Latin and South America			84.0				6.5				70.4				5.6
Total		$	1,294.9							$	1,267.5

Sales information by geography to the extent available is reported based on the customer’s designated delivery point, except in the case of H3C’s OEM sales which are based on the hub locations of H3C’s OEM partners.

Sales in our China region in fiscal 2008 increased $22.4 million, or 4 percent, from fiscal 2007. This increase is primarily due to the appreciation of the Renminbi as well as increased direct touch China sales, partially offset by decreased sales to Huawei.

Sales in our Europe, Middle East, and Africa region in fiscal 2008 increased $19.6 million, or 7 percent, from fiscal 2007. This increase is primarily attributable to increased effectiveness of market penetration in this region, especially in networking and security products.

Sales in our North America region in fiscal 2008 decreased $31.5 million, or 13 percent, from fiscal 2007. This decrease is primarily due to weakness in sales of our voice solutions and an economic slowdown as well as perceived apprehension in the market related to the now-terminated proposed acquisition of the Company by affiliates of Bain Capital, partially offset by increased sales of our TippingPoint products in our North America region due to demand for security solutions including several large customer wins.

Sales in our Asia Pacific region excluding China in fiscal 2008 increased $3.3 million, or 3 percent, from fiscal 2007. This increase is primarily attributable to increased effectiveness of market penetration in this region, especially in networking products.

Sales in our Latin and South America region in fiscal 2008 increased $13.6 million, or 19 percent, from fiscal 2007. This increase is primarily attributable to increased effectiveness of market penetration in this region, especially in networking products.

Gross Margin

Gross margin by segment is as follows:

		Fiscal Year
		2008				2007
H3C			55.1	%			47.2	%
DVBU			31.3				32.9
TippingPoint			67.4				66.9
Intercompany eliminations and other			10.2				8.0
Gross Margin			50.5	%			45.6	%

Gross margin in our H3C segment improved 7.9 points to 55.1 percent in fiscal 2008 from 47.2 percent in fiscal 2007. The improvement in gross profit margin is driven by favorable product mix, improved pricing of products and reduced costs of products.

Gross margin in our DVBU segment decreased 1.6 points to 31.3 percent in fiscal 2008 from 32.9 percent in the previous fiscal year. The decline is primarily explained by costs associated with our change from an outsourced service provider to a hybrid of outsourced and in-house performance of services to our customers and increased inter-company pricing, offset in part by product cost reductions.

Gross margin in our TippingPoint segment improved 0.5 points to 67.4 percent in fiscal 2008 from 66.9 percent in the previous fiscal year. This increase is primarily due to more favorable product mix of sales in the current fiscal year, offset in part by certain cost increases.

Gross margin related to intercompany eliminations and other increased 2.2 points to 10.2 percent in fiscal 2008 from 8.0 percent in the previous fiscal year. This category contains our intercompany eliminations and other items, which includes mainly the amortization of the purchase accounting step-up in inventory from our acquisition of the remaining 49 percent of H3C. The effect of the purchase accounting amortization was included in the first six months of our fiscal 2008, but was not present in the last six months or any of the prior-year periods presented.

Operating Expenses

Operating expenses in fiscal 2008 were $917.9 million, compared to $711.0 million in fiscal 2007, a net increase of $206.9 million, or 29 percent. The increase primarily relates to a $158.0 million goodwill impairment charge recorded in the fourth quarter of fiscal 2008 as well as increased amortization costs of $61.1 million due to a full year of amortization expense in current fiscal period as opposed to one day of amortization expense related to the 49 percent purchase of H3C in the prior fiscal year and to a lesser extent costs related to the now-terminated proposed acquisition of the Company by affiliates of Bain Capital of $10.6 million, a law firm success fee of $9.0 million related to the jury verdict in our Realtek litigation (a dispute which we resolved favorably through an agreement with Realtek to provide it with nonexclusive licenses in exchange for $70 million of license fees expected to be paid in the first quarter), a $4.9 million charge related to expenses incurred in connection with TippingPoint’s then-proposed IPO, and $5.1 million of increased FAS123R expenses. These expenses were partially offset by the absence of a change-in-control portion of H3C’s EARP bonus program, which contributed compensation expenses of $51.5 million in the year ended May 31, 2007 as well as in-process research and development expenses of $35.8 million in the year ended May 31, 2007.

As a percent of sales, total operating expenses in fiscal 2008 were 70.8 percent, compared to 56.1 percent in fiscal 2007. In aggregate, sales and marketing, research and development, and general and administrative expenses were 50.3 percent of sales in fiscal 2008, compared to 49.6 percent in fiscal 2007, an increase of $22.6 million in fiscal 2008 compared to fiscal 2007. We believe that to a significant degree, these expenses are controllable and discretionary over time, but they are not directly variable with sales levels within a particular period. The most significant component of the increase of $22.6 million was the incurrence of deal related costs of $10.6 million related to the now terminated proposed acquisition of the Company, a law firm success fee of $9.0 million related to the jury verdict in our Realtek litigation, increased FAS 123R expenses of $5.1 million, TippingPoint IPO related costs of $4.9 million and increased spending in all areas partially offset by the absence of change-in-control portion of H3C’s EARP bonus program, which contributed compensation expenses of $51.5 million in the year ended May 31, 2007.

A more detailed discussion of the factors affecting each major component of total operating expenses is provided below.

Sales and Marketing. Sales and marketing expenses in fiscal 2008 decreased $3.7 million compared to fiscal 2007. This decrease was due primarily to a $7.0 million decrease in H3C sales and marketing expenses partially offset by increased sales and marketing expenses in DVBU and TippingPoint. The $7.0 million decrease in H3C primarily relates to the absence of the change-in-control portion of H3C’s EARP bonus program of $17.7 million in the prior fiscal period partially offset by investments in the H3C direct touch sales force.

Research and Development. Research and development expenses in fiscal 2008 decreased $9.0 million compared to fiscal 2007. This decrease was due primarily to decreased spending in DVBU and TippingPoint partially offset by increased spending in our H3C segment. The decrease in the DVBU segment of $10.2 million primarily relates to integration of research and development activities formerly handled by DVBU into our H3C segment. The increase of $4.3 million in our H3C segment was due to these activities and increased investment in research and development, offset in part by the absence of the change-in-control portion of H3C’s EARP bonus program of $27.2 million in the prior fiscal period . The TippingPoint segment decreased $3.0 million from the prior fiscal year due to constricted spending.

General and Administrative. General and administrative expenses in fiscal 2008 increased $35.2 million from fiscal 2007. This increase is primarily due to the incurrence of deal related costs of $10.6 million related to the now terminated proposed acquisition of the Company, a law firm success fee of $9.0 million related to the jury verdict in our Realtek litigation (a dispute which we resolved favorably through an agreement with Realtek to provide it with nonexclusive licenses in exchange for $70 million of license fees expected to be paid in the first quarter), a $4.9 million charge related to TippingPoint IPO related costs, and $5.0 million of increased FAS123R expenses partially offset by the absence of the change-in-control portion of H3C’s EARP bonus program of $6.6 million in the year ended May 31, 2007.

Amortization. Amortization was $103.7 million in fiscal 2008 and $42.5 million in fiscal 2007, an increase of $61.2 million. Amortization increased due primarily to the inclusion of H3C amortization expenses for the entire fiscal year ended May 31, 2008. The fiscal 2007 amortization expense related to the March 29, 2007 purchase of 49 percent of H3C in 2007 was through March 31, 2007 as we record H3C results on a two month lag.

In-process research and development. In fiscal 2007 $34.0 million of the total purchase price of our acquisition of Huawei’s remaining minority interest in H3C was allocated to in-process research and development and was expensed in the fourth quarter of fiscal 2007. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and which have no alternative future use. At the time of acquisition, H3C had multiple in-process research and development efforts under way for certain current and future product lines. We had no in-process research and development charges in fiscal 2008.

Restructuring Charges. Restructuring charges were $4.5 million in fiscal 2008 and $3.5 million in fiscal 2007. Restructuring charges in fiscal 2008 and 2007 were the result of reductions in workforce and continued efforts to consolidate and dispose of excess facilities. Further actions may be taken if our business activity declines or additional cost reduction efforts are necessary.

Gain on Investments, Net

During fiscal 2008, net gains of investments of $0.5 million were due primarily to gains from the Company’s remaining investment portfolio of equity securities that were sold in the first quarter. During fiscal 2007, net gains on investments were $1.1 million, primarily reflecting gains from sales of certain equity securities.

Interest (Expense) Income and Other Income, Net

Interest (expense) income and other income, net, was $31.3 million in fiscal 2008, a decrease of $47.9 million compared to $79.2 million in fiscal 2007. The primary reason for the decrease was net interest expense in fiscal 2008 of $13.1 million compared to interest income of $40.9 million in fiscal 2007. The net change in interest expense relates to the interest expense from the $430 million of debt incurred in the fourth quarter of fiscal 2007, as well as decreased interest income from our reduced cash balance in the current fiscal year. Partially offsetting the increase in interest expense was an increase of $13.9 million of other income from H3C for an operating subsidy program by the Chinese VAT authorities in the form of a partial refund of VAT taxes collected by H3C from purchasers of software products.

Income Tax Benefit (Provision)

We had an income tax benefit of $2.9 million in fiscal 2008 compared to an income tax provision of $10.2 million in fiscal 2007. The income tax benefit for fiscal 2008 was primarily the result of the recognition of previously unrecognized tax benefits of $13.2 million as a result of the effective settlement of certain foreign examinations. This benefit was partially offset by the revaluation in the third quarter of our deferred assets and liabilities relating to our H3C subsidiary in China. The net effect of these revaluations was an increase in our tax provision for fiscal 2008 of $6.1 million. Under the new PRC tax law, effective January 1, 2008, companies which qualify as “new and high technology” companies will pay corporate income tax at a reduced rate of 15%. Based on the draft regulations, we believe that our H3C subsidiary in China will qualify for this reduced rate. However, the final regulations and the detailed application process have not yet been announced. Even though we expect our long-term income tax rate in China to be 15%, accounting rules require us to revalue our deferred tax balances to the enacted statutory rates until such time as we qualify for the reduced rate. This is discussed further in “Risk Factors” above. The balance of the net benefit for the year was the result of providing for taxes in certain foreign jurisdictions. Notwithstanding the issue discussed above, our H3C subsidiary in China is currently entitled to tax concessions which began in 2004 and exempted it from the PRC income tax for its initial two years and entitle it to a 50 percent reduction in income tax in the following three years. 2008 will be the final year of those tax concessions. Consequently, until such time as we receive approval for the reduced long-term rate of 15 percent, we currently expect the H3C statutory rate in China to be 9 percent for the calendar year 2008, and, on the expectation that we qualify for the reduced rate, 15 percent thereafter. If we do not qualify for the reduced rate, the statutory income tax rate in China will be 20% for 2009, 22% for 2010, 24% for 2011, and 25% thereafter.

The income tax provision for fiscal 2007 was the result of providing for taxes in certain state and foreign jurisdictions.

Minority Interest in Income of Consolidated Joint Venture

In fiscal 2007, we recorded a charge of $26.2 million related to the acquisition of the 49 percent interest in H3C held by Huawei prior to our purchase. In fiscal 2008 we had no minority interest.

Comparison of fiscal 2007 and 2006

During the year ended June 1, 2007 we experienced strong results in our H3C segment and improved results in our TippingPoint segment offset by declines in our DVBU segment’s sales and we reduced operating expenses in our DVBU business segment, offset in part by investment in the TippingPoint security business.

Sales

The increase in sales from the 2006 fiscal year to the 2007 fiscal year was primarily due to the inclusion of full year H3C sales in the current period, as well as increased sales of TippingPoint security products. The increase was partially offset by decreases in networking revenues in our DVBU segment.

The following table shows our sales from products categories in absolute dollars and as a percentage of total sales for fiscal 2007 and fiscal 2006 (in millions):

		Fiscal Year
		2007								2006
Networking		$	1,028.1				81.1	%		$	577.0				72.6	%
Security			120.1				9.5				88.0				11.1
Voice			68.0				5.4				56.6				7.1
Services			35.9				2.8				33.4				4.2
Connectivity Products			15.4				1.2				39.8				5.0
Total		$	1,267.5							$	794.8

Networking revenue includes sales of our Layer 2 and Layer 3 stackable 10/100/1000 managed switching lines, our modular switching lines, routers, wireless switching offerings and our small to medium-sized enterprise market products. Sales of our networking products in fiscal 2007 increased 78 percent from fiscal 2006. The increase in sales was primarily driven by the inclusion of full year results from our H3C segment offset in part by decreases in DVBU sales.

Security revenue includes our TippingPoint™ products and services, as well as other security products in our H3C and DVBU segments, such as virtual private network, or VPN, and network access control, or NAC, offerings. Sales of our security products in fiscal 2007 increased 36 percent from fiscal 2006. The increase is primarily attributable to organic growth in sales of our TippingPoint segment’s security products in fiscal 2007 and the inclusion of H3C’s full year results of security product sales.

Voice revenue includes our VCX™ and NBX^® voice-over-internet protocol, or VoIP, product lines, as well as voice gateway offerings. Sales of our VoIP telephony products in fiscal 2007 increased 20 percent from fiscal 2006. The increase was primarily driven by the inclusion of full year results from our H3C segment.

Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Service revenue in fiscal 2007 increased 7 percent from fiscal 2006. The increase in sales was primarily driven by the inclusion of full year results from our H3C segment.

Connectivity Products revenue includes our legacy network interface card, personal computer card, and mini-peripheral component interconnect offerings. At the end of fiscal 2007 sales of these products are close to zero with continued revenue only expected to be from royalty arrangements.

Sales by geographic region are as follows (in millions):

		Fiscal Year
		2007								2006
North America		$	233.7				18.4	%		$	248.5				31.3	%
Latin and South America			70.4				5.6				72.2				9.1
Europe, Middle East, and Africa			272.8				21.5				298.5				37.5
Asia Pacific, excluding China			103.5				8.2				91.4				11.5
China			587.1				46.3				84.2				10.6
Total		$	1,267.5							$	794.8

Sales information by geography to the extent available is reported based on the customer’s designated delivery point, except in the case of H3C’s OEM sales which are based on the hub locations of H3C’s OEM partners. China sales increased 597 percent primarily due to the inclusion of H3C results for the full year in fiscal 2007.

Gross Margin

Gross margin by segment is as follows:

		Fiscal Year
		2007				2006
H3C			47.2	%			47.5	%
DVBU			32.9				35.7
TippingPoint			66.9				70.6
Intercompany eliminations and other			8.0				0.0
Gross Margin			45.6	%			41.3	%

Gross margin in our H3C segment decreased 0.3 points to 47.2 percent in fiscal 2007 from 47.5 percent in fiscal 2006. The decline in gross margin was primarily driven by increased intercompany sales with lower margins.

Gross margin in our DVBU segment decreased 2.8 points to 32.9 percent in fiscal 2007 from 35.7 percent in the previous fiscal year. The decline is primarily explained by less favorable product mix, price reductions and to a lesser extent decreased sales volume, partially offset by product cost reductions.

Gross margin in our TippingPoint segment decreased 3.7 points to 66.9 percent in fiscal 2007 from 70.6 percent in the previous fiscal year. This decline was primarily due to increased costs due to product quality issues incurred in fiscal year 2007.

Gross margin related to intercompany eliminations and other increased 8.0 points to 8.0 percent in fiscal 2007 from 0.0 percent in the previous fiscal year. This category contains our intercompany eliminations and other items in fiscal 2007 which were not present in the prior fiscal year, which primarily includes the amortization of the purchase accounting step-up in inventory from our acquisition of the remaining 49 percent of H3C.

Operating Expenses

Operating expenses in fiscal 2007 were $711.0 million, compared to $485.2 million in fiscal 2006, a net increase of $225.8 million. Included in the increase in operating expenses were H3C operating expenses of $354.0 million for the full year ended May 31, 2007 as compared to $36.6 million for the two months consolidated in 2006. In addition, the incurrence of the change-in-control portion of H3C’s EARP bonus program contributed compensation expenses of $51.5 million in the year ended May 31, 2007, which were not incurred in the previous fiscal year. This increase was partially offset by significant cost reduction in our DVBU segment as compared to the previous year. The full year inclusion of H3C was the primary contributor to increases in sales and marketing expenses of $45.0 million, research and development expenses of $113.8 million, general and administrative expenses of $21.3 million, and amortization of intangibles of $21.6 million. Purchase accounting charges related to the acquisition of the remaining 49 percent interest of H3C was the main contributor to the increase in in-process research and development of $35.1 million. These increases were partially offset by the decrease of restructuring charges of $10.9 million.

As a percent of sales, total operating expenses in fiscal 2007 were 56.1 percent, compared to 61.0 percent in fiscal 2006. In aggregate, sales and marketing, research and development, and general and administrative expenses were 49.6 percent of sales in fiscal 2007, compared to 56.5 percent in fiscal 2006, and increased $180.0 million in fiscal 2007 compared to fiscal 2006. We believe that to a significant degree, these expenses are controllable and discretionary over time, but they are not directly variable with sales levels within a particular period. The most significant component of the increase of $180.0 million was the inclusion of $292 million of H3C expenses for the entire fiscal year ended May 31, 2007 partially offset by significant cost reductions in our DVBU segment.

A more detailed discussion of the factors affecting each major component of total operating expenses is provided below.

Sales and Marketing. Sales and marketing expenses in fiscal 2007 increased $45.0 million compared to fiscal 2006. This increase was due primarily to the inclusion of H3C expenses for the entire fiscal year ended May 31, 2007. In addition, the incurrence of the change-in-control portion of H3C’s EARP bonus program contributed compensation expenses of $17.7 million in our H3C segment in the year ended May 31, 2007. The expenses were not incurred in the 2006 fiscal year and were partially offset by a reduction in the DVBU sales and marketing expenses. The reduction of the DVBU sales and marketing expenses were primarily related to the reduction of programmatic marketing expenses, and a reduction in employee related expenses due to our restructuring efforts.

Research and Development. Research and development expenses in fiscal 2007 increased $113.8 million compared to fiscal 2006. This increase was due primarily to the inclusion of H3C expenses for the entire fiscal year ended May 31, 2007. In addition, the incurrence of the change-in-control portion of H3C’s EARP bonus program contributed compensation expenses of $27.2 million in our H3C segment in the year ended May 31, 2007. These expenses were not incurred in the previous fiscal year and were partially offset by the reduction in DVBU research and development expenses. The decrease in the DVBU research and development costs was related to reduced non-recurring engineering projects and employee related expenses which was slightly offset by increased investment in TippingPoint research and development.

General and Administrative. General and administrative expenses in fiscal 2007 increased $21.3 million from fiscal 2006. This increase is primarily due to the inclusion of H3C expenses for the entire fiscal year ended May 31, 2007. In addition, the incurrence of the change-in-control portion of H3C’s EARP bonus program contributed compensation expenses of $6.6 million in our H3C segment in the year ended May 31, 2007. These expenses were not incurred in the previous fiscal year and were partially offset by a reduction in the Corporate segment general and administrative expenses. The reduction of the Corporate segment general and administrative expenses were primarily related to the reduced workforce-related expenses due to our restructuring initiatives and reduced IT and facilities-related expenses.

Amortization and Write-Down of Intangibles. Amortization and write-down of intangibles were $42.5 million in fiscal 2007 and $20.9 million in fiscal 2006, an increase of $21.6 million. Amortization and write-down of intangibles increased due primarily to the inclusion of H3C expenses for the entire fiscal year ended May 31, 2007. The amortization expense related to the March 29, 2007 purchase of 49 percent of H3C in 2007 is through March 31, 2007 as we record H3C results on a two month lag.

In-process research and development. $34.1 million of the total purchase price of 49 percent of the remaining minority interest in H3C was preliminarily allocated to in-process research and development and was expensed in the fourth quarter of fiscal 2007. Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and which have no alternative future use. At the time of acquisition, H3C had multiple in-process research and development efforts under way for certain current and future product lines.

Restructuring Charges. Restructuring charges were $3.5 million in fiscal 2007 and $14.4 million in fiscal 2006. Restructuring charges in fiscal 2007 were composed primarily of charges for actions taken in fiscal 2007, including employee severance and outplacement costs of $12.1 million, and facilities-related credits of $7.5 million. Restructuring charges for fiscal 2007 were the result of reductions in workforce and continued efforts to consolidate and dispose of excess facilities.

Gain on Investments, Net

During fiscal 2007, net gains on investments were $1.1 million, primarily reflecting gains from sales of certain equity securities. During fiscal 2006, net gains on investments were $4.3 million, primarily reflecting gains from sales of certain equity securities.

Interest Income and Other Income (Expense), Net

Interest and other income, net, was $79.2 million in fiscal 2007, an increase of $41.9 million compared to $37.3 million in fiscal 2006. Contributing to the increase was $30.6 million of other income from H3C for an operating subsidy program by the Chinese VAT authorities in the form of a partial refund of VAT taxes collected by H3C from purchasers of software products. An increase in interest income accounted for $12.0 million of the increase, primarily attributable to higher interest rates applicable to short-term investments and the inclusion of a full year of results of H3C. Interest income and interest expense related to H3C are included through the period ended March 31, 2007. Thus, there is only three days of interest expense recorded related to the debt incurred on March 28, 2007. In fiscal 2006 our results reflected a quarterly VAT payment that was received during the two month period of H3C’s results that are in our consolidated financials. Future subsidy payments, which are funded by VAT receipts, are subject to the discretion of Chinese VAT authorities.

Income Tax (Provision) Benefit

Our income tax provision was $10.2 million in fiscal 2007, compared to an income tax benefit of $14.8 million in fiscal 2006. The income tax provision for fiscal 2007 was the result of providing for taxes in certain state and foreign jurisdictions. The tax benefit for fiscal 2006 was the result of a $23.0 million benefit resulting from a tax settlement with foreign tax authorities in the second quarter of fiscal 2006, for which reserves had been provided in prior years and which have now been reversed into income upon reaching settlement. Partially offsetting the income tax benefit for fiscal 2006 was the provision of additional taxes in certain state and foreign jurisdictions. 

Minority Interest in the Income of Consolidated Joint Venture

In fiscal 2007, we recorded a charge of $26.2 million related to the acquisition of the 49 percent interest in H3C held by Huawei prior to our purchase. In fiscal 2006, we recorded a charge of $11.1 million representing Huawei’s 49 percent interest in the net income reported by the former H3C joint venture for the two month period included in our fiscal 2006.

LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents as of May 31, 2008 were $503.6 million, a decrease of approximately $55.6 million compared to the balance of $559.2 million as of May 31, 2007. These balances were comprised of the following (in millions):

		2008				2007				2006
Cash and equivalents		$	503.6			$	559.2			$	501.1
Short-term investments			—				—				363.2
Cash and equivalents and short term investments		$	503.6			$	559.2			$	864.3

The May 31, 2008 and 2007 balance included cash and equivalents in our H3C segment of $338.9 million and $328.7 million, respectively.

The following table shows the major components of our consolidated statements of cash flows for the last three fiscal years:

		Years Ended May 31,
(in millions)		2008				2007				2006
Cash and equivalents, beginning of period		$	559.2			$	501.1			$	268.5
Net cash provided by (used in) operating activities			54.9				165.5				(86.2	)
Net cash (used in) provided by investing activities			(16.4	)			(505.9	)			300.8
Net cash (used in) provided by financing activities			(123.9	)			387.9				15.7
Other (1)			29.8				10.6				2.3
Cash and equivalents, end of period		$	503.6			$	559.2			$	501.1

Net cash provided by operating activities was $54.9 million for fiscal 2008. The cash generation was largely due to non-cash adjustments to our net loss which included $158.0 million of goodwill impairment, $136.0 million of depreciation and amortization and $25.2 million of stock based compensation, as well as significant reductions in inventories and other assets, which were partially offset by our net loss and decrease in accounts payable and other liabilities.

Based on current business conditions and our current operating and financial plans, we believe that our existing cash and equivalents will be sufficient to satisfy our anticipated cash and debt payment requirements for at least the next 12 months.

Significant commitments that will require the use of cash in future periods include obligations under debt, lease, contract manufacturing and outsourcing agreements, as shown in the following table (in millions):

		Payments Due by Period
						Less than												More than
Contractual Obligations (1)(2)		Total				one year				1-3 years				3-5 years				5 years
Operating leases		$	57.2			$	35.0			$	22.1			$	0.1			$	—
Purchase commitments with contract manufacturers (3)			65.4				65.3				0.1				—				—
Long term debt (4)			301.0				48.0				116.0				137.0				—
Outsourcing agreements (5)			15.1				15.1				—				—				—
Total		$	438.7			$	163.4			$	138.2			$	137.1			$	—

We have no material commitments for capital expenditures as of May 31, 2008 other than ordinary course of business purchases of computer hardware, software and leasehold improvements which we generally believe to be consistent with prior practice. In addition, although no firm commitments exist today, as we further develop our worldwide integration plans we may decide to make capital expenditure investments in infrastructure to support a more integrated Company in amounts which could be material.

Net cash used in investing activities was $16.4 million for fiscal 2008, including $17.9 million of outflows related to the purchase of property and equipment. We made no equity investments in fiscal 2008 and $225.0 million in fiscal 2007, in municipal and corporate bonds, government agency instruments and equity securities. In August 2006, we sold certain venture capital limited partnership interests and generated cash of approximately $17.0 million with a gain on sale of investment of $2.4 million and eliminated our future capital call requirements. Proceeds from maturities and sales of municipal and corporate bonds, government agency instruments and equity securities were $0.4 million in fiscal 2008 and $609.3 million in fiscal 2007. Included in the $609.3 million were sales of our remaining venture portfolio investments that generated cash of approximately $1.3 million. In fiscal 2007 we also had $898.5 million of business acquisitions net of cash acquired, as well as $36.6 million of proceeds from the sale of the Santa Clara facility and insurance proceeds for the damage to our Hemel Hemstead facility.

Net cash used in financing activities was $123.9 million for fiscal 2008, which includes $129.0 million of payments under our H3C loans, including a $35 million prepayment due to excess operating cash flows from our H3C segment. During fiscal 2008, we also repurchased shares of restricted stock valued at $3.2 million upon vesting of awards from employees consisting of shares to satisfy the tax withholding obligations that arise in connection with such vesting. This was offset by proceeds of $8.3 million from issuances of our common stock upon exercise of stock options. During fiscal 2005, we entered a new agreement facilitating the issuance of standby letters of credit and bank guarantees required in the normal course of business. As of May 31, 2008, such bank-issued standby letters of credit and guarantees totaled $6.9 million, including $6.2 million relating to potential foreign tax, custom, and duty assessments.

During fiscal 2008, we issued approximately 3.6 million shares of our common stock in connection with our employee stock purchase and option plans with total proceeds from such issuances of $12.9 million. As of May 31, 2008, our outstanding stock options as a percentage of outstanding shares were 11 percent.

On May 25, 2007, our subsidiary H3C Holdings Limited (“Borrower”) entered into an amended and restated credit agreement with various lenders, including Goldman Sachs Credit Partners L.P., as Mandated Lead Arranger, Bookrunner, Administrative Agent and Syndication Agent, and Industrial and Commercial Bank of China (Asia) Limited, as Collateral Agent (the “Credit Agreement”). Under the original credit agreement, the Borrower borrowed $430 million in the form of a senior secured term loan with two tranches (Tranche A and Tranche B) to finance a portion of the purchase price for 3Com’s acquisition of 49 percent of H3C Technologies Co., Limited, or H3C. Remaining principal is $301 million as of May 30, 2008 and the final loan maturity date is on September 28, 2012.

Interest on borrowings is payable semi-annually on March 28 and September 28. All amounts outstanding under the Tranche A Term Facility will bear interest, at the Borrower’s option, at the (i) LIBOR, or (ii) Base Rate (i.e., prime rate), in each case plus the applicable margin percentage set forth in the table below, which is based on a “leverage ratio” of consolidated indebtedness of the Borrower and its subsidiaries to EBITDA (as defined in the Credit Agreement) for the relevant twelve-month period:

Leverage Ratio		LIBOR +				Base Rate +
>3.0:10			2.25	%			1.25	%
£ 3.0:1.0 but > 2.0:1.0			2.00	%			1.00	%
£ 2.0:1.0 but > 1.0:1.0			1.75	%			0.75	%
£ 1.0:1.0			1.50	%			0.50	%

All amounts outstanding under the Tranche B Term Facility will bear interest, at the Borrower’s option, at the (i) LIBOR plus 3.00 percent or (ii) Base Rate (i.e., prime rate) plus 2.00 percent. We have elected to use LIBOR as the reference rate for borrowings to date, and expect to do so for the foreseeable future. Applicable LIBOR rates at year end were 2.63 percent and the effective interest rate is 4.38 percent for the Tranche A Term Facility and 5.63 percent for the Tranche B Term Facility.

Covenants and other restrictions under the Credit Agreement apply to the Borrower and its subsidiaries, which we refer to as the “H3C Group,” but not to 3Com’s DVBU, TippingPoint and Corporate segments. The loans are secured by assets at the H3C level. H3C also guarantees the loans.

The loans may be prepaid in whole or in part without premium or penalty. The Borrower will be required to make mandatory prepayments using net proceeds from H3C Group (i) asset sales, (ii) insurance proceeds and (iii) equity offerings or debt incurrence. In addition, the Borrower will be required to make annual prepayments in an amount equal to 75 percent of “excess cash flow” of the H3C Group. This percentage will decrease to the extent that the Borrower’s leverage ratio is lower than specified amounts. Any excess cash flow amounts not required to prepay the loan may be distributed to and used by the Company’s other segments, provided certain conditions are met.

The Borrower must maintain a minimum debt service coverage, minimum interest coverage, maximum capital expenditures and a maximum total leverage ratio. Negative covenants restrict, among other things, (i) the incurrence of indebtedness by the Borrower and its subsidiaries, (ii) the making of dividends and distributions to 3Com’s other segments, (iii) the ability to make investments including in new subsidiaries, (iv) the ability to undertake mergers and acquisitions and (v) sales of assets. Also, cash dividends from the PRC subsidiaries to H3C, and H3C to the Borrower, will be subject to restricted use pending payment of principal, interest and excess cash flow prepayments. Standard events of default and defaulted interest rates apply.

Remaining payments of the $301.0 million principal on the loans are due as follows on September 28, for fiscal years ending May 31 (in thousands):

		Tranche A				Tranche B
2009		$	46,000			$	2,000
2010			46,000				2,000
2011			46,000				2,000
2012			—				20,000
2013			—				137,000

The closing of the remaining 49 percent acquisition of H3C triggered a bonus program for substantially all of H3C’s approximately 4,800 employees. This program, which was implemented by Huawei and 3Com in a prior period, is called the Equity Appreciation Rights Plan, or EARP, and funds a bonus pool based upon a percentage of the appreciation in H3C’s value from the initiation of the program to the time of the closing of the Acquisition. A portion of the program is also based on cumulative earnings of H3C. The total value of the EARP is expected to be approximately $180 million. Approximately $94 million (related to cumulative earnings and change-in-control) was accrued by March 31, 2007 and was paid in the first quarter of fiscal year 2008. At May 31, 2008, we accrued $35 million for the fiscal 2008 EARP plan which is expected to be paid in the first quarter of fiscal year 2009. We expect the unvested portion amounting to $44 million will be accrued in H3C operating segment over the next 3 fiscal years serving as a continued retention and incentive program for H3C employees. The only stipulation for payout is that the participants remain employed with the Company on the date of the payout which is required to be made within a specified period after the anniversary date of our 49 percent H3C acquisition on March 29, 2007.

Remaining cash payment requirements under the Equity Appreciation Rights Plan for fiscal years ending May 31 are approximately as follows (in thousands):

2009		$	34,500
2010			27,000
2011			17,000

It is expected that we will have significant cash outflows in fiscal 2009 of $62.5 million of loan payments for principal and interest and approximately $35 million for EARP commitments.

On July 11, 2008, we entered into three agreements with Realtek Group which document the resolution of the patent dispute between the parties and provide for the non-exclusive license by 3Com to Realtek of certain patents and related network interface technology for license fees totaling $70 million. The fees are payable by Realtek to 3Com during our first fiscal quarter of 2009. 3Com is also obligated to pay $9 million in previously-expensed litigation fees to our outside counsel.

EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For additional information regarding recently issued accounting pronouncements, see Note 2 to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity. Interest to be paid by us on our senior secured loan is at an interest rate based, at our option, on either the LIBOR or the prime rate, plus an applicable margin. We expect the base interest rate generally to be based on the published LIBOR rate, which is subject to change on a periodic basis. Recently, interest rates have trended upwards in major global financial markets. If these interest rate trends continue, this will result in increased interest rate expense as a result of higher LIBOR rates. Continued increases in interest rates could have a material adverse effect on our financial position, results of operations and cash flows, particularly if such increases are substantial. In addition, interest rate trends could affect global economic conditions.

Foreign Currency Exchange Risk. Our risk management strategy currently uses forward contracts to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures with gains and losses resulting from the forward contracts that hedge these exposures. We attempt to reduce the impact of foreign currency fluctuations on corporate financial results by hedging existing foreign currency exposures and anticipated foreign currency transactions expected to occur within one month. Anticipated foreign currency transaction exposures with a maturity profile in excess of one month may be selectively hedged. Translation exposures are not hedged. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China and do not hedge the Renminbi at this time. With the recent appreciation of the Renminbi against the US dollar, during fiscal 2008 we experienced a benefit from the positive currency fluctuations, and the financial results of China were favorable. At the same time, our senior secured bank loan — which we intend to service and repay primarily through cash flow from H3C’s PRC operations — is denominated in US dollars.

Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure. A hypothetical ten percent appreciation of the U.S. Dollar from May 31, 2008 market rates would increase the unrealized value of our forward contracts by $3.3 million. Conversely, a hypothetical ten percent depreciation of the U.S. Dollar from May 31, 2008 market rates would decrease the unrealized value of our forward contracts by $3.3 million. The gains or losses on the forward contracts are largely offset by the gains or losses on the underlying transactions and consequently we believe that a sudden or significant change in foreign exchange rates would not have a material impact on future net income or cash flows other than with respect to the Renminbi.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

		Page
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm			49
Consolidated Statements of Operations for the years ended May 31, 2008, 2007, and 2006			50
Consolidated Balance Sheets as of May 31, 2008 and 2007			51
Consolidated Statements of Stockholders’ Equity for the years ended May 31, 2008, 2007, and 2006			52
Consolidated Statements of Cash Flows for the years ended May 31, 2008, 2007, and 2006			53
Notes to Consolidated Financial Statements			54
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts and Reserves			97

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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of 3Com Corporation
Marlborough, Massachusetts:

We have audited the accompanying consolidated balance sheets of 3Com Corporation and subsidiaries (3Com) as of May 30, 2008 and June 1, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended May 30, 2008. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of 3Com’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of 3Com at May 30, 2008 and June 1, 2007, and the results of their operations and their cash flows for each of the three years in the period ended May 30, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, 3Com adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), Share-Based Payment, effective June 3, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 3Com’s internal control over financial reporting as of May 30, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 25, 2008 expressed an unqualified opinion on 3Com’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
July 25, 2008

3COM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		Years Ended May 31,
		2008				2007				2006
Sales		$	1,294,879			$	1,267,481			$	794,807
Cost of sales			640,424				689,027				466,743
Gross profit			654,455				578,454				328,064
Operating expenses:
Sales and marketing			316,019				319,696				274,745
Research and development			206,653				215,632				101,870
General and administrative			129,116				93,875				72,596
Amortization			103,670				42,525				20,903
Goodwill impairment			157,977				—				—
In-process research and development			—				35,753				650
Restructuring charges			4,501				3,494				14,403
Total operating expenses			917,936				710,975				485,167
Operating loss			(263,481	)			(132,521	)			(157,103	)
Gain on investments, net			460				1,143				4,333
Interest (expense) income, net			(13,087	)			40,863				29,085
Other income, net			44,364				38,291				8,235
Loss from operations before income taxes, equity interest in income of unconsolidated joint venture, and minority interest in income of consolidated joint venture			(231,744	)			(52,224	)			(115,450	)
Income tax benefit (provision)			2,903				(10,173	)			14,833
Equity interest in income of unconsolidated joint venture			—				—				11,016
Minority interest in income of consolidated joint venture			—				(26,192	)			(11,074	)
Net loss		$	(228,841	)		$	(88,589	)		$	(100,675	)
Basic and diluted net loss per share:
Net loss		$	(0.57	)		$	(0.22	)		$	(0.26	)
Shares used in computing per share amounts:
Basic and diluted			399,524				393,894				386,801

The accompanying notes are an integral part of these consolidated financial statements.

3COM CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

		May 31,
		2008				2007
ASSETS
Current assets:
Cash and equivalents		$	503,644			$	559,217
Notes receivable			65,116				77,368
Accounts receivable, less allowance for doubtful accounts of $12,253 and $15,292, respectively			116,281				102,952
Inventories			90,831				107,988
Other current assets			34,033				50,157
Total current assets			809,905				897,682
Property and equipment, less accumulated depreciation and amortization of $205,835 and $234,554, respectively			54,314				76,460
Goodwill			609,297				766,444
Intangible assets, net			278,385				371,289
Deposits and other assets			23,229				39,217
Total assets		$	1,775,130			$	2,151,092
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	90,280			$	110,430
Current portion of long-term debt			48,000				94,000
Accrued liabilities and other			366,181				435,638
Total current liabilities			504,461				640,068
Deferred taxes and long-term obligations			22,367				23,725
Long-term debt			253,000				336,000
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; none outstanding			—				—
Common stock, $0.01 par value, 990,000 shares authorized; shares issued: 405,656 and 399,064, respectively			2,353,688				2,323,356
Retained deficit			(1,405,247	)			(1,176,406	)
Accumulated other comprehensive income			46,861				4,349
Total stockholders’ equity			995,302				1,151,299
Total liabilities and stockholders’ equity		$	1,775,130			$	2,151,092

The accompanying notes are an integral part of these consolidated financial statements.

3COM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

																										Accumulated
																		Unamortized								Other
		Common Stock								Treasury Stock								Stock-based				Retained				Comprehensive
		Shares				Amount				Shares				Amount				Compensation				Deficit				Income (Loss)				Total
Balances, May 31, 2005			393,377				2,302,190				(8,135	)		$	(39,821	)		$	(14,011	)		$	(967,952	)		$	(5,483	)		$	1,274,923
Components of comprehensive loss:
Net loss																							(100,675	)							(100,675	)
Unrealized gain on available-for-sale securities, net of tax																											300				300
Accumulated translation adjustments																											2,226				2,226
Total comprehensive loss																															(98,149	)
Repurchase of common stock			(588	)			(2,848	)			(864	)			(4,228	)															(7,076	)
Common stock issued under stock plans, net of cancellations			653				2,230				8,999				44,049				(4,593	)			(18,885	)							22,801
Stock-based compensation expense							199												9,664												9,863
Reduction of shares reserved for issuance of options in connection with acquisition							(1,375	)											1,375												—
Balances, May 31, 2006			393,442				2,300,396				—				—				(7,565	)			(1,087,512	)			(2,957	)			1,202,362
Elimination of unamortized stock-based compensation							(7,565	)											7,565												—
Components of comprehensive loss:
Net loss																							(88,589	)							(88,589	)
Unrealized gain on available-for-sale securities, net of tax																											2,310				2,310
Accumulated translation adjustments																											4,996				4,996
Total comprehensive loss																															(81,283	)
Repurchase of common stock			(2,359	)			(9,041	)			(870	)			(4,259	)							(163	)							(13,463	)
Common stock issued under stock plans, net of cancellations			7,981				19,471				870				4,259								(142	)							23,588
Stock-based compensation expense							20,095																								20,095
Balances, May 31, 2007			399,064				2,323,356				—				—				—				(1,176,406	)			4,349				1,151,299
Components of comprehensive loss:
Net loss																							(228,841	)							(228,841	)
Unrealized loss on available-for-sale securities, net of tax																											(209	)			(209	)
Accumulated translation adjustments																											42,721				42,721
Total comprehensive loss																															(186,329	)
Repurchase of common stock			(952	)			(3,180	)																							(3,180	)
Common stock issued under stock plans, net of cancellations			7,544				8,305																								8,305
Stock-based compensation expense							25,207																								25,207
Balances, May 31, 2008			405,656			$	2,353,688				—			$	—			$	—			$	(1,405,247	)		$	46,861			$	995,302