UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 30, 2007

OR

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

Delaware		94-2605794
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
350 Campus Drive
Marlborough, Massachusetts		01752
(Address of principal executive offices)		(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer þ       Accelerated Filer o       Non-Accelerated Filer o

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 December 28, 2007, 402,207,736 shares of the registrant’s common stock were outstanding.

 

 

3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2007
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Statements of Operations			1
Three and Six Months Ended November 30, 2007 and 2006
Condensed Consolidated Balance Sheets			2
November 30, 2007 and May 31, 2007
Condensed Consolidated Statements of Cash Flows			3
Six Months Ended November 30, 2007 and 2006
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION			27
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			40
Item 6. Exhibits			40
SIGNATURES			42
EXHIBITS			43
EX-10.1 Amended and Restated,1984 Employee Stock Purchase Plan
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. H3C follows a calendar year basis of reporting and therefore results are consolidated on a two-month time lag.

3Com, the 3Com logo, Digital Vaccine, NBX, TippingPoint Technologies, and TippingPoint are registered trademarks and VCX is a trademark of 3Com Corporation or its subsidiaries. H3C is a trademark of H3C Technologies Co., Limited. Other product and brand names may be trademarks or registered trademarks of their respective owners.

This quarterly report on Form 10-Q 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, predictions regarding the following aspects of our future: future growth; future growth of H3C, including strategy, growth, management of growth, dependence, expected benefits, method of consolidation, PRC tax rate and dividend tax, sales from China, adjustments to preliminary purchase price allocation for 49 percent acquisition, and resources needed to comply with Sarbanes-Oxley and manage operations; impact of SFAS No. 123(R) and other accounting regulations; expected annual amortization expense; TippingPoint IPO; environment for enterprise networking equipment; challenges relating to sales growth; supply of components; trend towards Gigabit products; research and development focus; characteristics of IPS and certain H3C products; future sales of connectivity products; re-assessment, development and execution of our “go-to-market” strategy; strategic product and technology development plans; management of DVBU and Corporate segments to reach sustained profitability; 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; potential additional restructuring and cost reduction activities; expected sale of land; expected cost savings from restructuring activities and integration; potential acquisitions and strategic relationships including matters relating to our announced proposed acquisition by an entity controlled by affiliates of Bain Capital Partners; future contractual obligations; recovery of deferred tax assets; adjustments to tax benefits; reserves; market risk; outsourcing; competition and pricing pressures; 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 II 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 have no intent, and disclaim any obligation, to update any forward-looking statements.

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3COM CORPORATION

(Unaudited)

		Three Months Ended								Six Months Ended
		November 30,								November 30,
(In thousands, except per share data)		2007				2006				2007				2006
Sales		$	317,801			$	332,976			$	637,235			$	633,120
Cost of sales			165,681				182,825				336,179				346,540
Gross profit			152,120				150,151				301,056				286,580
Operating expenses:
Sales and marketing			80,785				76,188				155,189				153,310
Research and development			52,199				48,151				104,509				95,944
General and administrative			31,060				22,341				52,538				42,617
Amortization			26,260				12,221				52,266				24,402
Restructuring charges			3,147				630				3,572				555
Total operating expenses			193,451				159,531				368,074				316,828
Operating loss			(41,331	)			(9,380	)			(67,018	)			(30,248	)
Gain (loss) on investments, net			1				(911	)			328				1,381
Interest (expense) income, net			(3,966	)			11,447				(7,533	)			21,537
Other income, net			10,342				12,616				22,426				17,334
(Loss) income before income taxes and minority interest			(34,954	)			13,772				(51,797	)			10,004
Income tax provision			(670	)			(2,315	)			(2,481	)			(3,673	)
Minority interest in income of consolidated joint venture			—				(14,973	)			—				(23,915	)
Net loss		$	(35,624	)		$	(3,516	)		$	(54,278	)		$	(17,584	)
Basic and diluted net loss per share		$	(0.09	)		$	(0.01	)		$	(0.14	)		$	(0.04	)
Shares used in computing per share amounts:
Basic and diluted			398,989				393,352				398,015				392,619

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

3COM CORPORATION

(Unaudited)

		November 30,				May 31,
(In thousands, except per share data)		2007				2007
ASSETS
Current assets:
Cash and equivalents		$	419,143			$	559,217
Notes receivable			70,996				77,368
Accounts receivable, less allowance for doubtful accounts of $16,124 and $15,292 respectively			127,550				102,952
Inventories			93,788				107,988
Other current assets			54,227				50,157
Total current assets			765,704				897,682
Property and equipment, less accumulated depreciation and amortization of $197,936 and $234,554 respectively			63,919				76,460
Goodwill			767,274				766,444
Intangible assets, net			322,678				371,289
Deposits and other assets			26,747				39,217
Total assets		$	1,946,322			$	2,151,092
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	103,115			$	110,430
Current portion of long-term debt			48,000				94,000
Accrued liabilities and other			366,873				435,638
Total current liabilities			517,988				640,068
Deferred taxes and long-term obligations			14,865				23,725
Long-term debt			288,000				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: 402,205 and 399,064 respectively			2,337,557				2,323,356
Retained deficit			(1,230,686	)			(1,176,406	)
Accumulated other comprehensive income			18,598				4,349
Total stockholders’ equity			1,125,469				1,151,299
Total liabilities and stockholders’ equity		$	1,946,322			$	2,151,092

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

3COM CORPORATION

(Unaudited)

		Six Months Ended
		November 30,
(In thousands)		2007				2006
Cash flows from operating activities:
Net loss		$	(54,278	)		$	(17,584	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			69,279				39,789
Stock-based compensation charges			9,868				10,237
Loss (gain) on property and equipment disposals			155				(10,920	)
Gain on investments, net			(185	)			(1,801	)
Minority interest in income of consolidated joint venture			—				23,915
Deferred income taxes			(1,234	)			(5,907	)
Changes in assets and liabilities:
Accounts receivable			(10,418	)			(53,149	)
Inventories			16,863				3,349
Other assets			113				19,925
Accounts payable			(14,642	)			(30,897	)
Other liabilities			(68,080	)			18,035
Net cash used in operating activities			(52,559	)			(5,008	)
Cash flows from investing activities:
Purchases of investments			—				(224,999	)
Proceeds from maturities and sales of investments			442				269,932
Purchases of property and equipment			(9,746	)			(16,118	)
Proceeds from sale of property and equipment			864				33,108
Net cash (used in) provided by investing activities			(8,440	)			61,923
Cash flows from financing activities:
Issuances of common stock			5,656				12,635
Repurchases of common stock			(1,322	)			(4,708	)
Repayment of long term debt			(94,000	)			—
Dividend paid to minority interest shareholder			—				(40,785	)
Net cash used in financing activities			(89,666	)			(32,858	)
Effect of exchange rate changes on cash and equivalents			10,591				4,026
Net change in cash and equivalents during period			(140,074	)			28,083
Cash and equivalents, beginning of period			559,217				501,097
Cash and equivalents, end of period		$	419,143			$	529,180

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

3COM CORPORATION

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our financial position as of November 30, 2007 and June 1, 2007, our results of operations for the three and six months ended November 30, 2007 and December 1, 2006 and our cash flows for the six months ended November 30, 2007 and December 1, 2006.

We use a 52 or 53 week fiscal year ending on the Friday nearest to May 31. For convenience, the condensed consolidated financial statements have been shown as ending on the last day of the calendar month. Accordingly, the three months shown as ended November 30, 2007 actually ended on November 30, 2007, the three months shown as ended November 30, 2006 actually ended on December 1, 2006, and the year shown as ended May 31, 2007 actually ended on June 1, 2007. The results of operations for the three and six months ended November 30, 2007 may not be indicative of the results to be expected for the fiscal year ending May 30, 2008 or any other future periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended June 1, 2007.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). The interpretation requires companies to recognize the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained upon examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty on the excess. FIN 48 requires, among other items, a tabular reconciliation of the change during the reporting period, in the aggregate unrecognized tax benefits claimed or expected to be claimed in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Additional disclosure will also be required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of June 2, 2007. See Note 5 – Income Taxes.

Recently issued accounting pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by 3Com in the first quarter of fiscal 2009. We have not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on our results of operations or financial condition.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which expresses the staff’s views regarding the process of quantifying financial statement misstatements. The Bulletin is effective at our fiscal year end 2008. The Company currently believes the adoption will have no impact on our results of operations, cash flow or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by 3Com in the first quarter of fiscal 2009. 3Com currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

In June 2007, the FASB ratified EITF 07-3, Accounting for NonRefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be adopted in the first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, of the pending adoption of EITF 07-3 on its consolidated financial statements.

NOTE 2. STOCK-BASED COMPENSATION

In order to determine the fair value of stock options and employee stock purchase plan shares, we use the Black-Scholes option pricing model and apply the single-option valuation approach to the stock option valuation. In order to determine the fair value of restricted stock awards and restricted stock units we use the closing market price of 3Com common stock on the date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the awards for options granted following the adoption of SFAS No. 123(R) for time vested awards. We recognize compensation expense for performance based restricted stock in the fiscal quarter when an event makes it probable that performance will more than likely be achieved. For unvested stock options outstanding as of May 31, 2006, we will continue to recognize stock-based compensation expense using the accelerated amortization method prescribed in FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”.

As of November 30, 2007, total unrecognized stock-based compensation expense relating to unvested employee stock options, restricted stock and employee stock purchase plan, adjusted for estimated forfeitures, was $38.6 million. This amount is expected to be recognized over a weighted-average period of 2.5 years. If actual forfeitures differ from current estimates, total unrecognized stock-based compensation expense will be adjusted for future changes in estimated forfeitures.

Stock-based compensation recognized in the three and six months ended November 30, 2007 as a result of the adoption of SFAS No. 123(R) as well as pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the adoption of SFAS No. 123(R) use the Black-Scholes option pricing model for estimating the fair value of options granted under the company’s equity incentive plans. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The underlying weighted-average assumptions used in the Black-Scholes model and the resulting estimates of fair value per share were as follows for options granted during the three and six months ended November 30, 2007 and 2006:

		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		November 30,				November 30,				November 30,				November 30,
		2007				2006				2007				2006
Employee stock options:
Volatility			42.9	%			42.7	%			40.5	%			42.7	%
Risk-free interest rate			3.9	%			4.7	%			4.7	%			4.7	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Expected life (years)			3.8				4.0				3.8				4.0
Fair value per option		$	1.46			$	1.67			$	1.49			$	1.67
Employee Stock Purchase Plan:
Volatility			61.1	%			49.2	%			61.1	%			49.2	%
Risk-free interest rate			4.0	%			5.1	%			4.0	%			5.1	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Expected life (years)			0.5				0.5				0.5				0.5
Fair value per option		$	1.60			$	1.27			$	1.60			$	1.27

The following table presents stock-based compensation expenses included in the accompanying consolidated statements of operations (in thousands):

		Three Months				Three Months				Six Months				Six Months
		Ended November				Ended November				Ended November				Ended November
		30, 2007				30, 2006				30, 2007				30, 2006
Cost of sales		$	523			$	383			$	907			$	702
Sales and marketing			1,418				1,568				2,393				2,805
Research and development			973				1,545				1,694				2,713
General and administrative			3,092				3,454				4,874				4,017
Stock-based compensation expense before tax		$	6,006			$	6,950			$	9,868			$	10,237

As of November 30, 2007, our outstanding stock options as a percentage of outstanding shares were approximately 12 percent. Stock option detail as of November 30, 2007, was as follows (shares in thousands):

						Weighted
						average
		Number of				exercise
		shares				price
Outstanding May 31, 2007			52,280			$	5.23
Granted			1,455				4.08
Exercised			(1,649	)			2.03
Cancelled			(3,914	)			6.10
Outstanding November 30, 2007			48,172			$	5.24
Exercisable			25,943			$	5.86
Weighted average grant-date fair value of options granted						$	1.49

During the six months ended November 30, 2007 approximately 1.6 million options were exercised at an aggregate intrinsic value of $4.4 million. The intrinsic value is calculated as the difference between the market value as of November 30, 2007 and the exercise price of the options. The closing market value as of November 30, 2007 was $4.31 per share as reported by the NASDAQ Global Select Market. The aggregate intrinsic value of in-the-money options outstanding and options exercisable as of November 30, 2007 was $12.3 million and $8.4 million, respectively.

Options outstanding that are vested and expected to vest as of November 30, 2007 are as follows:

Weighted

Weighted

Average

Number of

average

Remaining

Aggregate

Shares

Grant-Date

Contractual

Intrinsic Value

(in thousands)

Fair Value

Life (in years)

(in thousands)

Vested and expected to vest at November 30, 2007

37,733

$

5.43

4.3

$

10,845

Restricted stock award activity during the six months ended November 30, 2007 and restricted stock award detail as of November 30, 2007, were as follows (shares in thousands):

						Weighted
		Number of				average
		Shares				Grant-Date
		(unvested)				Fair Value
Outstanding May 31, 2007			2,403			$	4.33
Granted			790				3.90
Vested			(576	)			4.37
Forfeited			(275	)			4.15
Outstanding November 30, 2007			2,342			$	4.20

During the six months ended November 30, 2007 approximately 0.6 million restricted shares with an aggregate fair value of $2.4 million became vested.

Restricted stock unit activity during the six months ended November 30, 2007 and restricted stock units outstanding as of November 30, 2007, were as follows (shares in thousands):

		Number of
		Shares
		(unvested)
Outstanding May 31, 2007			3,111
Granted			4,427
Vested			(632	)
Forfeited			(364	)
Outstanding November 30, 2007			6,542

Total aggregate intrinsic value of restricted stock units at November 30, 2007 was $28.2 million with a weighted-average remaining contractual term of 2.2 years.

During the six months ended November 30, 2007 approximately 0.6 million restricted share units with an aggregate fair value of $2.2 million became vested.

Employee Stock Purchase Plan. We have an employee stock purchase plan (ESPP) under which eligible employees may authorize payroll deductions of up to ten percent of their compensation, as defined, to purchase common stock at a price of 85 percent of the lower of the fair market value as of the beginning or the end of the six-month offering period. We recognized $0.8 million of stock-based compensation expense related to the ESPP in the six months ended November 30, 2007.

NOTE 3. ACQUISITIONS

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 had the one-time option to purchase an additional two percent ownership interest from Huawei. We exercised this right and 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). Three years after formation of H3C, we and Huawei each had the right to initiate a bid process to purchase the equity interest in H3C held by the other. 3Com initiated the bidding process on November 15, 2006 to buy Huawei’s 49 percent stake in H3C. Huawei ultimately accepted our bid and the transaction closed on March 29, 2007, at which time 3Com paid the $882 million purchase price in full. As such, H3C is a wholly owned subsidiary in the six months ended November 30, 2007 as compared to the same period of the previous year when we owned 51 percent and Huawei had a minority ownership.

NOTE 4. RESTRUCTURING CHARGES

In recent fiscal years, we have undertaken several initiatives involving significant changes in our business strategy and cost structure.

In fiscal 2001, we began a broad restructuring of our business to enhance the focus and cost effectiveness of our businesses in serving their respective markets. These restructuring efforts continued through fiscal 2008. As of November 30, 2007, accrued liabilities related to actions initiated in fiscal 2001, 2002, 2003, 2004, 2005, 2006, 2007, and 2008 (the “Fiscal 2001 Actions”, “Fiscal 2002 Actions”, “Fiscal 2003 Actions”, “Fiscal 2004 Actions”, “Fiscal 2005 Actions”, “Fiscal 2006 Actions”, “Fiscal 2007 Actions”, and “Fiscal 2008 Actions”) mainly consist of lease obligations associated with vacated facilities and employee separation costs.

Restructuring charges related to these various initiatives resulted in a charge of $3.1 million in the second quarter of fiscal 2008 and a net charge of $0.6 million in the second quarter of fiscal 2007. Net restructuring charges in the second quarter of fiscal 2008 consisted of $2.4 million for severance and outplacement costs and $0.7 million for facilities-related charges. Included in the $2.4 million of severance and outplacement costs was a $1.0 million charge related to the termination of the unvested stock options, restricted stock and restricted stock units, of terminated employees, who were let go as part of the Fiscal 2008 Actions. The severance agreements contain a provision for the payout of the intrinsic value of the share-based awards pending the closing of a proposed acquisition by affiliates of Bain Capital Partners. The net restructuring charge in the second quarter of fiscal 2007 resulted from severance, outplacement and other costs of $2.8 million, offset by $2.2 million in benefit resulting from changes in estimates on previously established restructuring provisions. Restructuring charges for the first six months of fiscal 2008 were $3.6 million, and net restructuring charges for the first six months of fiscal 2007 were $0.5 million.

Accrued liabilities associated with restructuring charges totaled $3.9 million as of November 30, 2007 and are included in the caption “Accrued liabilities and other” in the accompanying consolidated balance sheets. These liabilities are classified as current because we expect to satisfy such liabilities in cash within the next 12 months.

Fiscal 2008 Actions

Activity and liability balances related to the fiscal 2008 restructuring actions are as follows (in thousands):

		Employee
		Separation Expense				Total
Balance as of May 31, 2007		$	—			$	—
Provisions			3,435				3,435
Payments			(1,164	)			(1,164	)
Balance as of November 30, 2007		$	2,271			$	2,271

Employee separation expenses include severance pay, outplacement services, medical and other related benefits. During the six months ended November 30, 2007, the total reduction in workforce associated with actions initiated during fiscal 2008 included approximately 49 employees who had been separated or were currently in the separation process and approximately 16 additional employees who had been notified but had not yet worked their last day.

We expect to complete any remaining activities related to actions initiated in fiscal 2008 during fiscal 2008.

Fiscal 2007 Actions

Activity and liability balances related to the fiscal 2007 restructuring actions are as follows (in thousands):

		Employee				Facilities-				Other
		Separation				related				Restructuring
		Expense				Charges				Costs				Total
Balance as of May 31, 2007		$	1,330			$	264			$	—			$	1,594
Provisions (benefits)			(132	)			(15	)			53				(94	)
Payments			(863	)			(120	)			(53	)			(1,036	)
Balance as of November 30, 2007		$	335			$	129			$	—			$	464

Employee separation expenses include severance pay, outplacement services, medical and other related benefits. The reduction in workforce affected employees involved in research and development, sales and marketing, customer support, and general and administrative functions. In the six months ended November 30, 2007, the total reduction in workforce associated with actions initiated during fiscal 2007 included approximately four employees who had been separated or were currently in the separation process and approximately one additional employee who had been notified but had not yet worked his or her last day.

We expect to complete any remaining activities related to actions initiated in fiscal 2007 during fiscal 2008.

Fiscal 2001 through 2006 Actions

Activity and liability balances related to the fiscal 2001 through 2006 restructuring actions are as follows (in thousands):

		Employee								Other
		Separation				Facilities-				Restructuring
		Expense				related Charges				Costs				Total
Balance as of May 31, 2007		$	303			$	1,479			$	—			$	1,782
Provisions (benefits)			(3	)			231				3				231
Payments			—				(830	)			(3	)			(833	)
Balance as of November 30, 2007		$	300			$	880			$	—			$	1,180

Facilities related provisions in the quarter were related to revised lease obligation terms, for estimated sublease income.

We expect to complete any remaining activities related to these actions during fiscal 2008.

NOTE 5. INCOME TAXES

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. The Company adopted the provisions of FIN 48 on June 2, 2007 which resulted in no adjustment to the beginning of the year retained earnings balance. As of the adoption date, the Company had unrecognized tax benefits of $24.8 million and valuation allowances of $937.1 million, for a total of $961.9 million in unrecognized tax benefits. The valuation allowance of $937.1 million includes $143.5 million attributable to the tax benefit of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital. In addition, the valuation allowance includes approximately $59.3 million for acquired net operating loss carryforwards which, if realized, would result in a decrease in goodwill. The remaining tax benefits, if recognized would affect our effective tax rate. As of the end of the second quarter of fiscal 2008 the balance of unrecognized tax benefits excluding the valuation allowance was $27.4 million, representing an increase over the fiscal year to date of $2.6 million. All of this increase, if recognized, would affect our effective tax rate. The amount of the increase in the second quarter was $1.3 million. Substantially all of these increases relate to tax positions taken in the current fiscal period. Since adoption there has been no material reduction in the amount of unrecognized benefits as a result of the expiry of applicable statutes.

The Company files a consolidated U.S. income tax return and tax returns in various state and local jurisdictions, and our subsidiaries file tax returns in various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as China, the United Kingdom and Singapore, as well as the U.S. With some exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years before 2004.

The significant exceptions are as follows. In Singapore we are subject to examination in relation to transfer pricing and other issues for fiscal years 1999 to 2004. In the Netherlands we are under examination for fiscal year 1997 in relation to the taxable status of income from an interest in a foreign partnership. In Hong Kong we are under examination for fiscal years 2000 to 2002 in relation to an offshore claim in respect of income from our Asia Pacific Region customer service business. It is possible that these examinations will be settled within the next twelve months and therefore it is reasonably possible that, as a result of settlement, there could be a material change in the balance of unrecognized tax benefits. However it is not possible to estimate the amount of the potential change.  

We estimate that the balance of unrecognized tax benefits will decrease by approximately $0.8 million over the next twelve months as a result of the expiration of various statutes.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 2, 2007, the combined amount of accrued interest and penalties related to uncertain tax positions was $2.1 million and zero, respectively, which has been recorded within the balance of unrecognized tax benefits. As of the end of the second quarter of fiscal 2008 the balance of interest and penalties included in unrecognized tax benefits was $2.5 million, representing an increase over the fiscal year to date of $0.4 million. The amount of the increase in tax expense related to interest and penalties in the second quarter was $0.2 million.

NOTE 6. COMPREHENSIVE (LOSS) INCOME

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

		Three Months Ended								Six Months Ended
		November 30,								November,
		2007				2006				2007				2006
Net loss		$	(35,624	)		$	(3,516	)		$	(54,278	)		$	(17,584	)
Other comprehensive income:
Net unrealized gain (loss) on investments			—				965				(210	)			2,004
Change in accumulated translation adjustments			7,622				2,985				14,250				3,667
Total comprehensive (loss) income		$	(28,002	)		$	434			$	(40,238	)		$	(11,913	)

NOTE 7. NET LOSS PER SHARE

Employee stock options of 48.2 million, restricted stock awards of 2.3 million and restricted stock units of 6.5 million shares for both the three and six months ended November 30, 2007 and stock options of 64.2 million, restricted stock awards of 3.1 million and restricted stock units of 3.5 million shares for both the three and six months ended November 30, 2006 were not included in the computation of diluted earnings per share as the net loss for these periods would have made their effect antidilutive.

NOTE 8. INVENTORIES

The components of inventories are as follows (in thousands):

		November 30,				May 31,
		2007				2007
Finished goods		$	58,495			$	61,857
Work-in-process			6,588				7,143
Raw materials			28,705				38,988
Total		$	93,788			$	107,988

NOTE 9. INTANGIBLE ASSETS, NET

The following table details our purchased intangible assets (in thousands):

		November 30, 2007												May 31, 2007
						Accumulated												Accumulated
		Gross				Amortization				Net				Gross				Amortization				Net
Existing technology		$	374,384			$	(165,883	)		$	208,501			$	387,233			$	(148,641	)		$	238,592
Trademark			55,502				—				55,502				55,500				—				55,500
Huawei non-compete agreement			33,370				(11,066	)			22,304				33,000				(61	)			32,939
OEM agreement			24,140				(3,985	)			20,155				23,800				(22	)			23,778
Maintenance contracts			19,000				(8,972	)			10,028				19,000				(7,389	)			11,611
Other			22,008				(15,820	)			6,188				21,924				(13,055	)			8,869
Total		$	528,404			$	(205,726	)		$	322,678			$	540,457			$	(169,168	)		$	371,289

In the first quarter of fiscal 2008 we wrote off a $15.6 million fully amortized existing technology intangible asset related to our connectivity business. Since the products associated with the connectivity business are near the end of the product life cycle, we have concluded that the asset does not provide any future benefit. Additionally, in the first six months of fiscal 2008 our gross intangible assets increased by $3.5 million for the appreciation on the Renminbi affecting the value of certain intangible assets tied to our Chinese business. These intangible assets have a weighted-average useful life of approximately four years.

NOTE 10. ACCRUED WARRANTY

Most products are sold with varying lengths of warranty ranging from 90 days to limited lifetime. Allowances for estimated warranty obligations are recorded in the period of sale, based on historical experience related to product failure rates and actual warranty costs incurred during the applicable warranty period and are recorded as part of cost of goods sold. Also, on an ongoing basis, we assess the adequacy of our allowances related to warranty obligations recorded in previous periods and may adjust the balances to reflect actual experience or changes in future expectations.

The following table summarizes the activity in the allowance for estimated warranty costs for the six months ended November 30, 2007 and 2006 (in thousands):

		Six Months Ended
		November 30,
		2007				2006
Accrued warranty, beginning of period		$	40,596			$	41,791
Cost of warranty claims processed during the period			(21,377	)			(26,481	)
Provision for warranties related to products sold during the period			20,699				23,671
Accrued warranty, end of period		$	39,918			$	38,981

NOTE 11. LONG-TERM DEBT

On March 22, 2007, H3C Holdings Limited (the “Borrower”), an indirect wholly-owned subsidiary of 3Com Corporation, entered into the Credit and Guaranty Agreement dated as of March 22, 2007 among H3C Holdings Limited, as Borrower, 3Com Corporation, 3Com Holdings Limited and 3Com Technologies, as Holdco Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., as Mandated Lead Arranger, Bookrunner, Administrative Agent and Syndication Agent (“GSCP”), and Industrial and Commercial Bank of China (Asia) Limited, as Collateral Agent (the “Credit Agreement”). On March 28, 2007, the Borrower borrowed $430 million under the Credit Agreement 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 Technologies Co., Limited, or H3C.

On May 25, 2007, the parties amended and restated the Credit Agreement in order to, among other things, convert the facility into two tranches with different principal amortization schedules and different interest rates, as further described below (the “A&R Loans”). The parties closed the A&R Loans on May 31, 2007.

Interest on borrowings is payable semi-annually on March 28 and September 28, and commenced on September 28, 2007. The applicable LIBOR rate at September 30, 2007 was 5.1%. Remaining payments of principal on the A&R 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			—				172,000

In the second quarter of fiscal 2008, we made principal and interest payments of $94.0 million and $11.2 million, respectively. Accrued interest at the end of the period related to the long-term debt was $0.1 million.

As of November 30, 2007, we are in compliance with all of our debt covenants under the A&R Loans.

NOTE 12. SEGMENT INFORMATION

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 (“Corp”). We do not use any allocation methods to distribute these corporate expenses to our operating business units.   Management evaluates segment performance based on segment revenue, gross profit, direct operating expense and operating income (loss).  

Summarized financial information of our operations by segment for the three and six months ended November 30, 2007 and 2006 is as follows.

		Three Months Ended November 30, 2007
										Tipping								Eliminations/
(in thousands)		H3C				DVBU				Point				Corp				Other				Total
Revenue		$	182,823			$	139,879			$	25,785							$	(30,686	)a		$	317,801
Gross profit			100,673				40,125				17,536				(100	)b			(6,114	)c			152,120
Operating expense			72,926				49,610				16,989				11,436	b			42,490	d			193,451
Operating income (loss)		$	27,747			$	(9,485	)		$	547			$	(11,536	)		$	(48,604	)		$	(41,331	)

		Three Months Ended November 30, 2006
										Tipping								Eliminations/
(in thousands)		H3C				DVBU				Point				Corp				Other				Total
Revenue		$	190,291			$	144,268			$	22,257							$	(23,840	)a		$	332,976
Gross profit			90,715				45,377				15,042				(600	)b			(383	)c			150,151
Operating expense			61,051				51,884				17,058				10,750	b			18,788	d			159,531
Operating income (loss)		$	29,664			$	(6,507	)		$	(2,016	)		$	(11,350	)		$	(19,171	)		$	(9,380	)

		Six Months Ended November 30, 2007
										Tipping
(in thousands)		H3C				DVBU				Point				Corp				Eliminations/Other				Total
Revenue		$	369,751			$	279,455			$	51,253							$	(63,224	)a		$	637,235
Gross profit			195,463				83,667				34,162				(210	)b			(12,026	)c			301,056
Operating expense			140,737				97,812				34,168				22,957	b			72,400	d			368,074
Operating income (loss)		$	54,726			$	(14,145	)		$	(6	)		$	(23,167	)		$	(84,426	)		$	(67,018	)

		Six Months Ended November 30, 2006
										Tipping
(in thousands)		H3C				DVBU				Point				Corp				Eliminations/Other				Total
Revenue		$	360,259			$	281,336			$	41,012							$	(49,487	)a		$	633,120
Gross profit			170,799				89,921				27,252				(690	)b			(702	)c			286,580
Operating expense			120,839				107,504				33,392				21,231	b			33,862	d			316,828
Operating income (loss)		$	49,960			$	(17,583	)		$	(6,140	)		$	(21,921	)		$	(34,564	)		$	(30,248	)

Certain product groups accounted for a significant portion of our sales. Sales from these product groups as a percentage of total sales for the respective periods are as follows (in thousands except percentages):

		Three Months Ended																Six Months Ended
		November 30,																November 30,
		2007								2006								2007								2006
Networking		$	255,533				80	%		$	272,852				82	%		$	517,509				81	%		$	516,885				82	%
Security			35,062				12	%			31,582				9	%			66,545				11	%			57,044				9	%
Voice			16,657				5	%			16,549				5	%			32,978				5	%			32,498				5	%
Services			9,953				3	%			8,568				3	%			18,983				3	%			16,919				3	%
Legacy connectivity products			596				—	%			3,425				1	%			1,220				—	%			9,774				1	%
Total		$	317,801							$	332,976							$	637,235							$	633,120

NOTE 13. GEOGRAPHIC INFORMATION

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

		Three Months Ended November 30,								Six Months Ended November 30,
		2007				2006				2007				2006
China		$	143,107			$	158,276			$	289,861			$	290,785
Europe, Middle East, and Africa			73,209				70,933				142,871				140,467
North America			52,589				55,159				112,607				113,582
Asia Pacific (except China)			25,865				28,312				49,247				52,671
Latin and South America			23,031				20,296				42,649				35,615
Total		$	317,801			$	332,976			$	637,235			$	633,120

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 original equipment manufacturer, or OEM, sales which are based on the hub locations of H3C’s OEM partners.

NOTE 14. LITIGATION

We are a party to lawsuits in the normal course of our business.  Litigation can be expensive and disruptive to normal business operations.  Moreover, the results of complex legal proceedings are difficult to predict.  We believe that we have meritorious defenses in the matter set forth below in which we are named as a defendant. An unfavorable resolution of the lawsuit described below could adversely affect our business, financial position, results of operations, or cash flow. We cannot estimate the loss or range of loss that may be reasonably possible as a result of this litigation and, accordingly, we have not recorded any associated liability in our consolidated balance sheets.

On December 5, 2001, TippingPoint and two of its current and former officers and directors, as well as the managing underwriters in TippingPoint’s initial public offering, were named as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The lawsuit, which is part of a consolidated action that includes over 300 similar actions, is captioned In re Initial Public Offering Securities Litigation, Brian Levey vs. TippingPoint Technologies, Inc., et al. (Civil Action Number 01-CV-10976). The principal allegation in the lawsuit is that the defendants participated in a scheme to manipulate the initial public offering and subsequent market price of TippingPoint’s stock (and the stock of other public companies) by knowingly assisting the underwriters’ requirement that certain of their customers had to purchase stock in a specific initial public offering as a condition to being allocated shares in the initial public offerings of other companies. In relation to TippingPoint, the purported plaintiff class for the lawsuit comprises all persons who purchased TippingPoint stock from March 17, 2000 through December 6, 2000. The suit seeks rescission of the purchase prices paid by purchasers of shares of TippingPoint common stock. On September 10, 2002, TippingPoint’s counsel and counsel for the plaintiffs entered into an agreement pursuant to which the plaintiffs dismissed, without prejudice, TippingPoint’s former and current officers and directors from the lawsuit. In May 2003, a memorandum of understanding was executed by counsel for the plaintiffs, the issuer-defendants and their insurers setting forth the terms of a settlement that would result in the termination of all claims brought by the plaintiffs against the issuer-defendants and the individual defendants named in the lawsuit. In August 2003, TippingPoint’s Board of Directors approved the settlement

terms described in the memorandum of understanding. In May 2004, TippingPoint signed a settlement agreement on behalf of itself and its current and former directors and officers with the plaintiffs. This settlement agreement formalizes the previously approved terms of the memorandum of understanding and, subject to certain conditions, provides for the complete dismissal, with prejudice, of all claims against TippingPoint and its current and former directors and officers. Any direct financial impact of the settlement is expected to be borne by TippingPoint’s insurers. On August 31, 2005, the District Court issued its preliminary approval of the settlement terms. The settlement remains subject to numerous conditions, including final approval by the District Court. There can be no assurance that such conditions will be met. If the District Court rejects the settlement agreement, in whole or in part, or the settlement does not occur for any other reason and the litigation against TippingPoint continues, we intend to defend this action vigorously, and to the extent necessary, to seek indemnification and/or contribution from the underwriters in TippingPoint’s initial public offering pursuant to its underwriting agreement with the underwriters. However, there can be no assurance that indemnification or contribution will be available to TippingPoint or enforceable against the underwriters.

On December 22, 2006, Australia’s Commonwealth Scientific and Research Organization (CSIRO) filed suit in the United States District Court for the Eastern District of Texas (Tyler Division) against several manufacturers and suppliers of wireless products, including 3Com, seeking money damages and injunctive relief. The complaint alleges that the manufacture, use, and sale of wireless products compliant with the IEEE 802.11(a) or 802.11(g) wireless standards infringes on CSIRO’s patent, U.S. Patent No. 5,487,069. On March 9, 2007, 3Com filed its Answer, denying infringement and claiming invalidity and unenforceability of the CSIRO patent, among other defenses. The case is in the discovery phase of litigation. The majority of 3Com’s wireless products are supplied to the Company under OEM Purchase and Development Agreements that impose substantial intellectual property indemnifications obligations upon 3Com’s suppliers. We cannot make any predictions as to the outcome of this litigation and intend to vigorously defend the matter.

Between September 28, 2007 and October 10, 2007, five putative class action complaints were filed in the Court of Chancery of the State of Delaware in connection with the announcement of the proposed acquisition of the Company by affiliates of Bain Capital Partners — Fisk v. 3Com Corporation, et al., Civil Action No. 3256-VCL; Bendit v. 3Com Corporation, et al., Civil Action No. 3258-VCL; Litvintchouk v. Robert Y.L. Mao, et al., Civil Action No. 3264-VCL; Kadlec v. 3Com Corporation, et al., Civil Action No. 3268-VCL; and Kahn v. 3Com Corporation, et al., Civil Action No. 3286-VCL. On October 12, 2007, the above-referenced actions were consolidated for all purposes and captioned: IN RE: 3COM SHAREHOLDERS LITIGATION, Civil Action No. 3256-VCL. An additional two putative class action complaints were filed in the Superior Court of Middlesex County, Massachusetts — Tansey v. 3Com Corporation, et al., Civil Action No. 07-3768, and Davenport v. Benhamou, et al., Civil Action No. 07-3973F. On November 2 and 13, 2007, the defendants filed motions to dismiss or, in the alternative, stay the two Massachusetts proceedings. On December 20, 2007, the Davenport case was stayed pending the resolution of class certification in the consolidated Delaware action captioned IN RE: 3COM SHAREHOLDERS LITIGATION. The motion to dismiss or, in the alternative, stay filed in the Tansey case is still pending. All of the complaints name 3Com and the current members of our board of directors as defendants. All of the complaints except the Tansey and Kahn petitions also name Paul G. Yovovich, a former member of our board of directors, as a defendant. Excepting the Tansey and Davenport petitions, all of the complaints also name Bain Capital Partners as a defendant. The Tansey complaint names Bain Capital, LLC as a defendant. The Davenport complaint also names Diamond II Acquisition Corp. and Diamond II Holdings, Inc. as defendants. Diamond II Acquisition Corp. was also named as a defendant in the Kahn complaint. The Bendit complaint also names Huawei Technologies Company as a defendant, and the Tansey complaint also names Huawei Technology Co. Ltd. as a defendant. Plaintiffs purport to represent stockholders of 3Com who are similarly situated to them. Among other things, the seven complaints allege that the proposed purchase price of $5.30 per share is inadequate and that our directors, in approving the proposed Merger, breached fiduciary duties owed to 3Com’s shareholders because they allegedly failed to take steps to maximize the value to our public stockholders. The complaints further allege that Bain Capital Partners and, in some cases, 3Com and Huawei, aided and abetted these alleged breaches of fiduciary duty. The complaints seek class certification, damages and certain forms of equitable relief, including enjoining the consummation of the Merger and a direction to our board of directors to obtain a transaction in the best interests of 3Com’s shareholders. We believe that plaintiffs’ allegations are without merit, and we intend to vigorously contest these actions. There can be no assurance, however, that we will be successful in our defense of these actions.

NOTE 15. PROPOSED ACQUISITION BY AFFILIATES OF BAIN CAPITAL  PARTNERS LLC   

On September 28, 2007, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Diamond II Holdings, Inc., a corporation organized under the laws of the Cayman Islands, (“Newco”), and Diamond II Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Newco (“Merger Sub”). Pursuant to the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, and as a result the Company will continue as the surviving corporation and a wholly owned subsidiary of Newco (the “Merger”). Newco is controlled by Bain Capital Fund IX, L.P. and Shenzhen Huawei Investment & Holding Co. Ltd. The Board of Directors of the Company unanimously approved this transaction.

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of the Company will be canceled and will be automatically converted into the right to receive $5.30 in cash, without interest. Vesting of all outstanding 3Com equity based awards will continue until the closing of the merger, in accordance with their respective terms. At the closing of the Merger, all outstanding shares of restricted stock and restricted stock units will fully vest and such outstanding shares of restricted stock and restricted stock unit awards will be purchased for $5.30 per share less applicable withholdings. Immediately prior to the closing of the Merger, outstanding options will become fully vested and exercisable. To the extent unexercised as of the closing of the Merger, options with an exercise price below $5.30 per share will be cashed out at the difference between $5.30 and the exercise price of the option, less applicable withholdings. All other options will terminate as of the closing of the Merger.

The Merger Agreement contains a non-solicitation or “no shop” provision restricting the Company from soliciting alternative acquisition proposals from third parties and from providing information to and engaging in discussions with third parties regarding alternative acquisition proposals. The no-shop provision is subject to a customary “fiduciary-out” provision which allows the Company under certain circumstances to participate in discussions with third parties with respect to bona fide written unsolicited alternative acquisition proposals and to terminate the Merger Agreement under certain circumstances after paying a termination fee of $66.0 million. The Merger Agreement further provides that, upon its termination under specified circumstances, the buyers would be required to pay the Company a termination fee of either $66.0 million or $110.0 million as applicable.

The buyers have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement. The aggregate proceeds of the commitments, together with the available cash of the Company, will be sufficient for the buyers to pay the aggregate merger consideration and all related fees and expenses. Consummation of the Merger is subject to customary conditions to closing, including the approval of the Company’s stockholders and receipt of requisite U.S. and foreign antitrust and competition law approvals.

Several purported class action lawsuits have been filed since September 28, 2007 by 3Com shareholders against the Company, its current directors, a former director, Bain Capital Partners, and in some cases, Huawei Technologies. See note 14 “Litigation” for a further discussion of these actions.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

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

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. 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:

	§		The proposed acquisition of the Company by affiliates of Bain Capital Partners;
	§		the formation and subsequent 100 percent acquisition of our Chinese joint venture H3C;
	§		financing a portion of the purchase price for our acquisition of H3C by entering into a $430 million senior secured credit agreement;
	§		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;
	§		significant changes to our executive leadership;
	§		acquiring TippingPoint Technologies, Inc.; and
	§		realigning our DVBU sales and marketing channels and expenditures.

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

Significant Events

Proposed Acquisition of the Company

On September 28, 2007 the Company entered into an Agreement and Plan of Merger to be acquired by an entity controlled by affiliates of Bain Capital Partners. Affiliates of Huawei Investment & Holding Co. Ltd will be minority investors in the acquiring entity.   Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of the Company will be canceled and will be automatically converted into the right to receive $5.30 in cash, without interest. We currently expect to complete the transaction by the first calendar quarter of 2008. Consummation of the Merger is, however, subject to customary conditions to closing, including the approval of the Company’s stockholders and receipt of requisite U.S. and foreign antitrust and competition law, many of which are outside of our control. The review by the Committee on Foreign Investment in the United States (or CFIUS) of our proposed acquisition by affiliates of Bain Capital Partners is a confidential process to which we submitted voluntarily. We and Bain Capital Partners are working closely with CFIUS to provide U.S. officials with information about the proposed transaction. For a further discussion of risks associated with the proposed acquisition, please refer to “Risk Factors” in Part II, Item 1A in this Form 10-Q.

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 had the one-time option to purchase an additional two percent ownership interest from Huawei. We exercised this right and 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). Three years after formation of H3C, we and Huawei each had the right to initiate a bid process to purchase the equity interest in H3C held by the other. 3Com initiated the bidding process on November 15, 2006 to buy Huawei’s 49 percent stake in H3C. Huawei ultimately accepted our bid and the transaction closed on March 29, 2007, at which time 3Com paid the $882 million purchase price in full. As such, H3C is a wholly owned subsidiary for the three and six months ended November 30, 2007 as compared to the same period of the previous year when we owned 51 percent and Huawei had a minority ownership.

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.

New Products

We have introduced multiple new products targeted at the small, medium and large enterprise markets, including modular switches and routers, as well as voice over IP, or VoIP, security, wireless, storage, surveillance and unified switching solutions. We also announced our Open Services Networking, or OSN, strategy.

Business Environment and Future Trends

Networking industry analysts and participants differ widely in their assessments concerning the prospects for near-term industry growth. Industry factors and trends also present significant challenges in the medium-term with respect to our goals for sales growth, gross margin improvement and profitability. 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 and to continue to invest in the development of key technologies. Our key focus for the remainder of our fiscal 2008 will be to continue to manage each of our operating segments toward sustainable growth, to make targeted investments in the integration of sales efforts and back office functions between H3C and both DVBU and Corporate, to maintain investment in key technologies, and to manage our TippingPoint and DVBU segments towards profitability. In the remainder of fiscal 2008, we also intend to continue investing in our H3C segment, in which we expect continued growth, but at a slower rate than in the past. This is expected to involve continued investment in research and development, increased focus on growth both inside and outside of China, and growing the dedicated H3C infrastructure in concert with a global 3Com consolidated plan. In addition we may make certain targeted investments in the integration of the H3C with both the DVBU and Corporate operating segments designed to drive more profitable near and long-term growth of the business.

We continue to face significant challenges in the DVBU segment with respect to sales growth, gross margin and profitability. We believe future sales growth for the DVBU segment depends to a substantial degree on increased sales of our networking products, and we believe our best growth opportunity requires us to expand our product lines targeting small and medium businesses, or SMB, customers as well as selected medium-enterprise customers. These product enhancements are expected to be based in part upon leveraging open source and open architecture platforms to differentiate our networking offerings. These are also expected to be complemented by expanded security offerings such as the development of attack, access and application controls.

Finally, we intend to look to improve our channels to market on these products. In order to achieve our sales goals in the DVBU segment for the remainder of fiscal 2008, it is important that we continue to enhance the features and capabilities of our products in a timely manner in order to expand our addressable market opportunities, distribution channels and market competitiveness. Also, we expect a very competitive pricing environment for the foreseeable future; this will likely continue to exert downward pressure on our DVBU sales, gross margin and profitability.

Other important factors in the continued success of our H3C business are expected to include: retaining key management and employees, continuing sales through Huawei as an OEM partner of H3C in the near-to-medium term, and continuing the year-over-year growth in H3C.

Our future plans for fiscal 2008 include a potential initial public offering (IPO) of common stock of our wholly owned subsidiary TippingPoint, our business that develops, markets and sells security products and services, such as its intrusion prevention system appliances and its security protection updates through its Digital Vaccine service. Given our announcement regarding our proposed acquisition by an entity controlled by affiliates of Bain Capital Partners, these plans are subject to the discretion of the purchaser in the event our acquisition closes. Any sale of TippingPoint stock would be registered under the Securities Act of 1933, and such shares of common stock would only be offered and sold by means of a prospectus. This Form 10-Q does not constitute an offer to sell or the solicitation of any offer to buy any securities of TippingPoint, and there will not be any sale of any such securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such state.

Summary of Three Months Ended November 30, 2007 Financial Performance

	§		Our sales in the three months ended November 30, 2007 were $317.8 million, compared to sales of $333.0 million in the three months ended November 20, 2006, a decrease of $15.2 million, or 4.6 percent.
	§		Our gross margin improved to 47.9 percent in the three months ended November 30, 2007 from 45.1 percent in the three months ended November 30, 2006.
	§		Our operating expenses in the three months ended November 30, 2007 were $193.5 million, compared to $159.5 million in the three months ended November 30, 2006, a net increase of $34.0 million, or 21.3 percent.
	§		Our net loss in the three months ended November 30, 2007 was $35.6 million, compared to a net loss of $3.5 million in the three months ended November 30, 2006.
	§		Our balance sheet contains cash and equivalents of $419.1 million as of November 30, 2007, compared to cash and equivalents of $559.2 million at June 1, 2007 (the end of fiscal 2007). The balance sheet also includes debt of $336 million with $48 million classified as a current liability as of November 30, 2007 compared with debt of $430 million with $94 million classified as a current liability at the end of fiscal 2007.

Summary of Six Months Ended November 30, 2007 Financial Performance

	§		Our sales in the six months ended November 30, 2007 were $637.2 million, compared to sales of $633.1 million in the six months ended November 20, 2006, an increase of $4.1 million, or 0.6 percent.
	§		Our gross margin improved to 47.2 percent in the six months ended November 30, 2007 from 45.3 percent in the six months ended November 30, 2006.
	§		Our operating expenses in the six months ended November 30, 2007 were $368.1 million, compared to $316.8 million in the six months ended November 30, 2006, a net increase of $51.3 million, or 16.2 percent.
	§		Our net loss in the six months ended November 30, 2007 was $54.3 million, compared to a net loss of $17.6 million in the six months ended November 30, 2006.

Our critical accounting policies are described in Note 2 to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended June 1, 2007. These policies continue to be those that we feel are most important to a reader’s ability to understand our financial results.

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. The Company adopted the provisions of FIN 48 on June 2, 2007 which resulted in no adjustment to the beginning of the year retained earnings balance. As of the adoption date, the Company has unrecognized tax benefits of $24.8 million and valuation allowances of $937.1 million, for a total of $961.9 million in tax benefits. The valuation allowance of $937.1 million includes $143.5 million attributable to the tax benefit of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital. In addition, the valuation allowance includes approximately $59.3 million for acquired net operating loss carryforwards which, if realized, would result in a decrease in goodwill. The remaining tax benefits, if recognized would affect our effective tax rate. As of the end of the second quarter of fiscal 2008

the balance of unrecognized tax benefits excluding the valuation allowance was $27.4 million, representing an increase over the fiscal year to date of $2.6 million. All of this increase, if recognized, would affect our effective tax rate. The amount of the increase on the second quarter was $1.3 million. Substantially all of these increases relate to tax positions taken in the current fiscal period.

The Company files a consolidated U.S. income tax return and tax returns in various state and local jurisdictions, and our subsidiaries file tax returns in various foreign jurisdictions. In addition to the U.S., our major taxing jurisdictions include China, the United Kingdom and Singapore. For each of the major taxing jurisdictions, the tax years fiscal 1999 through fiscal 2007 remain open to examination by the respective taxing authorities.

We are currently subject to examination in certain foreign jurisdictions in relation to transfer pricing and other issues. It is possible that certain of these examinations will be settled within the next twelve months. As a result it is reasonably possible that there could be a material change in the balance of unrecognized tax benefits, however it is not possible to estimate the amount of the potential change.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 2, 2007, the combined amount of accrued interest and penalties related to uncertain tax positions was $2.1 million, which has been recorded within the balance of unrecognized tax benefits. As of the end of the second quarter of fiscal 2008 the balance of interest and penalties included in unrecognized tax benefits was $2.5 million, representing an increase over the fiscal year to date of $0.4 million. The amount of the increase in the second quarter was $0.2 million.

RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED NOVEMBER 30, 2007 AND 2006

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

		Three Months Ended								Six Months Ended
		November 30								November 30
		2007				2006				2007				2006
Sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			52.1				54.9				52.8				54.7
Gross profit margin			47.9				45.1				47.2				45.3
Operating expenses:
Sales and marketing			25.4				22.9				24.4				24.2
Research and development			16.4				14.4				16.4				15.2
General and administrative			9.8				6.7				8.2				6.7
Amortization and write-down of intangible assets			8.3				3.7				8.2				3.9
Restructuring charges			1.0				0.2				0.5				0.1
Total operating expenses			60.9				47.9				57.7				50.1
Operating loss			(13.0	)			(2.8	)			(10.5	)			(4.8	)
Gain (loss) on investments, net			0.0				(0.3	)			0.1				0.2
Interest (expense) income, net			(1.3	)			3.4				(1.2	)			3.4
Other income, net			3.3				3.8				3.5				2.7
(Loss) income before income taxes and minority interest			(11.0	)			4.1				(8.1	)			1.5
Income tax provision			(0.2	)			(0.7	)			(0.4	)			(0.6	)
Minority interest in income of consolidated joint venture			—				(4.5	)			—				(3.8	)
Net loss			(11.2	)%			(1.1	)%			(8.5	)%			(2.9	)%

Sales

Consolidated sales for the three and six months ended November 30, 2007 and 2006 by segment were as follows (dollars in millions):

		Three Months Ended								Six Months Ended
		November 30,								November 30,
		2007				2006				2007				2006
H3C		$	182.8			$	190.3			$	369.7			$	360.3
DVBU			139.9				144.3				279.5				281.3
TippingPoint			25.8				22.3				51.3				41.0
Intercompany eliminations and other			(30.7	)			(23.9	)			(63.3	)			(49.5	)
Consolidated sales		$	317.8			$	333.0			$	637.2			$	633.1

Sales in our H3C segment decreased $7.5 million, or 3.9 percent, in the three months ended November 30, 2007 and increased $9.4 million, or 2.6 percent in the six months ended November 30, 2007 compared to the same period in the previous fiscal year. The decrease in sales in the three months ended November 30, 2007 is primarily attributable to reduced OEM sales to Huawei, partially offset by appreciation on the Renminbi related to our direct sales in China. The growth for the six months ended November 30, 2007 is primarily attributable to the appreciation on the Renminbi related to our direct sales in China as well as increased sales to our DVBU segment.

Sales in our DVBU segment decreased $4.4 million, or 3.0 percent, in the three months ended November 30, 2007 and decreased $1.8 million, or 0.6 percent in the six months ended November 30, 2007 compared to the same periods in the previous fiscal year. The decrease in sales in the three months ended November 30, 2007 is primarily attributable to decreased sales in our connectivity products and slower than expected sales in our North America region. Most of the decrease in our North America region was in our networking products. This decrease was partially offset by increased networking sales in our EMEA region. The decrease in sales in the six months ended November 30, 2007 is primarily attributable to decreased sales in our connectivity business which resulted from our exit of that business and reductions in North America region mostly offset by increased demand for DVBU’s Gigabit products in both our EMEA region and our Latin America region.

Sales in our TippingPoint segment increased $3.5 million, or 15.7 percent, in the three months ended November 30, 2007 and increased $10.3 million, or 25.1 percent in the six months ended November 30, 2007 compared to the same periods in the previous fiscal year. The increase in sales in the three and six months ended November 30, 2007 is primarily attributable to an increase in large account sales and related service revenue.

Intercompany eliminations and other increased by $6.8 million or 28.5 percent, in the three months ended November 30, 2007 and increased $13.8 million, or 27.9 percent in the six months ended November 30, 2007 compared to the same period in the previous fiscal year. This increase in both periods is primarily due to increased sales from our H3C segment to our DVBU segment.

Consolidated revenues decreased by $15.2 million or 4.6 percent in the three months ended November 30, 2007 and increased by $4.1 million, or 0.6 percent in the six months ended November 30, 2007 compared to the same period in the previous fiscal year.

Sales by major product categories are as follows (dollars in millions):

		Three Months Ended																Six Months Ended
		November 30																November 30
		2007								2006								2007								2006
Networking		$	255.5				80	%		$	272.9				82	%		$	517.5				81	%		$	516.9				82	%
Security			35.1				12	%			31.6				9	%			66.5				11	%			57.0				9	%
Voice			16.7				5	%			16.5				5	%			33.0				5	%			32.5				5	%
Services			9.9				3	%			8.6				3	%			19.0				3	%			16.9				3	%
Connectivity Products			0.6				—	%			3.4				1	%			1.2				—	%			9.8				1	%
Total		$	317.8				100	%		$	333.0				100	%		$	637.2				100	%		$	633.1				100	%

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 decreased $17.4 million or 6.4 percent in the three months ended November 30, 2007 and increased $0.6 million in the six months ended November 30, 2007 compared to the same period in the previous fiscal year. The decrease in the three months ended November 30, 2007 is primarily attributable to slower than expected sales in our North American region. The increase in the six months ended November 30, 2007 is primarily attributable to expansion in our global sales of H3C developed products mostly offset by slower than expected sales in our North American region.

Security revenue includes our TippingPoint^® products and services, as well as other security products, such as H3C’s security offerings, and our virtual private network, or VPN, and network access control, or NAC, offerings. Sales of our security products increased $3.5 million or 11.1 percent in the three months ended November 30, 2007 and $9.5 million, or 16.7 percent for the six months ended November 30, 2007 compared to the same period in the previous fiscal year. The increase is primarily driven by increased sales of our TippingPoint products in our North American region due to a couple of large deals 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 Voice products increased $0.2 million or 1.2 percent in the three months ended November, 2007 and $0.5 million, or 1.5 percent in the six months ended November 30, 2007 compared to the same period in the previous fiscal year due to increased demand in North America.

Services revenue includes professional services and maintenance contracts, excluding TippingPoint maintenance which is included in security revenue. Services revenue increased $1.3 million or 15.1 percent in the three months ended November 30, 2007 and $2.1 million, or 12.4 percent in the six months ended November 30, 2007 compared to the same period in the previous fiscal year. The increase was driven by increased service offerings tied to expanded H3C networking sales.

Connectivity Products revenue in the three and six months ended November 30, 2007 was minimal compared to prior periods with continued future revenue only expected to be from royalty arrangements. The decrease resulted from our exit of this product line.

Gross Margin

Gross margin for the three and six months ended November 30, 2007 and 2006 by segment were as follows (dollars in millions):

		Three Months Ended								Six Months Ended
		November 30,								November 30,
		2007				2006				2007				2006
H3C			55.1	%			47.7	%			52.9	%			47.4	%
DVBU			28.7	%			31.5	%			29.9	%			32.0	%
TippingPoint			68.0	%			67.6	%			66.7	%			66.4	%
Intercompany eliminations and other			20.3	%			4.1	%			19.4	%			2.8	%
Gross Margin			47.9	%			45.1	%			47.2	%			45.3	%

Gross margin in our H3C segment improved 7.4 points to 55.1 percent in the three months ended November 30, 2007 from 47.7 percent, and 5.5 points to 52.9 percent in the six months ended November 30, 2007 from 47.4 percent in the same periods in the previous fiscal year. The improvement in gross profit margin is explained by reduced cost of products, and improved pricing of products, including inter-company pricing as well as healthy growth of new products with higher margins.

Gross margin in our DVBU segment decreased 2.8 points to 28.7 percent in the three months ended November 30, 2007 from 31.5 percent in the same period of the previous fiscal year, and 2.1 points to 29.9 percent in the six months ended November 30, 2007 from 32.0 percent in the same period of the previous fiscal year. The decline is explained by costs associated with our change in service providers and reduced pricing, primarily in the mid-range switching product-offerings and inter-company pricing, offset in part by product cost reductions.

Gross margin in our TippingPoint segment improved 0.4 points to 68.0 percent in the three months ended November 30, 2007 from 67.6 percent and 0.3 points to 66.7 percent in the six months ended November 30, 2007 from 66.4 percent in the same period in the previous fiscal year.

Gross margin related to intercompany eliminations and other improved 16.2 points to 20.3 percent in the three months ended November 30, 2007 from 4.1 percent and 16.6 points to 19.4 percent in the six months ended November 30, 2007 from 2.8 percent in the same period in the previous fiscal year. The increase in both periods relate to purchase accounting adjustments resulting from our acquisition of the final 49 percent of H3C not present in the prior period.

Operating Expenses

		Three Months Ended																Six Months Ended
		November 30,								Change								November 30,								Change
(dollars in millions)		2007				2006				$				%				2007				2006				$				%
Sales and marketing		$	80.8			$	76.2			$	4.6				6	%		$	155.2			$	153.3			$	1.9				1	%
Research and development			52.2				48.2				4.0				8	%			104.5				96.0				8.5				9	%
General and administrative			31.1				22.3				8.8				39	%			52.5				42.6				9.9				23	%
Amortization			26.3				12.2				14.1				116	%			52.3				24.4				27.9				114	%
Restructuring			3.1				0.6				2.5				417	%			3.6				0.5				3.1				620	%
Total		$	193.5			$	159.5			$	34.0				21	%		$	368.1			$	316.8			$	51.3				16	%

Sales and Marketing. The most significant factors in the increase in the three and six months ended November 30, 2007 compared to the same periods in fiscal 2007 was the increased China related sales and marketing costs of $3.6 million due to increased compensation related charges.

Research and Development. The most significant factor contributing to the increase in the three and six months ended November 30, 2007 compared to the same period in fiscal 2007 was continued investment in our China-based development efforts and increased headcount of 195 Chinese employees.

General and Administrative. The most significant factor in the increase in the three and six months ended November 30, 2007 compared to the same periods in fiscal 2007 was $7.6 million of acquisition related costs from the proposed acquisition by affiliates of Bain Capital Partners.

Amortization. Amortization increased $14.1 million and $27.9 million in the three and six months ended November 30, 2007, respectively, when compared to the previous fiscal year due to a significant increase in amortization charges related to our acquisition of the remaining 49% of H3C in March.

Restructuring Charges

Restructuring charges in the three months ended November 30, 2007 included $2.4 million for severance and outplacement costs and $0.7 million in facilities-related charges. Restructuring charges in the six months ended November 30, 2007 included $3.3 million for severance and outplacement costs and $0.3 million in facilities-related charges. Restructuring charges in the three months ended November 30, 2006 included 1.6 million for severance and outplacement costs and $1.2 million for facilities-related charges partially offset by a $2.2 million in benefit resulting from for a change in estimate on previously established restructuring provisions. Restructuring charges in the first six months of fiscal 2007 primarily included $9.2 million for severance and outplacement costs and $1.5 million for facilities-related charges which were almost offset by an $8.0 million gain on the sale of our Santa Clara facility and $2.2 million in benefit resulting from a change in estimate on previously established restructuring provisions.

See Note 4 to Condensed Consolidated Financial Statements for a more detailed discussion of restructuring charges.

Gain (loss) on Investments, Net

Net gains on investments were zero million and $0.3 million in the three and six months ended November 30, 2007, respectively, which resulted from gains on our remaining investment portfolios. Net losses on investments were $0.9 million in the three months ended November 30, 2006 primarily reflecting a $1.0 million loss from the sale of our venture fund portfolios. This sale completed the sales of our venture portfolios. Net gains on investments were $1.4 million in the first six months of fiscal 2007, primarily reflecting a $1.4 million gain from the sale of certain investment portfolios.

Interest Expense/Income, Net

In the three and six months ended November 30, 2007, the Company incurred $3.9 million and $7.5 million, respectively, in net interest expense, versus net interest income of $11.4 million and $21.5 million in same periods of the prior fiscal year. The change was directly attributable to the reduced cash balance and incurrence of debt, both resulting from the use of funds and borrowings for the acquisition of the final 49 percent of H3C in March 2007.

Other Income, Net

Other income, net was $10.3 million in the three months ended November 30, 2007, a decrease of $2.3 million compared to the three months ended November 30, 2006. The decrease was in our Corporate segment which in the prior-year period included a gain from the insurance settlement on our Hemel facility of $3 million, net of other small increases. Other income, net was $22.4 million in the six months ended November 30, 2007, an increase of $5.1 million compared to the six months ended November 30, 2006. The increase was primarily due to a $5.0 million gain from the sale of a patent no longer used in our business and larger software subsidy amounts in our H3C segment in the six month period, offset in part by the absence of the Hemel facility insurance gain.

Income Tax Provision

Our income tax provision was $0.7 million for the three months ended November 30, 2007, a decrease of $1.6 million when compared to the corresponding period in the previous fiscal year. In the current quarter we had a favorable final position on an insurance settlement of $1.6 million as well as a discrete benefit of $0.5 million related to refunds of state taxes for prior periods. The remainder of the income tax provision for the current quarter and all of the provision for the corresponding period was the result of providing for taxes in certain foreign jurisdictions at various statutory rates. H3C 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. Consequently, subject to the possible effects of the new PRC tax laws discussed in “Risk Factors” below, we currently expect the H3C statutory rate in China to be 7.5 percent for the calendar years 2007 and 2008, and 15 percent thereafter.

The company has US Federal net operating loss carryforwards in the amount of $2.5 billion as of May 31, 2007.

Minority Interest of Huawei in the Income of Consolidated Huawei-3Com Joint Venture

There is no minority interest in the three or six months ended November 30, 2007 as H3C is now a wholly-owned subsidiary.
In the three and six months ended November, 2006 we recorded an allocation to minority interest of $15.0 million and $23.9 million, respectively, representing Huawei’s 49 percent interest in the net income reported by the H3C joint venture for the three and six months ended November 30, 2006.

Net Loss

Our net loss in the three months ended November 30, 2007 was $35.6 million, a $32.1 million increase in net loss when compared to the same period of the previous fiscal year. The increase was primarily driven by increased amortization expenses of $14.0 million due to the acquisition of the remaining 49 percent of H3C, acquisition costs of $7.6 million related to the proposed acquisition by affiliates of Bain Capital Partners, increased sales and marketing related costs of $4.6 million, increased R&D expenses of $4.0 million and increased restructuring charges of $2.5 million, partially offset by increased gross profits during the quarter. Our net loss in the six months ended November 30, 2007 was $54.3 million, a $36.7 million increase in net loss when compared to the same period of the previous fiscal year. The increase was primarily driven by increased amortization expenses of $27.9 million due to the acquisition of the remaining 49 percent of H3C, acquisition costs of $7.6 million related to the proposed acquisition by affiliates of Bain Capital Partners, increased sales and marketing related costs of $1.9 million, increased R&D expenses of $8.6 million and increased restructuring charges of $3.0 million, partially offset by increased gross profits and a $5.0 million gain from the sale of a patent during the period.

LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents as of November 30, 2007 were $419.1 million, a decrease of $140.1 million compared to the balance of $559.2 million as of May 31, 2007. The following table shows the major components of our condensed consolidated statements of cash flows for the six months ended November 30, 2007 and 2006:

		Six Months Ended
		November 30,
(In millions)		2007				2006
Cash and equivalents, beginning of period		$	559.2			$	501.1
Net cash used in operating activities			(52.6	)			(5.0	)
Net cash (used in) provided by investing activities			(8.4	)			61.9
Net cash used in financing activities			(89.7	)			(32.8	)
Other			10.6				4.0
Cash and equivalents, end of period		$	419.1			$	529.2

Net cash used in operating activities was $52.6 million in the six months ended November 30, 2007, primarily reflecting our net loss of $54.3 million and increased deferred income taxes of $1.2 million,, more than offset by $69.3 million of depreciation and amortization and $9.9 million of stock-based compensation. Changes in assets and liabilities resulted in a net use of cash of $76.2 million, with other liabilities decreasing $68.1 million primarily due to a $95 million previously accrued compensation charge related to the change-in-control portion of H3C’s Equity Appreciation Rights Plan (which was triggered by the acquisition of the remaining 49% of H3C). Additionally accounts receivable increased $16.8 million, partially offset by a net collection in notes receivable of $6.4 million and a decrease in inventory of $16.9 million.

Net cash used in investing activities was $8.4 million for the six months ended November 30, 2007, consisting primarily of $9.7 million of net outflows related to purchases of property and equipment.

Net cash used in financing activities was $89.7 million in the six months ended November 30, 2007. During the six months ended November 30, 2007, we made a principal payment of $94.0 million related to our long term debt and we acquired $1.3 million of shares of restricted stock awards upon vesting from employees including those shares tendered to us to satisfy the tax withholding obligations that arise in connection with such vesting. This was offset by proceeds of $5.7 million from issuances of our common stock upon exercise of stock options.

As of November 30, 2007, bank-issued standby letters of credit and guarantees totaled $6.3 million, including $5.9 million relating to potential foreign tax, custom, and duty assessments.

We currently have no material capital expenditure purchase commitments other than ordinary course purchases of computer hardware, software and leasehold improvements. We believe that our future cash requirements will likely include an aggregate of $5 million to $10 million for professional fees related to our proposed acquisition by affiliates of Bain Capital Partners that are not contingent on the closing of the deal.

Cash requirements relating to our senior secured debt for the next twelve months include a March 2008 interest payment of approximately $13.1 million and a September 2008 interest and principal payment of approximately $61.1 million.

We currently believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months.

EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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. The Company adopted the provisions of FIN 48 on June 2, 2007 which resulted in no adjustment to the beginning of the year retained earnings balance. As of the adoption date, the Company has unrecognized tax benefits of $24.8 million and valuation allowances of $937.1 million, for a total of $961.9 million in tax benefits. The valuation allowance of $937.1 million includes $143.5 million attributable to the tax benefit of stock option deductions, which, if recognized, will be allocated directly to paid-in-capital. In addition, the valuation allowance includes approximately $59.3 million for acquired net operating loss carryforwards which, if realized, would result in a decrease in goodwill. The remaining tax benefits, if recognized would affect our effective tax rate. There was no significant change to the balance of unrecognized tax benefits during the first quarter of fiscal 2008.

The Company files a consolidated U.S. income tax return and tax returns in various state and local jurisdictions, and our subsidiaries file tax returns in various foreign jurisdictions. In addition to the U.S., our major taxing jurisdictions include China, the United Kingdom and Singapore. For each of the major taxing jurisdictions, the tax years fiscal 1999 through fiscal 2007 remain open to examination by the respective taxing authorities.

We are currently subject to examination in certain foreign jurisdictions in relation to transfer pricing and other issues. It is possible that certain of these examinations will be settled within the next twelve months. As a result it is reasonably possible that there could be a material change in the balance of unrecognized tax benefits, however it is not possible to estimate the amount of the potential change.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 2, 2007, the combined amount of accrued interest and penalties related to uncertain tax positions was $2.1 million, which has been recorded within the balance of unrecognized tax benefits. There was no significant change to this amount during the six months ended November 30, 2008.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by 3Com in the first quarter of fiscal 2009. We have not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on our results of operations or financial condition.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which expresses the staff’s views regarding the process of quantifying financial statement misstatements. The Bulletin is effective at our fiscal year end 2008. The Company currently believes the adoption will have no impact on our results of operations, cash flow or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by 3Com in the first quarter of fiscal 2009. 3Com currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

In June 2007, the FASB ratified EITF 07-3, Accounting for NonRefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be adopted in the first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, of the pending adoption of EITF 07-3 on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We no longer hold any marketable equity traded securities as of November 30, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of our quarter ended November 30, 2007 pursuant to Exchange Act Rule 13a-15(b). The term “disclosure controls and procedures,” as defined under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of our quarter ended November 30, 2007, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 14 to the Notes to the Condensed Consolidated Financial Statements is incorporated by reference herein.

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.

On September 28, 2007, we announced an agreement to be acquired by an entity controlled by affiliates of Bain Capital Partners. We cannot provide any assurance that the proposed acquisition will be consummated. If the transaction closes, we cannot assure you of the timing of the closing.

Consummation of the proposed acquisition is subject to the satisfaction of various conditions, including approval of the acquisition by a vote of a majority of the outstanding shares of our common stock and other customary closing conditions described in the Merger Agreement. We cannot guarantee that these closing conditions will be satisfied, that we will receive the required approvals or that the proposed acquisition will be successfully completed. Many of these conditions are out of our control. In the event that the proposed acquisition is not completed or is delayed:

	•		management’s and our employees’ attention from our day-to-day business may be diverted because matters related to the proposed acquisition may require substantial commitments of their time and resources;
	•		we may lose key employees;
	•		our relationships with customers and vendors may be substantially disrupted as a result of uncertainties with regard to our business and prospects;
	•		certain costs related to the proposed acquisition, such as legal and accounting fees and reimbursement of certain expenses, are payable by us whether or not the proposed acquisition is completed;
	•		under certain circumstances, if the proposed acquisition is not completed, we may be required to pay a termination (break-up) fee of up to $66 million; and
	•		the market price of shares of our common stock may decline to the extent that the current market price of those shares reflects a market assumption that the proposed acquisition will be completed.

In addition, CFIUS will review this transaction and could recommend that the transaction be changed, or blocked by the President, on national security grounds.

Any of these events could have a material negative impact on our results of operations and financial condition and could adversely affect the price of our common stock.

Risks Related to Historical Losses, Financial Condition and Substantial Indebtedness

We have incurred significant net losses in recent fiscal periods, including $35.6 million for the quarter ended November 30, 2007 and $3.5 million for the quarter ended November 30, 2006 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;
	•		management changes;
	•		disruptions and expenses resulting from our workforce reductions, management changes and employee attrition;
	•		risk of increased excess and obsolete inventories; and
	•		interest expense resulting from our senior secured loan.