FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

3Com Corporation
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5400 Bayfront Plaza
Santa Clara, CA 95052
(408) 764-5000
http://www.3com.com

UNION CITY, CA (June 25, 1997)/FOOLWIRE/ --- 3Com Corporation reported fourth quarter 1997 results after the market close yesterday. The company announced record revenues for the fourth quarter and fiscal year. For the quarter, sales of $829.9 million increased 26% from the fourth quarter of fiscal 1996. Net income for the quarter was $89.2 million or $0.48 per share. Year ago net income included a pre-tax charge of $53.3 million or $0.30 per share primarily for purchased in-process technology. Excluding these non-recurring items, net income increased 8% from $82.5 million or $0.46 per share posted in the same quarter a year ago.

Q4 HIGHLIGHTS. Their fourth quarter caps another year of growth in 3Com's revenue, earnings, market share, and competitive position. Their business is being driven by customer requirements for complete networking systems consisting of best-in-class products both for the local area and wide area networks. This is an exciting period for 3Com. In addition to posting record sales for the quarter they have made many of the decisions necessary to expedite the integration of 3Com and US Robotics. They have transitioned to a new organization and completed the business plan for the new company. Shortly, customers and shareholders will begin to see the benefits of their broader product line, stronger distribution channels, and increased market coverage. Based on market analyst reports published during the quarter, the combination of 3Com and US Robotics now holds the number one or two worldwide market share position in network interface cards, PC modems, LAN switches, shared media hubs, remote access concentrators, and connected organizers.

VERY PLEASED WITH RESULTS. 3Com was very pleased to be able to achieve record revenues on the heels of a softer Q3. This was even more gratifying to them for two reasons. First because they were able to outgrow all of their core competitors during that period and therefore gain share in every key segment. This was corroborated by the most recent reports from Del'Orro, Gartner, and from IDC. They gained share in Ethernets and Fast Ethernet NICs and Ethernet and Fast Ethernet hubs, in workgroup switches, in stackable systems of all types, and in backbone switching based on their CoreBuilder product family. They also posted good growth in remote access, even prior to their combination with US Robotics. Second, because their organization was able to engage in broad-based pre-merger integration planning work without losing sight of their business end of the market.

HIGHLIGHTS FOR FY 1997. Q4 was a very busy quarter for 3Com and represented a good finish to the fiscal year. They have done a lot of work in the last 3 months, especially with respect to the USR merger. They have made many of the decisions necessary to rapidly integrate USR and identified a lot of synergies that will be realized in fiscal 1998 and beyond. At the same time, they had a quarter to deliver and feel good about posting record sales and sequentially up earnings while completing the largest merger in the history of the networking industry. Looking at all of FY 1997, they saw continuing growth in their core businesses, reflecting marketshare gains in LAN switching, stackable hubs, and adaptors, as well as their increasing stature as an enterprise systems provider. They enjoyed a very strong first half of FY 1997 and a challenging Q3. They are happy to end the year on an up note as their Q4 sales reached record levels and their sequential increase in sales of 5% is above that of virtually every other networking company's most recent quarterly report with the exception of US Robotics.

SALES. Sales for the quarter were $829.9 million, a 26% increase from the year ago quarter. Sales for the year were $3.1 billion, a 35% increase from $2.3 billion in fiscal 1996. For the quarter the breakdown of sales by product line was as follows: adaptors were $349.6 million or 42% of the mix and were up sequentially 1% and were up 35% compared to the same quarter last year. The annual change for the entire year for the adaptor business was up 45%. Systems were $473 million or 57% of the mix, up 9% sequentially and up 20% compared to Q4 last year and for the entire year systems business was up 30%. Other product lines were $7.3 million in sales or 1% of the total and were down 8% sequentially, down 14% compared to Q4 last year, and for all of fiscal 1997 were down 15% compared to fiscal 1996.

ADAPTOR SALES. Looking by product line, their adaptor business showed solid unit growth this quarter while reflecting an accelerated product mix shift from 10 to 10/100 megabits per second Fast Ethernet and from desktop to mobile adaptors, the fastest growing segments of the adaptor market. A recent marketshare report shows that 3Com continued to gain share versus Intel in the 10/100 NIC market, shipping over 1.25 million units versus 730,000 for Intel. Demand for mobile products was strong, reflecting the strength of the overall market and their broad family of award-winning products. Sales through their OEM partners in the Network Ready program continues to accelerate and now approximates 15-20% of adaptor revenues. The pricing environment continues to be aggressive and aggregate average selling prices actually declined sequentially by approximately 4% notwithstanding the accelerated transition to 10/100 Ethernet. During the quarter they shipped a total of 4.6 million adaptors.

SYSTEMS SALES. Growth in their systems business this quarter was strong, driven by demand for their switching products. Sales of both the CoreBuilder family of high function switches and workgroup switches reflected this growth underscoring the rapid move toward fully switched infrastructures. Both their remote access business and their internetworking business showed good growth this quarter. In fact, with the exception of shared media hubs, all systems products enjoyed sequential growth in the double digit percent range. Even in shared media hubs, where their results were consistent with the prior quarter, they believe they gained market share.

GEOGRAPHIC MIX. In the US sales in the fourth quarter were $379.5 million, 46% of the mix, up 10% sequentially, and up 17% compared to Q4 last year. For all of the fiscal year, sales in the US were up 34% compared to last year. Internationally, sales in the fourth quarter were $450.4 million, 54% of the total, up 2% sequentially, up 34% compared to Q4 last year, and for all of fiscal 1997 up 36%. Growth was particularly strong in the US this Spring, rebounding nicely from a slower Winter quarter.

GROSS MARGINS. Gross margin of 52.3% decreased 2.2% from 54.5% in the prior quarter. On last quarter's conference call they signaled that gross margins would be coming down, although at the time they expected that gross margins would be at or near the lower end of their long-term financial model or around 53%. The primary reason for the gross margin decline was the accelerated transition from 10 megabit per second Ethernet to 10/100 megabit per second Ethernet. This transition led to a little stronger topline sales result than would otherwise have been the case and a lower gross margin that would otherwise have been the case. Aggressive channel programs also contributed to the outcome.

EXPENSES. Expenses as a percentage of sales were down 1.6% to 36.4% of sales from 38% last quarter. Their goal during the quarter was to rein in headcount growth and hold expenses as flat as possible to the prior quarter. Headcount at quarter end was 7,109 compared with 7,059 in the prior quarter, so it did climb 50 during the quarter. However, it peaked in March and has trended downward since. Expenses grew 1% during the quarter leading to the decline as a percentage of sales. They are still above their long-term model, but getting closer.

INCOME. Operating income at 15.9% declined 0.5% from 16.4% in the prior quarter, attributable to lower gross margins. Other income grew slightly, consistent with the growth in their cash balances from the prior quarter. The tax rate remained unchanged at 35.5%. Absolute shares outstanding at quarter end was 178.4 million, an increase of 850,000 from the prior quarter. Weighted average share count was 186.5 million. Net income for the quarter was $89.1 million or $0.48 per share.

BALANCE SHEET HIGHLIGHTS. Their balance sheet remains very strong with cash and investments growing almost $100 million to $890 million. Their receivables DSO of 57 showed some improvement, down 1 day from Q3, but is still above their historical year-end level due to the shipment pattern during the quarter. The percentage of sales in the last month of the quarter was similar to last quarter, in the low 40%s, not an overly back-end-loaded quarter compared to other companies, but somewhat higher than has traditionally been the case at 3Com. During the quarter, inventory levels decreased by $27 million from Q3 and inventory turns increased to 6.5 times from 5.8 in the previous quarter marking the first time in a year they have been this high. They continue to carry $110 million of long-term debt on their balance sheet which represents a convertible debenture issued in November of 1994. The first opportunity to call this debenture comes up this Fall at the 3-year anniversary of the issue. Should the stock price remain above $35 it is likely this debt would convert to equity at that time.

TECHNOLOGY TRENDS. They are going through an important and unprecedented upgrade cycle toward switched bandwidth and towards faster speeds. The transition from Ethernet to Fast Ethernet has clearly accelerated in the first half of the year. They are seeing it on PC line connections including desktops, servers, and mobile computers. Over the next four quarters they expect to derive more revenues from Fast Ethernet PC line connections than from standard Ethernet line connections. Unlike in 1996, the wiring closet connections at the other end of the wire are also transitioning rapidly from Ethernet to Fast Ethernet. In other words, a 10-100 connection is no longer being purchased as a form of insurance for new PCs. It is actually being used at 100 megabits per second speed. Deeper in the network infrastructure, the interest of 3Com customers in ATM backbone solutions OC3 or OC12 and in gigabit Ethernet backbone solutions is also at an all-time high. It is now commonplace for 3Com to advise their customers on how to deploy the next level of bandwidth hierarchy as they discover that their FDDI or their Fast Ethernet backbones can no longer cope with increasing traffic levels and with new applications. 3Com is extremely well-positioned to ride this overall upgrade cycle as their position in line connections for PCs and in wiring closet connections, both hubs and switches, is the strongest in the market. Also they find themselves in a very favorable position at the core as they continue to gain share in ATM-based backbone solutions. They are also getting to market earlier than their core competitors with complete Gigabit solutions such as the ones they demonstrated at the most recent Networld+Interop trade show last month.

X2 TECHNOLOGY. The same drive towards faster speeds is present on the WAN side as well. Last week, for example, America Online announced its plans for a broad rollout of x2 across its hubs in over 200 cities in North America in response for increasing customer demand for 56kbps transmission. 3Com is also measuring the steady increase in the percentage of x2 initiated calls among their large ISP customers week after week and expect this upgrade will accelerate further as the draft international standard for 56kbps technology is published this coming Fall. They began deploying x2 in both Europe and Asia over the last 4-5 weeks. The transition towards higher speeds will likely accelerate. They are now engaged in several trials of xDSL technology both in Europe and in the US. There again, they expect to distinguish their offering by providing integrated solutions that span both ends of the wire and offer lower costs of ownership for both the carrier and the consumers.

LAYER 3 SWITCHING. The industry is still grasping with the various ways to manage increased IP traffic flows across switched environments. The debate between layer 2 switching, layer 3 switching, traditional routing, and IP switching rages on. 3Com finds that any hopes for a one-size-fits-all solution are unrealistic. Customers will typically require various combinations of these technologies depending upon their applications and use of the network. They are very encouraged by customer acceptance of their Fast IP switching technology to increase the performance of intrasubnet traffic. This is a tangible illustration of the benefits that can be derived at a low cost from applying appropriate protocol intelligence to the access points into the network, in this case through the dynamic access software of their network interface cards. They are also quite bullish on the market acceptance of layer 3 switching technology with one important caveat -- they do not believe that layer 3 switches are a panacea and that they should be deployed everywhere. The view that is sometimes reported in the trade press that layer 3 devices are now plug-and-play commodities and that they should be spread throughout the network is quite misleading. However, this statement should not diminish the fact that layer 3 processing will now take place at much greater speeds than every before. 3Com invented layer 3 switching as part of their high function switching line over two years ago. Last month they began disclosing to their customers their plans for their next generation of high function switches. It will route at wire speeds between 4 million packets per second and 30 million packets per second. They expect to begin shipping these products in the second half of this calendar year, ahead of their core competitors.

POLICY-BASED NETWORKING IN DEMAND. Earlier this month 3Com held their Network 3 event, which is their second annual end-user conference, in San Francisco. It was attended by over 700 of their large enterprise customers. The size of this event more than doubled over last year, confirming their continued progress as the leading vendor in the enterprise networking market. A survey of these customers strengthened the validity of the trends just summarized. In addition to those, 3Com noticed a strong desire to introduce policy based networking in their IT environment, reflecting their needs to provide different classes of service to different users and different applications. They also noticed a sharp increase in the plans made by these customers to integrate multimedia traffic over the network infrastructure. The technology and products that 3Com acquired from OnStream last Fall are enabling them to meet the demands of these leading-edge customers. In addition, they entered into an agreement with Siemens last month to collaborate on voiceover IP technology.

COMPETITIVE TRENDS. Competitive trends have not changed materially over the last quarter with a clear acceleration in industry consolidation combined with a period of slower growth in the early part of this year. Some weaknesses have begun showing among some of 3Com's smaller competitors. Some, like Cabletron, Fore, Zircon, and Madge are reporting disappointing results. Others yet, like Microdyne, are withdrawing from the market. Technology is really the reason for this weakening among 3Com's competitors, they feel. More often they think the symptoms can be traced to insufficient financial critical mass, insufficient customer relationships, brand presence, and distribution channels. Overall, the outlook for their industry and their markets remain as stated previously. Visibility is better today than it was 5 months ago, although not as good as it was a year ago. 3Com does not have any new news to report with respect to geographic trends. The same regions that showed healthy growth in the early Spring continue to show favorable prospects -- namely the Americas and Asia. The region that showed most sluggish growth compared to the long term potential -- namely Japan, Germany, and France -- seem to be in the same predicament today.

3COM IS WELL-POSITIONED TO COMPETE. From a product perspective, 3Com feels they are in an excellent position to engage any of their competitors either at the component level or at the full system level. However, they have several important platform transitions to manage over the next few quarters which could improve their economic standing further if they execute well. This quarter they are beginning volume shipments of their 10-100 workgroup switch with sub-$300 price per port. 3Com is the only workgroup switches in the industry which have higher speed downlink capabilities, either ATM or Gigabit Ethernet. 3Com has just begun shipments of their OC-12 modules for their high-end CoreBuilder platform. They are also beginning volume shipments of high density modules for total control with multi-session capability per DSP. This makes Total Control the highest density remote access platform in the industry. They also intend to roll to a new generation Fast Ethernet silicon on their NICs, although this will only affect their fiscal 1998 Q2 revenues. Beginning around the middle of their fiscal year, they will begin the most ambitious high-end system product introductions in their history with their next generation CoreBuilder platforms and their layer 3 switches.

FOUR CATEGORIES OF PARTNERSHIPS. Partnerships are playing an increasingly strong role in 3Com's strategy as they move more and more visibly towards the system end of the spectrum and away from the pure component end of the spectrum. For 3Com, partnerships tend to fall into four major categories -- PC vendors with which they work more and more intimately to create the intelligent LAN and WAN connections at the design level. Their network-ready PC program is a vehicle to solidify these relationships with recent additions this quarter such as Siemens Nixdorf and Olivetti. The net PC announcements they made earlier this month illustrate the recent new developments of that program with the support of Dell. The second category is carriers and ISPs with whom they work closely to design public networks and deploy new services to their subscribers. AOL and the IBM Global Network are examples of large ISPs with which they partnered last quarter for the rollout of x2 around the world. The third category includes system integration partners which help strengthen 3Com's ability to deliver complete solutions in global service to large enterprise customers. They expect to introduce one major relationship in that category this quarter. The fourth and final category includes technology partners that augment their ability to integrate adjacent technologies to their network infrastructure. They forged a strong relationshp last quarter related to the integration of reliable multicast technology for push information distribution methods. They also strengthened their relationship with IBM in the area of ATM for next generation backbone switches previewed at the CeBit show last March in Germany. They are engaged in several important strategic relationships in each of these categories which they will be communicating in the course of the upcoming quarter.

UPDATE ON USR MERGER TRANSITION. With regard to the USR merger, they began operating as a single company on June 16th when the transaction closed. Since the last quarterly call in March, the general feelings vis a vis the 3Com/USR merger within the investment community have changed from lukewarm to strongly positive after the management teams had a chance to provide the full context and rationale of how this transaction could create superior returns for shareholders. Employees, partners, and customers continue to be overwhelmingly supportive and excited at the opportunities ahead. Their websites have been integrated with more capabilities coming at the end of Q1. They are also now operating under the new organizational framework which they described in the Spring. They have a complete management team in place and have integrated their email and voicemail systems since day one in order to maximize ease of communication. They have made major decisions regarding facilities integration, manufacturing strategy, employee compensation and benefits, and employee redeployments which are the areas most likely to yield financial synergies as the year unfolds. This quarter they intend to complete the integration of their field organizations across all channels and geographies. They are going through the last pass of their fiscal 1998 financial plan and are very confident that by the time of their annual analyst conference in late July, they will be able to share details of their long-term financial model and a complete roadmap and milestone chart that will enable people to track their progress as they execute the largest merger in the history of the high tech industry.

THE FINANCIALS FOR THE NEW 3COM. Some may wonder why they have just reported a standalone quarter for 3Com given that the USR transaction has closed. The reason is that the transaction closed on June 12th, after the close of the quarter. Going forward, FY 1998 will comprise the 12 months starting in June and ending next May. In September they will report the combined results for the new 3Com's first quarter representing the Summer months of June, July, and August and so on by quarter throughout the remainder of the fiscal year. They will continue to use the historical 3Com fiscal pattern with one exception. Effective this quarter they are adopting the 13-week quarter used by USR and many others. In this particular instance it makes no difference as the quarter will end on Sunday, August 31st either way. Backwards looking, FY 1997 will be restated to include the 12 months ended in May for 3Com and the 12 months ended in March for US Robotics. Q1 of FY 1997 will be restated to include the 3 months ended last August for 3Com and the 3 months ended last June for USR and so on. The most recent quarter, Q4, will be the quarter just reported for 3Com ending in May combined with the 3 months ended in March for USR. April and May for USR will be summarized as an adjustment to retained earnings to start the fiscal year and will not be reported as part of an income statement.

THE COMBINED STATEMENT FOR THE MOST RECENT QUARTER. (Disclaimer from the Company: First, they are not formally publishing restated financials at this point and do not expect to do so until approximately the time of their annual analyst meeting in late July. The reason for this is that much work remains to conform accounting practices between the two entities. In some instances, what had been expensed at one company had been capitalized at the other, what had been considered a sales discount at one company had been a marketing expense at the other, and so on. When this work is done, they will reissue the complete set of quarterly results for FY 1997. Until that point in time the best they can do is merely add the reported results of the two companies. This will be a reasonable proxy but the numbers will change somewhat so it won't be precise.) So, for Q4 a combined result for sales would be $1.52 billion. Cost of sales would be $747 million or 49.2% of sales. Gross margin would be $773 million or 50.8% of sales. Sales and marketing would be $311 million or 20.5% of sales. R&D would be $137 million or 9% of sales. G&A expenses would be $74 million or 4.9% of sales. Operating income would be $250 million or 16.5% of sales. Other income would be $5 million, income before taxes would be $255 million, tax provision would be $92 million, and net income would be $163 million. Shares would be 354.5 million and earnings per share would be $0.46. The dilution caused in the last quarter was $0.02 per share. It is possible that there may be another penny dilution when the accounting policies mapping is finalized. So, this marks the approximate starting point for the new company.

THE LONG-TERM FINANCIAL MODEL ON WHICH THEY WILL MANAGE THE COMPANY. This too is an ongoing exercise as they need the restated financials to complete it. They still have a lot of work to do to assess the timing of the synergies. Accordingly, they gave some guidance now to be supplemented at the time of the analyst meeting in late July. First, it remains their primary objective to grow revenues faster than the market. They will model operating margins in the range of 16-20%. For the time being they will not describe a model for gross margins or expenses, but can give guidance regarding expected trends. They expect gross margins to decline in the coming quarter as the blended average of 50.8% included abnormally higher gross margins from the USR March results than is typical. This should not be a surprise to anyone. Beyond Q1, they expect gross margins to improve, in part due to synergies. They expect expenses to decline as a percentage of sales throughout the year, both due to synergies and the desire to drive down expenses as a percentage of sales significantly from their Q4 FY 1997 levels. It is difficult to predict if gross margin declines in the near term can be more than offset by a reduction in expenses as a percentage of sales, meaning that the short term movement in operating margin is unclear. However, beyond the Summer quarter, they expect operating margin to improve throughout the remainder of the fiscal year.

FACTORS THAT WILL IMPACT THE BUSINESS GOING FORWARD

FIRST. The new 3Com benefits from unprecedented scale and market leadership and has the broadest channel coverage and the best brands in the industry. Their overall breadth of products creates a very different and much stronger company with a unique and sustainable competitive advantage because they own their intellectual property including ASIC and software contents across the product lines.

SECOND. They will benefit from a long list of synergies available to them in the relatively near term. Examples include cross-selling in both geographies and channels, the combined purchasing power of a $5.6 billion company, the elimination of duplicate costs, and the ability to reduce the blended tax rate by manufacturing products in strategic locations worldwide.

THIRD. There is a continuing new product cycle across their businesses accelerating in the second half of FY 1998 including Gigabit Ethernet, Fast Ethernet, and ATM switches; next generation total control; and x2 momentum on both the client and POP side; as well as new 10/100 Fast Ethernet NICs, chips, and mobile products.

FOURTH. Product mix shifts from shared to switched infrastructures and from 10 to 10/100 Fast Ethernet, from v.34 to 56k, present both opportunity and challenges for them.

FIFTH. The environment continues to be very competitive and consolidation continues to accelerate, hurting smaller vendors as witnessed by recent weak results from Cabletron, Xircom, Fore, Xylan, Madge, and SMC. They believe critical mass, which 3Com and few others enjoy, is particularly important in this environment.

SIXTH. As reported by other vendors, visibility in Europe is poor.

SEVENTH. They are entering their seasonally slowest quarter because they face three factors in the Summer. First, business during the Summer months is typically slower than at other times. This is not news to anyone. However, the pattern of 3Com's fiscal year places all 3 Summer months in the same quarter. Any other quarterly pattern would not have this effect. Second, the Summer softness is more pronounced in Europe than elsewhere and 3Com has relatively more of their sales in Europe than most other networking companies. Third, their fiscal year ended in May and as most sales people were driven to reach year-end bonuses, they typically enter the Summer quarter with a little less in the sales funnel than is the case in other quarters.

EIGHTH. They face the challenge of successfully integrating the largest business combination in the history of the networking industry.

NINTH. Historically, sequential growth for them in the Summer quarter has been in the low single digits.

SUMMARY. They remain optimistic about long-term growth for their industry and 3Com's position in the industry. 3Com has risen to the second, and a close second, largest networking vendor in the world. It remains their objective to grow faster than the market in FY 1998.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.