UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the quarterly period ended March 31, 2004*
OR

For the transition period from       to       

Commission file number 0-22874

JDS Uniphase Corporation

(408) 546-5000
(Registrant’s telephone number, including area code)

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

     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 x No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No

     Number of shares of common stock outstanding as of April 30, 2004 was 1,440,159,889 including 62,219,973 exchangeable shares of JDS Uniphase Canada Ltd. Each exchangeable share is exchangeable at any time into common stock on a one-for-one basis, entitles a holder to dividend and other rights economically equivalent to those of the common stock, and through a voting trust, votes at meetings of stockholders of the Registrant.

* Our quarter ended formally on April 3, 2004. For more information see Part 1, Note 1 of Notes to Condensed Consolidated Financial Statements regarding Registrant’s fiscal periods.

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements

JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

See accompanying notes to condensed consolidated financial statements

2

JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share data)
(unaudited)

See accompanying notes to condensed consolidated financial statements

3

JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

See accompanying notes to condensed consolidated financial statements

4

JDS UNIPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

     The financial information as of March 31, 2004 and for the three and nine months ended March 31, 2004 and 2003 is unaudited, but includes all adjustments (which include only normal, recurring adjustments) that JDS Uniphase Corporation (the “Company”) considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission. Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.

     The balance sheet at June 30, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three and nine months ended March 31, 2004 may not be indicative of results for the year ending June 30, 2004 or any future periods.

     The Company has a fiscal year that ends on the Saturday closest to June 30. The third quarters of fiscal 2004 and 2003 ended on April 3, 2004 and March 29, 2003, respectively. For comparative presentation purposes, all accompanying financial statements and footnotes thereto have been shown as ending on the last day of the calendar month.

Note 2. Recent Accounting Pronouncements

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued revised Interpretation No. 46 (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which was originally issued in January 2003. FIN 46R requires an investor who absorbs the majority of the expected losses, receives a majority of its expected returns, or both, (primary beneficiary) of a variable interest entity (“VIE”) to consolidate the assets, liabilities and results of operations of the entity. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. FIN 46R, as amended, is applicable in the first fiscal year or interim period ending after March 15, 2004 for non-special purpose entities (“SPEs”) interests created prior to February 1, 2003. FIN 46R is applicable to interests held in SPE’s created prior to February 1, 2003 for the first fiscal year or interim period ending after December 15, 2003. Interests held in VIE’s created after January 31, 2003 are subject to the provisions of FIN 46R from the date of the Company’s initial involvement with that entity. During the first quarter of fiscal 2004, the Company adopted the provisions of FIN 46R with respect to a master lease agreement with a special purpose entity (the “Lessor”) pertaining to two properties for facilities located in Melbourne, Florida and Raleigh, North Carolina. The Company exercised its option to purchase these properties on September 16, 2003, and paid the Lessor $44.7 million in cash. Prior to purchasing the properties, in connection with the Company’s restructuring activities, the Company had recorded impairment charges of $15.5 million related to the Raleigh, North Carolina properties. In addition, the Company accrued an impairment loss of $6.9 million related to the Melbourne, Florida properties, which the Company was amortizing over the original term of the lease. As a result of the purchase of the properties and in conjunction with the adoption of FIN 46R, the Company recognized $44.7 million of additions to property, plant and equipment, reduced by the $15.5 million impairment charge and recognized the remaining accrued impairment loss of $5 million (see Note 11) as a deferred impairment charge and a non-cash cumulative effect of an accounting change adjustment of $2.9 million (see Note 4). No other variable interests required consolidation of the related VIE’s nor were they material to the Company’s financial position.

     The Company has reviewed its cost and equity method investments and other variable interests to determine whether those entities are variable interest entities and, if so, if the Company is the primary beneficiary of any of its investee companies. At March 31, 2004, the Company had 21 cost and equity method investments primarily in privately held companies and venture funds that have the potential to provide strategic technologies and relationships to the Company’s businesses. The Company has determined that its equity investments, which are not material to the Company’s financial position, do not require consolidation as they are either not variable interest entities or in the event that they are variable interest entities, the Company is not considered to be the primary beneficiary. The Company’s maximum exposure to loss for these investments at March 31, 2004 is limited to the carrying amount of its investment of $31.4 million in such entities and its minimum funding commitments of $18.2 million.

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     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires companies to classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that requires a transfer of assets and that meets the definition of liabilities in Concepts Statement 6 and other recognition criteria in SFAS No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises,” be reported as a liability. SFAS No. 150 also requires that certain obligations that could be settled by issuance of an entity’s equity but lack other characteristics of equity be reported as liabilities even though the obligation does not meet the definition of liabilities in Concepts Statement No. 6. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on our consolidated financial position, results of operations or cash flows.

     In November 2003, the EITF reached a consensus on Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing and method of revenue recognition for arrangements that include the delivery of more than one product or service. EITF 00-21 is effective for arrangements entered into in periods beginning after June 15, 2003. The Company adopted the provisions of EITF 00-21 in the first quarter of fiscal 2004. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position or results of operations.

Note 3. Pro Forma Stock Compensation Expense

     In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the Company elected to continue to account for its employee stock compensation under the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and disclose the pro forma effects of its employee stock compensation on net loss and net loss per share. Under APB Opinion No. 25, when the exercise price of the Company’s employee stock compensation equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. For purposes of pro forma disclosure, the estimated fair value of the options or shares is amortized over the vesting period on a straight-line basis or using the graded method. The following table presents the effect on the Company’s net loss and net loss per share as if the Company had applied the fair value based method of accounting under SFAS No. 123 (in millions, except per-share data):

Note 4. Cumulative Effect of an Accounting Change

     During the first quarter of fiscal 2004, the Company adopted FIN 46R, “Consolidation of Variable Interest Entities” with respect to a synthetic lease agreement pertaining to two separate properties (see Note 2). The arrangement was a variable interest entity as defined under FIN 46R and the Company was the primary beneficiary.

     As a result, the Company recognized a non-cash accounting change adjustment of $2.9 million, reflecting cumulative depreciation on the two properties from the inception of the lease until the assets were purchased by the Company on September 16, 2003, as a cumulative effect of an accounting change in the accompanying Condensed Consolidated Statements of Operations.

Note 5. Inventories

     The components of inventories consisted of the following (in millions):

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     The Company recorded write-downs of excess and obsolete inventories of $9.5 million and $22.1 million for the three and nine months ended March 31, 2004, respectively. The Company recorded write-downs of excess and obsolete inventories of $10.1 million and $45.5 million for the three and nine months ended March 31, 2003, respectively.

     In addition, the Company consumed previously written-down inventories of $10.7 million and $34.4 million for the three and nine months ended March 31, 2004, respectively and $17.9 million and $52.2 million for the three and nine months ended March 31, 2003, respectively.

Note 6. Goodwill

     During the first nine months of fiscal 2004, goodwill of $1.0 million was recorded as a result of the attainment of certain goals specified in the acquisition of Ditech which resulted in an accrual for contingent consideration to be paid (see Note 17). The additional goodwill is included in the Communications Products reportable segment. Goodwill by reportable segment is as follows (in millions):

Note 7. Other Intangibles

     During the first nine months of fiscal 2004, no significant identified intangible assets were acquired and no identified intangible assets were impaired. The following tables present details of the Company’s other intangibles (in millions):

     Amortization of intangibles was $3.9 million and $11.8 million for the three and nine months ended March 31, 2004, respectively. Amortization of intangibles was $3.7 million and $15.9 million for the three and nine months ended March 31, 2003, respectively.

     Based on the carrying amount of the intangibles as of March 31, 2004, the estimated future amortization is as follows (in millions):

7

Note 8. Investments

     During fiscal 2004, the Company entered into an agreement with a former customer, which settles product cancellation claims made by the Company against this former customer. As a result of this settlement, the Company received approximately 2.7 million preferred shares representing an approximate 5% ownership of the former customer, on a fully diluted basis, a convertible note with a principal amount of $5.1 million that is convertible at the former customer’s option into preferred shares of their company, a promissory note in the amount of $6.1 million that is in settlement of trade receivables owed the Company and is due and payable in installments through fiscal 2006 and a supply agreement whereby the Company has the option to buy certain components from the former customer at the former customer’s cost. The Company has evaluated the financial condition of the former customer and has determined that the realization of the assets received as part of the settlement is not probable and therefore has not ascribed any value to these assets, nor recognized any gain associated with settlement.

Reduction of Fair Value of Investments:

     The Company regularly evaluates the carrying value of its investments. When the carrying value of an investment exceeds the fair value and the decline in value is deemed to be other-than-temporary, the Company writes down the investment to its fair value. During the three and nine months ended March 31, 2004 and 2003, the Company recorded other-than-temporary reductions in fair value of certain non-marketable equity investments. Details of the charges were as follows (in millions):

     During fiscal year 2002, the Company entered into an automation development alliance agreement with Adept (see Note 18). In connection with this alliance, the Company invested $25.0 million in Adept’s convertible preferred stock, which the Company converted into common stock. During the first quarter of fiscal 2003, the Company determined that the decline in fair value of its Adept investment was other-than-temporary and recorded an impairment charge of $19.1 million. During the third quarter of fiscal 2003, the Company determined that there was an additional other-than-temporary decline in the fair value of its Adept investment and recorded an impairment charge for the remaining balance of $5.9 million.

Loss on Equity Method Investments:

     During the three and nine month periods ended March 31, 2004, the Company recorded $0.5 million and $6.5 million, respectively, as its pro rata share of net losses in its equity method investments. During the three and nine month periods ended March 31, 2003, the Company recorded $1.2 million and $7.7 million, respectively, as its pro rata share of net losses in its equity method investments.

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Note 9. Commitments and Contingencies

Pending Litigation

The Securities Class Actions:

          As discussed in our previous filings, litigation under the federal securities laws has been pending against the Company and certain former and current officers and directors since March 27, 2002. On March 9, 2004, Defendants moved to dismiss the second amended complaint in In re JDS Uniphase Corporation Securities Litigation, C-02-1486 (N.D. Cal.). Briefing on the motion will continue through April and May. A hearing on the motion and a case management conference is set for June 4, 2004. No activity has occurred in Zelman v. JDS Uniphase Corp., No. C-02-4656 (N.D. Cal.), a related securities case, since our last filing on Form 10-Q.

The Derivative Actions:

          As discussed in our previous filings, derivative actions purporting to be brought on the Company’s behalf have been filed in state and federal courts against several of our current and former officers and directors based on the same events alleged in the securities litigation. On March 17, 2004, Defendants moved to dismiss the complaint in Corwin v. Kaplan, No. C-02-2020 (N.D. Cal.). Briefing on the motion will continue through April and May. A hearing on the motion and a case management conference is set for June 4, 2004. A stay remains in place in the California state derivative action, In re JDS Uniphase Corporation Derivative Litigation, Master File No. CV806911 (Santa Clara Super. Ct.). On March 4, 2004, the Court denied Plaintiffs’ motion to lift the stay and scheduled a status conference for June 15, 2004. No activity has occurred in Cromas v. Straus, Civil Action No. 19580 (Del. Ch. Ct.), the Delaware derivative action, since our last filing on Form 10-Q.

The OCLI and SDL Shareholder Actions:

          As discussed in our previous filings, plaintiffs purporting to represent the former shareholders of OCLI and SDL have filed suit against the former directors of those companies, asserting that they breached their fiduciary duties in connection with the events alleged in the securities litigation against the Company. On February 24, 2004, Defendants answered the complaint in the OCLI action, Pang v. Dwight, No. 02-231989 (Sonoma Super. Ct.). In the SDL action, Cook v. Scifres, Master File No. CV814824 (Santa Clara Super. Ct.), the Court on March 15, 2004, approved the parties’ stipulation to a limited stay of discovery pending a determination by the Northern District whether the federal securities action against JDSU may proceed.

The ERISA Actions:

          As discussed in our previous filings, actions have been filed in the District Court for the Northern District of California against the Company and certain of its former and current officers and directors on behalf of a purported class of participants in the Company’s 401(k) Plan. On February 27, 2004, the Court scheduled a case management conference for June 4, 2004.

          The Company believes that the factual allegations and circumstances underlying these securities class actions, derivative actions, the OCLI and SDL class actions, and the ERISA class actions are without merit. The costs of defending these lawsuits has been costly, will continue to be costly, and could be material and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations which could prove to be time consuming and disruptive to normal business operations. An unfavorable outcome or settlement of this litigation could have a material adverse effect on the Company’s financial position, liquidity or results of operations.

          The Company is a party to other litigation matters and claims, which are normal in the course of its operations. While the results of such litigation matters and claims cannot be predicted with certainty, the Company believes that their final outcome will not have a material adverse impact on its financial position, liquidity, or results of operations.

Note 10. Reduction of Goodwill

     During the three and nine months ended March 31, 2004, the Company recorded no impairment charges under SFAS No. 142. During the three and nine months ended March 31, 2003, the Company recorded $0 and $225.7 million, respectively, of impairment charges.

9

     As part of its quarterly review of financial results in the first quarter of fiscal 2003, the Company noted indicators that the carrying value of its goodwill may not be recoverable and performed an additional impairment review. The impairment review was performed because of the prolonged economic downturn affecting the Company’s operations and revenue forecasts. As the Company determined that the continued decline in market conditions within the Company’s industry was significant and prolonged, the Company evaluated the recoverability of its goodwill in accordance with SFAS No. 142.

     Under the first step of the interim SFAS No. 142 analysis, the fair value of the reporting units was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Under the income approach, the Company assumed a cash flow period of 5 years, long-term annual growth rates of 9% to 33%, a discount rate of 12.5% and terminal value growth rates of 5% to 7%. Based on the first step analysis, the Company determined that the carrying amount of three reporting units within the Communications Products Group was in excess of their fair value. As such, the Company was required to perform the second step analysis on the three reporting units that have failed the first step test to determine the amount of the impairment loss. As of the filing of the Quarterly Report on Form 10-Q for the first quarter of fiscal 2003, the Company had not completed the second step analysis due to the complexities involved in determining the implied fair value of the goodwill of each reporting unit. However, the Company determined that an impairment loss was probable and could be reasonably estimated. Therefore, as permitted by SFAS No. 142, the Company recorded an estimated impairment charge of $224.4 million to reduce the carrying value of its goodwill in the first quarter of fiscal 2003.

     During the second quarter of fiscal 2003, the Company completed the second step analysis in connection with the impairment review for the first quarter of fiscal 2003 and recorded an additional impairment charge of $1.3 million, as the actual impairment charge was determined to be higher than the estimated charge recorded in the first quarter of fiscal 2003.

     The following table summarizes the impairment charges recorded during fiscal 2003 (in millions):

(1) During the first quarter of fiscal 2004, the names of certain reporting units were changed. The table above reflects the current names for these reporting units.

Note 11. Reduction of Other Long-Lived Assets

     During the three and nine months ended March 31, 2004 and three and nine months ended March 31, 2003, the Company recorded $10.5 million, $53.8 million, $11.2 million and $165.8 million, respectively, of reductions in the carrying value of its long-lived assets in accordance with SFAS No. 144. These charges excluded asset write-downs associated with the restructuring actions (see Note 12). The following table summarizes the components of the reductions of other long-lived assets (in millions):

Three and Nine Months Ended March 31, 2004:

Assets Held and Used:

10

     During the three months ended March 31, 2004, in accordance with SFAS No. 144, the Company reduced to estimated realizable value, the value of certain manufacturing equipment by $7.7 million, and other assets by $3.6 million. During the first nine months of fiscal 2004, as a result of the adoption of FIN 46R with respect to two properties under a synthetic lease agreement, the Company recognized a $5 million deferred impairment charge related to the Melbourne, Florida property, which was originally being amortized over the term of the lease. (See Note 2). The Company noted no indicators of impairment during the three and nine month periods ending March 31, 2004 related to the Company’s remaining long-lived assets, including purchased intangibles.

Assets Held for Sale:

     During the three and nine months ended March 31, 2004, the Company classified certain assets as assets held for sale and adjusted the carry value of certain assets previously classified as held for sale. In accordance with SFAS 144, the Company increased the carrying value of certain assets by $0.9 million for the three months ended March 31, 2004. The Company recorded total impairment charges of $37.4 million for the nine months ended March 31, 2004, representing the amount by which the carrying value of the assets exceeded fair value less cost to sell.

Three and Nine Months ended March 31, 2003:

Assets Held and Used:

     The Company noted indicators during the first quarter of fiscal 2003 that the carrying value of its long-lived assets, including purchased intangibles recorded in connection with its various acquisitions and property, plant and equipment, may not be recoverable and performed an impairment review. The impairment review was performed pursuant to SFAS No. 144 because of the prolonged economic downturn affecting the Company’s operations and revenue forecasts. The Company’s projected future revenue and cash flows for certain of the Company’s asset groupings were revised downward in the first quarter of fiscal 2003. Therefore, the Company evaluated the recoverability of its long-lived assets and recorded impairment charges based on the amounts by which the carrying amounts of these assets exceeded their fair value. For purchased intangibles, fair value was determined based on discounted future cash flows for the operating entities that had separately identifiable cash flows. For tangible fixed assets, the Company valued these assets that were subject to impairment using specific appraisals.

     The following table summarizes the write-downs of purchased intangibles and property, plant and equipment by acquisition for the first quarter of fiscal 2003 (in millions):

     During the second and third quarters of fiscal 2003, the Company noted no impairment indicators in connection with its long-lived assets held and used, and accordingly, a test of recoverability of its long-lived assets was not required.

Assets Held for Sale:

     During the three and nine month periods ended March 31, 2003, the Company classified certain property and equipment as assets held for sale. The Company recorded a loss of $11.2 million and $18.1 million, respectively, representing the amount by which their carrying value exceeded fair value less cost to sell.

Note 12. Restructuring

Overview - Q3’04 Restructuring Actions:

11

     In January 2004, the Company terminated or notified for termination 30 employees at its manufacturing operation in Atsugi, Japan, eliminating technology and manufacturing from its Japan operation. In a separate transaction the Company sold certain assets of the Atsugi operation and recorded a nominal loss. As part of this sale and restructure the Company has moved to a newer technology, which it believes will provide improved products at lower costs.

     In February 2004, the Company initiated the consolidation and reorganization of the Subsystem Products Group into a functionally aligned structure. This facilitated a product alignment from modules through circuit packs and customer driven systems. Subsystem Products Group research and development activities were also combined into a single group, where it can provide focused project teams in support of new product introductions. This consolidation/reorganization allows the Company to provide common attributes for all Subsystem Products Group products and enhance support for its customers’ evolving needs, while standardizing the design process, enhancing alignment of product specifications and creating more efficiencies.

     The Company’s Q3’04 Restructurings resulted in restructuring charges of $1.2 million primarily related to severance and fringe benefits associated with employee reductions of approximately 30 in North America and 30 in Asia-Pacific, of which 40 were engaged in manufacturing, 15 in research and development and 5 in selling, general and administration functions. As of March 31, 2004, 54 employees have been terminated. The Company recorded the initial charges in the third quarter of fiscal 2004, which were offset by payments of $0.9 million. The remaining severance and benefit payments are scheduled to be paid through the first quarter of fiscal 2005.

Overview - Global Realignment Program:

     In April 2001, the Company initiated the Global Realignment Program, under which it began restructuring its business in response to the economic downturn. From April 2001, through the end of the second quarter of fiscal 2004, the Company implemented 9 phases of restructuring activities under the Global Realignment Program and recorded total restructuring charges of $651.8 million. In addition, the Company incurred charges other than restructuring of $480.7 million related to the Global Realignment Program (GRP). Restructuring activities initiated prior to December 31, 2002 were recorded in accordance with EITF No. 94-3, and restructuring activities initiated after December 31, 2002 were recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employers’ Accounting for Post Employment Benefits.”

     Under the Global Realignment Program, the Company has consolidated and reduced its manufacturing, research and development, sales and administrative facilities in North America, Europe and Asia-Pacific. The total number of sites and buildings closed or scheduled for closure is 29, all of which are related to various phases of restructuring. Based on the decisions made through the end of the second quarter of fiscal 2004, the Company expects to have reduced its total workforce by approximately 19,900 employees upon the completion of the Global Realignment Program. Of the total, 19,150 relate to restructuring activities and 750 relate to other decisions made under the Global Realignment Program. As of March 31, 2004, 19,836 employees have been terminated.

     In connection with the restructuring activities, management with the appropriate level of authority approved and committed the Company to plans to close 29 sites, vacate buildings at the closed sites as well as at other continuing operations, and reduce its workforce by approximately 19,150 employees. These sites were located in Arnhem, Netherlands; Asheville, North Carolina; Bracknell, United Kingdom; Columbus, Ohio; Eatontown, New Jersey; Eindhoven, Netherlands; Freehold, New Jersey; Gloucester, Massachusetts; Hillend, United Kingdom; Horsham, Pennsylvania; Manteca, California; two sites in Ottawa, Ontario; Oxford, United Kingdom; Piscataway, New Jersey; Plymouth, United Kingdom; Raleigh, North Carolina; Richardson, Texas; Rochester, New York; two sites in San Jose, California; Shunde, China; Sydney, Australia; Taipei, Taiwan; Toronto, Ontario; Torquay, United Kingdom; Victoria, British Columbia; Waghaeusel-Kirrlach, Germany; and Witham, United Kingdom. One of the San Jose, California sites is related to the E-TEK operations, which were relocated to the Company’s other sites located in West Trenton, New Jersey and Shenzhen, China. The Company’s San Jose headquarters continues to occupy a portion of the E-TEK site.

Workforce Reduction:

     The Company recorded initial charges totaling $228.6 million primarily related to severance and fringe benefits associated with the reduction of approximately 19,150 employees, which includes non-cash severance charges of $12.3 million, of which $11.1 million related to the modification of a former executive’s stock options and $1.2 million to disputed severance. The Company has recorded decreases of $12.9 million, to the accrual balance. The decreases are due to actual payments for such charges being lower than original estimated expenses.

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     Approximately 16,200 employees were engaged in manufacturing, 1,350 in research and development, and 1,600 in selling, general and administrative functions. Approximately 16,400 employees were located in North America, 1,700 in Europe, and 1,050 in Asia-Pacific. The Company has substantially completed its Phase 1 through 4, 6, 7 and 8 workforce reductions. The remaining accrual balance reflects severance and benefit payments scheduled to be paid, primarily under Phase 5,through fiscal 2005, for employees that have been notified that they will be terminated, as well as future payments for employees that have already been terminated, as required under local laws.

Facilities and Equipment and Lease Costs:

     Property and equipment that were disposed of or removed from operations resulted in initial charges totaling $274.4 million, of which $229.7 million was related to the Communications Products Group, $41.2 million was related to the Commercial and Consumer Products Group and $3.5 million was related to the “All Other” category for segment reporting purposes (see Note 16). The property and equipment write-downs consisted primarily of owned buildings, leasehold improvements, computer equipment and related software, production and engineering equipment, and office equipment, furniture and fixtures. Through the third quarter of fiscal 2004, the Company recorded total adjustments of $11.6 million, primarily due to additional declines in the fair market value of owned buildings held for disposal. In addition, through the third quarter of fiscal 2004, the Company received $8.4 million of cash proceeds in excess of the estimated salvage value of certain restructured assets sold.

     The Company incurred initial charges totaling $156.0 million, for exiting and terminating leases based on assumptions and related estimates that it deemed appropriate for the economic environment that existed at the time these estimates were made. Initial charges were accrued for phases one though five and seven through nine. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions. However, due to the continued deterioration of the commercial real estate market, primarily in the U.S., and the final settlement of certain lease obligations, we have made appropriate adjustments to the initial restructuring charges recorded for all the phases. The Company’s accrued liability for all plans of $81.4 million at March 31, 2004, was net of approximately $82.8 million of estimated sublease income to be generated from sublease contracts not yet negotiated and estimated savings on settlement of future lease terminations.

Global Realignment Program (GRP) and Q3’04 Restructuring Activities:

     The following table summarizes the various restructuring charges from inception through the end of the third quarter of fiscal 2004 (in millions):

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Charges Other Than Restructuring:

     In addition to the charges recorded in connection with the restructuring activities, the Company has incurred total other charges of $480.7 million related to the Global Realignment Program. Details of these charges were as follows (in millions):

     Through March 31, 2004, the Company has incurred total charges related to property and equipment of $209.2 million. During the three and nine month periods ended March 31, 2004 and 2003, the Company recorded $0.3 million, $7.8 million, $1.8 million and $30.7 million, respectively, of additional depreciation from changes in the estimated useful life and the write-downs of certain property and equipment that were identified for disposal but remained in use until the date of disposal.

     Through March 31, 2004, the Company has incurred total charges related to inventory write-downs of $173.5 million and purchase commitments and obligations of $47.3 million. During the three and nine month periods ended March 31, 2004 and 2003, the Company recorded charges associated with inventory write-downs, purchase commitments and other obligations of $0.2 million, $1.7 million, $1.6 million and $(3.6) million respectively resulting from product consolidations and discontinuations in connection with the Global Realignment Program.

     Through March 31, 2004, the Company has incurred total workforce-related charges of $28.7 million. The reduction of approximately 750 employees, consisting of approximately 600 in manufacturing, 50 in research and development, and 100 in selling, general and administrative functions. Approximately 150 employees were located in North America, 100 in Europe and 500 in Asia-Pacific. All 750 employees have been terminated and severance and benefit payments related to these employees have been paid in full.

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     Through March 31, 2004, the Company has incurred total lease costs of $10.7 million. The Company anticipates that it will take approximately 18 months from the end of the third quarter to sublease the vacated properties. Amounts related to the lease expense, net of anticipated sublease proceeds, will be paid over the respective lease terms through fiscal 2011. During the three and nine month periods ended March 31, 2004 the Company recorded an increase to the lease costs of $0.5 million and decreases of $1.2 million, respectively, reflecting cost of owned properties no longer in productive use offset by reduced expected ongoing expenditures. For the three and nine months ended March 31, 2003, the Company incurred lease costs of $0.0 million and $0.5 million, respectively.

     Through March 31, 2004, the Company has incurred total moving and other costs of $11.3 million. During the three and nine month periods ended March 31, 2004 and 2003, the Company incurred moving and other costs of $0.3 million, $(0.6) million, $2.1 million and $1.2 million, respectively.

     Charges other than restructuring were recorded in the Company’s Condensed Consolidated Statements of Operations for the three and nine months of fiscal 2004 as follows (in millions):

     As of March 31, 2004, the accrual balance related to these charges was $5.9 million, consisting primarily of purchase and lease commitments. The accrual balance is included in “Other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.

Recommissioning of Assets:

     As the Company continued to execute its restructuring plans to realign its operations and consolidate the facilities, the Company recommissioned certain property and equipment during the fourth quarter of fiscal 2002 with a carrying value of $0 that had previously been removed from operations and fully depreciated or written down under the Global Realignment Program. These assets were placed back into service due to the following reasons: (i) unanticipated changes in the industry and customer demand for certain product lines, (ii) impact of unforeseen warranty obligations, and (iii) changes in initial estimates. The total net book value of the recommissioned property and equipment at the time of the write-downs was $27.7 million, of which $15.9 million was related to the Communications Products Group, $10.7 million was related to the Commercial and Consumer Products Group and $1.1 million was related to the “All Other” category for segment reporting purposes (see Note 16). Based on the dates these assets were placed back into service and taking into consideration the potential impact of the impairment loss on these assets, the Company would have incurred additional depreciation expense of approximately $0.8 million, $2.7 million, $1.1 million and $3.3 million for the three and nine month periods ended March 31, 2004 and 2003, respectively.

Note 13. Income Tax Expense (Benefit)

     The Company recorded an income tax benefit of $7.3 million and $17.7 million, for the three and nine months ended March 31, 2004, respectively, as compared to an income tax expense of $18.6 million and $19.5 million for the three and nine months ended March 31, 2003, respectively. The income tax benefit the Company recorded for the three and nine months ended March 31, 2004, includes tax benefits of $11.0 million and $27.3 million, respectively, recognized as a result of appreciation in the carrying value of available-for-sale marketable securities that reduced the amount of valuation allowance for deferred tax assets that otherwise would have been recorded in connection with our domestic loss from continuing operations.

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     The income tax benefit recorded for the three and nine months ended March 31, 2004 differs from the expected tax benefit that would be calculated by applying the federal statutory rate to our loss before income taxes primarily due to increases in our valuation allowance for deferred tax assets attributable to our domestic and foreign loss from continuing operations and income tax expense recorded in connection with the sale of marketable securities.

     Fluctuations in the value of our available for sale investments may create volatility in the income tax expense (benefit) we record in future quarters.

     Due to the continued economic uncertainty in the industry, the Company has recorded deferred tax assets as of March 31, 2004 only to the extent of deferred tax liabilities.

Note 14. Net Loss Per Share

     The following table sets forth the computation of basic and diluted net loss per share (in millions, except per-share data):

     As the Company incurred net losses for the three and nine months ended March 31, 2004, the effect of dilutive securities (in-the-money stock options) totaling 13.5 million and 6.9 million equivalent shares, respectively, has been excluded from the calculation of diluted net loss per share because it was anti-dilutive. As the Company incurred net losses for the three and nine months ended March 31, 2003, the effect of dilutive securities (in-the-money stock options) totaling 4.3 million and 3.7 million equivalent shares, respectively, has been excluded from the calculation of diluted net loss per share because it was anti-dilutive.

Note 15. Comprehensive Income (Loss)

     The Company’s accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, accumulated net unrealized gains on available-for-sale investments, less an adjustment for net gain on investments previously included in net income and the estimated tax (benefit). At March 31, 2004 and June 30, 2003, the Company had a balance of net unrealized gains of $46.7 million and $29.2 million, respectively, on available-for-sale investments. Additionally, at March 31, 2004 and June 30, 2003, the Company had $15.9 million and $18.6 million, respectively, of foreign currency translation losses.

     The components of comprehensive loss were as follows (in millions):

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Note 16. Segment Information

     The Company evaluates its reportable segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company has identified Kevin Kennedy, Chief Executive Officer, as its Chief Operating Decision Maker (“CODM”) pursuant to SFAS No. 131. The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and operating results.

     The Company designs and manufactures products for fiberoptic communications, as well as for markets where its core optics technologies provide solutions for industrial, commercial and consumer applications. The Company has two reportable segments as described below:

(i)		Communications Products Group:
		The Communications Products Group consists of the Company’s communication businesses, which provide fiberoptic components and modules for system manufacturers in the telecommunications, data communications and cable television industries.
(ii)		Commercial and Consumer Products Group – formerly the Thin Film Products Group:
		The Commercial and Consumer Products Group consists of the Company’s non-communications businesses and includes laser subsystems products and thin film products for display, security, decorative, aerospace and defense applications.

     The amounts shown as “All other” consist of certain unallocated corporate-level operating expenses. In addition, the Company does not allocate restructuring charges, income taxes, non-operating income and expenses or specifically identifiable assets to its segments. During the first quarter of fiscal 2004, the Company stopped allocating restructuring and other realignment charges to its segments. In addition, the Company began allocating corporate sales and marketing expenses to the Communications Group.

     Information on reportable segments is as follows (in millions):

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     Intersegment sales were recorded at fair market value less an agreed-upon discount.

Note 17. Acquisitions

Ditech Communications:

     On July 16, 2003, the Company completed the acquisition of certain assets of the optical communications business of Ditech Communications (“Ditech”). The Company believes that the acquisition adds to its abilities to integrate optics, electronics and software in subsystems for optical equipment manufacturers. Under the terms of the agreement, the Company will pay Ditech $1.6 million in cash, of which $1.4 million was paid at closing. The Company has retained the remaining amount for possible breach of general representations and warranties and will pay this amount to Ditech approximately one year after the closing date in the event no such breach of general representations or warranties exists.

     The Company expects to make additional cash payments of up to $4.9 million, of which $0.9 million is based on the level of inventory purchased from Ditech that is sold by the Company (the Company is entitled to be reimbursed for any purchased inventory that remains unused at June 30, 2004), and $4 million is contingent upon the revenue generated by the acquired business through June 30, 2005. At March 31, 2004, the Company has accrued $0.9 million for payments to be made as a result of revenue levels attained through that date. Additional payments related to inventory will be recorded to cost of sales at the time product is sold, while contingent payments based on revenue will be accounted for as goodwill. Direct transaction costs incurred in connection with the acquisition were immaterial.

     The purchase price allocation was as follows (in millions):

     Existing technology is being amortized over its estimated useful life of three years.

     The acquisition was accounted for as a purchase transaction under SFAS No. 141, and accordingly, the tangibles assets acquired were recorded at their fair value at the date of the acquisition. The results of operations of Ditech have been included in the Company’s financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

     The following table summarizes the components of the net tangible assets acquired (in millions):

OptronX:

     On September 18, 2002, the Company completed the acquisition of the transceiver/transponder business unit of OptronX. The Company believes that the acquisition will extend its transmission product line in metro and short-reach applications. The Company paid $6.2 million in cash to OptronX. Direct transaction costs incurred in connection with the acquisition were immaterial.

     The final purchase price allocation was as follows (in millions):

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     Existing technology is being amortized over its estimated useful life of three years.

     The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair value at the date of the acquisition. The results of operations of the transceiver/transponder unit have been included in the Company’s financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

     The following table summarizes the components of the net tangible liabilities assumed (in millions):

     A portion of the purchase price has been allocated to existing technology and acquired in-process research and development (“IPR&D”). They were identified and valued through analysis of data provided by OptronX concerning developmental products, their stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The Income Approach was the primary technique used in valuing the existing technology. The discount rate used was 20%.

     Those developmental projects that had not reached technological feasibility and had no future alternative uses were classified as IPR&D and expensed in the first quarter of fiscal 2003. The nature of the efforts required to develop the IPR&D into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

Datacom:

     During the second quarter of fiscal 2003, the Company completed the allocation of the purchase price of Datacom, which the Company acquired in the second quarter of fiscal 2002. The following table summaries the allocation of the purchase price (in millions):

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          During the three and nine months ended March 31, 2003, the Company recorded adjustments of $0 and $2.7 million, respectively, as a result of the final valuation of the inventories acquired from IBM.

Note 18. Related Party Transactions

     On October 22, 2001, the Company entered into an automation development alliance agreement with Adept. Under the agreement, Adept agreed to pay the Company up to $5.0 million for certain research and development activities. The Company invested $25.0 million in Adept’s convertible preferred stock, which has been converted into common stock, and the investment was accounted for under the cost method. For the three months ended September 30, 2002, the Company recorded $19.1 million of reductions in fair value of its Adept investment as the decline in fair value was determined to be other-than-temporary, and for the three months ended March 31, 2003, the Company recorded an additional $5.9 million of reduction in the fair value, bringing the value to $0 (see Note 8).

     During the second quarter of fiscal 2003, the Company and Adept mutually terminated the automation development alliance agreement. As a result of the termination, Adept issued the Company a promissory note of $1.0 million to pay off its outstanding obligation of the same amount to the Company. Adept paid the promissory note during the second quarter of fiscal 2004.

Note 19. Guarantees

     The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.

     The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of March 31, 2004.

Product Warranties:

     In general, the Company offers a one-year warranty for most of its products in the Communications Products Group, and a three-month to one-year warranty for most of its products in the Commercial and Consumer Products Group (formerly the Thin Film Products Group). The Company provides reserves for the estimated costs of product warranties during the period in which revenue is recognized. The Company estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

     The following table presents the changes in the Company’s warranty reserve during the three and nine months ended March 31, 2004 and 2003 (in millions):

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Note 20. Convertible Notes

     On October 31, 2003, we completed the sale of $475 million aggregate principal amount of Zero Coupon Senior Convertible Notes due in 2010. The notes were issued for cash consideration in a private placement to the initial purchasers, Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., and CIBC World Markets Corp. The initial purchasers resold the notes to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. Proceeds from the notes amounted to $462.5 million after issuance costs. The notes do not bear interest, have a zero yield-to-maturity, and are convertible into the Company’s common stock at a conversion price of $4.94 per share. Each $1,000 principal amount is initially convertible into 202.4291 shares of the Company’s common stock upon the satisfaction of certain conditions. Therefore, the notes are convertible in the aggregate into approximately 96.2 million shares of common stock. The Company has the right to redeem the notes beginning November 15, 2008. Holders of the notes may require the Company to repurchase the notes on November 15, 2008. Under certain circumstances, specifically, during any fiscal quarter commencing after December 31, 2003, if the closing sale price of our Common Stock exceeds 110% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter, holders may require the Company to repurchase the notes beginning the second quarter of fiscal 2004. This has not occurred. The Company intends to use the net proceeds of the offering for general corporate purposes, including research and development programs, general working capital and possible future acquisitions and strategic investments.

     The Company filed a registration statement with the SEC on November 14, 2003 and amended the registration statement on December 12, 2003, with respect to the resale of the Notes and the common stock issuable upon the conversion of the Notes. The registration statement was declared effective by the SEC on December 12, 2003. The costs incurred in connection with the convertible notes are being amortized to interest expense over 5 years.

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

Forward-Looking Statements

     Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipate that,” “believes,” “can impact,” “continue to,” “estimates,” “expects to,” “hopes,” “intends,” “plans,” “to be,” “will be,” “will continue to be” or similar words.

     These statements include: (i) statements or implications regarding the stabilization of our markets and current or future growth thereof; (ii) our expectations and beliefs regarding future average sales prices, costs and margins, as well as future restructuring costs and their impact on our financial results; (iii) statements regarding the completion of the restructuring and other realignment programs and the expected level and timing of cost savings and other benefits to the Company from the same as well as the expected costs thereof; (iv) statements or implications regarding our execution and our ability to improve the same; and (v) any anticipation or guidance as to future industry or market conditions or as to our financial performance. Forward-looking statements also include, among others, all italicized portions of this Report.

     Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include, among other things, the risks (i) our ongoing integration and restructuring efforts, including, among other things, facility closings, product transfers and organizational changes, may not be successful in achieving their expected benefits, may be insufficient to align our operations with customer demand and the changes affecting our industry, or may be more costly, disruptive or extensive than currently anticipated or may cause manufacturing delays, product quality problems, product shortages and other disruptions to our supply chain and ability to timely deliver products to our customers as and when requested; (ii) increasing pricing pressure, as the result of the industry uncertainty, industry consolidation and competitive factors, may harm our revenue and profit margins; (iii) our research and

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development programs may be insufficient or too costly, or may not produce new products, with performance, quality, quantity and price levels satisfactory to our customers; (iv) our ongoing efforts to reduce product costs to our customers, through, among other things, relocation, automation, improved manufacturing processes and product rationalization may be unsuccessful; and (v) our ability to predict future performance continues to be difficult. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties including the risks set forth above. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our expectations.

Results of Operations

Our Industries and Quarter Developments

     We are a worldwide leader in optical technology. We design and manufacture products for fiberoptic communications, as well as for markets where our core optics technologies provide innovative solutions for industrial, commercial and consumer applications. Our fiberoptic components and modules are deployed by system manufacturers for the telecommunications, data communications and cable television industries. We also offer products for display, security, medical/environmental instrumentation, decorative and aerospace and defense applications. We currently employ approximately 5,300 employees at 13 locations, principally located in North America, the Peoples Republic of China, France and the Netherlands.

     Our communications markets consist generally of:

	•		Enterprise and storage equipment providers such as Cisco, Sun Microsystems and Hewlett Packard.
	•		The telecommunications carriers: the regional Bell companies, or “RBOCS”; the long distance carriers, such as AT&T and MCI; international counterparts, such as British Telecom and Deutsche Telcom; and, to a growing extent, emerging carriers in the rest of the world.
	•		System and equipment providers to the communications network carriers: principally Nortel, Lucent, Alcatel, Ciena, and Cisco
	•		Cable service providers such as Comcast and Time Warner.
	•		System and equipment providers to the cable service providers, such as Scientific Atlanta.

     We supply a broad portfolio of optical components, modules and subsystems to the equipment and system providers in each of these segments.

     Our Commercial and Consumer Products Group (formerly referred to as the Thin Film Products Group) includes our optical coating and bulk optics capablilities. Optical coatings are microscopic layers of materials, such as silicon and magnesium fluoride, applied to the surface of a substrate, such as glass, plastic or metal, to alter its optical properties. Optical coatings work by controlling, enhancing or modifying the behavior of light to produce specific effects such as reflection, refraction, absorption, abrasion resistance, anti-glare and electrical conductivity. This control is achieved as a result of the optical properties, number of layers and thickness of the optical coatings in relation to wavelengths of light. The ability to control the behavior of light using thin film coatings plays a critical role in many industries and products.

     Our Commercial and Consumer Products Group markets consist generally of:

	•		Display: optical components and modules and front surface mirrors used in rear projection and plasma displays.
	•		Custom Optics: medical/environmental intrumentation, high precision coated products, optical sensors for aerospace and defense applications and optical filters for medical instruments.
	•		Light Interference Pigments: color shifting utilized in security products and decorative surface treatments. Pigments are used in security products to inhibit counterfeiting of currencies and other valuable documents.
	•		Lasers: lasers subsystems are used in biotechnology, graphic arts and imaging, semiconductor processing, material processing and other laser based applications and markets.

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     Overall, our communications markets are notable for, among other things, their high concentration of customers at each level of the industry, as well their extremely long design cycles. One consequence of a highly concentrated customer base is systemic pricing pressure at each level of the industry. Large capital investment requirements, long return on investment periods, uncertain business models and complex and shifting regulatory hurdles, among other things, currently combine to limit opportunities for new carriers to emerge. Thus, we expect that high customer concentration and its attendant pricing pressure and other effects on our communications markets will remain for the foreseeable future. Long design cycles mean that considerable resources must be spent to design and develop new products with limited visibility relative to the ultimate market opportunity for the products (pricing and volumes) or the timing thereof. As the supplier of components and modules to this industry, we feel the effects most acutely, as system designs must first be initiated at the carrier level, communicated to the systems provider and then communicated to us and our competitors. During system design periods, shifts in economic, industry, customer or consumer conditions could and often do cause redesigns, delays or even cancellations to occur with their concomitant costs to those involved. Communications industry design cycles are often devastating for companies without the financial and infrastructural resources to sustain the long periods between project initiation and revenue realization. Our Commercial and Consumer Products Group, while more diverse, shares some of the customer concentration and design cycle attributes of our communications markets.

     We are working aggressively to expand our distribution channels for several of our core competencies in these areas to, among other things, reduce our exposure to customer concentration and long design cycles across our company.

     Major business developments during the third quarter of fiscal 2004 include:

	•		We continued to align our organization and focus on organizational development by identifying and implementing hiring, streamlining and consolidation programs.
	•		For the second consecutive quarter our revenues increased. Revenue was approximately evenly divided between our Communications and Commercial and Consumer Products segments.
	•		We continued to focus on execution improvement.
	•		We had two customers from our Commercial and Consumer Products Group (formerly the Thin Film Products Group) that represented greater than 10% of our total revenues for the quarter.
	•		Our SG&A and R&D expenses continued to decline sequentially reflecting the benefit from cost reduction initiatives we have undertaken.
	•		We realized a gain on the sale of marketable public securities of approximately $19.2 million. The fair value of our marketable securities at March 31, 2004 was approximately $101.3 million.
	•		We recorded a tax benefit of approximately $7 million primarily resulting from an unrealized gain on our investments in marketable securities. We expect continuing fluctuations in the value of our marketable securities which will create variability in our tax provision.
	•		Our levels of accounts receivable and inventory increased as we experienced a higher portion of our quarterly shipments during the third month of the quarter and we increased our investment in inventory to respond to customer requested shorter lead times.

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Net Revenue:

* Primary reasons for change. Net revenue declined primarily due to lower demand for our Commercial and Consumer products, particularly due to reduced display and security product revenue. These declines were partially offset by increased revenue from our Communications products, primarily reflecting increased demand for components supporting the long haul market.

**Primary reasons for change: Net revenue declined due to lower demand for our Communications products, and lower average selling prices resulting from industry consolidation, and decreases in network deployment and capital spending by telecommunications carriers, which in turn caused our customers to reduce their inventory levels, and hence, their need for our products. The decline in our Commercial and Consumer Products revenue was primarily due to declines in our display revenue.

Notes:

	•		Net revenue during the third quarter of fiscal 2004 included no cancellation revenue. Net revenue for the nine months ended March 31, 2004 included $0.4 million of cancellation revenue, compared to $3.2 million in the third quarter of fiscal 2003 and $26.4 million in the nine months ended March 31, 2003.
	•		Net revenue from our Communications Product Group accounted for 49% of our net revenue during the third quarter of fiscal 2004 as compared to 45% during the third quarter of fiscal 2003. Revenues were relatively evenly split between communications and non-communications products for the first nine months of both fiscal 2004 and fiscal 2003.
	•		Net revenue from our Commercial and Consumer Products Group accounted for 51% of our net revenue during the third quarter of fiscal 2004 as compared to 55% during the third quarter of fiscal 2003. We expect our Commercial and Consumer Products Group net revenue to continue to account for a major portion of our total net revenue.
	•		For the third quarters of each of fiscal 2004 and 2003, two customers of our Commercial and Consumer Products Group accounted for more than 10% of our net revenue. Texas Instruments and SICPA accounted for 11% and 10%, respectively, of net revenue for the third quarter of 2004, and 13% and 11%, respectively, of our net revenue for the third quarter of fiscal 2003. For the first nine months of 2004, no customer accounted for more than 10% of net revenue. Texas Instruments accounted for approximately 13% of net revenue in the first nine months of fiscal 2003.
	•		Net revenue from customers outside North America represented 38%, 30%, 35% and 30% of net revenue in the three and nine month periods ended March 31, 2004 and 2003, respectively. We expect revenue from international customers to continue to be an important part of our overall revenue and an increasing focus for revenue growth.
	•		Please refer to the “Operating Segment Information” section below for further discussions with respect to net revenue and operating results for each of our operating segments.

Comment and analysis:

     During the third quarter, our net revenue of $161.4 million was approximately 6% higher than our net revenues for the second quarter of fiscal 2004, with third quarter revenues remaining largely evenly balanced between our Communications Products Group and our Commercial and Consumer Products Group. The increased revenue over the prior quarter is attributable largely to volume increases across most of our businesses. We continue to experience instances of customer requests for shorter lead times. We believe we are seeing signs of stability in both our communication and commercial and consumer products markets, particularly evidenced by sequential revenue increases. Relying on this data, we believe that improvements in our execution will be a more significant contributor to our near term Communications Product Group revenue growth than changes in market conditions. As we experience these signs of stabilization, we have encountered multiple and systemic execution challenges principally related to factory and product transitions initiated as part of our restructuring programs. These challenges include product delivery timetable uncertainty, supply chain constraints, protracted lead times, quality problems, systems strain and related customer dissatisfaction. These execution challenges have caused order cancellations and postponements and limited our revenue growth. Improving our overall execution will be a major priority for the foreseeable future. If we do not improve our execution, including our lead times, volumes and product quality, particularly in our communications businesses, our operating results will suffer and we may experience customer defections.

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Gross Margin:

*Primary reasons for change: Improvements in gross margin were due to (i) a decline in personnel-related expenses of approximately $10.7 million as a result of workforce reductions, site closures, product transfers to both lower cost locations and contract manufacturers; (ii) $9.5 million of write-downs of excess and obsolete inventories in the current quarter, as compared to $17.5 million in the prior-year period; (iii) a reduction in acquisition related stock compensation charges of $6.4 million; and (iv) reclassification to R&D of $2.3 million of expenses previously included in cost of goods sold. These favorable impacts to gross margin were partially offset by the following: (i) a decrease in the consumption of inventory previously written off as excess or obsolete for the three months ended March 31, 2004 of $7.2 million as compared to the prior year period; (ii) no contract cancellation revenue in the current quarter, compared to $3.2 million in the prior-year period; and (iii) continued decline in average selling prices of our products resulting from continuing pricing pressures from our customers.

**Primary reasons for change: Improvements in gross margin were due to (i) a decline in personnel-related expenses of $57.7 million as a result of workforce reductions, site closures, product transfers to both lower cost locations and contract manufacturers and other cost cutting measures implemented under our Global Realignment Program; (ii) $22.1 million of write-downs of excess and obsolete inventories during the nine month period ended March 31, 2004, as compared to $45.5 million in the prior-year period; (iii) a reduction in acquisition related stock compensation charges of $16.2 million; and (iv) a decrease in warranty expense of $11.4 million as compared to the prior-year period, primarily the result of lower warranty requirements on certain products. These favorable impacts to gross margin were partially offset by the following: (i) $0.4 million in contract cancellation revenue during the current nine months compared to $26.4 million in the prior-year period; (ii) decreases in the consumption of inventory previously written off as excess or obsolete for the nine months ended March 31, 2004 of $23.8 million as compared to the prior year period; and (iii) continued decline in average selling prices of our products.

Comment and analysis:

     Gross margin for the third quarter was approximately 25% which is a two point improvement from the previous quarter. Continued average selling price declines continued to strain revenue associated with volume increases in the third quarter and restrict further improvements to our gross margin. We believe this pricing pressure will continue and may be indicative of fundamental changes in our communications industries resulting from, among other things, increased product commoditization and industry consolidation. Looking ahead, we expect this strain to moderate somewhat, as we believe that our lead-time and execution improvement programs should in general help stabilize pricing and we expect to see favorable inventory recoveries in future quarters as customers initiate orders for products that have not been produced for some time. However, we expect gross margin pressures to remain for the foreseeable future, and we are focused on actions designed to optimize our cost structure and improve our gross margins.

Research and Development (R&D):

*Primary reasons for change: The decline was attributable to (i) a decline in R&D materials of $5 million; (ii) a decline in acquisition related stock compensation charges of $4.4 million; and (iii) a decline of approximately $1.1 million for facilities and occupancy related expenses due to the write-downs of property, plant and equipment as a result of our quarterly impairment reviews, site consolidations and the removal and disposal of property, plant and equipment under the Global Realignment Program. These

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decreases were offset in part by a reclassification of $2.3 million of expense, previously included in cost of goods sold, to research and development.

**Primary reasons for change: The decrease was primarily due to the cost savings resulting from our Global Realignment Program, which included the elimination of certain product development programs, including (i) a decline in R&D materials expense of $14.5 million, as well as workforce reductions resulting in savings of approximately $11.6 million; (ii) a decline in acquisition related stock compensation charges of $9.6 million; and (iii) a reduction in facilities and occupancy related costs of approximately $4.7 million.

Comment and analysis:

     During the third quarter we continued to reduce our overall research and development costs. However, we believe that investment in R&D is critical to attaining our strategic objectives. Historically we have devoted significant engineering resources to assist with production, quality and delivery challenges which has had some negative impact on our new product development activities. Despite our continued efforts to reduce expenses, there can be no assurance that our R&D expenses will continue to decline in future quarters. In addition, there can be no assurance that such expenditures will be successful or that improved processes or commercial products, at acceptable volumes and pricing, will result from our investment in R&D.

Selling, General and Administrative Expense (SG&A):