For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-22874

JDS UNIPHASE CORPORATION

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value of $.001 per share
(Title of class)

     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 o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

     As of January 3, 2004, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5.4 billion, based upon the closing sale prices of the common stock and exchangeable shares as reported on the Nasdaq National Market and the Toronto Stock Exchange, respectively. Shares of common stock and exchangeable shares held by executive officers and directors have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     As of August 13, 2004, the Registrant had 1,443,264,161 shares of common stock outstanding, including 62,208,177 exchangeable shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain information required in Part III of this Annual Report on Form 10-K is incorporated by reference to the Registrant’s definitive Proxy Statement in connection with the 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year.

Table of Contents

FORWARD-LOOKING STATEMENTS

          Statements contained in this Annual Report on Form 10-K 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,” “continuing,” “ongoing,” or similar words. These forward-looking statements include, among others, all italicized portions of this Report and the entire “Strategy” section under Item 1. Business.

          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 forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including, without limitation, the following: (i) due to, among other things, the Company’s limited visibility, the Company’s ability to perceive or predict market trends (including, among other things, any stabilization recovery or growth thereof) is limited and uncertain; (ii) the Company’s ongoing integration, cost reduction, reorganization and restructuring efforts may not be successful in achieving their expected cost reductions and other benefits, may be insufficient to align the Company’s operations with customer demand and the changes affecting its industry, or may be more costly, or may be more extensive than currently anticipated; (iii) the Company’s ability to predict financial performance for future periods continues to be difficult; and (iv) ongoing efforts to improve our execution and design and introduce products that meet customers’ future need and to manufacture such products at competitive costs may not be successful. 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 and the “Risk Factors” set forth in this Annual Report on Form 10-K. Moreover, neither we assume 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 Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations.

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PART I

ITEM 1. BUSINESS

General

     We believe JDS Uniphase is a worldwide leader and pioneer of optical products that enable dramatic improvements in the way we communicate, detect, present and experience information. Our products are used in communications, commercial and consumer applications, including optical networks, entertainment, brand protection and defense.

     Our communications products, which include components, modules and subsystems, are used by communications equipment providers for telecommunications, data communications, and cable television networks. These products enable the transmission of video, audio and text data over high-capacity fiberoptic cables. Although ultimately highly complex, these systems perform three basic functions: transmitting, routing (switching) and receiving information, in this case, information encoded on light signals. These products include transmitters, receivers, amplifiers, dispersion compensators, multiplexers and demultiplexers, add/drop modules, switches, optical performance monitors and couplers, splitters and circulators. We also provide test and measurement equipment used to assess performance of optical components in manufacturing, research and development, system development and network maintenance.

     The communications industry is undergoing a transformation from audio to visual media for the presentation, analysis and consumption of information used in business, education and entertainment. At the same time, the storage and distribution of content (in the form of high-data audio and video, including emerging digital cinema and HDTV, and multi-player games) are similarly transforming from traditional CDs, floppy discs, DVDs and other physical storage and related distribution methods to digital files transmitted over communications networks and stored on large-capacity servers and hard drives. These transformations require the support of higher capacity networks. Traffic generated over broadband access networks already accounts for the majority of data traffic, and continues to grow at a very high rate. As greater bandwidth capability is delivered closer to the end user, we expect consumers to increasingly demand and obtain higher content, real-time, interactive visual and audio experiences. We believe that we are well positioned to continue to lead in these industries due to our unique expertise in the application of light to innovative optical solutions, enabling new business opportunities for our original equipment manufacturer (OEM) customers worldwide.

     Many of the forces driving demand for high-bandwidth communications networks (such as the emergence of high-data digital audio, video and gaming) are similarly transforming the consumer and commercial electronics industries from traditional analog cathode ray tube (CRT), smaller screen displays, to large, flat panel and projection digital mircrodisplays, as consumers and businesses are increasingly demanding the improved visual experiences offered by the new high-data content. Our commercial and consumer segment provides optics and display products (including components and subsystems used in front and rear projection displays) to serve these markets. This segment also provides lasers, coated optics and assemblies for defense, aerospace, instrumentation, biomedical and other applications. For example, we provide lasers for biotechnology, remote sensing, semiconductor, material processing, graphics and imaging and other applications. We also provide document authentication, brand protection and product differentiation solutions for a range of public and private sector markets. The products we provide for these applications control, enhance and modify the behavior of light utilizing its reflection, absorption and transmission properties to achieve specific effects such as high reflectivity, anti-glare and spectral filtering. Specific product applications include computer monitors and flat panel displays, projection systems, photocopiers, facsimile machines, scanners, security products and decorative surface treatments.

     The Company was incorporated in California in May 1979 and reincorporated in Delaware in October 1993. The Company is the product of several significant mergers and acquisitions, including, among others, the combination of Uniphase Corporation and JDS FITEL Inc. to form JDS Uniphase Corporation on June 30, 1999, and the subsequent acquisitions of Optical Coating Laboratory, Inc. (“OCLI”) on February 4, 2000, E-TEK Dynamics, Inc. (“E-TEK”) on June 30, 2000 and SDL, Inc. (“SDL”) on February 13, 2001.

     Our Internet address is www.jdsu.com. We post all Securities and Exchange Commission (SEC) filings on our website at www.jdsu.com/investors as soon as reasonably practicable after they are electronically filed or furnished to the SEC. All such filings on our Investor Relations web site are available free of charge. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Industry Environment

     The Company offers innovative products, categorized into two segments, “Communications” and “Commercial and Consumer.” Collectively, these products serve the communications, display, commercial lasers, product and document security and product differentiation markets.

Communications

     Among the driving factors in the communications industry is the strong competitive dynamic between telecommunications, cable television, satellite and wireless service providers. Each of these provider types is vying for share of the market for the expected convergence of voice, text and video content. That is, while text, voice and video content are each currently generally delivered over disparate networks, expectations are that all digitized information (text, voice and video) will be delivered from single sources over a consolidated network architecture. Consequently, while service providers typically offer diversified services to both consumers and business markets, many are rapidly investing to deploy converged multi-service networks capable of delivering “triple-play services”, i.e. integrated voice, video and entertainment services. Potential benefits for service providers include increased Average Revenue per User (ARPU) and reduced customer turnover rates, thus increasing both profitability and long-term competitive advantage. This competitive trend is predominantly relevant in markets where government action has led to deregulation of the communications industry, in particular in North America, the European Union, and several countries in both Asia and South America.

     Competition between service providers and the need to provide increasing types of services, including a larger percentage of video-based content including news, movies, and gaming is generating strong growth in demand for network capacity and bandwidth rates which in turn drives demand for many types of networking, access and transport systems.

     Within the Enterprise market, growing demand for broadband is driven by demand for intra-company (LAN or local area network) and inter-company (WAN or wide area network) information. In addition, many companies are embracing new productivity-enhancing applications, such as Voice over Internet Protocol (VoIP), which replaces traditional fixed circuit, point-to-point voice communications with packet-based network routed calls, and universal messaging systems that require greater bandwidth capability and data storage requirements.

     Growing demand for network capacity and bandwidth is expected to result in greater adoption of optical communications products across all segments including: Long Haul, Metro (core and access), Cable TV (CATV), Submarine, Fiber to the Premises (FTTP) in the Telecom sector and LAN, SAN or storage area networks and WAN for the Storage or Enterprise market. While it is too early to predict the outcome of recent industry developments concerning potential FTTP and when or if these developments will impact our business, we do expect that any deployment of fiber closer to the end user will result in increased demand on the metro and long-haul infrastructures into which these new deployments would feed. In general, all implementations move fiber closer to the consumer, displacing copper infrastructure and increasing the availability of wider bandwidth services. We believe that JDS Uniphase, with one of the broadest communications product portfolios in the industry, is poised to capitalize on these developments.

     We do remain cautious, however, in attempting to forecast the future. Visibility remains extremely limited, and we cannot provide any assurance as to the timing or scale of any new optical network deployments or sustained industry recovery, in general.

Commercial and Consumer

     Our Commercial and Consumer group offers innovative products for application in the following industries:

     Entertainment

          We participate in several markets in the entertainment industry that are undergoing a significant evolution driven by:

•

The emergence of High-Definition content, rapid adoption of DVDs and on-line gaming, and increased use of digital distribution of films and video – Consumers have quickly come to appreciate the impact that higher resolution formats have on the entertainment experience. Among other things, content providers and both

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satellite and cable television service providers are rapidly increasing supply of high-definition (HD) material that can provide up to 5 times higher resolution than traditional formats.

•

Regulations for broadcast and reception for digital TV content – As of July 1, 2004, television manufacturers are mandated by the U.S. Federal Communications Commission to integrate 50% of ATSC (Advanced Television System Committee) standards for digital tuning into all sets measuring 36 inches and larger, and 100 percent of those a year later. Next year, the mandate extends to 50% of sets measuring 25 inches through 35 inches, growing to 100% in 2006. And by July 1, 2007, all sets and video devices that normally carry analog tuning are required to integrate terrestrial ATSC tuning.

     Furthermore, the U.S. Federal Communications Commission has mandated that the nation’s 1,600 television stations transition from analog transmissions to digital signals by the end of 2006, as long as at least 85 percent of households are able to receive those signals.

     While we caution that compliance with these regulations has not been universal and, moreover, all or portions of these regulations may be modified, delayed or suspended prior to implementation and enforcement, we do expect that digital broadcasting will increase and, ultimately, replace analog broadcasting.

•

Migration from scheduled to on-demand content delivery – television programming is undergoing a transformation from scheduled programming, tightly managed by the content providers, to on-demand consumption, driven by consumer demand for greater flexibility as to when and where content is experienced. This in turn, is expected to drive further growth of consumed content.

     The above factors are contributing to the growth of HDTV sets which in turn increasingly rely on microdisplay based solutions such as Liquid Crystal (LCD), Texas Instruments’ Digital Light Processing (DLP™) and Liquid-Crystal-on-Silicon (LCoS) technologies as well as plasma technologies to provide the required high resolution solutions needed to display HD images, at cost and form factor points necessary to address the broadest possible market.

     As a result of advances in microdisplay technology, consumers can now enjoy very high image quality in large screen formats at an increasingly affordable cost, and demand for rear projection televisions (RPTVs) has fueled a multi-billion dollar market. In calendar 2004, sales of microdisplay-based RPTVs are expected to exceed $4 billion and to surpass sales of the older generation, Cathode-Ray-Tube (CRT) technology models as early as in calendar 2005.

     We provide high-quality and high performance component and subsystem level products to Texas Instruments as well as to other OEMs in the RPTV market, and believe we are therefore well positioned to benefit from these trends.

     Commercial and Defense

     We offer laser and light management solutions for applications in commercial and defense markets including biotechnology, biohazard detection, graphics and imaging, semiconductor and material processing. Technology demands and trends shaping the adoption of high- performance optical solutions include:

•

analysis of anomalies in human genome sequencing to discover cures to genetic diseases;

•

growth in the semiconductor market;

•

need for lasers and instrumentation that offer innovative, non-invasive, effective measurement and analysis for biomedical and healthcare; and

•

remote sensing in environmental, including bio hazard detection, applications growth.

     These trends are generating increasing demands for commercial laser products. Market growth is further stimulated by the continuous reductions in sizes and power driven by adoption of solid state technology. We believe that, as a leading provider of commercial laser and other supporting technologies, we are poised to benefit from the rapid development of these industry trends.

     Consumer

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     Brand owners are increasingly concerned with the loss of revenues to counterfeit products. Revenue lost to counterfeit products is currently estimated near $500 billion annually, and growing. Additional effects include risk to consumer health and safety, corporate liability issues, devaluation of brand image and weakening of brand loyalty. Products likely to be subject to counterfeit include pharmaceuticals, apparel, automotive parts, consumer electronic products, electronic media, and currency.

     Multiple factors are contributing to the rapidly growing counterfeit market including, among others, the broad adoption of the Internet, ready availability of low-cost, very high-quality printers, the elimination of international trade barriers and an increasingly mobile global society.

     Many corporate brand owners are now taking protective measures, developing both covert and overt packaging strategies that provide consumers and/or their inspection personnel with the ability to quickly determine product authenticity, for instance, by detecting a color-shifting pattern on the package itself.

     Our optical technology already protects more than 90 currencies worldwide, is now being introduced by leading pharmaceutical companies and is being evaluated by other companies, to protect some of their most important brands. We believe that, as a leader in the design and manufacture of color-shifting technology for decorative, document and brand authentication solutions, we are poised to continue extending our industry impact and to broaden our reach to new areas.

Restructuring Programs

     In December 2003, we announced the completion of our Global Realignment Program which began in April 2001. That program focused on large-scale site and employee reductions. We expect to continue to take advantage of opportunities to further reduce costs through targeted, customer-driven, restructuring events.

     In the future we expect our restructuring efforts to be focused principally on:

     Reducing the company’s footprint and rationalizing the manufacture of our products based on core competencies, cost efficiency and alternative manufacturers, where appropriate. Among other things, we expect to continue strengthening our partnerships with contract manufacturers primarily for our telecommunications, data communications, lasers and display products. Furthermore, we expect to increasingly centralize in-house manufacturing to our lower-cost facility in Shenzhen, China. We may not be successful in our manufacturing strategy. There are many risks to be addressed, as more particularly described in the “Risk Factors” section below.

o

We have consolidated manufacturing, research and development, sales and administrative facilities through building and site closures. As of June 30, 2004, 29 sites and buildings in North America, Europe and Asia-Pacific have been closed. The process involves consolidating product lines, standardizing on global product designs, and transferring manufacturing to fewer locations. The 29 sites closed were as follows:

o

We have centralized many administrative functions such as information technology, human resources and finance to take advantage of synergies, economies of scale and common processes and controls.

     Our results of operations and financial condition were significantly affected by charges related to our restructuring activities, the write-downs of inventories, and the impairment of our investments and long-lived assets during fiscal 2004, 2003 and 2002.

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Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion on these charges.

Acquisitions

     As part of JDS Uniphase’s strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, to the acquisition of additional products, technologies or businesses that are complementary to, or broaden the markets for our products. During fiscal 2004, we acquired:

	•		E2O Communications, Inc.; and
	•		the optical communication business from Ditech Communications, Inc.

Acquisition of E2O Communications

     We acquired E2O Communications for approximately $60 million in cash. E2O develops and manufactures optical transceivers to support Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet, 1X-4X Fibre Channel, 10 Gigabit Fibre Channel, ESCON, ATM and SONET. E2O is a supplier to major datacom customers, including seven that are additive to JDS Uniphase’s customer base.

Acquisition of the optical business of Ditech Communications

     We paid approximately $1.4 million in cash for the optical business of Ditech Communications, which included specific product lines from Altamar, the optical portion of Ditech. We acquired an amplifier product line that offers a full range of integrated solutions including optics, electronics and software. We also acquired their product line of transponder subsystems that are rack-mountable and ready for installation into a system. These product lines complement our own and are in line with our strategic direction toward providing higher levels of integration, in particular, the integration of modules, electronics and software to provide subsystems.

     Please refer to “Note 17. Mergers and Acquisitions” of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion of these acquisitions

Operating Segments and Products

     We operate in two principal segments through which we develop and manufacture our products: (i) Communication Products, which accounted for approximately 50% of our net revenue in fiscal 2004, and (ii) Commercial and Consumer Products —formerly the Thin Film Products Group, which accounted for approximately 50% of our net revenue in fiscal 2004. The revenue included under Commercial and Consumer Products includes the products addressing both the Entertainment and Defense industries.

     Please refer to “Note 18. Operating Segments and Geographic Information” of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for further discussion of our operating segments.

     Through our two segments, we serve customers in the communications, entertainment, consumer, commercial and defense industries.

     In the communications industry, we provide optical products and solutions to the telecommunications market, including submarine, long haul, metro, access and cross connect applications. We also serve the data communications market, including SAN, LAN, and Ethernet WAN applications, as well as the cable television market.

     In the commercial and defense industries, we provide laser and optics products that are used in biotechnology, material processing, semiconductor, graphics and imaging, aerospace and defense applications.

     In the consumer industry, we provide optical solutions using light interference for document and currency authentication as well as for product authentication and brand protection. We also provide decorative coatings using light interference that provide product differentiation.

     In the entertainment industry, we provide light engines, coated optics and assemblies for displays for front and rear projection televisions. We also provide coated optics for entertainment lighting.

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Communications Products:

     Our communications products include a broad range of components, modules and subsystems better enabling our customers to satisfy all of their requirements through “one-stop” shopping at a single supplier. We also leverage our broad-based component portfolio to provide higher levels of integration in modules and subsystems to create value-added solutions for our customers. The breadth of our communications product offering is described below.

     Source Lasers: At the front end of the network, a source laser provides the initial signal that is transmitted over the network. A single source laser is required for each channel in a wavelength division multiplexing (WDM) system. We provide continuous wave lasers for external modulation as well as directly modulated lasers for a variety of telecom and cable television systems. In addition to fixed wavelength lasers, we also provide tunable lasers that can be adjusted to any frequency over a range of wavelengths, and this year introduced Tunable Laser Modulator (the TLM series), the industry’s first integrated laser-modulator tunable over the entire C-band of wavelengths.

     Photodetectors and Receivers: Photodetectors and receivers detect the optical signals and convert them back into electronic signals. Photodetectors, when co-packaged with an electronic preamplifier, are referred to as receivers. Receivers are used in WDM products for each channel at both ends of the fiberoptic link. Photodetectors are also used throughout a network to monitor a variety of characteristics including power levels and channel count. We expanded our broad offering of receivers this year to include a 10 Gb/s avalanche photodiode (APD) receiver that offers high dynamic range through the integration of a variable optical attenuator and a very small form factor, multi-source agreement (MSA) compliant, micro APD receiver.

     Modulators: Modulators turn light on and off external to the source laser to encode the information being sent through the network. External modulation can be achieved either by using a separate discrete modulator or by monolithically integrating a laser and modulator. We supply both types of modulators. The highest performance is obtained using lithium niobate technology, which was used in the integrated tunable laser/modulator described in Source Lasers, above.

     Wavelength Lockers: We supply wavelength lockers that are used to stabilize the wavelength of lasers used in dense WDM transmission systems. These lockers ensure that, over the lifetime of the system, the wavelength of a source laser does not drift to interfere with an adjacent wavelength channel. The locker operates by filtering and detecting a small amount of the source-laser light and providing a stabilizing feedback signal to the laser.

     Transmitters: We manufacture transmitters that combine source lasers, modulators, wavelength lockers and electronic drivers so that the optical signal is created and encoded in a single package.

     Transceivers: Transceivers combine transmitters with receivers so that signals can be generated and encoded, and received and detected in a single package. These modules are installed at both ends of a system. We supply transceivers in various form factors and specifications to both the data communications and telecommunications markets, now including the new 4.25 Gigabit per second (Gb/s) Fibre Channel and Ethernet transceivers small form factor pluggable (SFP) and the new 10 Gb/s XFP 850 nm small form factor, pluggable, datacom transceivers.

     Transponders: Transponders are transceivers that include electrical multiplexing and demultiplexing functions. They include signal receivers or transmitters that respond to or send signals. Transponders are often used as input interfaces between the optical and electrical signals for WDM systems. We offer transponders for a wide range of data rates and link distances, and introduced this year a family of small form factor, 300-pin, 10 Gb/s microprocessor-controlled transponders for SONET/SDH or Ethernet applications in access, metro and core networks fiber up to 100 km.

     Cable Television Transmitters and Amplifiers: In cable television networks we supply externally modulated transmitters and amplifiers for trunk-line applications, directly modulated transmitters for the distribution portion of cable television networks, return-path lasers for interactive communications and transmitters providing both analog and digital signals to the recipient. We expanded our product line this year with xEMT 2100, a 1550 nanometer (nm) externally modulated transmitter designed for CATV and fiber to the premises (FTTP) original equipment manufacturers and system integrators.

     Amplifiers: We supply Erbium-doped fiber amplifier (EDFA) optical amplifiers and Raman amplification pump modules. These products cover a wide range of functionality and are designed to boost optical signals without reconversion to electrical signals and permit an optical signal to travel a greater distance between electronic terminals and regenerators. Technology advances

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enable smaller, more efficient designs, and we introduced the OA450, a compact and economical option for pre-amplifier or booster amplification in either single channel or dense wavelength division multiplexing (DWDM) in metro, long haul, or ultra long haul networks.

     Pump Lasers: Pump lasers are used in optical amplifiers within networks to regenerate the light signal that naturally suffers loss over distance within the network. Optical amplifiers each contain from one to six pump lasers depending on amplifier performance requirements. We supply 980-nanometer and 1480-nanometer pump lasers. These pumps are used to energize the erbium-doped fiber that comprises the amplifier. We also supply 14xx-nm (wavelength tailored) pump lasers that are utilized in Raman modules.

     Add-Drop Multiplexers: We supply add-drop multiplexers that allow systems to add and drop optical wavelengths without reconversion to an electrical signal. For example, a system operating from San Francisco to New York can drop one wavelength in Chicago and add another allowing for greater network flexibility. The modules include multiple components such as switches, wavelength mutiplexers/demultiplexers, and attenuators.

     WDM Couplers, Filters, Isolators and Circulators: Wavelength division multiplexer couplers are used to split and combine signals of different wavelengths in an optical network. We supply WDM demultiplexers and access/bi-directional couplers. These products are based on thin-film filters, arrayed waveguide gratings, fused fiber couplers, microlenses and /or special optical materials. Isolator products are used to allow light signals in a network to propagate in one direction within a network, but prevent that signal from returning in the opposite direction. Circulators also allow light in a system to flow in only one direction, but have multiple ports and use these multiple ports to perform a routing function within the network. We supply various types of isolators and circulators including tunable narrow-bandpass filters that are wavelength-tunable by voltage control.

     Switches and Attenuators: Optical switches are used to route and switch signals to different destinations within networks. Attenuators are used to adjust the power of the optical signal to be compatible with the optical receivers within a network system. We supply both discrete devices and modules, including dynamically reconfigurable modules, containing a number of these components.

     Optical Channel Monitors (OCM): We introduced this year the OCM, a 100 GHz spaced optical channel monitor that allows system developers to check performance continuously in real-time. The OCM integrates all the functions needed to cost-effectively monitor wavelength, power and, if desired, Optical Signal to Noise Ratio (OSNR) performance in complex networks in the C- and L-band wavelength ranges.

     Telecommunications Specialty Modules: We supply a number of specialty products for multi-gigabit fiberoptic systems.

     Instrumentation: Test instruments are used for testing and measuring optical components. Many of the test instruments were originally developed for evaluating our own optical components during design and production. We pioneered the development of swept wavelength systems, which are faster and allow more measurements over smaller wavelength ranges than previous methods. Our Multiple Application Platform (MAP), the next generation platform for our line of fiberoptic test and measurement instrumentation includes a flexible, modular test instrument, in a direct modulated CATV transmitter module and a ribbon fiber power meter that can test cables with up to 72 fibers.

     WaveReady Products: WaveReady Products are a family of plug-and-play products for metro edge and access applications including amplification, reach extension, fiber relief, protection switching, and optical demarcation. They offer a low cost alternative for enabling DWDM and CWDM networking and new wavelength services such as Ethernet and SAN. Hardware and software products new this year to the WaveReady™ network edge access product line include the WSH-540LX and WSH-550SX DWDM optical regenerators for converting 1360 nm to 15xx DWDM wavelengths, The WaveReady 2010 Gigabit Ethernet extender that increases maximum interconnect distance to 67 miles, the WaveReady 3100 rack-mount platform and the WaveReady Node Manager, an intuitive graphical interface for use with the communications module to provide fault and status management functions.

     Subsystems: In addition to the components and modules listed above, we provide higher levels of integration by providing subsystem level products. Our circuit packs, which include optics and electronics integrated on to a circuit board and or otherwise packaged with an interface and increasing levels of embedded software intelligence plug into a telecommunication system. We provide amplifier, transponder, switching and other circuit pack subsystems.

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Commercial and Consumer Products:

     Our Commercial and Consumer Products represent the company’s center of excellence for thin film coating, optical assembly, bulk optics and laser technologies. Optical thin film 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. Thin film 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 thin film 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.

     The Commercial and Consumer Products Group has direct responsibility for leveraging its technologies into the following markets.

Entertainment:

     In the display market, we manufacture and sell products for use in both home and business display systems. These products include front surface mirrors, color wheels, packaging lids for DLP™ (Digital Light Processor, a microdisplay technology developed by Texas Instruments) imagers, and other coated optics and assemblies.

     In our fiscal year 2004, we introduced the UltreX and DefiniTV light engines for the fast growing large screen, high-definition television market. In a projection display, a signal enters, is decoded and a color image created. This image must then be enlarged hundreds of times and projected on a screen without distortion to the image or colors, so that it is still clear, sharp and vivid. The light engine is a highly integrated assembly of optics that is used in a rear projection television to reflect and magnify the image while managing color, maintaining contrast, minimizing losses and distortion. We offer light engines for both Liquid-Crystal-on-Silicon (LCOS) and DLP technologies.

     Our UltreX light engine is designed for use with LCOS microdisplay technology in large-screen, rear projection televisions. UltreX is an optics assembly that enlarges and manages light to produce a vivid and accurate image for large-screen and high definition applications.

     The DefiniTV light engine is designed for use with DLP™ imagers, a microdisplay technology developed by Texas Instruments. DefiniTV is an optics assembly that enlarges and manages light to produce a vivid and accurate image for large-screen and high definition applications.

Optics:

     The aerospace and medical/environmental instrumentation markets require sophisticated, custom, high-precision coated products and optical components that selectively absorb, transmit or reflect light in order to meet the specific performance requirements of advanced systems. Our products include infrared filters, beam splitters and optical sensors for aerospace applications, optical filters for medical instruments and solar cell covers for satellites. Our products in the office automation market include photoreceptors and front surface mirrors for photocopiers, document scanners, overhead projectors, facsimile machines and printers.

     Entertainment Lighting: We provide entertainment lighting filters, which are used to create dramatic lighting effects and project rich, saturated color in intelligent lighting systems for concerts, discotheques, stages, and studios.

     Infrared Products: We provide multi-cavity and linear variable infrared filters on a variety of substrates for a variety of applications including gas monitoring and analysis, thermal imaging, smart munitions, fire detection, spectroscopy, and pollution monitoring.

     Solar Products: We believe we are a world leader in solar cell cover glass and thermal control mirror technology. One or more of our solar products can be found on all U.S. manned spacecraft, on most U.S. satellites, and on many international satellites.

     Crystals, Prisms, and Custom Optics: We offer a wide array of crystals, precision optics, and crystal assembly for Solid State Diode Pumped (DPSS) laser systems that are used in analytical instruments, DPSS lasers, DVD optical pickup heads, and high power lasers.

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Document Authentication and Brand Protection

     Light interference pigments create unique color shifting characteristics utilized in security products and decorative surface treatments. Our security products use light interface pigments, which allow ink to exhibit different colors from different viewing angles. The pigments are used to inhibit counterfeiting of currencies and other valuable documents. We also provide products incorporating proprietary interference technologies to provide brand authentication and security to protect against counterfeits. Applications include pharmaceuticals, as well as premium brand apparel, electronics, computer and other consumer goods. We offer these products in a wide range of flexible solutions by incorporating them into labels and packaging. This year we expanded our SecureShift® product line with the introduction of MetaSwitch, an effective alternative to holograms, that provides an easily recognizable, secure method of product authentication.

Product Differentiation

     We have a line of decorative products that utilize similar manufacturing processes as our security products, but are designed to have certain color characteristics that make it attractive for applications in paints, cosmetics and plastics. The pigments create a durable color shifting finish for automotive, consumer electronics and other applications.

Laser Products:

     Our portfolio of laser products includes components and subsystems used in a wide variety of OEM applications. Our broad range of products, including industrial laser diodes, industrial fiber lasers, marking systems, helium-neon (HeNe) gas lasers, air-cooled argon gas lasers, and continuous wave and pulsed diode-pumped solid-state lasers, allow us to meet the needs of our customers in markets and applications such as: Biotechnology, materials processing, semiconductor, graphics and imaging, remote sensing/ranging and laser marking.

     Industrial Laser Diodes: We have leveraged our telecom expertise into a family of industrial laser diode products, including components, plug and play modules and fiber-coupled devices. These laser diodes address a wide variety of applications including laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, material processing, optical storage, and spectral analysis.

     Argon Ion Lasers: We believe we are a leading manufacturer of air-cooled argon ion lasers. Argon lasers are very stable and reliable over the entire range of operating currents and temperatures, making them well suited for complex, high-resolution OEM applications such as flow cytometry, DNA sequencing, graphics and imaging, and semiconductor inspection.

     Helium-Neon Lasers: We offer helium-neon lasers in the red, green, yellow, and orange wavelengths. These products provide high output power with low noise, offering excellent beam pointing and amplitude stability, and instant start-up. These lasers are used in various applications including bar code scanning, flow cytometry, metrology, photo processing, and alignment.

     Diode-Pumped Solid-State Lasers: With high output power, excellent beam quality, low noise, exceptional reliability, and very small packaging, our continuous wave and pulsed diode-pumped solid-state lasers are ideal for use in biotechnology instrumentation, material processing, graphics and imaging, semiconductor manufacturing, and laser induced fluorescence applications.

     Fiber Lasers: Fiber lasers are compact in size, require simple wall-socket power, and are air-cooled, making them easy to integrate into a system. The nominal output wavelength of one micron makes them ideal for precision machining applications such as marking, bending and cutting, and selective soldering. New this year is the 6390-L3 Commercial Laser, designed for laser manufacturers developing fiber and disk lasers for applications as diverse as auto body welding and semiconductor marking.

     Although these markets and applications comprise the principal portion of our laser products business, we continue to develop our technology and evaluate the potential to provide solutions in additional applications and in new markets.

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Competitive Environment

     In our communications markets we compete against numerous fiberoptic component, module, subsystem and instrumentation manufacturers, including independent merchant suppliers and business units within vertically integrated equipment manufacturers, some of whom are also our customers. A partial list of these competitors includes: Agilent Technologies (“Agilent”), Avanex, Bookham Technology, Finisar, Fujitsu, Furukawa Electric, Oplink Communications, and Sumitomo Electric. In addition to these established companies, we also face competition from other companies and from emerging start-ups. While each of our product families has multiple competitors, we believe that we have the broadest range of products and technologies available in the industry. We also believe that this range of products and technology positions us well as the industry continues to move towards module and subsystem level products.

     In our commercial and consumer markets, we strive to be a principal supplier to most of our key customers. In our consumer markets, we face competition from providers of special effect pigments, including BASF and Merck KGaA. In our entertainment markets, we face competition from Japanese coating companies such as Nidek, Toppan and Tore, and display component companies such as Viratec, Nitto Optical, Asahi, Nikon and Fuji Photo-Optical. In our commercial and defense markets we compete with optics companies such as Deposition Sciences, Barr Associates, and Sonoma Photonics. We also compete with laser companies such as Coherent, Melles Griot and the Spectra-Physics division of Newport.

Strategy

     Our objective is to continue to be a leading supplier of fiberoptic components, modules and subsystems for all markets and industries we serve – in particular, we plan to pursue the following product strategies:

     Communications

     Help accelerate our customers’ profitability and time-to-revenue via enhanced vertically integrated optical platforms, such as modules and circuit packs that leverage the broad optical components we also sell directly to OEMs

     Commercial & Defense

     Exploit transitions from gas to solid-state to enable new generation of applications, by making laser-based solutions accessible in the bio-medical, graphical, remote sensing and material processing markets

     Consumer

     Uniquely differentiate and effectively protect valuable brands via a secure, flexible and aesthetically innovative optical platform. Within our entertainment sub-segment, deliver the highest quality entertainment experience with best in class integrated light engines, which provide high-contrast and high-brightness for the fast growing microdisplay-based HD RPTV market.

     In support of these product strategies, we are pursuing a corporate strategy that we believe will best position us for future opportunities in all the markets we serve. The key elements of our corporate strategy include:

	•		Customer-driven execution. We are committed to working closely with our customers from initial product design through to manufacturing and delivery. We strive to engage with our customers at the early stages of development to provide them with their entire component, module or subsystem needs. Ensuring that our sales, customer support, product marketing and development efforts are organized and executed to maximize effectiveness in our customer interactions continues to be a fundamental aspect of our strategy.
	•		Maintaining technology leadership. We believe that our technology and product leadership is an important competitive advantage. Driven by current and anticipated demand, we will continue to invest in new technologies and products that offer our customers increased efficiency, higher performance, improved functionality, and/or higher levels of integration.

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	•		Vertical Integration. In response to cost saving initiatives, enterprises are increasingly focusing on core competences and choosing to outsource manufacturing that was previously performed in-house. As a result of these two trends, a growing number of our customers are demanding more highly integrated products across our markets, for example, integrated circuit packs rather than individual components in the communications business, and integrated light engines for large-screen televisions rather than individual components in the consumer business. Higher levels of integration offer the opportunity for higher revenues, and improved margins over time.
	•		Structuring our manufacturing capabilities for increased efficiency and quality improvement. Between 2001 and 2004, we consolidated 41 manufacturing locations to 14, inclusive of our mergers and acquisitions activity during the period. We remain committed to streamlining our manufacturing operations and reducing costs by using lower-cost contract manufacturers where appropriate, and by situating our factories in lower-cost locations capable of consistently meeting our customers’ quality and performance requirements. For example, we are moving the manufacture of many of our established communications products to our facility in Shenzhen, China.
	•		Pursuing complementary strategic relationships. Complementary and digestible acquisitions can expand our addressable markets and strengthen our competitive position. As part of our growth strategy, we continue to critically assess opportunities to develop strategic relationships, including acquisitions and investments, with other businesses.
	•		Developing our people. Our management and employees have formed a culture of innovation, passion, adaptability and resilience that has proven its strength through extreme changes in the market. We are focused on retaining key contributors, developing our people and nurturing this level of commitment.

     Although we expect to be successful in implementing our strategy, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under “Risk Factors” below.

Sales and Marketing

     We market our products primarily to original equipment manufacturers, distributors and strategic partners in North America, Europe and Asia-Pacific. Our sales organizations communicate directly with customers’ engineering, manufacturing and purchasing personnel in determining the design, performance and cost specifications for customer product requirements. Our customers for fiberoptic communications solutions include Agilent, Alcatel, Ciena, Cisco Systems, Hewlett-Packard, Huawei, IBM, Lucent, Nortel, SBC Communications and Scientific-Atlanta. Our customers in our commercial and consumer markets include Agilent, Applied Biosystems, Eastman Kodak, Hitachi, KLA Tencor, Mitsubishi, SICPA, Sony, Texas Instruments and Toshiba.

     During fiscal 2004 and 2002, no customer accounted for more than 10% of net revenue. During fiscal 2003, Texas Instruments accounted for 12% of net revenue.

     We believe that a high level of customer support is necessary to develop and maintain long-term relationships with our customers. Each relationship begins at the design-in phase and is maintained as customer needs change and evolve. We provide direct service and support to our customers through our offices in North America, Asia and Europe. We have aligned our sales organization in the communications business to offer customers a single point of contact for all of their product requirements, and created centers of excellence to streamline customer interactions with product line managers. We are also continuing to consolidate administrative functions to provide improved customer service and reduce our costs.

Research and Development

     During fiscal 2004, 2003, and 2002, we incurred research and development expenses of $99.5 million, $153.7 million, and $254.8 million, respectively. Our total number of employees engaged in research and development has decreased to 647 as of June 30, 2004, compared to 674 at June 30, 2003 and 1,240 as of June 30, 2002.

     We devote substantial resources to research and development in order to develop new and enhanced component, module and subsystem, products to serve our communications, display, document and product security, medical/environmental instrumentation and laser markets. Once the design of a product is complete, our engineering efforts shift to enhancing both the performance of that

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product and our ability to manufacture it at high volumes and at lower cost.

     For the communications marketplace, we are increasing our focus on the most promising markets while maintaining our capability to provide products throughout the network. We are increasing our emphasis on the next generation optical components and modules, such as reconfigurable optical add drop multiplexers (ROADMs), tunable devices, FTTP products and intelligent modules, needed for long-haul, metro, access, local area network, storage area network, and enterprise markets. We are also responding to our customers’ requests for higher levels of integration, including the integration of optics, electronics and software in our modules, subsystems and circuit packs.

     In our Commercial and Consumer markets, our research and development efforts concentrate on developing more innovative solutions such as economical and commercially suitable light interference pigments, color separation filters and various components for optical systems, and components, modules and assemblies to serve the display and instrumentation markets. Among other things, we are currently devoting substantial research and development resources to our light engine and other display products, as well as to solid-state lasers and improved processes and manufacturing equipment.

Manufacturing

     The following table sets forth our manufacturing locations and the primary products manufactured at each location as of June 30, 2004. Manufacturing facilities and products manufactured by our contract-manufacturing partners (located in San Jose, Texas, Mexico, Thailand and Singapore) are not included in the table below:

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Sources and Availability of Raw Materials

     Our intention is to establish at least two sources of supply for materials whenever possible, although we do have some sole source supply arrangements. The loss or interruption of such arrangements could have an impact on our ability to deliver certain products on a timely basis.

Patents and Proprietary Rights

     Intellectual property rights that apply to our various products include patents, trade secrets and trademarks. Because of the rapidly changing technology and a broad distribution of patents in our industry, we do not rely primarily on intellectual property rights to protect or establish our market position. We do not intend to broadly license our intellectual property rights unless we can obtain adequate consideration or enter into acceptable patent cross-license agreements. As of June 30, 2004, we held 947 U.S. patents and 373 foreign patents.

Backlog

     Backlog consists of written purchase orders for products for which we have assigned shipment dates within the following 12 months. As of June 30, 2004, our backlog was approximately $147.0 million as compared to $90.5 million at June 30, 2003. Orders in backlog are firm, but are subject to customers’ cancellation or rescheduling. Because of possible changes in product delivery schedules and cancellation of product orders, and because our sales will often reflect orders shipped in the same quarter in which they are received, our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.

Employees

     We had 6,041 employees as of June 30, 2004, as compared to 5,489 and 9,222 as of June 30, 2003 and June 30, 2002, respectively. Our workforce as of June 30, 2004 included 4,578 employees in manufacturing, 647 employees in research and development, 492 employees in general and administrative functions (including information technology, finance and human resources), and 324 employees in sales and marketing.

     Our employees are not represented by any collective bargaining organization except for our operations in France and Germany. We have never experienced a work stoppage, slowdown or strike. Notwithstanding the current economic slowdown, we consider our employee relations generally to be good.

     Similar to other technology companies, particularly those located in Silicon Valley, we rely upon our ability to use stock options and other forms of equity-based compensation as key components of our executive and employee compensation structure. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels (or develop alternative compensation structures) in order to retain our key employees, particularly as and when an industry recovery returns. Recent proposals to modify accounting rules relating to the expensing of equity compensation may require us to substantially reduce, or even eliminate, all or portions of our equity compensation programs.

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Risk Factors

We have continuing concerns regarding the manufacture, quality and distribution of our products. These concerns are heightened as our markets stabilize and our volumes and new product offerings increase.

     Our success depends upon our ability to deliver high quality products on time to our customers at acceptable cost. As a technology company, we constantly encounter quality, volume and cost concerns. Currently, a confluence of factors is exacerbating our concerns:

•		Our continuing cost reduction programs, which include site consolidations, product transfers (internally and to contract manufacturers) and employee reductions, require the re-establishment and re-qualification of complex manufacturing lines, as well as modifications to systems, planning and operational infrastructure. During this process, we have experienced, and continue to experience, additional costs, and delays in re-establishing volume production levels, supply chain interruptions, planning difficulties and systems integration problems.
•		Recent increases in demand for our products, in the midst of our cost reduction programs, have strained our execution abilities as well as those of our suppliers, as we are experiencing capacity, workforce and materials constraints, enhanced by concerns associated with product and operational transfers.
•		Recently, we have commenced a series of new product programs and introductions, particularly in our circuit pack, communications and display components, light engine and commercial laser businesses, which due to the untested and untried nature of the relevant products and their manufacture and their increased complexity, exposes us to product quality risk, internally and with our materials suppliers. Among other things, one of our light engine customers recently announced delays in its display program due in part to yield, quality and volume problems with our light engine. While we are working diligently to resolve these problems, we cannot predict when all of these concerns will be resolved or the impact of these concerns on our customers and our light engine program.

     These factors have caused considerable strain on our execution capabilities and our customer relations. Currently, we are (a) having difficulty responding to customer delivery expectations for some of our products, (b) unable to fulfill customer demand for some of our products, (c) experiencing yield and quality problems, particularly with some of our new products and high-volume products, and (d) expending additional funds and other resources to respond to these execution challenges. We are currently losing additional revenue opportunities due to these concerns. We are also, in the short-term, diverting resources from research and development and other functions to assist with resolving these matters. If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged and our customers may choose to reduce their purchases of our products and purchase additional products from our competitors.

If our customers do not qualify our manufacturing lines for volume shipments, our operating results could suffer

     Customers will not purchase certain of our products, other than limited numbers of evaluation units, prior to qualification of the manufacturing lines for the products. This concern is particularly relevant to us as we continue to take advantage of opportunities to further reduce costs through targeted, customer-driven, restructuring events, which will involve the relocation of certain of our manufacturing internally and to external manufacturers. Each new (including relocated) manufacturing line must undergo rigorous qualification testing with our customers. The qualification process can be lengthy and is expensive, with no guarantee that any particular product qualification process will lead to profitable product sales. The qualification process determines whether the manufacturing line achieves the customers’ quality, performance and reliability standards. Our expectations as to the time periods required to qualify a product line and ship products in volumes to customers may be erroneous. Delays in qualification can cause a long-term supply program to be cancelled. These delays will also impair the expected timing, and may impair the expected amount, of sales of the affected products. Nevertheless, we may, in fact, experience delays in obtaining qualification of our manufacturing lines and, as a consequence, our operating results and customer relationships would be harmed.

We could incur significant costs to correct defective products

     Our products are rigorously tested for quality both by our customers and us. Nevertheless, our products do, and may continue to, fail to meet customer expectations from time-to-time. Also, not all defects are immediately detectible.

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Customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems that are unforeseeable in testing or that are detected only when products are fully deployed and operated under peak stress conditions), our products may fail to perform as expected long after customer acceptance. Failures could result from faulty design or problems in manufacturing. In either case, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced such failures in the past and remain exposed to such failures, as our products are widely deployed throughout the world in multiple demanding environments and applications. In some cases, product redesigns or additional capital equipment may be required to correct a defect. We have in the past increased our warranty reserves and have incurred significant expenses relating to certain communications products. Any significant product failure could result in lost future sales of the affected product and other products, as well as severe customer relations’ problems, litigation and damage to our reputation.

If our contract manufacturers fail to deliver quality products at reasonable prices and on a timely basis, our results of operations and financial conditions could be harmed

     We are increasing our use of contract manufacturers as an alternative to internal manufacturing. If these contract manufacturers do not fulfill their obligations to us, or if we do not properly manage these relationships and the transition of production to these contract manufacturers, our existing customer relationships will suffer. In addition, by undertaking these activities, we run the risk that the reputation and competitiveness of our products and services may deteriorate as a result of the reduction of our control over quality and delivery schedules. We also may experience supply interruptions, cost escalations and competitive disadvantages if our contract manufacturers fail to develop, implement or maintain manufacturing methods appropriate for our products and customers. In this regard, we have experienced, and continue to experience, difficulties (such as delays, interruptions and quality problems) associated with products we have transferred to contract manufacturers. These may continue, resulting in, among other things, lost revenue opportunities, customer dissatisfaction and additional costs.

We must improve our cost structure to achieve long-term profitability

     Although we have made progress in reducing the magnitude of our losses in recent quarters, we are not yet profitable. High overhead and materials costs, product transfer and reorganization expenses and new product (start-up) costs have contributed to our high expense structure, while competitive forces (increasingly from Asia-based competitors) and a highly concentrated customer base for many of our products continue to pressure pricing. In addition, our telecommunications business, which has historically featured discrete, highly customized products (with concomitant higher profit margins), is moving to increased standardization and commoditization (with correspondingly lower profit margins). Taken together, these factors are limiting our profitability. Among other things, we believe that customer base concentration, product standardization and commoditization and international competition (particularly from Asia) represent fundamental changes to our industries and that these factors, among others, will create continuing pricing constraints.

     In response to these concerns we are working vigorously to reduce our cost structure and have seen significant progress. Nevertheless, major actions remain, including elimination of duplicative operations or infrastructure, transferring manufacturing and product lines to more optimal internal locations or, in many cases, to independent contract manufacturers, disposing of unnecessary assets, centralizing functions, improving our governance and systems, and, as necessary, streamlining our employee base. These measures (including, among other things, the measures taken under our restructuring programs) may be disruptive, more costly or extensive than expected, may be insufficient to align our operations with customer demand and the changes affecting our industry, and, ultimately, unsuccessful in creating profit margins sufficient to sustain our business and growth strategy.

If our new product offerings fail in the market, our business will suffer

     We are a technology company. Our success or failure depends, in large part, upon our ability to continuously and successfully introduce and market new products and technologies meeting or exceeding our customer’s expectations. Accordingly, we intend to continue to develop new product lines and improve the business for existing ones. However, we have considerably reduced our research and development spending from historic levels and some of our competitors now spend considerably higher percentages of their revenues on research and development than do we. If we fail to develop and sustain a robust, commercially viable product pipeline our business will suffer.

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     In recent periods, we have increased our focus on new products, particularly in our circuit pack and display businesses. Our current growth strategy emphasizes both of these businesses. Nevertheless, several of the key relevant products are untried and untested and have not yet demonstrated long-term commercial viability. Current challenges include establishing sustainable pricing and cost models, predictable and acceptable quality and yields, and adequate and reliable supply chains, as well as demonstrating our (and our suppliers’) ability to scale and provide adequate facilities, personnel and other resources. Nonetheless, if we fail to successfully develop and commercialize some or all of these new products, our business could suffer.

Stability concerns affecting many of our key suppliers could impair the quality, cost or availability of many of our important products, harming our revenue, profitability and customer relations

     We have numerous materials suppliers for our products and, frequently, many of our important products rely on single-source suppliers for critical materials. These products include several of our advanced components, modules and subsystem products across our businesses. Many of our important suppliers are small companies facing financial stability, quality, yield, scale or delivery concerns. Some of these companies may be acquired, undergo material reorganizations or become insolvent. Others are larger companies with limited dependency upon our business, resulting in unfavorable pricing, quantity or delivery terms. The recent signs of market stability in our business have exacerbated these concerns as we increase our purchasing to meet our customers’ demands. We are currently undertaking programs to ensure the long-term strength of our supply chain. Nevertheless, we are experiencing, and expect for the foreseeable future to continue to experience, strain on our supply chain and periodic supplier problems. We have incurred, and expect for the foreseeable future to continue to incur, costs to address these problems. In addition, these problems have impacted, and we expect for the foreseeable future will continue to impact, our ability to meet customer expectations. If we do not identify and implement long-term solutions to our supply chain concerns, our customer relationships and business will materially suffer.

Recent signs of market stability are not necessarily indicative of long-term growth

The recent economic downturn has had and will likely continue to have long-term implications for our markets.

     Among other things, while our direct telecommunications customer base has remained largely intact, their customer base, the service providers, has been significantly reduced due to significant industry consolidations and the elimination of most of the competitive local exchange carriers. Notwithstanding recent signs of market stability and generally increasing demand for our products, average selling prices continue to decline and revenue and profitability targets and projections are subject to uncertainty and variability. While we are encouraged by recent developments, our visibility remains limited and we remain cautious and cannot predict the long-term prospects for our industries, or our business, operations or financial condition, at this time.

The communications equipment industry has extremely long product development cycles requiring us to incur product development costs without assurances of an acceptable investment return

     The telecommunications industry is a capital-intensive industry similar, in many respects, to any other infrastructure development industry. Large volumes of equipment and support structures are installed over vast areas, with considerable expenditures of funds and other resources, with long investment return period expectations. Moreover, reliability requirements are intense. Consequently, there is significant resistance to network redesigns and upgrades. Consequently, redesigns and upgrades of installed systems are undertaken only as required in response to user demand and competitive pressures and generally only after the applicable carrier has received sufficient return on its considerable investment. At the component supplier level this reality creates considerable, typically multi-year, gaps between the commencement of new product development and volume purchases. Accordingly, we and our competitors often incur significant research and development and sales and marketing costs for products that, at a minimum, will be purchased by our customers long after much of the cost is incurred (very long “time to cash”) and, at a maximum, may never be purchased due to changes in industry or customer requirements in the interim.

Our success depends on sustained recovery and long-term growth in our markets

If the Internet does not continue to grow as expected, our communications business will suffer.

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     Our future success as a manufacturer of optical components, modules and subsystems ultimately depends on the continued growth of the communications industry and, in particular, the growth of the Internet as a global communications system. As part of that growth, we are relying on increasing demand for high-content voice, video, text and other data delivered over high-speed connections (i.e., high bandwidth communications). As Internet usage and bandwidth demand increase, so does the need for advanced optical networks to provide the required bandwidth. Without Internet and bandwidth growth, the need for our advanced communications products, and hence our future growth as a manufacturer of these products, is jeopardized. Currently, while increasing demand for Internet access and for broadband access, in particular, is apparent, growth is limited by several factors, including, among others, an uncertain regulatory environment, reluctance from content providers to supply video and audio content over the communications infrastructure, and uncertainty regarding sustainable business models as multiple industries (cable, traditional telecommunications, wireless, satellite, etc.) offer non-complimentary and competing content delivery solutions. Ultimately, should long-term expectations for Internet growth and bandwidth demand not be realized or support a sustainable business model, our business would be significantly harmed.

We are increasingly depending on stability and growth in non-communications markets.

     Our Communications and Commercial and Consumer products segments each currently represent about fifty percent (50%) of our total revenue. Our strategy emphasizes the growth opportunities in both segments, as we seek to expand our markets and customer base, increase the level of integration of our products, and improve time to revenue. In furtherance of this strategy, we are engaged in or exploring several new product opportunities in our Commercial and Consumer segment, particularly in our display business, as well as expanding the opportunities for our current products in this segment. Consequently, we are increasingly dependent upon growth markets outside of communications for our overall growth and success. Failures in these markets or our execution of programs related to the same will significantly harm our business.

Our business and financial condition could be harmed by our long-term growth strategy

     Notwithstanding the recent decline, our businesses have historically grown, at times rapidly, and we have grown accordingly. We have made, and expect in the future to make, significant investments to enable our future growth through, among other things, internal expansion programs, product development, acquisitions and other strategic relationships. We may grow our business through business combinations or other acquisitions of businesses, products or technologies. We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, capital investments and the purchase, licensing or sale of assets. Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. If we fail to manage or anticipate our future growth effectively, particularly during periods of industry uncertainty, our business will suffer. Through our cost reductions measures we are balancing the need to consolidate our operations with the need to preserve our ability to grow and scale our operations as our markets stabilize and recover. If we fail to achieve this balance, our business will suffer to the extent our resources and operations are insufficient to respond to a return to growth.

Our financial results could be affected by potential changes in the accounting rules governing the recognition of stock-based compensation expense

     We measure compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, we recognized compensation charges related to stock compensation plans of $2.0 million, $50.9 million, and $124.9 million in fiscal 2004, 2003 and 2002, respectively. In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” we provide disclosures of our operating results as if we had applied the fair value method of accounting (pro-forma basis). Beginning in the third quarter of fiscal 2003, we provide such disclosures in our Quarterly Reports on Form 10-Q in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Had we accounted for our compensation expense under the fair value method of accounting prescribed by SFAS No. 123, the charges would have been significantly higher than the intrinsic value method used by us, totaling $300.0 million, $685.2 million, and $688.9 million in fiscal 2004, 2003 and 2002, respectively. Currently, the Financial Accounting Standards Board (“FASB”) is considering changes to accounting rules concerning the recognition of stock option compensation expense. If these proposals are implemented, we and other companies may be required to measure compensation expense using the fair value method, which would adversely affect our results of operations by increasing our losses by the additional amount of such stock option charges.

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Our sales are dependent upon a few key customers

     A few large customers account for most of our sales. During fiscal 2004 and 2002, no customer accounted for 10% of our total net revenue. During fiscal 2003, Texas Instruments accounted for 12% of our total net revenue. We expect that, for the foreseeable future, sales to a limited number of customers will continue to account, alone or in the aggregate, for a high percentage of our total net revenues. Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue.

One of our products is dependent upon a single customer for a majority of sales.

     We have a strategic alliance with SICPA, our principal customer for our light interference pigments which are used to, among other things, provide security features in currency. Under a license and supply agreement, we rely exclusively on SICPA to market and sell to this market worldwide. The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement. If SICPA fails to purchase these quantities, as and when required by the agreement, for any reason, our business and operating results (including, among other things, our revenue and gross margin) will be harmed, at least in the short-term. In the long-term, we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.

Any failure to remain competitive would harm our operating results

     The markets in which we sell our products are highly competitive and characterized by rapidly changing and converging technologies. We face intense competition from established domestic and international competitors and the threat of future competition from new and emerging companies in all aspects of our business. Much of our current competition comes from large, diversified Asian corporations, and emerging, largely Chinese optical companies. These competitors have considerable optical expertise, and often very low cost structures. We expect Asian, and particularly Chinese, competition to increase. To remain competitive in both the current and future business climates, we believe we must maintain a substantial commitment to research and development, and significantly improve our cost structure. Our efforts to remain competitive may be unsuccessful.

If we fail to attract and retain key personnel, our business could suffer.

     Our future depends, in part, on our ability to attract and retain key personnel. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. The loss of services of these or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business.

     Similar to other technology companies, particularly those located in Silicon Valley, we rely upon our ability to use stock options and other forms of equity-based compensation as key components of our executive and employee compensation structure. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels (or develop alternative compensation structures) in order to retain our key employees, particularly as and when an industry recovery returns. Recent proposals to modify accounting rules relating to the expensing of equity compensation may cause us to substantially reduce, or even eliminate, all or portions of our equity compensation programs.

Certain of our non-telecommunications products are subject to governmental and industry regulations, certifications and approvals.

     The commercialization of certain of the products we design, manufacture and distribute through our Commercial and Consumer product segment may be delayed or made more costly due to required government and industry approval processes. Development of applications for our light interference pigment products may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our pigments used with automotive paints can take up to three years. If we change a product for any reason including technological changes or changes in the manufacturing process, prior approvals or certifications may be invalid and we may need to go through the approval process again. If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be

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adversely affected.

We face risks related to our international operations and revenue

     Our customers are located throughout the world. In addition, we have significant offshore operations, including manufacturing, sales and customer support operations. Our operations outside North America include facilities primarily in Asia-Pacific.

     Our international presence exposes us to certain risks, including the following:

o		our ability to comply with the customs, import/export and other trade compliance regulations of the countries in which we do business, together with any unexpected changes in such regulations;
o		difficulties in establishing and enforcing our intellectual property rights;
o		tariffs and other trade barriers;
o		political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and research facilities;
o		difficulties in staffing and management;
o		language and cultural barriers;
o		seasonal reductions in business activities in the countries where our international customers are located;
o		integration of foreign operations;
o		longer payment cycles;
o		greater difficulty in accounts receivable collection;
o		currency fluctuations; and
o		potential adverse tax consequences.

     Net revenue from customers outside North America accounted for 36%, 30% and 26% of our total net revenue in fiscal 2004, 2003 and 2002, respectively. We expect that revenue from customers outside North America will continue to account for a significant portion of our total net revenue. Lower sales levels that typically occur during the summer months in Europe and some other overseas markets may materially and adversely affect our business. In addition, sales of many of our customers depend on international sales and consequently further expose us to the risks associated with such international sales.

     The international dimensions of our operations and sales subject us to a myriad of domestic and foreign trade regulatory requirements. As part of our ongoing integration program, we are evaluating our current trade compliance practices and implementing improvements, where necessary. Among other things, we are auditing our product export classification and customs procedures and are installing trade information and compliance systems using our global enterprise software platforms. We do not currently expect the costs of such evaluation or the implementation of any resulting improvements to have a material adverse effect on our operating results or business. However, our evaluation and related implementation are not yet complete and, accordingly, the costs could be greater than expected and such costs and the legal consequences of any failure to comply with applicable regulations could affect our business and operating results.

We are increasing manufacturing operations in China, which expose us to risks inherent in doing business in China

     As a result of our efforts to reduce costs, we have increased our manufacturing operations in China and those operations are subject to greater political, legal and economic risks than those faced by our other operations. In particular, the political, legal and economic climate in China (both at national and regional levels) is extremely fluid and unpredictable. Among other things,

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the legal system in China (both at the national and regional levels) remains highly underdeveloped and subject to change, with little or no prior notice, for political or other reasons. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and other matters. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. These concerns are exacerbated for foreign businesses, such as ours, operating in China. Our business could be materially harmed by any changes to the political, legal or economic climate in China or the inability to enforce applicable Chinese laws and regulations.

     Currently, we operate manufacturing facilities located in Shenzhen, Fuzhou and Beijing, China. As part of our efforts to reduce costs, we continue to increase the scope and extent of our manufacturing operations in our Shenzhen facilities. Accordingly, we expect that our ability to operate successfully in China will become increasingly important to our overall success. As we continue to consolidate our manufacturing operations, we will incur additional costs to transfer product lines to the facilities located in China, which could have a material adverse impact on our operating results and financial condition.

     We intend to export the majority of the products manufactured at our facilities in China. Accordingly, upon application to and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and are exempt from customs duty assessment on imported components or materials when the finished products are exported from China. We are however required to pay income taxes in China, subject to certain tax relief. As the Chinese trade regulations are in a state of flux, we may become subject to other forms of taxation and duty assessments in China or may be required to pay for export license fees in the future. In the event that we become subject to any new Chinese forms of taxation, our results of operations could be materially and adversely affected.

We may incur unanticipated costs and liabilities, including costs under environmental laws and regulations.

     Our operations use certain substances and generate certain wastes that are regulated or may be deemed hazardous under environmental laws. Some of these laws impose liability for cleanup costs and damages relating to releases of hazardous substances into the environment. Such laws may become more stringent in the future. In the past, costs and liabilities arising under such laws have not been material; however, we cannot assure you that such matters will not be material to us in the future.

Our business and operations would suffer in the event of a failure of our information technology infrastructure

     We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information technology infrastructure. Among other things, we have entered into an agreement with Oracle to provide and maintain our global ERP infrastructure on an outsourced basis. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

     Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to spend additional costs and other resources to protect us against damages caused by these disruptions or security breaches in the future.

If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed

We may not obtain the intellectual property rights we require.

     Others, including academic institutions, our competitors and other large technology-based companies, hold numerous patents in the industries in which we operate. Some of these patents may purport to cover our products. In response, we may seek to acquire license rights to these or other patents or other intellectual property to the extent necessary to ensure we possess sufficient intellectual property rights for the conduct of our business. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products, impede the sale of some of our current products, or substantially increase the cost to provide these products to our customers. While in the past, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products, in the future licenses to third-party technology may not be available on

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commercially reasonable terms, if at all. Generally, a license, if granted, includes payments by us of up-front fees, ongoing royalties or a combination of both. Such royalty or other terms could have a significant adverse impact on our operating results. We are a licensee of a number of third-party technologies and intellectual property rights and are required to pay royalties to these third-party licensors on some of our telecommunications products and laser subsystems.

Our products may be subject to claims that they infringe the intellectual property rights of others.

     The industry in which we operate experiences periodic claims of patent infringement or other intellectual property rights. We have received in the past and, from time to time, may in the future receive notices from third parties claiming that our products infringe upon third-party proprietary rights. One consequence of the recent economic downturn is that many companies have turned to their intellectual property portfolios as an alternative revenue source. This is particularly true of companies which no longer compete with us. Many of these companies have larger, more established intellectual property portfolios than ours. Typical for a growth-oriented technology company, at any one time we generally have various pending claims from third parties that one or more of our products or operations infringe or misappropriate their intellectual property rights or that one or more of our patents is invalid. For example, we have pending litigation with Litton Systems, Inc. and the Board of Trustees of the Leland Stanford, Jr. University involving claims for damages in connection with the alleged past infringement by our optical amplifiers of a now expired U.S. patent. We will continue to respond to other claims in the course of our business operations. In the past the settlement and disposition of these disputes has not had a material adverse impact on our business or financial condition, however this may not be the case in the future. Further, the litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we are successful. If we are unsuccessful, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We may not be successful in such development or such licenses may not be available on terms acceptable to us, if at all. Without such a license, we could be enjoined from future sales of the infringing product or products.

Our intellectual property rights may not be adequately protected.

     Our future depends in part upon our intellectual property, including trade secrets, know-how and continuing technological innovation. We currently hold numerous U.S. patents on products or processes and corresponding foreign patents and have applications for some patents currently pending. The steps taken by us to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing other technologies that are similar to our own. It is possible that patents may not be issued from any application pending or filed by us and, if patents do issue, the claims allowed may not be sufficiently broad to deter or prohibit others from marketing similar products. Any patents issued to us may be challenged, invalidated or circumvented. Further, the rights under our patents may not provide a competitive advantage to us. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States.

We face certain litigation risks that could harm our business

     We have had numerous lawsuits filed against us asserting various claims, including securities and ERISA class actions and stockholder derivative actions. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we are unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation can be costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits, particularly the securities class actions and stockholder derivative actions, have been significant, will continue to be costly 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 harm our business.

Recently enacted and proposed regulatory changes will cause us to incur increased costs

     Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of

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the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. In particular, we expect to incur additional SG&A expense as we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our Independent Registered Public Accounting Firm to attest to, our internal controls. The compliance of these new rules could also result in continued diversion of management’s time and attention, which could prove to be disruptive to normal business operations. Further, the impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business.

     We are currently performing the system and process evaluation required to ensure compliance as of June 30, 2005 with the management certification and auditor attestation requirements of Section 404 of the Sarbanes Oxley Act. While we currently anticipate that we will timely complete all such actions, we cannot at this time provide absolute assurance that all such actions will timely be completed, although possible consequences of failure include, sanction or investigation by regulatory authorities, such as the Securities Exchange Commission or the Nasdaq National Market, and inability to timely file our Annual Report on Form 10-K for fiscal 2005. Any such action could harm our stock price.

If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results could suffer

     We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. We often utilize derivative financial instruments to mitigate these risks. We do not use derivative financial instruments for speculative or trading purposes. The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments are floating rate and municipal bonds, auction instruments and money market instruments denominated in U.S. dollars. When we acquire assets denominated in foreign currencies, we usually mitigate currency risks associated with these exposures with forward currency contracts. A substantial portion of our sales, expense and capital purchasing activities are transacted in U.S. dollars. However, some of these activities are conducted in other currencies, primarily Canadian and European currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we may enter into foreign currency forward contracts. The contracts reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. Actual results on our financial position may differ materially.

     We also hold investments in other public and private companies, including, among others, Nortel Networks, Adept and ADVA, and have limited funds invested in private venture funds. All three companies have experienced severe stock price declines during the recent economic downturn, which have greatly reduced the value of our investments, and we have written down the value of these investments as the decline in fair value was deemed to be other-than-temporary. In addition to our investments in public companies, we have in the past and expect to continue to make investments in privately held companies as well as venture capital investments for strategic and commercial purposes. For example, we had a commitment to provide additional funding of up to $16.0 million to certain venture capital investment partnerships as of June 30, 2004. In recent months some of the private companies in which we held investments have ceased doing business and have either liquidated or are in bankruptcy proceedings. If the carrying value of our investments exceeds the fair value and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of the investments, which could materially harm our results of operations or financial condition.

We recently sold $475.0 million of senior convertible notes, which significantly increased our leverage, and may cause our reported earnings per share to be more volatile because of the conversion contingency features of these notes.

     On October 31, 2003 we issued $475.0 million of indebtedness in the form of senior convertible notes. The issuance of these notes substantially increased our principal payment obligations and we may not have enough cash to repay the notes when due. By incurring new indebtedness, the related risks that we now face could intensify. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.

     In addition, the holders of those notes are entitled to convert those notes into shares of our common stock under certain circumstances. Unless a conversion contingency is met, the shares of our common stock underlying the notes are not currently included in the calculation of our basic or diluted earnings per share. When this contingency is met, diluted earnings per share may, depending on the relationship between the interest on the notes and the earnings per share of our common stock, be expected to decrease as a result of the inclusion of the underlying shares in the diluted earnings per share calculation.

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     The FASB’s Emerging Issues Task Force (“EITF”) reached the tentative conclusion in EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share” that contingently convertible debt instruments should be included in diluted earnings per share computation regardless of whether the contingency has been met. The consensus reached by the Task Force is effective for reporting periods ending after December 15, 2004.

     Under the tentative conclusion reached by the EITF, we would include the 96.2 million contingently convertible shares in our calculation of diluted earnings per share. If the debt had been outstanding for the full fiscal year, it would have increased the number of shares used for calculating diluted earnings per share by approximately 7%.

Our rights plan and our ability to issue additional preferred stock could harm the rights of our common stockholders

     In February 2003, we amended and restated our Stockholder Rights Agreement and currently each share of our outstanding common stock is associated with one right. Each right entitles stockholders to purchase 1/100,000 share of our Series B Preferred Stock at an exercise price of $21.0.

     The rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisition of or tender offers for 15% or more of our common stock. For a limited period of time following the announcement of any such acquisition or offer, the rights are redeemable by us at a price of $0.01 per right. If the rights are not redeemed, each right will then entitle the holder to purchase common stock having the value of twice the then-current exercise price. For a limited period of time after the exercisability of the rights, each right, at the discretion of our Board of Directors, may be exchanged for either 1/100,000 share of Series B Preferred Stock or one share of common stock per right. The rights expire on June 22, 2013.

     Our Board of Directors has the authority to issue up to 499,999 shares of undesignated preferred stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without the consent of our stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock.

     The issuance of Series B Preferred Stock or any preferred stock subsequently issued by our Board of Directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.

     Some provisions contained in the rights plan, and in the equivalent rights plan that our subsidiary, JDS Uniphase Canada Ltd., has adopted with respect to our exchangeable shares, may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change in control. For example, such provisions may deter tender offers for shares of common stock or exchangeable shares, which offers may be attractive to stockholders, or deter purchases of large blocks of common stock or exchangeable shares, thereby limiting the opportunity for stockholders to receive a premium for their shares of common stock or exchangeable shares over the then-prevailing market prices.

Some anti-takeover provisions contained in our charter and under Delaware laws could hinder a takeover attempt

     We are subject to the provisions of Section 203 of the Delaware General Corporation Law prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short-term, to the interests of the stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating to the limitations of liability and indemnification of our directors and officers, dividing our board of directors into three classes of directors serving three-year terms and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders. These provisions also may have the effect of deterring hostile takeovers or delaying changes in control or management of us.

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ITEM 2. PROPERTIES

     Our principal offices are located in San Jose, California, United States. The table below summarizes the properties that we owned and leased as of June 30, 2004:

Leased Properties:

Owned Properties:

(1)

Operations have ceased at these properties, and we are in the process of vacating additional properties as part of our Global Realignment Program.

(2)

This property is actively being marketed and has been classified in our financial statements as “held for sale.” See “Note 13. Reduction of Other Long-Lived Assets” of the Notes to Consolidated Financial Statements

     As part of our Global Realignment Program, we have completed and approved restructuring plans to close sites, vacate buildings at closed sites as well as at continuing operations and consolidate excess facilities worldwide. Of the total leased and

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owned square footage as of June 30, 2004, approximately 2.3 million square feet were related to properties included in our Global Realignment Program, and other properties identified as surplus to our needs.

Please see the description of our manufacturing sites under the heading “Manufacturing” in Item 1.

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ITEM 3. LEGAL PROCEEDINGS

Pending Litigation

The Securities Class Actions:

     As discussed in our previous SEC 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 June 4, 2004, the court heard Defendants’ motions to dismiss the second amended complaint in In re JDS Uniphase Corporation Securities Litigation, C-02-1486 (N.D. Cal.). The court has not issued a ruling on the motions yet.

     No activity has occurred in Zelman v. JDS Uniphase Corp., No. C-02-4656 (N.D. Cal.), a related securities case, since our filing on Form 10-Q for the third quarter of fiscal 2004.

The Derivative Actions:

     As described in our previous SEC 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 June 4, 2004, the court heard Defendants’ motion to dismiss the complaint in Corwin v. Kaplan, No. C-02-2020 (N.D. Cal.). The court has not issued a ruling on Defendants’ motion yet. No trial date has been set in the Corwin action.

     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.). A status conference is scheduled for October 19, 2004. No trial date has been set in this action.

     No activity has occurred in Cromas v. Straus, Civil Action No. 19580 (Del. Ch. Ct.), the Delaware derivative action, since the filing of JDSU’s Form 10-Q for the third quarter of 2004. The OCLI and SDL Shareholder Actions:

     As described in our previous SEC 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. No activity has occurred in these actions since the filing of JDSU’s Form 10-Q for the third quarter of 2004.

The ERISA Actions:

     As described in our previous SEC 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. Defendants completed a voluntary production of documents on July 19, 2004. Plaintiffs filed a consolidated complaint on September 2, 2004, and Defendants’ response to the consolidated complaint is due by November 1, 2004. Although Plaintiffs have propounded a request for documents, Defendants have not produced documents beyond those produced in connection with their voluntary production of documents. No trial date has been set.

The Shareholder Inspection Demands

     Plaintiffs in the federal and California derivative actions have propounded inspection demands to JDSU pursuant to Delaware and California state law. These inspection demands purport to seek the production of certain JDSU documents for the purpose of investigating alleged misconduct by JDSU officers and directors.

     On April 27, 2004, the plaintiff in the federal derivative action propounded an inspection demand to JDSU purportedly pursuant to Section 220 of the Delaware Code. The parties have reached agreement as to the scope and confidentiality of

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documents to be produced in response to this inspection demand.

     On December 23, 2003, one of the lead plaintiffs in the California derivative action filed a Petition for Writ of Mandate to Compel Inspection and Copying of Books and Records of JDS Uniphase Corporation. That action is captioned Coykendall v. JDS Uniphase Corporation, Case No. 103 CV 011518 (Santa Clara Super. Ct.). On February 3, 2004, JDSU filed a demurrer to the Petition. Also on February 3, 2004, JDSU moved for a protective order pursuant to Section 1603 of the California Corporations Code. On March 16, 2004, the Court overruled JDSU’s demurrer. The Court also denied the motion for protective order without prejudice. JDSU answered the Petition on April 13, 2004. On April 15, 2004, Petitioner propounded Form Interrogatories and a Request for Production of Documents to JDSU. The Company responded to Petitioner’s discovery on May 14, 2004. A discovery conference is scheduled for September 14, 2004. The parties have not reached agreement yet as to the scope of documents to be produced, if any.

     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 expense of defending these lawsuits has been costly, will continue to be costly, and could be quite significant 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.

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

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

          None.

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PART II

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

     Our common stock is traded on the NASDAQ Stock Market under the symbol “JDSU” and our exchangeable shares of JDS Uniphase Canada Ltd. are traded on the Toronto Stock Exchange under the symbol “JDU.” Holders of exchangeable shares may tender their holdings for common stock on a one-for-one basis at any time. As of August 13th, 2004, we had 1,443,264,161 shares of common stock outstanding, including 62,208,177 exchangeable shares. The closing price on August 13th, 2004 was $2.97 for the common stock and Canadian $3.93 for the exchangeable shares. The following table summarizes the high and low closing sales prices for our common stock as reported on the NASDAQ Stock Market during fiscal 2004 and 2003:

     As of August 13th, 2004, we had 8,770 holders of record of our common stock and exchangeable shares. We have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

     The following tables present selected financial information for each of the last five fiscal years (in millions, except per share data):

(1) We acquired IBM’s optical transceiver business on December 28, 2001 in a transaction accounted for as a purchase. The Consolidated Statement of Operations for fiscal 2002 included the results of operations of the optical transceiver business subsequent to December 28, 2001 and the Consolidated Balance Sheet as of June 30, 2002 included the financial position of the optical transceiver business.

(2) We acquired SDL on February 13, 2001 in a transaction accounted for as a purchase. The Consolidated Statement of Operations for fiscal 2001 included the results of operations of SDL subsequent to February 13, 2001 and the Consolidated Balance Sheet as of June 30, 2001 included the financial position of SDL.

(3) On February 13, 2001, we completed the sale of our Zurich, Switzerland subsidiary to Nortel for 65.7 million shares of Nortel common stock valued at $1,953.3 million. After adjusting for the net costs of the assets sold and for the expenses associated with the divestiture, we realized a gain of $1,770.2 million from the transaction. We subsequently sold 41.0 million shares of Nortel common stock for total proceeds of $659.2 million, resulting in a realized loss of $559.1 million during fiscal 2001.

(4) We acquired OCLI on February 4, 2000 in a transaction accounted for as a purchase. The Consolidated Statement of Operations for fiscal 2000 included the results of operations of OCLI subsequent to February 4, 2000 and the Consolidated Balance Sheet as of June 30, 2000 included the financial position of OCLI.

(5) We acquired E-TEK on June 30, 2000 in a transaction accounted for as a purchase. The Consolidated Balance Sheet as of June 30, 2000 included the financial position of E-TEK.

(6) Commencing July 1, 2002, in accordance with SFAS 142, we no longer amortize goodwill, but test for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Fiscal years 2002, 2001 and 2000 include goodwill amortization as a component of the expense for amortization of goodwill and other intangibles.

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

Adjustments to Previously Announced FY 2004 Fourth-Quarter and Annual Results

     On July 28, 2004, we issued a press release announcing our fourth-quarter and annual results for the year ended June 30, 2004. In the press release, we reported an income tax benefit of $13.2 million in the Condensed Consolidated Statement of Operations for the year ended June 30, 2004. Subsequent to July 28, 2004, we settled a government tax audit. As a result of this settlement, we increased our tax benefit and reduced our income taxes payable by $2.6 million as of June 30, 2004. In this Annual Report on Form 10-K, we report the increase in the income tax benefit of $2.6 million in the Consolidated Statement of Operations for the year ended June 30, 2004.

     The following table presents a reconciliation of the net loss and net loss per share reported in our press release on July 28, 2004 to the amounts reported in this Annual Report on Form 10-K (in millions, except per share data):

Our Industries and Developments

     We believe 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 6,000 employees at 14 locations, principally located in North America, the People’s Republic of China and France

Our Communications Group 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 Telecom; 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.

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Our Commercial and Consumer Products Group markets consist generally of:

• Display products, with customers such as Texas Instruments, optical components and modules and front surface mirrors used in rear projection and plasma displays.

• Custom Optics: medical/environmental instrumentation, high precision coated products, optical sensors for aerospace and defense applications and optical filters for medical instruments.

• Light Interference Pigment products, with customers such as SICPA, 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.

     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.

Recent Accounting Pronouncements

EITF No. 03-1:

     In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The company has evaluated the impact of the adoption of EITF 03-1 and does not believe the impact is significant to the company’s overall results of operations or financial position.

SFAS No. 150:

     In May 2003, the “FASB” issued Statement of Financial Accounting Standards “SFAS” No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” (“SFAS 150”). SFAS No. 150 changes the statement of financial position classification of certain financial instruments from either an equity or mezzanine presentation to liabilities and requires an issuer of those financial instruments to recognize changes in fair value or redemption amount, as applicable, in earnings. 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

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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.

FASB Interpretation No. 46R:

     In December 2003, the 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, resulting in multiple effective dates based on the nature as well as the creation date of the variable interest entity (“VIE”) 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 VIE to consolidate the assets, liabilities and results of operations of the entity. A VIE 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, was applicable for public companies that have interests in VIEs or potential variable entities commonly referred to as special-purpose entities (“SPE’s”) for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. 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. See “Note 2. Recent Accounting Pronouncements” and “Note 13. Reduction of Other Long-Lived Assets” of our Notes to Consolidated Financial Statements. 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 June 30, 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 June 30, 2004 is limited to the aggregate of the carrying amount of its investment of $32.6 million in such entities and its minimum funding commitments of $16.0 million.

Critical Accounting Policies

     The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses, and the related disclosures. We base our estimates on historical experience, our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. This uncertainty and unpredictability are heightened during periods of economic uncertainty, such as the present. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions. We believe the following critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.

Revenue Recognition:

     We recognize revenue when persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured. Revenue recognition on the shipment of evaluation units is deferred until customer acceptance. Revenue from sales to distributors with rights of return, price protection or stock rotation is not recognized until the products are sold through to end customers. Generally, revenue associated with contract cancellation payments from customers is not recognized until we receive payment for such charges.

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     We record provisions against our gross revenue for estimated product returns and allowances in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, historical sales returns, analyses of credit activities, current economic trends and changes in our customers’ demand. Should our actual product returns and allowances exceed our estimates, additional provisions against our revenue would result.

Allowances for Doubtful Accounts:

     We perform credit evaluations of our customers’ financial condition. We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. We record our bad debt expenses as selling, general and administrative expenses. When we become aware that a specific customer is unable to meet its financial obligations to us, for example, as a result of bankruptcy or deterioration in the customer’s operating results or financial position, we record a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. In addition, we record additional allowances based on certain percentages of our aged receivable balances. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers, and if circumstances related to our customers deteriorate, our estimates of the recoverability of our trade receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provide more allowances than we need, we may reverse a portion of such provisions in future periods based on our actual collection experience.

Investments:

     We hold equity interests in both publicly traded and privately held companies. When the carrying value of an investment exceeds its fair value and the decline in value is deemed to be other-than-temporary, we write down the value of the investment and establish a new cost basis. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: assessment of the investees’ historical and forecasted financial condition, operating results and cash flows, the values of recent rounds of financing, or quoted market prices of comparable public companies. We regularly evaluate our investments based on criteria that include, but not limited to, the duration and extent to which the fair value has been less than the carrying value, the current economic environment and the duration of any market decline, and the financial health and business outlook of the investees. We generally believe an other-than-temporary decline occurs when the fair value of an investment is below the carrying value for two full consecutive quarters. Future adverse changes in these or other factors could result in an other-than-temporary decline in the value of our investments, thereby requiring us to write down such investments. Our ability to liquidate our investment positions in privately held companies will be affected to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner.

Inventory Valuation:

     We regularly assess the valuation of our inventories and write down those inventories which are obsolete or in excess of our forecasted usage to their estimated realizable value. Our estimates of realizable value are based upon our analyses and assumptions including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. We typically use a six to twelve month rolling forecast based on factors including, but not limited to, our production cycle, anticipated product orders, marketing forecasts, backlog, shipment activities and inventories held at our customers. If market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write-downs. If demand is higher than expected, we may sell our inventories that had previously been written down.

Goodwill Valuation:

     We test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

     The determination as to whether a write down of goodwill is necessary involves significant judgment based on the short-term

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and long-term projections of the future performance of the reporting unit to which the goodwill is attributed. The assumptions supporting the estimated future cash flows of the reporting unit, including the discount rate used and estimated terminal value reflect our best estimates.

Long-lived asset valuation (property, plant and equipment and intangible assets):

Long-lived assets held and used

     We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

     Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

Long-lived assets held for sale

     We classify long-lived assets as held for sale when certain criteria are met, which include: management commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; whether an active program to locate buyers and other actions to sell the assets has been initiated; whether the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; whether the assets are being marketed at reasonable prices in relation to their fair value; and how unlikely it is that significant changes will be made to the plan to sell the assets. Long-lived assets held for sale are included in other current assets.

     We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value less cost to sell. Fair value is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risk involved.

Deferred Taxes:

     We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income, and we record a valuation allowance to reduce our deferred tax assets to the amount that we believe to be more likely than not realizable. Due to the uncertain economic conditions in our industry, we determined in fiscal year 2002 that we should increase our valuation allowance for deferred tax assets to reduce our net deferred tax assets to an amount representing income taxes recoverable from prior years. All recoverable income taxes are recorded as refundable income taxes, and we record deferred tax assets only to the extent of deferred tax liabilities.

Warranty Accrual:

     We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our 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. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.

Restructuring Accrual:

     During fiscal 2004, 2003 and 2002, we developed formalized plans for restructuring our businesses and recorded significant charges in connection with our Global Realignment Program. In connection with these plans, we have recorded estimated expenses for severance and outplacement costs, lease cancellations, asset write-offs and other restructuring costs. In accordance with SFAS 146, generally costs associated with restructuring activities initiated after December 31, 2002 have been recognized when

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they are incurred rather than at the date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

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Results of Operations

     The following table sets forth the components of our Consolidated Statements of Operations as a percentage of net revenue:

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Results of Operations

Net Revenue:

* Primary reasons for change. The decline in net revenue reflects a decrease in cancellation revenue from $32.3 million in fiscal 2003 to $0.4 million in fiscal 2004, primarily in our Communications Products revenue, continued lower demand for our communications products and lower average selling prices for these products. We also experienced a decline in our Commercial and Consumer Products revenue, primarily due to declines in our display revenue. Results include the inclusion of approximately $3.5 million in revenue from E2O Communications, Inc as of its acquisition date of May 17, 2004. The Company’s revenue is split evenly between the Communications Products and Commercial and Consumer Products segments.

**Primary reasons for change: The decline in net revenue was due primarily to the downturn in the telecommunications industry which resulted in a decrease 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. Additionally, we had a decrease in cancellation revenue from $44.9 million in fiscal 2002 to $32.3 million in fiscal 2003, lower demand for our communications products and lower average selling prices for these products. The decline in our communications revenue in 2003 was partially offset by the increase in revenue of our Commercial and Consumer Products Group, primarily in display and security markets and the inclusion of revenue from L.A. Label and OptronX as of their acquisition dates of January 21, 2003 and September 18, 2002, respectively.

Notes:

•		Net revenue included cancellation revenue of $0.4 million, $32.3 million and $44.9 million during fiscal years 2004, 2003 and 2002.
•		Net revenue from our Communications Product Group accounted for 50% of our net revenue during fiscal 2004 as compared to 49% during fiscal 2003 and 72% during fiscal 2002.
•		Net revenue from our Commercial and Consumer Products Group accounted for 50% of our net revenue during fiscal 2004 as compared to 51% during fiscal 2003 and 28% during fiscal 2002. We expect our Commercial and Consumer Products Group net revenue to continue to account for a major portion of our total net revenue.
•		For fiscal 2004 and 2002, no customers accounted for 10% or more of our net revenue. Texas Instruments accounted for 12% of total net revenue for 2003.
•		Net revenue from customers outside North America represented 36%, 30% and 26% of total net revenue in 2004, 2003 and 2002, 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:

     Net revenue of $635.9 million in fiscal 2004 represents a decrease of $40.0 million, or 6%, from net revenue of $675.9 million in fiscal 2003. While we have seen quarter over quarter improvement in revenue for three consecutive quarters during fiscal 2004, revenue is still below historic levels. We are seeing signs of stability and growth in demand for our products in both our communication and commercial and consumer products markets, particularly evidenced by sequential quarterly revenue increases. Looking forward, we

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believe we must improve our delivery and quality performance in order to achieve continued growth. Based on this data, we believe that improvements in our execution will be a more significant contributor to our near term revenue growth than changes in market conditions. Over the last several quarters, we have encountered multiple and systemic execution challenges principally related to new product introductions, as well as to factory and product transitions initiated as part of our restructuring programs. These challenges, which include product delivery timetable uncertainty, supply chain constraints, protracted lead times, yield and quality problems, and systems strain, may lead to customer dissatisfaction and lost revenue opportunities. 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, yield and product quality, our operating results will suffer and we may experience customer defections.

Gross Margin:

*Primary reasons for change: Improvements in gross margin were due to (i) a decline in personnel-related expenses of approximately $64.3 million as a result of workforce reductions, site closures, product transfers to both lower cost locations and contract manufacturers; (ii) 29.8 million of write-downs of excess and obsolete inventories, as compared to $60.1 million in the prior year; (iii) a decline in depreciation of $19.5 million in the current fiscal year as compared to the prior year due to the write-downs of property, plant and equipment as a result of our impairment reviews and the removal and disposal of property, plant and equipment under our restructuring programs; (iv) a reduction in acquisition related stock compensation charges of $17.2 million; (v) a reduction in facilities and occupancy related costs of approximately $16.7 million; (vi) a reduction in royalty expense of $11.4 million; and (vii) reclassification to R&D of $4.5 million of expenses, previously included in cost of goods sold to better reflect the activities being performed. These favorable impacts to gross margin were partially offset by the following: (i) a decrease in the consumption of previously reserved excess or obsolete inventory of $23.3 million from $67.4 million in 2003 to $44.1 million in 2004; (ii) contract cancellation revenue of $0.4 million in the current year, compared to $32.3 million in the prior-year; 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 depreciation of $277.2 million in fiscal 2003 as compared to fiscal 2002 due to the write-downs of property, plant and equipment as a result of our impairment reviews and the removal and disposal of property, plant and equipment under our restructuring programs; (ii) a decline in personnel-related expenses of $80.9 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; (iii) $60.1 million of write-downs of excess and obsolete inventories during 2003, as compared to $203.9 million in the prior year; (iii) a reduction in acquisition related stock compensation charges of $23.9 million; and (iv) a decrease in warranty expense of $36.3 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) $32.3 million in contract cancellation revenue during fiscal 2003 compared to $44.9 million in the prior year; (ii) $18.4 million of royalty expense in connection with a new patent license in fiscal 2003; and (iii) continued decline in average selling prices of our products.

Comment and analysis:

     Gross margin as a percentage of net revenue for fiscal 2004 was approximately 23%, which is a 15-point improvement from the previous year. Gross margin for fiscal 2003 was approximately 8%, which is also a 15-point improvement from fiscal 2002. While average selling price declines and execution-related costs continued to strain revenue associated with volume increases and restrict further improvements to our gross margin, the Company’s focus on controlling costs has resulted in improvements to our gross margin. We believe 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. We also plan to continue our cost reduction programs which will focus on site

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consolidation, product transfers to low cost manufacturing locations internally and externally and employee reductions. This will require re-qualification of complex manufacturing processes and additional costs over the short term. Additionally, we have recently introduced a number of new products and programs which due to the untested nature of the products and the potential for complexity may continue to incur relatively higher startup costs and increased yield and product quality risk. These issues have negatively impacted and could continue to negatively impact our gross margin. 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 $24.2 million due primarily to the consolidation of the number of sites performing R&D; (ii) a decline in personnel-related expenses of approximately $10.5 million as a result of workforce reductions, site closures and other cost cutting measures; (iii) a decline in acquisition related stock compensation charges of $10.4 million; (iv) a decline of approximately $5.6 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; and (v) a decline of $1.6 million of charges other than restructuring associated with the Global Realignment Program. These decreases were offset in part by a reclassification to research and development of $4.5 million of expense, previously included in cost of goods sold, to better reflect the activities being performed.

**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) workforce reductions resulting in savings of approximately $34.6 million; (ii) a decline in acquisition related stock compensation charges of $20.9 million; (iii) a decline in indirect materials expense of $11.9 million; (iv) a reduction in facilities and occupancy related costs of approximately $11.4 million; and (v) a decline of $5.5 million of charges other than restructuring associated with the Global Realignment Program.

Comment and analysis:

     During fiscal 2004 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, or 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):

*Primary reasons for change: The decrease was primarily due to: (i) a decline of $42.8 million of charges other than restructuring associated with our Global Realignment Program; (ii) a reduction in facility and occupancy related costs of

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approximately $33.4 million 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; (iii) a decline in acquisition related stock compensation charges of $21.4 million; and (iv) a decline in personnel-related expenses of approximately $19.9 million resulting from workforce reductions, site closures and other cost cutting measures implemented. These expense reductions were offset in part by increases in Sarbanes-Oxley compliance costs.

**Primary reasons for change: The decrease was primarily due to: (i) a reduction in facility and occupancy related costs of $70.5 million 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; (ii) a decline in acquisition related stock compensation charges of $29.1 million; (iii) a decline in personnel-related expenses of approximately $28.2 million as a result of workforce reductions, site closures and other cost cutting measures implemented under our Global Realignment Program; and (iv) a decline of $4.7 million of charges other than restructuring associated with our Global Realignment Program.

Comment and analysis:

      We are continuing our focus on reducing SG&A expense as part of our overall cost reduction program. Our SG&A levels are a result, to a major extent, of our historic levels of operations, related complexity and the continuing costs required to resolve disputes such as our shareholder litigation, employment issues, facility closures and other matters attributable to the extent and scope of our historic organization and operations. While we expect these costs to diminish over time, we anticipate that non-recurring, non-core expenses related to these matters will be incurred periodically for the foreseeable future, none of which is expected to have a material adverse impact on our financial condition, but many of which could impact our profitability expectations for any particular quarter. In March 2001, we employed approximately 29,000 persons at 41 sites. As of June 30, 2004, we employed approximately 6,000 persons, at 14 sites. As we have reduced the number of our locations, we have made significant progress in reducing our SG&A expense. However, additional effort remains to align our SG&A levels to our current and expected operations, which alignment will be crucial to our recovery and we may not be successful in this effort. Also, we expect to continue to incur additional significant SG&A expenses as we implement the requirements of the Sarbanes-Oxley Act of 2002, in particular, Section 404 thereof, and continue to invest in personnel strategic to our business and as we integrate our recently announced acquisitions. There can be no assurance that our SG&A expense will continue to decline in the future or that, more importantly, we will develop a cost structure (including our SG&A expense), which will lead to profitability under current and expected revenue levels.

Amortization of Purchased Intangibles:

*Primary reasons for change: The decrease for fiscal 2004 as compared to fiscal 2003, and for fiscal 2003 as compared to 2002, were primarily due to the write-downs of the carrying amount of purchased intangibles as a result of impairment charges recorded in fiscal 2001 through fiscal 2003. Please refer to the “Reduction of Other Long-Lived Assets” section below for further discussion of the impairment charges related to our purchased intangibles.

Acquired In-Process Research and Development:

     In fiscal 2004, we recorded charges of $2.6 million for acquired in-process research and development (“IPR&D”) in connection with our acquisition of E2O. In fiscal 2003, we recorded $0.4 million for acquired IPR&D in connection with our acquisition of OptronX. In fiscal 2002, we recorded charges of $25.3 million resulting from our acquisition of IBM’s optical transceiver business ($22.1 million) and Scion ($3.2 million). These amounts were expensed on the acquisition dates because the acquired technology had not yet reached technological feasibility and had no future alternative uses. There can be no assurance that acquisition of businesses, products or technologies by us in the future will not result in substantial charges for acquired IPR&D.

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Reduction of Goodwill:

Comment and analysis:

     During fiscal 2004, we recorded no impairment charges. As part of our quarterly review of financial results, we determine if there are indicators that the carrying value of our goodwill may not be recoverable. We test for impairment of goodwill on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable (see “Note 12. Reduction of Goodwill” of our Notes to Consolidated Financial Statements). We did not identify any impairment indicators during fiscal 2004.

     In fiscal 2003, we recorded $225.7 million of impairment charges as compared to $4,360.8 in fiscal 2002.

Fiscal 2003:

     As part of our quarterly review of financial results in the first quarter of fiscal 2003, we noted indicators that the carrying value of our long-term assets including goodwill may not be recoverable and performed an additional impairment review.

     Under the first step of the SFAS No. 142 analysis, the fair value of the reporting units was determined. Based on that analysis, we determined that the carrying amount of the reporting units within the Communications Products Group exceeded their fair value. We were required to perform the second step analysis to determine the amount of the impairment loss. We recorded an estimated impairment charge of $224.4 million to reduce the carrying value of our goodwill in the first quarter of fiscal 2003, and an additional impairment charge of $1.3 million in the second quarter of fiscal 2003, bringing the total Reduction of Goodwill in fiscal 2003 to $225.7 million.

     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.

Fiscal 2002 Charges:

     As a result of restructuring activities in fiscal 2002, we restructured our businesses and realigned our operations to focus on certain markets and core opportunities. In the process, we abandoned certain redundant products and product platforms and reduced our workforce that had been valued in previous acquisitions. In accordance with SFAS No. 121, we wrote down the related intangible assets to their fair value, which was determined to be $0, and recorded total charges of $31.2 million related to goodwill.

     As part of our quarterly reviews of financial results, we noted indicators in the second, third and fourth quarters of fiscal 2002 that the carrying value of our goodwill may not be recoverable and performed an impairment review. The impairment review was

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performed pursuant to SFAS No. 121 because of the prolonged economic downturn affecting our operations and revenue forecasts. Our projected future revenue and cash flows for certain of our asset groupings were revised downward in the second, third and fourth quarters of fiscal 2002. Therefore, we recorded charges to reduce goodwill based on the amounts by which the carrying amounts of these assets exceeded their fair value. Fair value was determined based on discounted future cash flows for the operating entities that had separately identifiable cash flows.

     The following table summarizes the write-downs of goodwill for the second quarter of fiscal 2002 (in millions):

     We assumed a cash flow period of 5 years, a discount rate of 14%, and terminal growth rates of 5% to 7%. The long-term annual growth rates are higher in the early years of the 5-year cash flow period, representing our estimated growth in the period of industry recovery, and a reduced growth rate in the later years.

     The following table summarizes the write-downs of goodwill for the third quarter of fiscal 2002 (in millions):

     We assumed a cash flow period of 5 years, a discount rate of 14%, and terminal growth rates of 5% to 7%. The long-term annual growth rates are higher in the early years of the 5-year cash flow period, representing our estimated growth in the period of industry recovery, and a reduced growth rate in the later years.

     The following table summarizes the write-downs of goodwill for the fourth quarter of fiscal 2002 (in millions):

     We assumed a cash flow period of 5 years, a discount rate of 14%, and terminal growth rates of 7%. The long-term annual growth rates are higher in the early years of the 5-year cash flow period, representing our estimated growth in the period of industry recovery, and a reduced growth rate in the later years.

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Reduction of Other Long-Lived Assets:

Comment and analysis:

Fiscal 2004 Charges:

Assets Held and Used:

     During fiscal 2004, in accordance with SFAS No. 144, the Company reduced to the estimated realizable value, the value of certain manufacturing equipment by $7.7 million, and other assets by $3.7 million. In addition, as a result of the adoption of FIN 46R with respect to two properties under a synthetic lease agreement, the Company recognized a $5.0 million impairment charge related to its Melbourne, Florida property.

Assets Held for Sale:

     During fiscal 2004, the Company classified certain properties as assets held for sale, primarily the Company’s Ottawa campus. In accordance with SFAS 144, the Company recorded total impairment charges of $35.4 million, representing the amount by which the carrying value of the properties exceeded estimated fair value less cost to sell.

Fiscal 2003 Charges:

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.

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     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 rest 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 for these periods.

Assets Held for Sale:

     During the third quarter and fourth quarter of fiscal 2003, the Company classified certain property, plant and equipment intended to be disposed of within a twelve month period as assets held for sale. In accordance with SFAS No. 144, we recorded an impairment charge of $13.3 million, representing the amount by which their carrying value exceeds fair value less cost to sell. During the first quarter of fiscal 2003, we classified certain property and equipment as assets held for sale in connection with the sales of our SIFAM and Cronos subsidiaries and recorded total impairment charges of $6.9 million.

Fiscal 2002 Charges:

     As a result of the Phase 2 restructuring activities in the first quarter of fiscal 2002, we restructured our businesses and realigned our operations to focus on certain markets and core opportunities. In the process, we abandoned certain redundant products and product platforms and reduced our workforce that had been valued in previous acquisitions. In accordance with SFAS No. 121, we wrote down the related intangible assets to their fair value, which was deemed to be $0, and recorded total charges of $10.8 million related to purchased intangibles other than goodwill.

     As part of our quarterly reviews of financial results, we noted indicators in the second, third and fourth quarters of fiscal 2002 that the carrying value of our long-lived assets, including significant amounts of purchased intangibles recorded in connection with its various acquisitions, may not be recoverable and performed an impairment review. The impairment review was performed pursuant to SFAS No. 121 because of the prolonged economic downturn affecting our operations and revenue forecasts. As a result of the prolonged economic downturn, our projected future revenue and cash flows for certain of our asset groupings were revised downward in the second, third and fourth quarters of fiscal 2002. Therefore, we recorded charges to reduce our long-lived assets based on the amounts by which the carrying amounts of these assets exceeded their fair value. Fair value was determined based on discounted future cash flows for the operating entities that had separately identifiable cash flows.

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     The following table summarizes the write-downs of our long-lived assets, consisting of purchased intangibles and property, plant and equipment, for each quarter of fiscal 2002 (in millions):

     We assumed a cash flow period of 1 to 5 years, a discount rate of 14%, and terminal growth rates of 5% to 7%, with the exception of the fourth quarter, which used a terminal growth rate of 7%. The long-term annual growth rates are higher in the early years of the 5-year cash flow period, representing our estimated growth in the period of industry recovery, and a reduced growth rate in the later years.

Restructuring and Other Related Charges:

Comment and analysis:

     In the third and fourth quarters of fiscal 2004 we initiated two restructuring activities and in December 2003 we announced the completion of our Global Realignment Program, which began in April 2001. These activities were in response to the economic downturn and continued realignment of our business toward customer driven productivity. Since April 2001, we have recorded total restructuring charges of $657.1 million (of which $11.5 million, $121.3 million and $260.0 million were recorded in fiscal 2004, 2003 and 2002, respectively). In addition, we incurred charges other than restructuring of $481.7 million related to the Global

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Realignment Program (of which $6.8 million, $55.7 million and $182.7 million were recorded in fiscal 2004, 2003 and 2002, respectively). Please refer to “Note 14. Restructuring and Global Realignment” of our Notes to Consolidated Financial Statements for a detailed discussion on these charges associated with our Restructuring Programs.

     We are consolidating and reducing our manufacturing, research and development, sales and administrative facilities in North America, Europe and Asia-Pacific. To date, we have closed 29 sites and buildings. Based on the decisions made through the end of fiscal 2004, we expect to reduce our total workforce by approximately 20,050 employees. As of June 30, 2004, 19,949 employees have been terminated.

     The net obligation as of June 30, 2004, related to the Company’s total restructuring obligations of approximately $84 million are net of sublease income or lease settlement estimates of approximately $25 million. If adverse macroeconomic conditions continue, particularly as they pertain to the commercial real estate market, or if, for any reason, tenants under subleases fail to perform their obligations, the Company may be required to reduce estimated future sublease income and adjust the estimated amounts of future settlement agreements, and accordingly, increase estimated cost to exit certain facilities. Amounts related to the lease expense, net of anticipated sublease proceeds, will be paid over the respective lease terms through fiscal 2016.

     In the future, we expect to see further opportunities for restructuring activities including elimination of duplicative operations or infrastructure, transferring manufacturing and product lines to more optimal internal locations or, in many cases, to independent contract manufacturers, disposing of unnecessary assets, centralizing functions, improving our governance and systems, and, as necessary, streamlining our employee base.

     The Global Realignment Program is substantially complete. Looking forward, as we move from a set program of restructuring toward targeted customer-driven productivity improvements, we expect to see opportunities to further reduce costs.

Interest and Other Income, Net:

*Primary reasons for change: The decrease in fiscal 2004 as compared to fiscal 2003 is primarily attributable to lower interest rates on invested cash balances and reduced gains on the disposal of certain assets. Going forward, amortization of the cost incurred for the issuance of the Company’s Convertible Debt will reduce net interest income by approximately $2.5 million per fiscal year.

**Primary reasons for change: The decrease in fiscal 2003 from the prior-year was primarily attributable to the decline in interest income as a result of lower average daily cash and investment balances and lower interest rates.

Gain (Loss) on Sale of Subsidiaries’ Assets:

*Primary reasons for change: In fiscal 2003, we completed the sale of all or significantly all of the assets of three subsidiaries located in Billerica, Massachusetts, Raleigh, North Carolina and Torquay, United Kingdom, and recognized a net loss of $2.2 million from the transactions.

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**Primary reasons for change: In fiscal 2002, we sold 80.1% of our ownership in Iridian to IST Holdings for $1.1 million in cash, and retained the remaining 19.9%. After adjusting for the net costs of the assets sold and the expenses associated with the divestiture, we realized a gain of $0.1 million from the transaction.

Gain on Sale of Investments:

*Primary reasons for change: The gain in fiscal 2004 is primarily the result of the sale of marketable public securities, primarily Nortel common stock shares received in the sale of our Zurich facility to Nortel in fiscal 2001. The fair value of our marketable securities at June 30, 2004 is approximately $70.9 million. In fiscal 2003 and 2002, we recognized total gains of $4.0 million and $15.0 million, respectively, primarily from sales of certain non-marketable equity securities and fixed income securities.

Reduction in Fair Value of Investments:

*Primary reasons for change: We periodically review our investments for impairment. When the carrying value of an investment exceeds the fair value and the decline in fair value is deemed to be other-than-temporary, we write down the value of the investment to its fair value. The write-downs in fiscal 2004 consisted of $3.8 million related to the decline in fair value of various non-marketable equity securities. The write-downs in fiscal 2003 consisted of $25.0 million related to the decline in fair value of our investment in Adept and $20.4 million related to other non-marketable equity securities. The write-downs in fiscal 2002 consisted of $187.3 million related to our investment in Nortel common stock, $9.6 million related to other available-for-sale investments and $28.9 million related to non-marketable equity securities.

Comment and analysis:

     Should the fair value of our investments decline in the future, we may be required to record additional charges if the decline is determined to be other-than-temporary. The carrying amount of the Company’s investments is $32.6 million and its minimum funding commitments are $16.0 million.

Loss on Equity Method Investments:

*Primary reasons for change: Charges in fiscal 2004 and fiscal 2003 consisted primarily of our pro rata share of the net losses on our equity method investments. Charges in fiscal 2002 included: (i) $40.0 million related to our pro rata share of net losses in ADVA and other equity method investments; (ii) $13.9 million related to a charge to write down the carrying value of our

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investment in ADVA due to an other-than-temporary decline in its market value; and (iii) $0.7 million of amortization expense in fiscal 2002 related to the difference between the cost of the investment and the underlying equity in the net assets of ADVA.

Comment and analysis:

     We recorded losses on our equity method investments representing our pro-rata share of net losses. Our equity investments include four venture capital funds and direct investments.

Income Tax Expense (Benefit):

Comment and analysis:

Fiscal 2004 Tax Benefit:

     We recorded an income tax benefit of $15.8 million for fiscal 2004. The expected tax benefit derived by applying the federal statutory rate to our loss before income taxes for fiscal 2004 differed from the income tax benefit recorded primarily due to the net tax effects of non-deductible acquisition-related charges, increases in our valuation allowance for deferred tax assets, tax benefits realized from the reversal of previously accrued taxes and tax benefits arising from foreign earnings of one of our Far East subsidiaries operating under a tax holiday that are invested indefinitely offshore. Included in the fiscal 2004 tax benefit of $15.8 million is $7.8 million of tax benefit arising from the net tax effect of sales of certain marketable public securities and tax benefits arising from deferred tax assets recorded for fiscal 2004 operating losses that were not subject to a valuation allowance due to appreciation in the carrying value of certain marketable public securities designated as available-for-sale investments. Also included in the 2004 tax benefit is $5.0 million related to the carryback of tax net operating losses from fiscal 2002 to offset prior year taxes paid by certain acquired subsidiaries.

     During the fourth quarter of fiscal 2004, the Company recorded a $2.0 million tax benefit as a result of obtaining a tax clearance certificate in connection with the liquidation of one of the Company’s foreign subsidiaries. In August 2004, the Company recorded a $2.6 million tax benefit as of June 30, 2004 to reflect a reduction in previously estimated foreign tax liabilities as a result of the Company’s resolution of certain foreign tax audit issues with foreign taxing authorities. The $2.6 million benefit is reflected in the Company’s consolidated balance sheet as of June 30, 2004 under the caption “Income taxes payable” and in the consolidated statement of operations for the year ended June 30, 2004 under the caption “Income tax expense (benefit).”

     The Company is currently subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.

     Fluctuations in the value of our available-for-sale marketable public securities will create volatility in the amount of income tax expense (benefit) we record in future periods.

     Due to the continued economic uncertainty in the industry, management has determined that it is more likely than not that the Company’s net deferred tax assets will not be realized and the Company has recorded deferred tax assets as of June 30, 2004 only to the extent of deferred tax liabilities.

Fiscal 2003 Tax Expense:

     We recorded an income tax expense of $13.5 million in fiscal 2003. The expected tax benefit derived by applying the federal statutory rate to our loss before income taxes for fiscal 2003 differed from the income tax expense recorded primarily due to the net tax effects of non-deductible acquisition-related charges and increases in our valuation allowance for deferred tax assets. The $13.5 million tax expense we recorded in fiscal 2003 includes $18.0 million of tax expense related to the prior financial reporting period ended June 30, 2002 and resulted from an increase in the Company’s valuation allowance for deferred tax assets. During the fiscal

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year ended 2003, Canadian tax authorities completed a review of the Company’s pending claims for refunds of prior year income taxes. As a result of this review, certain matters related to carryback periods and minimum taxes were identified that caused the Company to conclude that it had recorded $18.0 million of net deferred tax assets in excess of income taxes actually recoverable from prior years and, therefore, necessitated the recording of an additional valuation allowance for deferred tax assets. The $18.0 million amount recorded in fiscal year 2003 was not material to the period in which it should have been recorded nor material to the consolidated results of operations for the year ended June 30, 2003.

     Included in the fiscal 2003 income tax expense of $13.5 million is a $7.0 million tax benefit recorded as a result of appreciation in the carrying value of available-for-sale marketable public securities that reduced by $7.0 million the amount of valuation allowance for deferred tax assets recorded in connection with our loss from continuing operations.

Fiscal 2002 Tax Expense:

     We recorded an income tax expense of $237.3 million in fiscal 2002. The expected tax benefit derived by applying the federal statutory rate to our loss before income taxes for fiscal 2002 differed from the income tax expense recorded primarily due to the net tax effects of non-deductible acquisition-related charges and increases in our valuation allowance for deferred tax assets and reductions in deferred tax assets recorded in prior years attributable to assumed employee stock options that were cancelled or exercised when the share value on the option exercise dates was less than the value recorded for purchase accounting purposes.

Operating Segment Information:

Communications Product Group:

*Primary reasons for change: The decrease in Communication Products Group net revenue for fiscal 2004 as compared to fiscal 2003 reflects a drop in customer cancellation revenue. It is also due to lower demand for our communications products and lower average selling prices caused by the slowdown in our industry, which resulted in a decrease in network deployment and capital spending by telecommunications carriers. The improvement in Communication Product Group Operating loss was primarily a function of improved gross margins and reduced operating expenses, as a result of workforce reductions, a reduction in facilities and occupancy related costs, site closures and other cost cutting measures implemented under our Global Realignment Program, as discussed in our analysis of changes in gross margin and selling, general and administrative costs.

**Primary reasons for change: The decrease in Communication Products Group net revenue for fiscal 2003 as compared to fiscal 2002 was primarily due to lower demand for our communications products and lower average selling prices caused by the slowdown in our industry, which resulted in a decrease in network deployment and capital spending by telecommunications carriers. The improvement in the operating loss was primarily due to improved gross margins and reduced operating expenses primarily related to cost reductions identified under the Global Realignment Program.

Commercial and Consumer Products Group:

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*Primary reasons for change The decline in our Commercial and Consumer Products revenue for fiscal 2004 as compared to fiscal 2003 was primarily due to declines in our display revenue and optically variable pigments. The increase in our net revenue for 2003 as compared to fiscal 2002 was primarily attributable to higher demand for our products for display and security markets. The improvement in Commercial and Consumer Products Group Operating Income for fiscal 2003 as compared to fiscal 2002 was primarily a function of improved gross margins and reduced operating expenses primarily related to reductions identified under the Global Realignment Program.

Liquidity and Capital Resources

     We had a combined balance of cash, cash equivalents and short-term investments of $1,548.7 million at June 30, 2004, an increase of $314.6 million from June 30, 2003 primarily due to the debt offering. Our total debt outstanding, including capital lease obligations, was $470.4 million at June 30, 2004.

     Operating activities used $135.2 million in cash during fiscal 2004, primarily resulting from: (i) our net loss adjusted for non-cash items including non-cash tax benefit associated with unrealized gains on publicly traded securities, depreciation and amortization, stock-based compensation expense, cumulative effect of an accounting change, reductions of goodwill and other long-lived assets, gains and losses on our investments; and (ii) decrease of current liabilities of $72.5 million, partially resulting from payments of obligation previously accrued under the Global Realignment Program of $49.9 million, the utilization and settlement of warranty obligations of $36.0 million and the reduction of other current liabilities of $11.5 million due to settlement and payment of obligations; and (iii) increases in accounts receivable due to quarterly revenue growth; and in inventory due to expected growth;. These items were partially offset by tax refunds received of approximately $44 million.

     Accounts receivable were higher in fiscal 2004 primarily due to sequential quarterly increases in sales during the year. Days sales outstanding in accounts receivable was 59 days at June 30, 2004 as compared to 55 days at June 30, 2003, primarily reflecting an increase in shipments near the end of the period. Inventory levels were higher at June 30, 2004 primarily due to increased purchases required to meet customer demand.

     Cash used by investing activities was approximately $259.1 million during 2004, primarily due to purchases of available for sale investments in the net amount of $186.3 million resulting from proceeds of debt financing offset by operational use; purchases of property, plant and equipment, including the purchase of properties formerly under a synthetic lease agreement for $44.7 million and acquisition of businesses as discussed in “Note 17. Mergers and Acquisitions” of our Notes to Consolidated Financial Statements. Partially offsetting this use of cash were proceeds of $36.0 million primarily related to the sale of a facility in Taiwan and the sale of our corporate airplane.

     Our financing activities provided cash of $481.1 million, resulting primarily from the issuance of $475.0 million in Zero Coupon Senior Convertible Notes. As of June 30, 2004, the Company had six standby letter of credit facilities totaling $9.4 million. See “Note 7. Convertible Debt and Letters of Credit” of our Notes to Consolidated Financial Statements for additional information regarding the issuance and terms of the convertible notes and available lines of credit.

     Our investments of surplus cash are made in accordance with an investment policy approved by our Board of Directors. In general, our investment policy requires that securities purchased and held be rated SP-1/MIG-1, A/A2 or better. No securities may have an effective maturity that exceeds 36 months, and the average duration of our investment portfolio may not exceed 18 months. At any time, no more than 10% of the investment portfolio may be concentrated in a single issuer other than the U.S. or Canadian government. The Company’s investments in debt securities and marketable equity securities are classified as available-for-sale investments or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are reported as a separate component of stockholders’ equity.

Financial Commitments:

     Our investment portfolio includes minority investments in certain privately held companies. As of June 30, 2004, we had a commitment to provide additional funding of up to a maximum of $16.0 million to certain venture capital investment partnerships.

Contractual Obligations

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     The following summarizes our contractual obligations and off balance sheet arrangements at June 30, 2004, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in millions).

As of June 30, 2004, operating lease obligations of $76.6 million in connection with our restructuring program were accrued in our Consolidated Balance Sheet.

Purchase obligations represent all open purchase orders as of June 30, 2004.

Off-Balance Sheet Arrangements:

     We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

     We expect to use approximately $120.0 to $140.0 million in cash in fiscal 2005, exclusive of amounts required relating to our acquisition and investment activities during the fiscal year. We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements at least through the next 12 months. However, possible investments in or acquisitions of complementary businesses, products or technologies may require the use of additional cash or financing prior to such time. We have in recent periods consumed, and we expect to continue to consume, portions of our cash reserves to fund our operations. The amounts consumed to date, together with the amounts currently anticipated to be spent, are not expected to materially impair our financial condition. However, we may need to expend additional, currently unanticipated, cash reserves to fund our operations. Our liquidity could be negatively affected by a decline in demand for our products, which are subject to rapid technological changes, or a reduction of capital expenditures by telecommunications carriers.

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Employee Stock Options

Stock Option Program Description:

     Our stock option program is a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. As of June 30, 2004, we have available for issuance 112.9 million shares of common stock underlying options for grant primarily under the Company’s 2003 Equity Incentive Plan. The exercise price is generally equal to the fair value of the underlying stock at the date of grant. Options generally become exercisable over a four-year period and, if not exercised, expire from five to ten years. Substantially all of our employees participate in our stock option program.

     The Company accounts for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as interpreted by Financial Accounting Standards Board Interpretation No. 44 (“FIN No. 44”), “Accounting for Certain Transactions Involving Stock Compensation.” The Company records and amortizes, over the related vesting periods on a straight-line basis, deferred compensation representing the difference between the price per share of stock issued or the exercise price of stock options granted and the fair value of the Company’s common stock at the time of issuance or grant. Stock compensation costs are immediately recognized to the extent the exercise price is below the fair value on the date of grant and no future vesting criteria exist. Please refer to “Note 10. Stockholders’ Equity” of our Notes to Consolidated Financial Statements for a detailed discussion on this program.

Status of Acquired In-Process Research and Development Projects

     We periodically review the stage of completion and likelihood of success of each of the IPR&D projects. The nature of the efforts required to develop the IPR&D projects 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. The current status of the IPR&D projects for our significant acquisitions during fiscal 2004, 2003 and 2002 is as follows:

E2O:

     E2O was in the process of developing a vertical-cavity surface-emitting laser (VSCEL) Shortwave laser as of the date of acquisition. From the date of acquisition through the end of the fiscal year, approximately $0.2 million was spent on research and development for the continued development of VSCEL product. The Company estimates that $0.5 million of additional research and development costs will be incurred prior to its estimated completion in calender 2006.

Scion:

     The products under development at the time of acquisition were comprised of advanced integrated waveguide devices. We have incurred post-acquisition costs of $3.9 million to date and estimate that an additional investment of approximately $0.7 million in research and development over the next 9 months will be required to complete the IPR&D projects. The differences between the actual outcome noted above and the assumptions used in the original valuation of the technology are not expected to have a significant impact on our results of operations and financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investments

     We maintain an investment portfolio in a variety of financial instruments, including fixed and floating rate bonds, municipal bonds, auction instruments, money market instruments, corporate bonds and agency bonds. Part of our investment portfolio also includes minority equity investments in several publicly-traded companies, the values of which are subject to market price volatility. These investments are generally classified as available-for-sale and, consequently, are recorded on our balance sheets at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity.

     Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market values of our fixed-rate securities decline if interest rates rise, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may be less than expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities that have experienced a decline in market value because of changes in interest rates.

     The following tables present the hypothetical changes in fair value in the financial instruments held at June 30, 2004 and June 30, 2003 that are sensitive to changes in interest rates. These instruments are not leveraged or hedged and are held for

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purposes other than trading. The modeling technique used measures the change in fair values arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS over a 12-month horizon. Due to the level of interest rates, a decrease of 150 BPS at June 30, 2003 was not relevant. Beginning fair values represent the principal plus accrued interest and dividends at June 30, 2004 and June 30, 2003. The following tables estimate the fair value of the portfolio at a 12-month horizon (in millions):

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     The following analyses present the hypothetical changes in fair values of equity investments in publicly-traded companies that are sensitive to changes in global equity markets. These equity securities are held for purposes other than trading. The modeling technique used measures the hypothetical change in fair values arising from selected hypothetical changes in each stock’s price. Stock price fluctuations of plus or minus 15%, 35% and 50% were selected. The following tables estimate the fair value of the publicly-traded corporate equities at a 12-month horizon (in millions):