**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                      |
|-----------------------------------------------------|
|                                                |   |   |
| **ý**                                          |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                |   |   |
| **For the quarterly period ended January 31, 2004** |
|                                                |   |   |
| **OR**                                              |
|                                                |   |   |
| **o**                                               |   | **TRANSACTION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                |   |   |
| **For the transition period from N/A to N/A**       |

 

**Commission file number 0-1424**

 

| **ADC  Telecommunications, Inc.**                                              |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |   |   |
| **Minnesota**                                                                       |   | **41-0743912** |
| (State or other jurisdiction of incorporation or organization)                      |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |   |
| **13625 Technology Drive, Eden Prairie, MN 55344-2252**                             |
| (Address of principal executive offices) (Zip code)                            |
|                                                                                |   |   |
| **(952) 938-8080**                                                             |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |   |
| **N/A**                                                                             |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 
| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 
| YES  ý |   | NO  o |
|-----------------------|--------|-----------------|

 

**APPLICABLE ONLY TOCORPORATE ISSUERS:**

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

Common stock, $.20 par value: 807,277,031****shares as ofMarch 8, 2004

 

 

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**PARTI. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS—UNAUDITED**

 

**(In millions)**

 
|                                                                             |   | **January 31,  2004** |       | **October 31,  2003** |       |
|----------------------------------------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|
| **ASSETS:**                                                                      |   |                       | ** ** |                       | ** ** |
|                                                                             |   |                       | ** ** |                       | ** ** |
| CURRENT ASSETS:                                                                  |   |                       |       |                       |       |
| Cash and cash equivalents                                                        |   | $                          | 724.6      |                       | $          | 718.0 |   |
| Available-for-sale securities                                                    |   | 25.0                       |       | 26.7                       |       |
| Accounts receivable, net                                                         |   | 97.3                       |       | 99.8                       |       |
| Unbilled revenue                                                                 |   | 27.1                       |       | 30.6                       |       |
| Inventories, net                                                                 |   | 68.6                       |       | 66.3                       |       |
| Assets of discontinued operations                                                |   | 23.4                       |       | 21.6                       |       |
| Prepaid and other current assets                                                 |   | 53.4                       |       | 48.4                       |       |
|                                                                             |   |                       |       |                       |       |
| Total current assets                                                             |   | 1,019.4                    |       | 1,011.4                    |       |
|                                                                             |   |                       |       |                       |       |
| PROPERTY AND EQUIPMENT, NET                                                      |   | 182.7                      |       | 190.6                      |       |
| ASSETS HELD FOR SALE                                                             |   | 20.5                       |       | 25.1                       |       |
| RESTRICTED CASH                                                                  |   | 16.0                       |       | 15.8                       |       |
| AVAILABLE-FOR-SALE SECURITIES                                                    |   | 17.1                       |       | 19.5                       |       |
| OTHER ASSETS                                                                     |   | 34.4                       |       | 38.2                       |       |
|                                                                             |   |                       |       |                       |       |
| Total assets                                                                     |   | $                          | 1,290.1    |                       | $          | 1,300.6 |   |
|                                                                             |   |                       |       |                       |       |
| **LIABILITIES AND SHAREOWNERS’ INVESTMENT:**                                |   |                       |       |                       |       |
|                                                                             |   |                       |       |                       |       |
| CURRENT LIABILITIES:                                                             |   |                       |       |                       |       |
| Accounts payable                                                                 |   | $                          | 49.2       |                       | $          | 46.4 |   |
| Accrued compensation and benefits                                                |   | 45.0                       |       | 52.8                       |       |
| Restructuring accrual                                                            |   | 25.6                       |       | 29.3                       |       |
| Other accrued liabilities                                                        |   | 103.7                      |       | 111.7                      |       |
| Liabilities of discontinued operations                                           |   | 23.4                       |       | 25.7                       |       |
| Notes payable                                                                    |   | 7.5                        |       | 8.3                        |       |
|                                                                             |   |                       |       |                       |       |
| Total current liabilities                                                        |   | 254.4                      |       | 274.2                      |       |
|                                                                             |   |                       |       |                       |       |
| LONG-TERM NOTES PAYABLE                                                          |   | 400.0                      |       | 400.0                      |       |
| OTHER LONG-TERM LIABILITIES                                                      |   | 2.5                        |       | 2.5                        |       |
|                                                                             |   |                       |       |                       |       |
| Total liabilities                                                                |   | 656.9                      |       | 676.7                      |       |
|                                                                             |   |                       |       |                       |       |
| SHAREOWNERS’ INVESTMENT  (807.7 and 806.6 shares outstanding, respectively) |   | 633.2                      |       | 623.9                      |       |
|                                                                             |   |                       |       |                       |       |
| Total liabilities and shareowners’  investment                              |   | $                          | 1,290.1    |                       | $          | 1,300.6 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED**

**(In millions, exceptper share amounts)**

 
|                                          |   | **Three  Months Ended  January 31,** |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|
|                                          |   | **2004**                                  |   | **2003** |   |
| NET SALES:                                    |   |                                      |   |   |   |
| Product                                       |   | $                                         | 123.9  |   | $ | 146.5 |   |
| Service                                       |   | 44.6                                      |   | 48.1 |   |
| TOTAL NET SALES                               |   | 168.5                                     |   | 194.6 |   |
|                                          |   |                                      |   |   |   |
| COST OF SALES:                                |   | 64.5                                      |   | 83.1 |   |
| Product                                       |   | 37.7                                      |   | 42.4 |   |
| Service                                       |   | 102.2                                     |   | 125.5 |   |
| TOTAL COST OF SALES                           |   |                                      |   |   |   |
|                                          |   |                                      |   |   |   |
| GROSS PROFIT                                  |   | 66.3                                      |   | 69.1 |   |
|                                          |   |                                      |   |   |   |
| OPERATING EXPENSES:                           |   |                                      |   |   |   |
| Research and development                      |   | 21.7                                      |   | 30.3 |   |
| Selling and administration                    |   | 42.1                                      |   | 61.4 |   |
| Impairment charges                            |   | —                                    |   | 10.3 |   |
| Restructuring charges                         |   | 6.9                                       |   | 8.2 |   |
|                                          |   |                                      |   |   |   |
| Total Operating Expenses                      |   | 70.7                                      |   | 110.2 |   |
|                                          |   |                                      |   |   |   |
| OPERATING LOSS                                |   | (4.4                                      | )      | (41.1 | ) |
|                                          |   |                                      |   |   |   |
| OTHER INCOME (EXPENSE), NET                   |   | 7.8                                       |   | (0.5 | ) |
|                                          |   |                                      |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES             |   | 3.4                                       |   | (41.6 | ) |
| PROVISION (BENEFIT) FOR INCOME TAXES          |   | —                                    |   | — |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS      |   | 3.4                                       |   | (41.6 | ) |
|                                          |   |                                      |   |   |   |
| DISCONTINUED OPERATIONS, NET OF TAX:          |   |                                      |   |   |   |
| (Loss) Income from discontinued operations    |   | (2.2                                      | )      | 0.1 |   |
| Loss on divestiture of subsidiary             |   | (3.6                                      | )      | — |   |
|                                          |   | (5.8                                      | )      | 0.1 |   |
|                                          |   |                                      |   |   |   |
| NET LOSS                                      |   | $                                         | (2.4   | ) | $ | (41.5 | ) |
|                                          |   |                                      |   |   |   |
| AVERAGE COMMON SHARES OUTSTANDING (BASIC)     |   | 806.8                                     |   | 801.1 |   |
| AVERAGE COMMON SHARES OUTSTANDING (DILUTED)   |   | 812.2                                     |   | 801.1 |   |
|                                          |   |                                      |   |   |   |
| BASIC AND DILUTED EARNINGS (LOSS) PER  SHARE: |   |                                      |   |   |   |
| Continuing operations                         |   | $                                         | 0.00   |   | $ | (0.05 | ) |
| Discontinued operations                       |   | $                                         | (0.01  | ) | $ | 0.00 |   |
| Basic and diluted earnings (loss) per share   |   | $                                         | 0.00   |   | $ | (0.05 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED**

**(In millions)**

 
|                                                                                |   | **Three  Months Ended January 31,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                |   | **2004**                                 |   | **2003** |   |
| OPERATING ACTIVITIES:                                                               |   |                                     |   |   |   |
| Net loss                                                                            |   | $                                        | (2.4   | ) | $ | (41.5 | ) |
| Adjustments to reconcile net loss to net  cash from operating activities:           |   |                                     |   |   |   |
| Inventory and fixed asset impairments                                               |   | —                                   |   | 10.3 |   |
| Depreciation and amortization                                                       |   | 11.4                                     |   | 15.3 |   |
| (Recoveries) Provision for losses on  receivables                                   |   | (4.5                                     | )      | 1.1 |   |
| Inventory reserves                                                                  |   | 1.5                                      |   | 1.1 |   |
| Non-cash stock compensation                                                         |   | 0.6                                      |   | 2.1 |   |
| Loss on write-down of investments                                                   |   | —                                   |   | 2.7 |   |
| Gain on sale of investments                                                         |   | (4.4                                     | )      | (4.7 | ) |
| Loss on sale of business and product lines                                          |   | 0.3                                      |   | 2.8 |   |
| Gain on sale of fixed assets                                                        |   | (0.4                                     | )      | (0.5 | ) |
| Other, net                                                                          |   | (0.7                                     | )      | 0.3 |   |
| Changes in operating assets and  liabilities, net of acquisitions and divestitures: |   |                                     |   |   |   |
| Accounts and unbilled receivables                                                   |   | 9.8                                      |   | 24.1 |   |
| Inventories                                                                         |   | (3.8                                     | )      | 0.6 |   |
| Prepaid and other assets                                                            |   | 1.7                                      |   | 105.3 |   |
| Accounts payable                                                                    |   | 3.1                                      |   | (17.4 | ) |
| Accrued liabilities                                                                 |   | (18.4                                    | )      | (51.4 | ) |
|                                                                                |   |                                     |   |   |   |
| Total cash (used for) provided by operating  activities                             |   | (6.2                                     | )      | 50.2 |   |
|                                                                                |   |                                     |   |   |   |
| INVESTING ACTIVITIES:                                                               |   |                                     |   |   |   |
| Divestitures, net of cash disposed                                                  |   | 5.0                                      |   | 0.5 |   |
| Property and equipment additions                                                    |   | (2.9                                     | )      | (5.7 | ) |
| Property and equipment disposals                                                    |   | 5.6                                      |   | — |   |
| Change in restricted cash                                                           |   | (0.2                                     | )      | 34.5 |   |
| Sale of available-for-sale securities, net                                          |   | 4.4                                      |   | 4.0 |   |
|                                                                                |   |                                     |   |   |   |
| Total cash provided by investing activities                                         |   | 11.9                                     |   | 33.3 |   |
|                                                                                |   |                                     |   |   |   |
| FINANCING ACTIVITIES:                                                               |   |                                     |   |   |   |
| Issuance (repayments) of debt                                                       |   | (0.8                                     | )      | 3.1 |   |
| Common stock issued                                                                 |   | 1.8                                      |   | 0.3 |   |
|                                                                                |   |                                     |   |   |   |
| Total cash provided by financing activities                                         |   | 1.0                                      |   | 3.4 |   |
|                                                                                |   |                                     |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                             |   | (0.1                                     | )      | 0.5 |   |
|                                                                                |   |                                     |   |   |   |
| INCREASE IN CASH AND CASH EQUIVALENTS                                               |   | 6.6                                      |   | 87.4 |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                                     |   | 718.0                                    |   | 278.9 |   |
|                                                                                |   |                                     |   |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                            |   | $                                        | 724.6  |   | $ | 366.3 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**ADCTELECOMMUNICATIONS, INC. AND SUBSIDIARIES**

 

**NOTES TO THECONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED**

 

**Note 1 - Basis of Presentation:**

 

The interiminformation furnished in this report is unaudited but reflects all normalrecurring adjustments, which are necessary, in the opinion of our management,for a fair statement of the results for the interim periods.  The operating results for the quarter endedJanuary 31, 2004, are not necessarily indicative of the operating results to beexpected for the full fiscal year. These statements should be read inconjunction with our most recent Annual Report filed on Form 10-K for thefiscal year ended October 31, 2003.

 

*Recently Issued Accounting Pronouncements.*  In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin No. 51,” which requirescompanies to consolidate certain types of variable interest entities.  A variable interest entity is an entity thathas inadequate invested equity at risk to meet expected future losses, or whoseholders of the equity investments lack any of the following threecharacteristics:  (i) the ability tomake decisions about the entity’s activities; (ii) the obligation to absorb theentity’s losses if they occur; or (iii) the right to receive the entity’sfuture returns if they occur. Interpretation No. 46 is applicable immediately for all variableinterests created after January 31, 2003. For all variable interest entities created before February 1, 2003,the provisions of this interpretation are effective in the first fiscal year orinterim period beginning after June 15, 2003 (our fourth quarter of fiscal2003). We are currently a party to a transaction involving a variable interestentity relating to our divestiture of the BroadAccess40 business (See Note2).  After performing an analysis, wedetermined we are not the primary beneficiary of the divested business.  As such, we will not consolidate thevariable interest entity.

 

*Summary of Significant Accounting Policies. *A detailed description of oursignificant accounting policies can be found in our most recent Annual Reportfiled on Form 10-K for the fiscal year ended October 31, 2003.

 

**Note 2 - Discontinued Operations:**

 

During thefirst quarter of fiscal 2004, we entered into an agreement to sell our BroadAccess40business, which was included in our Broadband Infrastructure and Accesssegment.  In accordance with SFAS 144,the financial results of this business is reported separately as discontinuedoperations for all periods presented. This transaction closed on February 24, 2004.

 

    Thepurchasers acquired all of the stock of our subsidiary that owns rights toBroadAccess40 and as such assumed substantially all liabilities associated withthis business with the exception of a $7.5 million note payable that was paidin full by us prior to the closing. The purchasers did not pay cash consideration but issued apromissory note to us for approximately $3.8 million that is payablewithin two years of the closing and a warrant to acquire up to 15% of the stockof the entity they purchased.  We alsoreceived certain contingent payment rights based upon future revenues of theBroadAccess40 business.

 

The financialresults of BroadAccess40 included in discontinued operations were as follows(in millions):

 

|                                              |   | **Three months ended  January 31,** |   |
|---------------------------------------------------|--------|------------------------------------------|--------|
|                                              |   | **2004**                                 |   | **2003** |   |
| Revenue                                           |   | $                                        | 5.0    |   | $ | 5.3 |   |
| Net (Loss) Income from discontinued  operations   |   | (2.2                                     | )      | 0.1 |   |
| Loss from divestiture of discontinued  operations |   | (3.6                                     | )      | — |   |
| (Loss) Income from discontinued operations        |   | (5.8                                     | )      | 0.1 |   |
|                                                   |        |                                          |        |  |  |  |  |

 

**Note 3 - Inventories:**

 

Inventoriesinclude material, labor and overhead and are stated at the lower of first-in,first-out cost or market. Inventories consisted of (in millions):

 

5

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|                                           |   | **January 31,  2004** |       | **October 31,  2003** |       |
|------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|
|                                           |   |                       | ** ** |                       | ** ** |
| Purchased materials and manufactured  products |   | $                          | 100.8      |                       | $          | 98.7 |   |
| Work-in-process                                |   | 2.8                        |       | 2.3                        |       |
| Less:   Inventory reserve                 |   | (35.0                      | )          | (34.7                      | )          |
|                                           |   |                       |       |                       |       |
|                                           |   | $                          | 68.6       |                       | $          | 66.3 |   |

 

**Note 4 - IncomeTaxes:**

A deferred tax assetgenerally represents future tax benefits to be received when certain expensespreviously recognized in U.S. GAAP-based income statements become deductibleexpenses under applicable income tax laws. Thus, realization of a deferred tax asset is dependent on future taxableincome against which these deductions can be applied.  SFAS No. 109, “Accounting for Income Taxes,” requires that avaluation allowance be established when it is more likely than not that all ora portion of deferred tax assets will not be realized.  In fiscal 2003 and for the three monthsended January 31, 2004, we recorded a full valuation allowance against theincrease in our deferred tax assets. We expect to provide a full valuationallowance on any future tax benefits until we can sustain a level ofprofitability that demonstrates our ability to utilize these assets. We willnot record tax benefits or significant provisions for pre-tax income (loss)until either our deferred tax assets are fully utilized to reduce future incometax liabilities or the value of our deferred tax assets are restored on thebalance sheet.  As of January 31,2004, we had $818.1 million of deferred tax assets that have a full valuationallowance against them and, therefore, such deferred tax assets are notreflected on the Condensed Consolidated Balance Sheet.  Our deferred tax assets expire throughOctober 31, 2024.

**Note 5 - Property Plant & Equipment:**

We record our property, plant and equipment, net of accumulateddepreciation, at the appropriate carrying value****in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”
|                           |   | **January 31,  2004** |       | **October 31,  2003** |       |
|--------------------------------|--------|----------------------------|------------|----------------------------|------------|
|                           |   |                       | ** ** |                       | ** ** |
| Land and buildings             |   | $                          | 127.1      |                       | $          | 126.7 |   |
| Machinery and equipment        |   | 367.5                      |       | 367.1                      |       |
| Furniture and fixtures         |   | 37.6                       |       | 37.4                       |       |
| Less: accumulated depreciation |   | (355.3                     | )          | (343.7                     | )          |
| Total                          |   | 176.9                      |       | 187.5                      |       |
| Construction in progress (CIP) |   | 5.8                        |       | 3.1                        |       |
| Total                          |   | $                          | 182.7      |                       | $          | 190.6 |   |

 

**Note 6- ComprehensiveLoss:**

The following table presents the calculation of comprehensive loss asrequired by SFAS No. 130 “Reporting Comprehensive Income.” Comprehensiveloss has no impact on our net loss but is reflected in our balance sheetthrough adjustments to shareowners’ investment.  The components of comprehensive loss are as follows (inmillions):

|                                                                                                                |   | **Three  Months Ended  January 31,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                |   | **2004**                             |   | **2003** |   |
| Net loss                                                                                                            |   | $                                    | (2.4   | ) | $ | (41.5 | ) |
| Change in cumulative translation  adjustments                                                                       |   | 4.4                                  |   | (3.6 | ) |
| Reclassification adjustment for realized  (gains) losses on securities classified as available for sale, net-of-tax |   | (4.1                                 | )      | — |   |
| Unrealized gain (loss) from securities classified  as available for sale, net-of-tax                                |   | (0.2                                 | )      | 2.2 |   |
|                                                                                                                |   |                                 |   |   |   |
| Comprehensive loss                                                                                                  |   | $                                    | (2.3   | ) | $ | (42.9 | ) |

 

**Note 7 – Net Income (Loss) from ContinuingOperations Per Share:**

The following table presents a reconciliation of the numerators anddenominators of basic and diluted earnings per share from continuing operations(in millions, except for per share amounts):
|                                                                    |   | **Three  months Ended  January 31,** |   |
|-------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                    |   | **2004**                             |   | **2003** |   |
|                                                                    |   |                                 |   |   |   |
| Numerator:                                                              |   |                                 |   |   |   |
| Net income (loss) from continuing  operations                           |   | $                                    | 3.4    |   | $ | (41.6 | ) |
|                                                                    |   |                                 |   |   |   |
| Denominator:                                                            |   |                                 |   |   |   |
| Weighted average common shares outstanding                              |   | 806.8                                |   | 801.1 |   |
| Employee stock options and other                                        |   | 5.4                                  |   | — |   |
| Weighted average common shares outstanding,  assuming dilution          |   | 812.2                                |   | 801.1 |   |
|                                                                    |   |                                 |   |   |   |
| Basic and diluted earnings (loss) per share  from continuing operations |   | $                                    | 0.00   |   | $ | (0.05 | ) |

 

Employee stock options to acquire 39.0 million shares were excludedfrom the dilutive securities described above for the three months ended January31, 2004, because the excercise prices of these options were greater than theaverage market price of the common stock. Employee stock options to acquire 115.6 million shares were excludedfrom the dilutive securities described above for the three months ended January31, 2003, as our net loss for that period would have made their inclusionanti-dilutive.

Warrants to acquire 99.7 million shares that were issued in connectionwith our convertible notes were excluded from the dilutive securities describedabove for the quarter ended January 31, 2004, because the strike price of thesewarrants was greater than the average market price of the common stock.  See Note 10 for a discussion of thewarrants.

Because of their anti-dilutive effect, all shares reserved for issuanceupon conversion of our convertible notes were excluded for the three monthsended January 31, 2004.  Upon achievingpositive net income in a reporting period, our recent issuance of convertiblenotes will require us to use the “if-converted” method for computing dilutedearnings per share with respect to the shares reserved for issuance uponconversion of the notes.  Under thismethod, we will add back the net-of-tax interest expense on the convertiblenotes to net income and then divide this amount by outstanding shares,including all 99.7 million shares reserved for issuance upon conversion of thenotes.  If this calculation results infurther dilution of the earnings per share, our diluted earnings per share willinclude all 99.7 million shares of common stock reserved for issuance upon conversionof our convertible notes.  If thiscalculation is anti-dilutive, the net-of-tax interest on the convertible noteswill not be added back and the 99.7 million shares of common stock reserved forissuance upon conversion of our convertible notes will not be included.  See Note 10 for a discussion of ourconvertible notes.

 

6

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**Note 8 - Segment Reporting:**

 

The“management approach” required by SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires us to discloseselected financial data by operating segment. This approach is based on the waywe organize segments within an enterprise for making operating decisions andassessing performance. We have identified two reportable segments based on ourinternal organizational structure, management of operations and performanceevaluation. These segments are Broadband Infrastructure and Access, andIntegrated Solutions. Segment detail is summarized as follows (in millions):

 
|                                                      |   | **Broadband  Infrastructure  and Access** |   | **Integrated  Solutions** |   | **Unallocated  Items** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------|--------|------------------------|--------|------------------|--------|
| **Three Months Ended January 31, 2004**              |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 106.0  |                      | $      | 17.9                   |   | $                | — |   | $ | 123.9 |   |
| Service                                                   |   |                                      |   | 44.6                      |   | —                 |   | 44.6             |   |
| Total external sales                                      |   | 106.0                                     |   | 62.5                      |   | —                 |   | 168.5            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges (1) |   | —                                    |   | —                    |   | (6.9                   | )      | (6.9             | )      |
| Operating loss                                            |   | 4.5                                       |   | (3.4                      | )      | (5.5                   | )      | (4.4             | )      |
| Other income (expense), net                               |   | —                                    |   | —                    |   | 7.8                    |   | 7.8              |   |
| Income from continuing operations before  income taxes    |   | 4.5                                       |   | (3.4                      | )      | 2.3                    |   | 3.4              |   |
| Assets                                                    |   | 184.6                                     |   | 168.2                     |   | 937.3                  |   | 1,290.1          |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| **Three Months Ended January 31, 2003**                   |   |                                      |   |                      |   |                   |   |             |   |
| External sales:                                           |   |                                      |   |                      |   |                   |   |             |   |
| Product                                                   |   | $                                         | 127.2  |                      | $      | 19.3                   |   | $                | — |   | $ | 146.5 |   |
| Service                                                   |   | —                                    |   | 48.1                      |   | —                 |   | 48.1             |   |
| Total external sales                                      |   | 127.2                                     |   | 67.4                      |   | —                 |   | 194.6            |   |
|                                                      |   |                                      |   |                      |   |                   |   |             |   |
| Impairment, restructuring and other  disposal charges (1) |   | —                                    |   | —                    |   | (18.5                  | )      | (18.5            | )      |
| Operating loss                                            |   | (7.9                                      | )      | (8.6                      | )      | (24.6                  | )      | (41.1            | )      |
| Other income (expense), net                               |   | —                                    |   | —                    |   | (0.5                   | )      | (0.5             | )      |
| Loss from continuing operations before  income taxes      |   | (7.9                                      | )      | (8.6                      | )      | (25.1                  | )      | (41.6            | )      |
| Assets                                                    |   | 259.7                                     |   | 208.5                     |   | 832.4                  |   | 1,300.6          |   |

 

7

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----

(1)          Theseimpairment, restructuring and other disposal charges were not allocated to aspecific segment.  See Note 9 for adiscussion of these charges.

 

**Note 9 - Impairment, Restructuring and OtherDisposal Charges:**

 

During thethree months ended January 31, 2004 and 2003, we continued our plan to improveoperating performance by restructuring and streamlining our operations.  As a result, we incurred impairment chargesrelated to the disposal of excess equipment, restructuring charges associatedwith workforce reductions as well as the consolidation of excess facilities, andother disposal charges associated with inventory write-offs and certainadministrative charges related to product line divestitures or shutdowns. Theimpairment, restructuring and other disposal charges resulting from ouractions, by category of expenditures, are as follows for the three months endedJanuary 31, 2004 and 2003, respectively (in millions):

 
| **Three Months Ended  January 31, 2004**      |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 3.3       |   | $ | 3.3 |   |
| Facility consolidation and lease  termination |   | —                  |   | 3.6                        |   | 3.6       |   |
| Total                                         |   | $                       | — |                       | $      | 6.9       |   | $ | 6.9 |   |

 
| **Three Months Ended  January 31, 2003**      |   | **Impairment  Charges** |   | **Restructuring  Charges** |   | **Total** |   |
|-----------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-----------|--------|
| Employee severance costs                      |   | $                       | — |                       | $      | 11.7      |   | $ | 11.7 |   |
| Fixed asset write-downs                       |   | 10.3                    |   | —                     |   | 10.3      |   |
| Facility consolidation and lease  termination |   | —                  |   | (3.5                       | )      | (3.5      | )      |
| Total                                         |   | $                       | 10.3   |                       | $      | 8.2       |   | $ | 18.5 |   |

 

***Impairment Charges:***As a result of our intention to sell, scale-back or exit non-strategicbusinesses, we evaluated our property and equipment assets for impairment. Forthe three months ended January 31, 2003, we recognized $10.3 million ofimpairment charges in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”

 

***RestructuringCharges:*** Restructuring charges relate principally to employee severance costs andfacility consolidation costs resulting from the closure of facilities and otherworkforce reductions attributable to our efforts to reduce costs.  During the three months endedJanuary 31, 2004 and 2003, approximately 65 and 670 employees,respectively, were impacted by reductions in force.

 

Facilityconsolidation and lease termination costs represent lease termination and othercosts associated with our decision to consolidate and close duplicative or excessmanufacturing and office facilities. The charge was a negative number during the three months endedJanuary 31, 2003, because we negotiated a favorable lease terminationsettlement with a landlord of a leased facility.  As a result, we reversed $4.2 million of the restructuringaccrual we had established in fiscal 2002 for this lease termination.

 

***Effect ofRestructuring Charges on Future Cash Flows:*** Thefollowing table provides detail on the activity and our remaining restructuringaccrual balance by category as of January 31, 2004 (in millions):

 
| **Type of Charge**       |   | **Accrual  October 31, 2003** |   | **Net  Additions** |   | **Cash  Charges** |   | **Accrual  January 31, 2004** |   |
|--------------------------|--------|------------------------------------|--------|--------------------|--------|-------------------|--------|------------------------------------|--------|
|                     |   |                               |   |               |   |              |   |                               |   |
| Employee severance costs |   | $                                  | 5.3    |               | $      | 3.3               |   | $                                  | 3.3    |   | $ | 5.3 |   |
| Facilities consolidation |   | 24.0                               |   | 3.6                |   | 7.3               |   | 20.3                               |   |
| Other                    |   | —                             |   | —             |   | —            |   | —                             |   |
| Total                    |   | $                                  | 29.3   |               | $      | 6.9               |   | $                                  | 10.6   |   | $ | 25.6 |   |

 

We expect thatsubstantially all of the remaining $5.3 million accrual relating to employeeseverance costs as of January 31, 2004, will be paid from unrestrictedcash by the end of the first quarter of fiscal 2005. Of the $20.3 million to bepaid for the consolidation of facilities, we expect that approximately $5.0million will be paid from unrestricted cash through January 31, 2005, andthat the balance will be paid from unrestricted cash over the respective leaseterms of the facilities through 2015. Based on our intention to continue toconsolidate and close duplicative or excess manufacturing operations in orderto reduce our cost structure, we may incur additional restructuring charges(both cash and non-cash) in future periods. These restructuring charges may have a material effect on our operatingresults.

 

In addition tothe restructuring accrual described above, we have $20.5 million of assets heldfor sale (of which $5.4 million relates to our Broadband Infrastructure andAccess segment and $15.1 million was not allocated to either of our segments).We classified these assets as “Held for Sale” pursuant to our decision to exitnon-strategic product lines and to reduce the size of our operations.  We expect to sell or dispose of these assetsbefore January 31, 2005.  Duringthe three months ended January 31, 2004, we sold two properties, previouslyclassified as held for sale, for proceeds of $5.2 million and a gain of $0.2million.

 

8

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**Note 10 - Long-TermDebt:**

 

OnJune 4, 2003, we issued $400.0 million of convertible unsecuredsubordinated notes in two separate transactions pursuant to Rule 144A under theSecurities Act of 1933.  The netproceeds to us from this offering were $355.5 million after underwritingdiscounts of $10.0 million and the net payment for the purchased call optionsand warrant transactions described below. In the first transaction, we issued $200.0 million of 1.0% fixed rateconvertible unsecured subordinated notes that mature on June 15,2008.  In the second transaction, weissued $200.0 million of convertible unsecured subordinated notes that have avariable interest rate and mature on June 15, 2013.  The interest rate for the variable ratenotes is equal to 6-month LIBOR plus 0.375%. The interest rate for the variable rate notes will be reset on eachsemi-annual interest payment date (i.e. which are June 15 andDecember 15 of each year beginning on December 15, 2003 for both thefixed and variable rate notes). The interest rate on the variable note is1.605% for the period ending June 15, 2004. The holders of both the fixed andvariable rate notes may convert all or some of their notes into shares of ourcommon stock at any time prior to maturity at a conversion price of $4.013 pershare.  We may not redeem the fixed ratenotes anytime prior to their maturity date. We may redeem any or all of the variable rate notes at any time on orafter June 23, 2008.

 

Concurrentwith the issuance of the fixed and variable rate notes, we purchased five andten-year call options on our common stock to reduce the potential dilution fromconversion of the notes.  These calloptions become exercisable upon conversion of the notes.  Under the call options we have the right topurchase from the counterparty at a purchase price of $4.013 per share theaggregate number of shares that we are obligated to issue upon conversion ofthe fixed and variable notes (i.e. 99.7 million shares).  We also have the option to settle the calloptions with the counterparty through a net share settlement or cashsettlement, either of which would be based on the extent to which thethen-current market price of our common stock exceeds $4.013 per share.  The total cost of the call options was$137.3 million, which was recognized in shareowners’ investment.  The cost of the call options was partiallyoffset by the sale of warrants to acquire shares of our common stock with termsof five and ten years to the same counterparty with whom we entered into thecall options.  The warrants areexercisable for an aggregate of 99.7 million shares at an exercise price of$5.28 per share.  The warrants becomeexercisable upon conversion of the notes, and may be settled, at our option,either through a net share settlement or a net cash settlement, either of whichwould be based on the extent to which the then-current market price of ourcommon stock exceeds $5.28 per share. The sale of the warrants produced gross proceeds of $102.8 million whichwas recognized in shareowners’ investment. The call options and the warrants are subject to early expiration uponconversion of the notes.  The net effectof the call options and the warrants is either to reduce the potential dilutionfrom the conversion of the notes (if we elect net share settlement) or toincrease the net cash proceeds of the offering (if we elect net cashsettlement) if the notes are converted at a time when the current market priceof our common stock is greater than $4.013 per share.

 

We plan to usethe cash proceeds from this offering for general corporate purposes andstrategic opportunities, including financing for possible acquisitions orinvestments in complementary businesses, technologies or products.

 

**Note 11 – Employee Benefit Plans:**

 

In fiscal2003, we adopted the disclosure provisions of SFAS No. 148 “Accounting forStock-Based Compensation”.  However, wedid not adopt the transition provisions of SFAS No. 148.  As a result of adopting the disclosureprovisions of SFAS No. 148, we are required to disclose the method we use toaccount for stock-based compensation on a quarterly basis.  Stock compensation is awarded to certain keyemployees in the form of stock options and restricted stock and beginning onMarch 2, 2004 in the form of restricted stock units.  We account for our stock compensation in accordance with APBOpinion 25, “Accounting for Stock Issued to Employees,” and related interpretations.All stock options are issued at fair market value on the date of grant.  Accordingly, we did not recognize stockcompensation expense for stock options granted during the periodspresented.  SFAS No. 148 also requiresdisclosure of how stock compensation expense would be computed under SFAS No.123, “Accounting for Stock Based Compensation,” using the fair valuemethod.  Under the fair value method,compensation cost is measured at the grant date based on the value of the awardand is recognized over the service period, which is usually the vestingperiod.  Fair value is determined usingan option-pricing model, such as Black-Scholes, that takes into account thestock price at the grant date, the exercise price, the expected life of theoption, the volatility of the underlying stock, the expected dividends, and therisk-free interest rate over the expected life of the option.  The following table summarizes what ouroperating results would have been if the fair value method of accounting forstock options had been utilized (in millions, except for per share amounts):

 

9

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|                                                                      |   | **Three  months Ended  January 31,** |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **2004**                                  |   | **2003** |   |
| Net Loss                                                                  |   |                                      |   |   |   |
| As reported                                                               |   | $                                         | (2.4   | ) | $ | (41.5 | ) |
| Add: Stock-based employee compensation  expense included in reported loss |   | 0.6                                       |   | 2.1 |   |
| Deduct: Stock compensation expense – fair  value based method        |   | (7.0                                      | )      | (14.7 | ) |
| Pro Forma Net Loss                                                        |   | $                                         | (8.8   | ) | (54.1 | ) |
|                                                                      |   |                                      |   |   |   |
| Loss Per Share – Basic and Diluted                                   |   |                                      |   |   |   |
| As reported                                                               |   | $                                         | 0.00   |   | $ | (0.05 | ) |
| Pro forma                                                                 |   | $                                         | (0.01  | ) | (0.07 | ) |

 

During the third quarterof fiscal 2003, we offered to eligible employees the right to exchange certainof their employee stock options for a lesser number of new options to begranted six months and one day following the surrender of their existingoptions.  The new options, which weregranted on December 29, 2003, have an exercise price of $2.83 per share, whichwas equal to the average of the high and low trading price of our common stockon the grant date.  These options willvest over a two-year period from the grant date.  For purposes of the above tabular disclosure of operating resultsunder the fair value method of accounting stock options, the unrecognizedcompensation cost of the cancelled options and the incremental fair value ofthe replacement options will be amortized over a 30 month period, whichconsists of the 24 month vesting period for the replacement options and the sixmonth and one day period between the cancellation of the surrendered optionsand the grant of the replacement options.

 

We have issuedrestricted stock as part of employee incentive programs as well as inconjunction with our fiscal year 2000 purchase of Broadband Access Systems,Inc.  The fair market value of therestricted stock is amortized over the projected remaining vesting period.

 

**Note 12 -Contingencies:**

 

On March 5,2003 we were served with a shareowner lawsuit brought by Wanda Kinermon thatwas filed in the United States District Court for the District ofMinnesota.  The complaint names ADC,William J. Cadogan, our former Chairman and Chief Executive Officer, and RobertE. Switz, our Chief Executive Officer, as defendants.  During the period the lawsuit covers Mr. Switz held the positionof Executive Vice President and Chief Financial Officer.  Since this lawsuit was served we have beennamed as a defendant in 11 other substantially similar lawsuits.  These shareowner lawsuits have beenconsolidated into a single lawsuit, that is now captioned In Re ADCTelecommunications, Inc. Securities Litigation.  This lawsuit purports to bring suit on behalf of a class ofpurchasers of our publicly traded securities from August 17, 2000 to March 28,2001.  The complaint alleges that weviolated the securities laws by making false and misleading statements aboutour financial performance and business prospects during this period.  On November 24, 2003 we filed a motion todismiss this lawsuit.  This motion ispending before the court.  We believethat this lawsuit is without merit and intend to defend this actionvigorously.  However, because litigationby its nature is uncertain, we cannot predict the ultimate outcome of thismatter with certainty and an unfavorable resolution of this matter couldmaterially adversely affect our business, results of operations or financialcondition.

 

On May 19, 2003we were served with a lawsuit brought by Lorraine Osborne that was filed in theUnited States District Court for the District of Minnesota.  The complaint names ADC and several of ourcurrent and former officers, employees and directors as defendants.  After this lawsuit was served, we were servedwith two substantially similar lawsuits. All three of these lawsuits were then consolidated into a singlelawsuit, that is captioned In Re ADC Telecommunications, Inc. ERISALitigation.  This lawsuit has beenbrought by individuals who seek to represent a class of participants in ourRetirement Savings Plan who elected our common stock as one of the investmentalternatives under the plan from February 2000 to present.  The lawsuit alleges a breach of fiduciaryduties under the Employee Retirement Income Security Act.  On February 2, 2004 we filed a motion todismiss this lawsuit.  This motion ispending before the court.  We believethat this lawsuit is without merit and intend to defend this action vigorously.  However, because litigation by its nature isuncertain, we cannot predict the ultimate outcome of this matter with certaintyand an unfavorable resolution of this matter could materially adversely affectour business, results of operations or financial condition.

 

On January 22,2004 we were served with a lawsuit brought by Theodore Pardo that was filed inthe United States District Court for the District of Minnesota.  Thecomplaint is structured as a shareholder derivative case and includes ourcompany as a plaintiff and as a nominal defendant and names several of ourcurrent and former officers and directors as defendants.  This lawsuit wasbrought by the plaintiff who seeks to represent the interests of ADC and itsshareholders.  The complaint alleges that the defendants breached theirfiduciary duties to us and our shareholders by failing to maintain properaccounting controls and by making allegedly false and misleading statementsabout our financial performance and business prospects that resulted inviolations of the securities laws.  Weexpect that a motion to dismiss this lawsuit will be filed during the secondquarter of fiscal 2004.  We cannot atthis time predict the ultimate outcome of this matter and an unfavorableresolution of this matter could materially adversely affect our business,results of operations or financial condition.

 

We believe that thethree lawsuits described above are without merit and intend to defend theseactions vigorously.  However, litigationis by its nature uncertain and unfavorable resolutions of these lawsuits couldmaterially adversely affect our business, results of operations or financialcondition.

 

We are a partyto various other lawsuits, proceedings and claims arising in the ordinarycourse of business or otherwise.  Theamount of monetary liability that could result from an adverse result in manyof those lawsuits, proceedings or claims cannot be determined at thistime.  As of January 31, 2004, we hadrecorded $8.9 million in loss reserves in the event of such adverse outcomes inthese other matters. However, because litigation by its nature is uncertain, wecannot predict the ultimate outcome of these matters with certainty andunfavorable resolution of these matters could materially adversely affect our business,results of operations or financial condition.

 

10

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**Note 15 - Subsequent Events:**

 

On March 2,2004, our shareowners approved proposals to amend our Global Stock IncentivePlan and to amend our Articles of Incorporation to increase our authorizedshares of common stock by 1.2 billion shares.

 

***ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

 

## **Business**

## ** **

We are aleading global supplier of broadband network equipment, software and systemsintegration services that enable communications service providers to deliverhigh-speed Internet, data, video and voice services to consumers and businessesworldwide.  Telephone companies, cabletelevision operators, Internet and data service providers, wireless serviceproviders and other communications service providers are building and upgradingthe broadband network infrastructure required to offer high-speed Internetaccess as well as data, video, telephony and other interactive multimediaservices.  Our product offerings anddevelopment efforts are focused on increasing the speed and efficiency of thelast mile/kilometer portion of broadband communications networks, and ourproduct and service offerings help connect communications service providers’offices to businesses and end users’ homes as well as to wirelesscommunications devices.

 

Our customersinclude local and long-distance telephone companies, cable televisionoperators, wireless service providers, new competitive service providers,broadcasters, governments, businesses, system integrators and communicationsequipment manufacturers and distributors. We offer broadband connectivity components and systems, broadband accessand network equipment, software and systems integration services to ourcustomers through the following two segments of product and service offerings:

 

•                                          BroadbandInfrastructure and Access; and

 

•                                          IntegratedSolutions.

 

Our *Broadband Infrastructure and Access*business provides network infrastructure products for wireline, cable andwireless communications network applications; Digital Subscriber Line (DSL)offerings for the telecommunications industry; and Internet Protocol (IP)-basedofferings for the cable industry.* *These products consist of:

 

•                                          connectivitysystems and components that provide the infrastructure to wireline, cable andwireless service providers to connect Internet, data, video and voice servicesto the network over copper, coaxial and fiber-optic cables; and

 

•                                          access systemsused by wireline, cable and wireless service providers to deliver high-speedInternet, data and voice services to consumers and businesses in the lastmile/kilometer of communications networks.

 

Our *IntegratedSolutions*business provides system integration services andoperations support system (OSS) software for broadband, multiservicecommunications over wireline and wireless networks.  Systems integration services are used to design, equip and buildcommunications networks that deliver Internet, data, video and voice servicesto consumers and businesses.  OSSsoftware includes communications billing, customer management, networkperformance and service-level assurance software used by service providers tooperate communications networks.

 

***Marketplace Conditions***

 

Our operating results duringthe three months ended January 31, 2004 continued to stabilize, a trend thatbegan in fiscal 2003.  However, spendingon communications equipment and services remains at significantly lower levelscompared to pre-2001 levels, and we cannot predict with certainty whetherstability in revenue levels will continue or when growth may occur in thefuture.  The reasons for this lowerlevel of spending have been well documented in the past and include generaleconomic conditions that have resulted in lower end-user demand forcommunications services, excess capacity within communications networks, theabsence of communications network buildouts by new competitive entrants in theservice provider market and a related decline in competitive spending byincumbent service providers.  Wecontinue to see deferred capital spending by some of our customers as well asreduced equipment purchases.  Forexample, a significant customer significantly reduced capital spending for thetime being, a factor that has most notably impacted the results of our systemsintegration business in our first quarter. In addition, we have experienced and expect to continue to experienceincreased pricing pressures from many of our customers.

 

We continue to be dependent on telecommunications service providers fora majority of our revenues, with the four major U.S. incumbent local exchangecarriers (Verizon, SBC, Bellsouth and Qwest) acounting for approximately 26.9%and 24.9% of our revenues during the three months ended January 31, 2004 and2003, respectively.  In addition, ourtop ten customers accounted for approximately 44.6% and 49.9% of our revenuesfor the three months ended January 31, 2004 and 2003, respectively.

 

We believe the downturn inthe communications service industry will cause consolidation among ourcustomers and our competitors in order for them to increase market share,diversify product portfolios and/or achieve greater economies of scale.  We expect this activity to have an impact onour results of operations.   There canbe no assurance that we will be a supplier to the surviving company in a mergerof service providers.  As an example,the acquisition of AT&T Broadband by Comcast Corporation resulted in ourloss of a significant amount of business for our IP cable products in fiscal2003 when Comcast did not approve us as a

 

11

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significant vendor for thefuture.  In addition to consolidation among ourcustomers, we expect several forms of structural correction in thecommunications equipment industry.  Overthe next twelve months, we expect some competitors to drop out of the marketplace due to bankruptcy or liquidation.We also believe that companies in the communications equipment industry willseek to form more strategic alliances or consolidate to diversify productportfolios or obtain greater economies of scale.  Finally, we expect continuing product line rationalization ascompanies divest unprofitable product lines in an effort to focus on profitablebusiness operations.

 

We plan to acquireadditional product lines or businesses that are complimentary to ourcommunications infrastructure business. We intend to pursue acquisition opportunities that will enable us toexpand our core business of supplying communications infrastructure productsand services to communications service providers, as well as opportunities thatwill bolster our position as a supplier to private, or enterprise, networkcustomers.  We expect to fund thesepotential acquisitions with all or a portion of the net proceeds of our $400million convertible note offering that was completed in June 2003, with theissuance of shares of common or preferred stock or through some combination ofcash or stock.  We also may divestnon-strategic product lines as we focus on growing our businessprofitably.  For instance, in the firstquarter of 2004 we signed a definitive purchase agreement to divest ourBroadAccess40 business, and that transaction closed in February 2004.  This business accounted for approximately 3%of our net sales in fiscal 2003 and the first quarter of fiscal 2004.

 

When the downturn incommunications equipment spending first became evident in fiscal 2001, weimplemented a cost restructuring plan through which we took steps to reduceoperating expenses and capital spending. As it became evident in 2002 and 2003that our industry was experiencing a more pronounced and prolonged economicdownturn, we took additional cost restructuring measures to realize further costsavings.  These cost cutting measureshave been well documented in our previous filings.  We will continue to look for ways to conduct our operations moreefficiently and to reduce costs without compromising our ability to operateeffectively.  Despite the significantcost reductions we have made over the past 3 years, we may be unable to meetexpected revenue levels in any particular quarter, in which case our operatingresults could be materially adversely affected if we are unable to furtherreduce our expenses in time to counteract such a decline in revenues.

 

On February 20, 2003, theFederal Communications Commission (FCC) adopted rules under the U.S.Telecommunications Act of 1996 concerning the obligation of the establishedtelecommunication service providers to share their networks with competitors, apractice known as “unbundling.” The FCC essentially retained the existingunbundling obligations of the carriers (known as UNE-P) with respect to theirhistoric copper-based network infrastructure, and ruled not to require theunbundling of certain network elements in their next generation hybrid andfiber networks. In August 2003, the FCC issued its final rules on unbundlingobligations, and it is too early to predict what effect these rules will haveon capital spending by our customers. Portions of these rules have already been subjected to legal challengesby various constituents within the telecommunications industry, and additionallegal challenges and appeals are likely. Overall, we do not anticipate thatthis aspect of the decision will result in increased capital spending by theincumbent carriers or insurgent competitors in the near term.

 

Prior to the downturn in ourbusiness beginning in fiscal 2001, our results of operations had been subjectto seasonal factors, with stronger demand for our products during our fourthfiscal quarter ending October 31 (primarily as a result of customer budgetcycles and our fiscal year-end initiatives) and weaker demand for our productsduring our first fiscal quarter ending January 31 (primarily as a result of thenumber of holidays in that quarter, the development of annual capital budgetsduring that period and a general industry slowdown during that period).  There can be no assurance that thesehistorical trends will return.  A moredetailed description of the risks to our business related to seasonality, alongwith other risk factors associated with our business, can be found in our Form10-K for the year ended October 31, 2003 in Item 1 of such report under thecaption “Risk Factors”.

 

***Results ofOperations***

 

The following table contains informationregarding the percentage to net sales of certain income and expense items forthe three months ended January 31, 2004 and 2003:

 

|                                         |   | **Percentage  of Net Sales**              |   |
|----------------------------------------------|--------|-------------------------------------------|--------|
|                                         |   | **Three  Months Ended  January 31,** |   |
|                                         |   | **2004**                                  |   | **2003** |   |
|                                         |   |                                      |   |   |   |
| **Net Sales:**                               |   |                                      |   |   |   |
| Product                                      |   | 73.5                                      | %      | 75.3 | % |
| Service                                      |   | 26.5                                      |   | 24.7 |   |
| **Total Net Sales**                          |   | 100.0                                     |   | 100.0 |   |
| **Cost of Sales:**                           |   |                                      |   |   |   |
| Product                                      |   | (38.2                                     | )      | (42.7 | ) |
| Service                                      |   | (22.5                                     | )      | (21.8 | ) |
| **Total Cost of Sales**                      |   | (60.7                                     | )      | (64.5 | ) |
| **Gross Profit**                             |   | 39.3                                      |   | 35.5 |   |
| **Expenses:**                                |   |                                      |   |   |   |
| Research and development                     |   | (12.9                                     | )      | (15.6 | ) |
| Selling and administration                   |   | (25.0                                     | )      | (31.5 | ) |
| Impairment charges                           |   | —                                    |   | (5.3 | ) |
| Restructuring charges                        |   | (4.1                                      | )      | (4.2 | ) |
| **Total Expenses**                           |   | (42.0                                     | )      | (56.6 | ) |
| **Operating Income / (Loss)**                |   | (2.6                                      | )      | (21.1 | ) |
| **Other Income (Expense), Net**              |   | 4.6                                       |   | (0.3 | ) |
| **Income (Loss) From Continuing Operations** |   | 2.0                                       |   | (21.4 | ) |
| **Net Loss**                                 |   | (1.4                                      | )      | (21.4 | ) |

 

12

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***NetSales***

 

The following table sets forth our net salesfor the three months ended January 31, 2004 and 2003, respectively, for each ofour segments described above (in millions):

 

|                                    |   | **Three  Months Ended January 31,** |   |
|-----------------------------------------|--------|------------------------------------------|--------|
|                                    |   | **2004**                                 |   | **2003** |   |
|                                    |   | **Net Sales**                            |   | **%** |   | **Net Sales** |   | **%** |   |
| **Broadband Infrastructure and Access** |   | $                                        | 106.0  |   | 62.9 | % | $ | 127.2 |   | 65.4 | % |
| **Integrated Solutions:**               |   |                                     |   |   |   |   |   |   |   |
| Product                                 |   | 17.9                                     |   | 28.6 |   | 19.3 |   | 28.6 |   |
| Service                                 |   | 44.6                                     |   | 71.4 |   | 48.1 |   | 71.4 |   |
| **Total Integrated Solutions**          |   | 62.5                                     |   | 37.1 |   | 67.4 |   | 34.6 |   |
| **Total**                               |   | $                                        | 168.5  |   | 100 | % | $ | 194.6 |   | 100.0 | % |

 

Net sales were $168.5 million for the threemonths ended January 31, 2004, respectively, reflecting a 13.4 % decreaseover the three-month period ending January 31, 2003.  International sales comprised 34.4 % and 38.6% of our net salesfor the three months ended January 31, 2004 and 2003, respectively.

 

During the three months ended January 31, 2004, net sales of BroadbandInfrastructure and Access products declined by 16.7% over the comparable 2003period.  Net sales of our IP cable andwireline products decreased by approximately 73% and 24% respectively over thecomparable 2003 period.  The decrease inIP cable product sales was primarily due to recognition of revenue in the firstquarter of fiscal 2003 that had been previously deferred on a significant internationalsale and was not repeated in the first quarter of 2004.  The decrease in wireline product sales wascaused primarily by decreased volumes and pricing concessions made to keycustomers.  Our wireline product linecontinues to face strong competition that has eroded market share positions forthese products.  We are taking actionsdesigned to defend our market share position and recently executed a new salescontract for our wireline products with a significant existing customer.  During the first quarter of fiscal 2004,these decreases in net sales were partially offset by increases of 5% and 108%for our connectivity and wireless products, respectively, over the comparable2003 period.  The increase in connectivitysales was attributable primarily to increased spending by our customers in thecore central office space.  The increasein wireless sales was a result of an increased acceptance of our productsacross a growing customer base.

 

During the three months ended January 31,2004, net sales of our Integrated Solutions products declined by 7.3% comparedto the comparable 2003 period.  Salesincreased year-over-year for our systems integration services by about 1%, butwere more than offset by a year-over-year 17% decrease in software sales primarilybecause customers continued to extend sales cycles.  Inaddition, a significant customer significantly reduced spending during thefirst quarter of 2004, a factor that negatively impacted sales of our systemsintegration services in the first quarter by about 15% from the fiscal 2003fourth quarter.  This development isexpected to continue to negatively impact revenues for systems integrationservices in the second quarter of fiscal 2004 and possibly further into thefuture.  We anticipate that future revenue in our Integrated Solutions segmentalso will be more variable primarily because we intend to focus our softwaresales efforts on major accounts, which typically have longer sales cycles.

 

Thedecrease in international sales as a percentage of net sales was due to twolarge contracts with European customers entered into in fiscal 2003.

 

***Gross Profit***

 

During the three months ended January 31, 2004and 2003, the gross profit percentages were 39.3 % and 35.5%,respectively.  The increase in grossprofit percentage was primarily due to a more favorable sales mix toward higher marginconnectivity products, our decision not to bid on low margin systemsintegration projects and a reduction in our fixed cost of sales as a result ofour restructuring activities.

 

13

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In additionto a more favorable sales mix, we benefited from production efficiencies andreduced production costs resulting from more favorable supplier pricing and theoutsourcing of portions of our manufacturing operations.  We anticipate that our future gross profitpercentage will vary based on many factors, including sales mix, competitivepricing, timing of new product introductions, timing of customer acceptance andcollectibility of large-scale sales transactions and manufacturing volume.

 

***Operating Expenses***

 

Total operating expenses for the three monthsended January 31, 2004 and 2003, were $70.7 million and $110.2 million,respectively, representing 42.0% and 56.6% of net sales, respectively. Includedin these operating expenses were restructuring charges of $6.9 million and $8.2million and impairment charges of $0.0 million and $10.3 million for the threemonths ended January 31, 2004 and 2003, respectively.  The decrease in our operating expenses inabsolute dollars and as a percentage of revenue was primarily due to areduction in the amount of our restructuring and impairment charges, theongoing cost savings from our restructuring efforts, bad debt recoveries andthe divestiture of certain business units and product lines during the earlierperiod.

 

Research anddevelopment expenses were $21.7 million and $30.3 million for the three monthsended January 31, 2004 and 2003, respectively.   This represents a decrease of 28.4%.*  *This decrease waslargely due to the divestiture or discontinuance of certain product lines.  We believe that, given the rapidly changingtechnological and competitive environment in the communications equipmentindustry, continued commitment to product development efforts will be requiredfor us to remain competitive. Accordingly, we intend to continue to allocatesubstantial resources, as a percentage of our net sales, to product developmentin each of our operating segments.

 

Selling andadministration expenses were $42.1 million and $61.4 million for the threemonths ended January 31, 2004 and 2003, respectively. * *Thisdecrease of 31.4% reflects the effects of workforce reductions of 927 employeesresulting from our continued restructuring efforts.  In addition, the decrease is attributable to approximately $4.5million of bad debt recoveries achieved primarily through the sale of customeraccount receivables with the remaining amount primarily resulting from lowercosts due to the divestiture or discontinuance of certain product lines*.*

 

Impairment charges were $0.0 million and$10.3 million for the three months ended January 31, 2004 and 2003,respectively.  For the three monthsended January 31, 2003, the impairment charges consisted solely of property andequipment impairments, which impacted both the Broadband Infrastructure andAccess and Integrated Solutions segments. The impairment charges were the result of our plan to dispose of excessequipment that resulted from our decision to streamline and reduce the size ofour operations.  The fair market valueof the disposed equipment was determined using external sources, primarilyproceeds received from previous equipment sales.

 

Restructuring charges for the three months ended January 31, 2004 and2003, were $6.9 million and $8.2 million, respectively.  For the three months ended January 31, 2004,restructuring charges consist of $3.3 million of severance costs and $3.6million for facility consolidation and lease termination costs.  Restructuring charges consist of $11.7million for employee severance costs and $(3.5) for facility consolidation andlease termination costs for the three months ended January 31, 2003.  Approximately 65 employees and 670 employeeswere impacted by reductions in force for the three months ended January 31,2004 and 2003, respectively.  Theemployee terminations affected both the Broadband Infrastructure and Access andIntegrated Solutions segments.

 

***Other Income(Expense), Net***

 

The following tableprovides a breakdown of other income and expenses for the three months endedJanuary 31, 2004 and 2003 (in millions):

 

|                                 |   | **Three months ended  January 31,** |   |
|--------------------------------------|--------|------------------------------------------|--------|
|                                 |   | **2004**                                 |   | **2003** |   |
| Interest income                      |   | $                                        | 0.8    |   | $ | 1.2 |   |
| Gain (Loss) on sale of product lines |   | 3.3                                      |   | (2.8 | ) |
| Gain on sale of investments          |   | 4.4                                      |   | 1.1 |   |
| Impairment of investments            |   | —                                   |   | (2.2 | ) |
| Gain (loss) on sale of fixed assets  |   | 0.4                                      |   | 0.5 |   |
| Other                                |   | (1.1                                     | )      | 1.7 |   |
| **Total Other Income (Expense)**     |   | $                                        | 7.8    |   | $ | (0.5 | ) |

 

14

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***IncomeTaxes***

 

As a result of our cumulative losses over thepast two fiscal years and the full utilization of our loss carryback potential,we are not recognizing income tax expense or benefit on our pretax income orlosses until we can sustain a level of profitability that demonstrates our abilityto utilize our deferred tax assets. Therefore, the effective income tax ratefor the three months ended January 31, 2004 and 2003, is zero.

 

***DiscontinuedOperations***

 

During thefirst quarter of fiscal 2004, we entered into an agreement to sell our BroadAccess40business, which was included in our Broadband Infrastructure and Accesssegment.  In accordance with SFAS 144,the financial results of this business is reported separately as discontinuedoperations for all periods presented. This transaction closed on February 24, 2004.  For a general description of the terms of the transaction referto Note 2 to the financial statements included in this Form 10-Q.

 

The financialresults of BroadAccess40 included in discontinued operations were as follows(in millions):

 
|                                              |   | **Three months ended  January 31,** |   |
|---------------------------------------------------|--------|------------------------------------------|--------|
|                                              |   | **2004**                                 |   | **2003** |   |
| Revenue                                           |   | $                                        | 5.0    |   | $ | 5.3 |   |
| Net (Loss) Income from discontinued  operations   |   | (2.2                                     | )      | 0.1 |   |
| Loss from divestiture of discontinued  operations |   | (3.6                                     | )      | — |   |
| (Loss) Income from discontinued operations        |   | (5.8                                     | )      | 0.1 |   |
|                                                   |        |                                          |        |  |  |  |  |

 

***Net Loss***

 

Net loss was $2.4 million (or $0.00 perdiluted share) for the three months ended January 31, 2004, respectively,compared to net loss of $41.5 million (or $0.05 per diluted share) for thethree months ended January 31, 2003, respectively.

 

**Application of Critical Accounting Policiesand Estimates**

 

There were nosignificant changes to our critical accounting policies during the three endedJanuary 31, 2004.  See our mostrecent Annual Report filed on Form 10-K for fiscal 2003 for a discussion of ourcritical accounting policies.

 

## **Liquidityand Capital Resources**

## ** **

**Cash**

 

Cash and cashequivalents, consisting primarily of short-term investments in commercial paperwith maturities of less than 90 days and other short-term investments, had a balanceof $749.6 million at January 31, 2004. This amount was an increase of $4.9 million from cash and cashequivalents at October 31, 2003.

 

As ofJanuary 31, 2004, we had restricted cash of $16.0 million.  Restricted cash represents cash pledged tovarious financial institutions to secure certain of our obligations, primarilycash collateral for letters of credit and lease obligations.  As a result, restricted cash is notavailable to us for working capital. The restricted cash is expected to become available to us uponsatisfaction of the obligations pursuant to which the letters of creditarrangements were issued.  We areentitled to the interest earnings on our restricted cash balances.

 

Cash used inoperating activities was $6.2 million for the three months ended January 31,2004.  This use of cash was primarilydue to a loss of $2.4 million, and negative changes in operating assets andliabilities of $7.6 million which were partially offset by $3.8 million ofnon-cash items included in net income.  The changes in other operating liabilities included net cashpayments of $3.7 million for restructuring liabilities and payment of fiscal2003 incentive bonuses of $6.0 million to employees of two product groups whichmet their targets under our management and employee incentive plans.  These decreases were partially offset byimproved accounts receivable collections, which in total were $9.8million.  Overall, working capital (currentassets less current liabilities) increased by $27.8 million during the threemonths ended January 31, 2004 primarily due to the payment of liabilities.  Working capital will increase or decrease,in general, with quarterly sales levels and the timing of revenue and billingsduring the quarter.

 

15

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Cash providedby investing activities of $11.9 million was primarily due to the net sale ofinvestments of  $4.4 million, proceedsof sales of assets held for sale of $5.6 million and proceeds of $5.0 millionfrom the sale of a non-operating subsidiary that had substantial taxlosses.  These cash inflows were offsetby $2.9 million of capital expenditures.

 

Cash providedby financing activities of $1.0 million was due to the issuance of common stockof $1.8 million related to employee benefit plans.  This increase was partially offset by the repayment of debt of$0.8 million.

 

During thethree months ended January 31, 2003, cash increased $87.4 million comparedto October 31, 2002.  Our primarysources of cash for the three months ended January 31, 2003, were:  a $103.4 million income tax refund; $15.3million in proceeds from the sale of two facilities; $26.6 million from moreeffective working capital management such as account receivable collections;lower inventory requirements and lower prepaid assets; and other net cash gainsfrom operations.  These cash inflowswere partially offset by $68.8 million used to pay current liabilities and $5.7million of net property, plant and equipment additions.

 

**Vendor Financing**

 

We have worked with customers and third-partyfinanciers to find a means of funding customer equipment purchases fromus.  As of January 31, 2004 and 2003, wehad commitments to extend credit of approximately $21.5 million and $58.6 million,respectively, under such arrangements. The total amount drawn and outstandingunder the commitments was approximately $18.2 million and $23.9 million as ofJanuary 31, 2004 and 2003, respectively. The commitments to extend credit areconditional agreements generally having fixed expiration or termination datesand specific interest rates, conditions and purposes. These commitments mayexpire without being drawn.   Some ofthese commitments enable the customer to draw on the commitment after the customerhas made payment to us for the products we sold, up to the amount the customerpreviously paid to us.  Accordingly,amounts committed may affect future cash flows. We regularly review alloutstanding commitments, and the results of these reviews are considered inassessing the overall risk for possible credit losses. At January 31,2004, we have recorded approximately $17.7 million in loss reserves in theevent of non-performance under these financing arrangements.

 

**Working Capital Outlook**

 

We believe that our current unrestricted cash on handis adequate to fund our working capital requirements, planned capitalexpenditures and restructuring costs through fiscal 2004 and beyond.  We also believe that our unrestricted cash on hand willenable us to pursue strategic opportunities, including possible product line orbusiness acquisitions.  However, if thecost of one or more acquisition opportunities exceeds our existing capitalresources, additional sources of capital may be required.  We do not currently have any committed linesof credit or other available credit facilities, and it is uncertain whethersuch facilities could be obtained in sufficient amounts or on acceptableterms.  Thus, any plan to raiseadditional capital may involve an equity-based or equity-linked financing, suchas another issuance of convertible debt or the issuance of common stock orpreferred stock, which would be dilutive to existing shareholders.

 

**Cautionary Statement for Purposes of the“Safe Harbor” Provisions of the Private Securities Litigation Reform Act of1995**

 

The foregoing Management’s Discussion andAnalysis of Financial Condition and Results of Operations, as well as the Notesto the Condensed Consolidated Financial Statements, contain various“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Forward-looking statements represent ourexpectations or beliefs concerning future events, including but not limited tothe following: any statements regarding future sales, profit percentages,earnings per share and other results of operations, our estimates of probableliabilities relating to pending litigation, the continuation of historicaltrends, the sufficiency of our cash balances and cash generated from operatingand financing activities for our future liquidity and capital resource needsand the effect of regulatory changes. We caution that any forward-looking statements made by us in this reportor in other announcements made by us are qualified by important factors thatcould cause actual results to differ materially from those in theforward-looking statements.  Thesefactors include, without limitation: the magnitude and duration of the significant downturn in thecommunications equipment industry which began in 2001, particularly withrespect to the demand for equipment by telecommunication service providers,from which a majority of our revenues are derived; our ability to restructureour business to achieve and maintain operating profitability; macroeconomicfactors that influence the demand for telecommunications services and theconsequent demand for communications equipment; possible consolidation amongour customers or competitors, which could cause disruption in our customer relationshipsor displacement of us as an equipment vendor to one or more customers; ourability to keep pace with rapid technological change in our industry; ourability to make the proper strategic choices with respect to product lineacquisitions or divestitures; increased competition within our industry andincreased pricing pressure from our customers; our dependence on relatively fewcustomers for a majority of our revenues; fluctuations in our operating resultsfrom quarter-to-quarter, which are influenced by many factors outside of

 

16

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our control, including variations in demand for particular products inour portfolio which have varying profit margins; the impact of regulatorychanges on our customers’ willingness to make capital expenditures for ourequipment, software and services; financial problems, work interruptions inoperations or other difficulties faced by some of our customers, which caninfluence future sales to these customers as well as our ability to collectamounts due us; economic and regulatory conditions outside of the UnitedStates, as approximately 25% to 40% of our sales come from non-U.S.jurisdictions; our ability to protect our intellectual property rights anddefend against infringement claims made by third parties; possible limitationson our ability to raise additional capital if required, either due tounfavorable market conditions, lack of investor demand; our ability to attractand retain qualified employees; our ability to maintain key competencies duringa period of reduced resources and restructuring; potential liabilities thatcould arise if there are design or manufacturing defects with respect to any ofour products; our ability to obtain raw materials and components, and ourincreased dependence on contract manufacturers to make certain of our products;changes in interest rates, foreign currency exchange rates and equitysecurities prices, all of which will impact our operating results; our abilityto successfully defend or satisfactorily settle our pending litigation; andother risks and uncertainties, including those identified in our Form 10-K forthe period ended October 31, 2003 in Item 1 of such report under the caption“Risk Factors”.  We disclaim anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposedto market risk from changes in security prices, foreign exchange rates andinterest rates. Market fluctuations could affect our results of operations andfinancial condition adversely. We, at times, reduce this risk through the useof derivative financial instruments. We do not enter into derivative financialinstruments for the purpose of speculation.

 

We are exposed to interest rate risk as aresult of issuing $200.0 million of convertible unsecured subordinated notesthat have a variable interest rate on June 4, 2003.  The interest rate on these notes is equal to6-month LIBOR plus 0.375%.  The interestrate on these notes will reset semiannually on each interest payment date,which is June 15 and December 15 of each year until their maturity infiscal 2013.  Assuming interest ratesrise 1%, 5% and 10%, our annual interest expense would increase by $2.0million, $10.0 million and $20.0 million, respectively.

 

We offer anon-qualified 401(k) excess plan to allow certain executives to defer earningsin excess of the annual individual contribution and compensation limits on401(k) plans imposed by the U.S. Internal Revenue Code.  Under this plan, the salary deferrals andour matching contributions are not placed in a separate fund or trust account.Rather, the deferrals represent our unsecured general obligation to pay thebalance owing to the executives upon termination of their employment.  In addition, the executives are able toelect to have their account balances indexed to a variety of diversified mutualfunds (stock, bond and balanced), as well as to our common stock.  Accordingly, our outstanding deferredcompensation obligation under this plan is subject to market risk.  As of January 31, 2004, our outstandingdeferred compensation obligation related to the 401(k) excess plan was $13.8million, of which approximately $1.7 million was indexed to ADC commonstock.  Assuming a 20%, 50% and 100%aggregate increase in the value of the investment alternatives to which theaccount balances may be indexed, our outstanding deferred compensationobligation would increase by $2.8 million, $6.9 million and $13.8 million,respectively, and we would incur an expense of a like amount.

 

We are exposedto market risk from changes in foreign exchange rates. To mitigate the riskfrom these exposures, we have instituted a balance sheet hedging program. Theobjective of this program is to protect our net monetary assets and liabilitiesin non-functional currencies from fluctuations due to movements in foreignexchange rates. The program operates in markets where hedging costs arebeneficial. We attempt to minimize exposure to currencies in which hedginginstruments are unavailable or prohibitively expensive by managing ouroperating activities and net asset positions. The majority of hedginginstruments utilized are forward contracts with maturities of less than oneyear.  Foreign exchange contracts reduceour overall exposure to exchange rate movements, since gains and losses onthese contracts offset losses and gains on the underlying exposure.

 

**ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES**

 

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)).  Based onthat evaluation, our CEO and CFO have concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures areadequately designed to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the applicable rulesand forms.  During the period covered bythis Quarterly Report on Form 10-Q, there was no change in our internal controlover financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)that materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

17

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

On March 5,2003 we were served with a shareowner lawsuit brought by Wanda Kinermon thatwas filed in the United States District Court for the District ofMinnesota.  The complaint names ADC,William J. Cadogan, our former Chairman and Chief Executive Officer, and RobertE. Switz, our Chief Executive Officer, as defendants.  During the period the lawsuit covers Mr. Switz held the positionof Executive Vice President and Chief Financial Officer.  Since this lawsuit was served we have beennamed as a defendant in 11 other substantially similar lawsuits.  These shareowner lawsuits have beenconsolidated into a single lawsuit, that is now captioned In Re ADCTelecommunications, Inc. Securities Litigation.  This lawsuit purports to bring suit on behalf of a class ofpurchasers of our publicly traded securities from August 17, 2000 to March 28,2001.  The complaint alleges that weviolated the securities laws by making false and misleading statements aboutour financial performance and business prospects during this period.  On November 24, 2003 we filed a motion todismiss this lawsuit.  This motion ispending before the court.  We believethat this lawsuit is without merit and intend to defend this actionvigorously.  However, because litigationby its nature is uncertain we cannot predict the ultimate outcome of thismatter with certainty and on unfavorable resolutions of this matter couldmaterially adversely affect our business, results of operations or financialcondition.

 

On May 19,2003 we were served with a lawsuit brought by Lorraine Osborne that was filedin the United States District Court for the District of Minnesota.  The complaint names ADC and several of ourcurrent and former officers, employees and directors as defendants.  After this lawsuit was served, we wereserved with two substantially similar lawsuits.  All three of these lawsuits were then consolidated into a singlelawsuit, that is captioned In Re ADC Telecommunications, Inc. ERISALitigation.  This lawsuit has beenbrought by individuals who seek to represent a class of participants in ourRetirement Savings Plan who elected our common stock as one of the investmentalternatives under the plan from February 2000 to present.  The lawsuit alleges a breach of fiduciaryduties under the Employee Retirement Income Security Act.  On February 2, 2004 we filed a motion todismiss this lawsuit.  This motion ispending before the court.  We believethat this lawsuit is without merit and intend to defend this action vigorously.  However, because litigation by its nature isuncertain we cannot predict the ultimate outcome of this matter with certaintyand on unfavorable resolutions of this matter could materially adversely affectour business, results of operations or financial condition.

 

On January 22,2004 we were served with a lawsuit brought by Theodore Pardo that was filed inthe United States District Court for the District of Minnesota.  Thecomplaint is structured as a shareholder derivative case and includes ourcompany as a plaintiff and as a nominal defendant and names several of ourcurrent and former officers and directors as defendants.  This lawsuit wasbrought by the plaintiff who seeks to represent the interests of ADC and itsshareholders.  The complaint alleges that the defendants breached theirfiduciary duties to us and our shareholders by failing to maintain properaccounting controls and by making allegedly false and misleading statementsabout our financial performance and business prospects that resulted inviolations of the securities laws.  Weexpect that a motion to dismiss this lawsuit will be filed during the secondquarter of fiscal 2004.  We cannot atthis time predict the ultimate outcome of this matter and an unfavorableresolution of this matter could materially adversely affect our business,results of operations financial condition.

 

We are a party to various other lawsuits,proceedings and claims arising in the ordinary course of business orotherwise.  The amount of monetaryliability that could result from an adverse result in many of those lawsuits,proceedings or claims cannot be determined at this time.  As of January 31, 2004, we had recorded $8.9million in loss reserves in the event of such adverse outcomes in these othermatters.  However, because litigation byits nature is uncertain, we cannot predict the ultimate outcome of thesematters with certainty and unfavorable resolution of these matters couldmaterially adversely affect our business, results of operations or financialcondition.

 

**ITEM 2.CHANGES IN SECURITIES**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

## **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

## ** **

a.                     Our annual meeting of shareowners was held onMarch 2, 2004.

 

b and c.          At the annual meeting, RobertAnnunziata, John J. Boyle III, Robert E. Switz and Larry W. Wangberg wereelected as directors for terms expiring at the annual meeting of ourshareowners in 2007.  The following table shows the vote totals withrespect to the election of these directors:

 

18

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| **Name**                      |   | **Votes  For** |   | **Authority  Withheld** |   |
|-------------------------------|--------|----------------|--------|-------------------------|--------|
| Robert  Annunziata            |   | 664,288,311    |   | 64,631,835              |   |
| John J.  Boyle  III |   | 670,391,685    |   | 58,528,461              |   |
| Robert  E. Switz              |   | 671,724,768    |   | 57,195,378              |   |
| Larry  W. Wangberg            |   | 671,356,058    |   | 57,564,088              |   |

 

John A. Blanchard III, B.Kristine Johnson and Jean-Pierre Rosso continued as directors for termsexpiring at the annual meeting of shareowners in 2006 and James C. Castle,Mickey P. Foret and John D. Wunsch continued as directors for termsexpiring at the annual meeting of shareowners in 2005.

 

At the annual meeting, ourshareowners also approved an amendment to our Global Stock Incentive Plan to:(a) provide us with greater flexibility to grant “full value” awards (such asrestricted stock and restricted stock units) as part of our long term incentivecompensation program, and (b) extend the term of the Plan for threeyears.  This proposal did not increase the aggregate shares authorizedunder the Plan.  The following table shows the vote totals with respect tothe amendment to our Global Stock Incentive Plan:

 

| **Votes  For** |   | **Votes  Against** |   | **Abstentions** |   |
|----------------|--------|--------------------|--------|-----------------|--------|
| 302,564,832    |   | 120,155,448        |   | 6,922,619       |   |

 

At the annual meeting ourshareowners also approved an amendment to our Articles of Incorporation toincrease the authorized shares of common stock that we may issue from1,200,000,000 shares to 2,400,000,000 shares.  The following table showsthe vote totals with respect to the amendment to our Articles of Incorporation:

 

| **Votes  For** |   | **Votes  Against** |   | **Abstentions** |   |
|----------------|--------|--------------------|--------|-----------------|--------|
| 611,792,337    |   | 111,642,993        |   | 5,483,211       |   |

 

At the annual meeting ourshareowners also ratified the appointment of Ernst & Young LLP as ourindependent auditors for the fiscal year ending October 31, 2004.  Thefollowing table shows the vote totals with respect to this ratification ofErnst & Young LLP as our independent auditors:

 

| **Votes  For** |   | **Votes  Against** |   | **Abstentions** |   |
|----------------|--------|--------------------|--------|-----------------|--------|
| 714,587,874    |   | 9,200,900          |   | 5,131,370       |   |

 

## **ITEM5.  OTHER INFORMATION**

## ** **

## **CharlesD. Yost’s term as a director expired at the annual meeting of shareowners onMarch 2, 2004, and he did not seek re-election.**

## ** **

Lois M. Martinwas appointed as a director of our company on March 2, 2004.  Ms. Martin was appointed by the othermembers of our Board of Directors and is scheduled to stand for election as adirector by our shareowners at our next annual meeting.

 

## **ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

## ** **

a.                                       Exhibits

 

See Exhibit Index on page 21 for a description of the documents thatare filed as exhibits to this Quarterly Report on Form 10-Q or are incorporatedby reference herein.  Any documentincorporated by reference is identified by a parenthetical referencing the SECfiling which included the document.  Wewill furnish to a securityholder upon request a copy of any Exhibit at cost.

 

b.                                      Reportson Form 8-K

 

We filed orfurnished the following Current Reports on Form 8-K during the quarter endedJanuary 31, 2004:

 
| **Date**          |   | **Item Reported**                                                                                                 |
|-------------------|--------|-------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                              |
| December 2,  2003 |   | Items 7, 9  and Item 12 – December 2, 2003 – news release announcing our fourth quarter  2003 earnings. |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
| Dated:  March 12, 2004 | ADC  TELECOMMUNICATIONS, INC. |
|-----------------------------|-------------------------------|
|                        |                          |   |
|                        | By:                           | /s/ Gokul V.  Hemmady |   |
|                        |                          | Gokul V. Hemmady |
|                        |                          | Vice  President, Chief Financial Officer and Controller  (Principal Financial Officer and Duly Authorized Officer) |

 

20

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**ADCTELECOMMUNICATIONS, INC.**

**EXHIBIT INDEX TO FORM10-QFOR THE THREE MONTHS ENDED JANUARY 31, 2004**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4-a              |   | Form of  certificate for shares of common stock of ADC Telecommunications, Inc.  (Incorporated by reference to Exhibit 4-a to ADC’s Form 10-Q for  the quarter ended April 30, 1996.)                                                                                                                                                                                                                                                                                                                 |
| 4-b              |   | Restated  Articles of Incorporation of ADC Telecommunications, Inc., as amended  prior to January 20, 2000. (Incorporated by reference to  Exhibit 4.1 to ADC’s Registration Statement on Form S-3 dated  April 15, 1997.)                                                                                                                                                                                                                                                                       |
| 4-c              |   | Articles of  Amendment to Restated Articles of Incorporation of ADC  Telecommunications, Inc. dated January 20, 2000. (Incorporated by  reference to Exhibit 4.6 to ADC’s Registration Statement on  Form S-8 dated March 14, 2000.)                                                                                                                                                                                                                                                             |
| 4-d              |   | Articles of  Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc.,  dated June 30, 2000. (Incorporated by reference to Exhibit 4-g to  ADC’s Quarterly Report on Form 10-Q for the quarter ended  July 31, 2000.)                                                                                                                                                                                                                                                |
| 4-e              |   | Articles of  Amendment to Restated Articles of Incorporation of ADC Telecommunications,  Inc., dated March 9, 2004.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4-f              |   | Restated  Bylaws of ADC Telecommunications, Inc., as amended effective  July 30, 2002.  (Incorporated by  reference to exhibit 4-e ADC’s Quarterly Report on Form 10-Q for the quarter  ended July 31, 2002)                                                                                                                                                                                                                                                                                          |
| 4-g              |   | Rights  Agreement, as amended and restated July 30, 2003, between ADC  Telecommunications, Inc. and Computershare Investor Services, LLC as Rights  Agent (Incorporated by reference to Exhibit 4-b to ADC’s Form 8-A/A filed on  July 31, 2003)                                                                                                                                                                                                                                                                |
| 4-h              |   | Indenture  dated as of June 4, 2003 between ADC Telecommunications, Inc. and U.S.  Bank National Association (Incorporated by reference to Exhibit 4-g of ADC’s  Quarterly Report on Form 10-Q for the quarter ended July 31, 2003).                                                                                                                                                                                                                                                                                 |
| 4-i              |   | Registration  Rights Agreement dated as of June 4, 2003 between ADC  Telecommunications, Inc. and Banc of America Securities LLC, Credit Suisse  First Boston LLC and Merrill Lynch Pierce Fenner & Smith Incorporated as  representatives of the Initial Purchase of ADC’s 1% Convertible Subordinated  Notes due 2008 and Floating Rate Convertible Subordinated Notes due 2013  (Incorporated by reference to Exhibit 4-h to ADC’s Quarterly Report on Form  10-Q for quarter ended July 31, 2003). |
| 10-a             |   | ADC  Telecommunications, Inc. Global Stock Incentive Plan, as amended and restated  through March 2, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10-b             |   | Compensation  Plan for Non-Employee Directors of ADC Telecommunications, Inc., restated as  of January 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10-c             |   | Form of ADC  Telecommunications, Inc. Restricted Stock Unit Award Agreement provided to  Non-Employee Directors of ADC with respect to Restricted Stock Unit awards  made under the Compensation Plan for Non-Employee Directors of ADC  Telecommunications, Inc., restated as of January 1, 2004.                                                                                                                                                                                                                             |
| 10-d             |   | Third  Amendment to ADC Telecommunications, Inc. Deferred Compensation Plan (1989  Restatement), effective as of December 9, 2003.                                                                                                                                                                                                                                                                                                                                                                                             |
| 10-e             |   | Restricted  Stock Award Agreement, dated as of December 11, 2003, between ADC  Telecommunications, Inc. and Hilton M. Nicholson.                                                                                                                                                                                                                                                                                                                                                                                               |
| 10-f             |   | Form of ADC  Telecommunications, Inc. Incentive Stock Option Agreement provided to  employees with respect to option grants made under the ADC  Telecommunications, Inc. Global Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                          |
| 10-g             |   | Form of ADC  Telecommunications, Inc. Non-qualified Stock Option Agreement provided to  employees with respect to option grants made under the ADC  Telecommunications, Inc. Global Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                      |
| 10-h             |   | ADC Telecommunications,  Inc. Executive Stock Ownership Policy for Section 16 Officers, effective as  of January 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31-a             |   | Certification  of principal executive officer required by Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31-b             |   | Certification  of principal financial officer required by Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32               |   | Certifications  furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                               |

 

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