UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 28, 2006

o		TRANSITION 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

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 by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ    NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ    Accelerated filer o    Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o    NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.20 par value: 117,231,372 shares as of August 25, 2006

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

Compensation Plan

401(k) Excess Plan

Certification of Principal Executive Officer

Certification of Principal Financial Officer

Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS—UNAUDITED
(In millions)

		July 28,				October 31,
		2006				2005
ASSETS
Current Assets:
Cash and cash equivalents		$	127.4			$	108.4
Available-for-sale securities			378.0				335.3
Accounts receivable, net of reserves of $6.6 and $9.4			188.6				180.6
Unbilled revenue			26.2				27.0
Inventories, net of reserves of $36.7 and $35.6			166.8				140.4
Current assets of discontinued operations			14.0				29.6
Prepaid and other current assets			39.2				33.5
Total current assets			940.2				854.8
Property and equipment, net of accumulated depreciation of $367.8 and $347.3			210.3				220.4
Restricted cash			16.2				23.6
Goodwill			240.2				240.5
Intangibles, net of accumulated amortization of $59.0 and $36.0			146.4				165.0
Available-for-sale securities			4.9				12.1
Long term assets of discontinued operations			0.3				1.2
Other assets			15.7				19.6
Total assets		$	1,574.2			$	1,537.2
LIABILITIES AND SHAREOWNERS’ INVESTMENT
Current Liabilities:
Accounts payable		$	104.2			$	69.6
Accrued compensation and benefits			45.6				78.9
Other accrued liabilities			60.4				74.9
Income tax payable			17.7				15.9
Restructuring accrual			20.0				29.6
Current liabilities of discontinued operations			15.6				19.6
Notes payable			—				0.3
Total current liabilities			263.5				288.8
Pension obligations and other long-term liabilities			82.9				74.5
Long-term notes payable			400.0				400.0
Total liabilities			746.4				763.3
Shareowners’ Investment:
(117.2 and 116.6 shares outstanding)			827.8				773.9
Total liabilities and shareowners’ investment		$	1,574.2			$	1,537.2

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

ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—UNAUDITED
(In millions, except per share amounts)

		Three Months Ended								Nine Months Ended
		July 28, 2006				July 29, 2005				July 28, 2006				July 29, 2005
Net Sales:
Product		$	307.5			$	273.6			$	870.3			$	738.5
Service			36.1				33.4				104.2				98.3
Total net sales			343.6				307.0				974.5				836.8
Cost of Sales:
Product			201.3				165.4				568.6				438.2
Service			30.1				24.1				85.8				80.8
Total cost of sales			231.4				189.5				654.4				519.0
Gross Profit			112.2				117.5				320.1				317.8
Operating Expenses:
Research and development			17.3				18.4				55.3				51.8
Selling and administration			67.4				63.0				211.3				186.8
Restructuring and impairment charges			3.5				0.2				6.7				6.1
Total operating expenses			88.2				81.6				273.3				244.7
Operating Income			24.0				35.9				46.8				73.1
Other income, net			2.3				3.1				7.2				20.5
Income before income taxes			26.3				39.0				54.0				93.6
Provision for income taxes			3.1				1.5				7.0				4.8
Income from continuing operations			23.2				37.5				47.0				88.8
Discontinued Operations, Net of Tax
Loss from discontinued operations			(1.3	)			(6.2	)			(4.7	)			(6.8	)
Gain (loss) from sale or write-down of discontinued operations, net			(10.6	)			(7.4	)			(10.6	)			27.8
Total discontinued operations			(11.9	)			(13.6	)			(15.3	)			21.0
Earnings before the cumulative effect of a change in accounting principle			11.3				23.9				31.7				109.8
Cumulative effect of a change in accounting principle			—				—				0.6				—
Net Income		$	11.3			$	23.9			$	32.3			$	109.8
Weighted Average Common Shares Outstanding (Basic)			117.2				116.0				117.0				115.8
Weighted Average Common Shares Outstanding (Diluted)			117.4				131.4				117.5				130.8
Basic Earnings (Loss) Per Share:
Continuing operations		$	0.20			$	0.32			$	0.40			$	0.77
Discontinued operations		$	(0.10	)		$	(0.12	)		$	(0.13	)		$	0.18
Cumulative effect of a change in accounting principle		$	—			$	—			$	0.01			$	—
Net income per share		$	0.10			$	0.20			$	0.28			$	0.95
Diluted Earnings (Loss) Per Share:
Continuing operations		$	0.20			$	0.30			$	0.40			$	0.73
Discontinued operations		$	(0.10	)		$	(0.10	)		$	(0.13	)		$	0.16
Cumulative effect of a change in accounting principle		$	—			$	—			$	0.01			$	—
Net income per share		$	0.10			$	0.20			$	0.28			$	0.89

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

ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In millions)

		Nine Months Ended
		July 28, 2006				July 29, 2005
Operating Activities:
Net income from continuing operations		$	47.0			$	88.8
Adjustments to reconcile net income from continuing operations to net cash provided by (used for) operating activities from continuing operations:
Fixed asset impairments			0.6				0.1
Depreciation and amortization			50.3				41.4
Change in bad debt reserves			0.1				(2.8	)
Non-cash stock compensation			9.2				2.2
Change in deferred income taxes			1.4				—
(Gain) loss on sale of property and equipment			0.1				(4.5	)
Other, net			0.1				(0.5	)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable and unbilled revenues			(10.1	)			(48.4	)
Inventories			(25.0	)			(28.6	)
Prepaid and other assets			1.3				(13.7	)
Accounts payable			33.8				3.5
Accrued liabilities			(53.9	)			(18.6	)
Total cash provided by operating activities from continuing operations			54.9				18.9
Total cash used for operating activities from discontinued operations			(3.3	)			(11.0	)
Total cash provided by operating activities			51.6				7.9
Investing Activities:
Acquisitions, net of cash acquired			(3.2	)			(7.1	)
Divestitures, net of cash disposed			—				33.7
Property, equipment and patent additions			(23.1	)			(19.4	)
Proceeds from disposal of property and equipment			0.8				16.7
Proceeds from collection of note receivable			6.8				17.8
Change in restricted cash			7.5				5.4
Purchases of available-for-sale securities			(377.0	)			(734.3	)
Sales of available-for-sale securities			341.9				704.4
Other			0.1				—
Total cash (used for) provided by investing activities from continuing operations			(46.2	)			17.2
Total cash provided by investing activities from discontinued operations			0.4				0.3
Total cash (used for) provided by investing activities			(45.8	)			17.5
Financing Activities:
Common stock issued			9.7				11.4
Total cash provided by financing activities from continuing operations			9.7				11.4
Total cash provided by financing activities from discontinued operations			—				—
Total cash provided by financing activities			9.7				11.4
Effect of Exchange Rate Changes on Cash			3.5				(1.3	)
Increase in Cash and Cash Equivalents			19.0				35.5
Cash and Cash Equivalents, beginning of period			108.4				63.8
Cash and Cash Equivalents, end of period		$	127.4			$	99.3

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

ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

Note 1 — Basis of Presentation:

     These interim unaudited condensed consolidated financial statements of ADC Telecommunications, Inc. (“ADC,” “we,” “us” and “our”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The interim information furnished in this report reflects all normal recurring adjustments, which are necessary in the opinion of our management for a fair presentation of the results for the interim periods. The operating results for the three and nine month periods ended July 28, 2006 are not necessarily indicative of the operating results to be expected for the full fiscal year. These statements should be read in conjunction with our most recent Annual Report on Form 10-K for our fiscal year ended October 31, 2005.

     During the third quarter of fiscal 2006, our Board of Directors approved a plan to divest our professional services business in France (“APS France”). We have classified this business as a discontinued operation. During the third quarter of fiscal 2005, we classified our ADC Systems Integration UK Limited (“SIUK”) business as a discontinued operation. The financial results of the APS France services business and SIUK are reported separately as discontinued operations for all periods presented.

     Fiscal Year

     Our quarters end on the last Friday of the final month in the quarter, except that our fiscal year ends on October 31. As a result, any one quarter may have more or less days than other quarters in the fiscal year.

     Reclassifications

     Certain prior year amounts have been reclassified to conform to the current year presentation. Prior to this reclassification, we stated as a net amount the Value Added Tax (“VAT”) receivables and VAT payables in other accrued liabilities on our Consolidated Balance Sheets. VAT receivables are now reported separately in prepaid and other current assets. Freight revenues for our APS business unit previously were netted with freight costs in cost of goods sold on our income statement, but are now included in net sales. Expenditures for capitalizable patents previously were classified in the operating activities section of our Statements of Cash Flows but are now classified as investing activities. These reclassifications have no effect on reported earnings, working capital or shareowners’ investment.

     Recently Issued Accounting Pronouncements

     During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We are required to adopt the provisions of FIN 48 in our fiscal year beginning November 1, 2007. We are currently evaluating the effects, if any, that this Interpretation may have on our consolidated financial statements.

     As of November 1, 2005, we adopted SFAS No.123(R) “Share-Based Payment: An amendment of FASB Statements No. 123 and 95” (“SFAS 123(R)”), which requires us to recognize in our income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. We adopted SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, our Consolidated Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123(R). Share based compensation expense recognized under SFAS 123(R) for the three and nine months ended July 28, 2006 was $2.8 million and $9.2 million, respectively. In addition, for the nine months ended July 28, 2006, we recognized an increase in net income of $0.6 million related to the cumulative effect of a change in accounting principle as of November 1, 2005. Refer to Note 2 for additional information.

     Summary of Significant Accounting Policies

     A detailed description of our significant accounting policies can be found in our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2005. As of November 1, 2005, we began recognizing and measuring our share-based compensation in accordance with SFAS 123(R). Prior to adoption of SFAS 123(R), we recognized and measured our share-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees ,” (“APB 25”) and related interpretations. Refer to Note 2 for additional information.

     Reverse Stock Split

     On April 18, 2005, we announced a one-for-seven reverse split of our common stock. The effective date of the reverse split was May 10, 2005. All share, share equivalent and per share amounts have been adjusted to reflect the reverse stock split for all periods presented in this Form 10-Q. We did not issue any fractional shares of our common stock as a result of the reverse split. Instead, shareowners who would otherwise be entitled to receive a fractional share of common stock received cash in an amount equal to the fractional share multiplied by the split adjusted price of one share of ADC common stock. As a result, 4,272 shares at $16.10 per share reduced common shares and paid-in capital in the consolidated statement of shareowners’ investment.

     Warranty

     We provide reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, our historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures. In addition, from time to time specific warranty accruals may be made if unforeseen technical problems arise.

     The following table provides details on the activity in the warranty reserve accrual balance as of July 28, 2006:

		Accrual				Charged to costs				Deductions				Accrual
		October 31, 2005				and expenses				(write-off’s)				July 28, 2006
Warranty Reserve		$	10.8			$	3.0			$	5.1			$	8.7

Note 2 — Share-Based Compensation:

     On November 1, 2005, we adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors. The awards include employee stock options, restricted stock units and restricted stock awards, based on estimated fair values. SFAS 123(R) supersedes APB 25, which we previously applied, for periods beginning in fiscal 2006.

     We adopted SFAS 123(R) using the modified prospective transition method, which requires application of the accounting standard as of November 1, 2005, the first day of our fiscal 2006 year. Our Consolidated Financial Statements as of and for the three and nine months ended July 28, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, our Consolidated Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123(R). Therefore, the results as of July 28, 2006 are not directly comparable to the same period in the prior year.

     SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award ultimately expected to vest is recognized as expense over the requisite service period. Share-based compensation expense recognized in our Consolidated Statements of Operations for the three and nine months ended July 28, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of November 1, 2005. This compensation expense is based on the grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation ,” (“SFAS 123”). Compensation expense for the share-based payment awards granted subsequent to November 1, 2005 are based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Share-based compensation expense recognized in the Consolidated Statements of Operations for the three and nine months ended July 28, 2006 is based on awards ultimately expected to vest, and therefore it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ materially from those estimates.

     Prior to the adoption of SFAS 123(R), we accounted for share-based awards using the intrinsic value method in accordance with APB 25, as allowed under SFAS 123. Under the intrinsic value method, no share-based compensation expense had been recognized in our Consolidated Statements of Operations, other than as that related to restricted stock units and restricted stock awards, be cause the exercise price of our granted stock options equaled the fair market value of the underlying stock at the date of grant. In our pro forma disclosures required under SFAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

     For purposes of determining the estimated fair value of share-based payment awards on the date of grant under SFAS 123(R), we used the Black-Scholes option-pricing model (“Black-Scholes Model”). The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of our employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time. This change could result in modifications to these assumptions and methodologies and thereby materially impact our fair value determination.

     Share-based compensation recognized under SFAS 123(R) for the three and nine months ended July 28, 2006 was $2.8 million and $9.2 million, respectively. The share-based compensation expense is calculated on a straight-line basis over the vesting period s of the related share-based awards. Share-based compensation expense of $0.7 million and $2.2 million for the three and nine months ended July 29, 2005, respectively, was related to restricted stock units and restricted stock awards. There was no share-based compensation expense related to stock options in the three and nine months ended July 29, 2005, because we accounted for share-based awards using the intrinsic value method in accordance with APB 25.

     The following table details the incremental impact of adopting SFAS 123(R) for the three and nine months ended July 28, 2006:

		Three Months				Nine Months
		Ended				Ended
		July 28, 2006				July 28, 2006
		(In millions, except				(In millions, except
		per share amounts)				per share amounts)
Effect on income before tax		$	(1.9	)		$	(6.9	)
Effect on income from continuing operations			(1.9	)			(6.9	)
Cumulative effect of change in accounting principle			—				0.6
Net income		$	(1.9	)		$	(6.3	)
Basic and diluted earnings per share		$	(0.02	)		$	(0.05	)

     As required by SFAS 123(R), we have presented disclosures of our pro forma income and net income per share for both basic and diluted shares for prior periods. The presentation assumes estimated fair value of the options granted prior to November 1, 2005 was amortized to expense over the option-vesting period per the illustration below.

		Three Months				Nine Months
		Ended				Ended
		July 29, 2005				July 29, 2005
		(In millions, except				(In millions, except
		per share amounts)				per share amounts)
Net income as reported		$	23.9			$	109.8
Plus: Share-based employee compensation included in reported income			0.7				2.2
Less: Stock compensation expense – fair value based method			(5.1	)			(15.1	)
Pro forma net income		$	19.5			$	96.9
Net income per share
As reported — basic		$	0.20			$	0.95
As reported — diluted		$	0.20			$	0.89
Pro forma — basic		$	0.17			$	0.84
Pro forma — diluted		$	0.17			$	0.79

     As of July 28, 2006, a total of 12.3 million shares were available for stock awards under our Global Stock Incentive Plan (“GSIP”). This total included 3.2 million shares available for issuance as restricted stock awards and restricted stock units. All stock options granted under the GSIP were made at fair market value. Stock options granted under the GSIP vest over a four-year period.

     During the first quarter of fiscal 2006, we granted 302,335 restricted stock units subject to a three-year cliff-vesting period and earnings per share performance threshold. Subject to certain conditions, the performance threshold requires that our aggregate diluted pre-tax earnings per share throughout our 2006, 2007, and 2008 fiscal years reach a targeted amount. For purposes of SFAS 123(R), these restricted stock units are being recognized on a straight-line basis from the grant date because we currently believe we will achieve the performance threshold.

     The following schedule summarizes activity in our share-based compensation plans:

						Stock Options				Restricted
		Stock Option				Weighted Average				Stock
		Shares				Exercise Price				Awards/Units
		(In millions)								(In millions)
Outstanding at October 31, 2005			6.8			$	28.95				0.4
Granted			0.9				23.87				0.3
Exercised			(0.3	)			(16.71	)			—
Restrictions lapsed			—				—				(0.1	)
Canceled			(0.3	)			(33.95	)			—
Outstanding at January 27, 2006			7.1				28.72				0.6
Granted			0.1				25.06				0.1
Exercised			(0.3	)			(16.43	)			—
Restrictions lapsed			—				—				—
Canceled			(0.1	)			(30.45	)			(0.1	)
Outstanding at April 28, 2006			6.8				29.06				0.6
Granted			—				—				—
Exercised			—				—				—
Restrictions lapsed			—				—				—
Canceled			(0.1	)			(32.94	)			—
Outstanding at July 28, 2006			6.7				29.02				0.6
Exercisable at October 31, 2005			4.6				33.70				—
Exercisable at July 28, 2006			4.6			$	32.68				—

     As of July 28, 2006, there were options to purchase 1.5 million shares of ADC common stock that had not yet vested and were expected to vest in future periods at a weighted average exercise price of $21.21. The following table contains details regarding our outstanding stock options as of July 28, 2006:

									Weighted Average
Range of									Remaining								Weighted
Exercise Prices							Number		Contractual Life		Weighted Average						Average
Between							Outstanding		(In years)		Exercise Price				Number Exercisable		Exercise Price
$	8.05		$	15.68			230,998		6.93		$	13.34			184,192		$	12.89
	15.75			15.82			857,229		6.33			15.82			856,961			15.82
	16.03			18.62			599,915		7.42			17.12			424,489			17.03
	18.69			18.76			857,967		8.39			18.76			201,121			18.76
	19.11			19.81			716,478		4.68			19.78			698,288			19.79
	20.02			23.45			649,488		7.64			20.64			339,218			20.65
	23.91			23.91			866,351		9.38			23.91			—			—
	24.01			30.59			782,907		5.66			29.19			736,384			29.42
	31.08			64.31			669,528		3.54			45.78			662,758			45.74
	64.85			293.56			445,790		3.05			109.76			445,790			109.76
$	8.05		$	293.56			6,676,651		6.48		$	29.02			4,549,201		$	32.68

     For purposes of determining estimated fair value under SFAS 123(R), we have computed the estimated fair values of stock options using the Black-Scholes Model. There were no stock options granted during the three months ended July 28, 2006. The weighted average estimated fair value of employee stock options granted during the three months ended July 29, 2005 was $8.45 per share. For options granted during the nine months ended July 28, 2006 and July 29, 2005, this value was $12.75 and $9.62 per share, respectively. These values were calculated using the Black-Scholes Model with the following weighted average assumptions:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
Expected volatility		NA(1)					53.18	%			57.73	%			59.10	%
Risk free interest rate		NA(1)					3.63	%			4.33	%			3.68	%
Expected dividends		NA(1)					—				—				—
Expected life (in years)		NA(1)					3.23				4.92				4.56

     We based our estimate of expected volatility for awards granted in fiscal 2006 on monthly historical trading data of our common stock for a period equivalent to the expected life of the award. Our risk-free interest rate assumption is based on implied yields of U.S. Treasury zero-coupon bonds having a remaining term equal to the expected term of the employee stock awards. We estimated the expected term consistent with historical exercise and cancellation activity of our previous share-based grants with a ten-year contractual term. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period.

     As of July 28, 2006, we have approximately $20.1 million of total compensation cost related to nonvested awards not yet recognized. We expect to recognize these costs over a weighted average period of 2.7 years.

Note 3 — Acquisitions:

     On August 26, 2005, we completed the acquisition of Fiber Optic Network Solutions Corp (“FONS”), a leading manufacturer of high-performance passive optical components and fiber optic cable packaging, distribution and connectivity solutions. In this transaction, we acquired all of the outstanding shares of FONS in exchange for cash paid of $166.1 million (net of cash acquired) and assumed certain liabilities of FONS. Of the purchase price, $34.0 million is held in escrow for up to two years following closing to address potential indemnification claims. As of July 28, 2006, no claims had been made . In addition, we placed $6.7 million into a trust account to be paid to FONS employees over the course of nine months following the close of the transaction. The last retention payment associated with this acquisition was made in May 2006. We acquired $83.3 million of intangible assets as part of the purchase. An allocation of $3.3 million was made to in-process research and development for new technology development and was immediately written-off. Goodwill of $70.9 million was recorded in the transaction and assigned to our Broadband Infrastructure and Access segment. None of this goodwill, intangible assets and in-process research and development is deductible for tax purposes . With the addition of FONS, we became one of the largest suppliers of fiber-to-the-X (i.e., the deployment of fiber-based networks closer to the ultimate consumer, which is sometimes referred to as “FTTX”) solutions in the United States according to proprietary market share estimates. The results of FONS, subsequent to August 26, 2005, are included in our results of operations.

     On May 6, 2005, we completed the acquisition of OpenCell, Corp (“OpenCell”), a manufacturer of digital fiber-fed distributed antenna systems and shared multi-access radio frequency network equipment. We purchased OpenCell from Crown Castle International Corp. for $7.1 million in cash and assumed certain liabilities. The acquisition of OpenCell allows us to incorporate OpenCell’s technology into our existing Digivance wireless solutions, which are used by wireless carriers to extend network coverage and accommodate ever-growing capacity demands. The results of OpenCell, subsequent to May 6, 2005, are included in our results of operations.

     Unaudited pro forma consolidated results for the three and nine months ended July 29, 2005, as though the acquisitions of FONS and OpenCell had taken place at the beginning of such periods, were:

		Three Months Ended				Nine Months Ended
		July 29, 2005				July 29, 2005
		(In millions, except				(In millions, except
		per share amounts)				per share amounts)
Net sales		$	327.9			$	903.3
Income from continuing operations			41.4				99.0
Net income			27.8				120.0
Income from continuing operations per share—basic			0.36				0.85
Income from continuing operations per share—diluted			0.33				0.80
Net income per share—basic			0.24				1.04
Net income per share—diluted		$	0.23			$	0.96

     The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions taken place at the beginning of the period presented or the results which may occur in the future.

Note 4 — Discontinued Operations:

     The financial results of the businesses described below are reported separately as discontinued operations for all periods presented in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets. ”

     APS France

     In the third quarter of fiscal 2006, our Board of Directors approved a plan to divest our APS France professional services business. We are in active discussions to complete divestiture of this business, subject to reaching final agreement with a buyer and required approvals under French law. Therefore, we have classified the APS France services business as a discontinued operation in the third quarter of fiscal 2006. We recorded a loss of $10.6 million, determined by comparing the net assets of APS France to the expected sales value of the business based on preliminary sales negotiations. APS France had been included in our Professional Services segment.

     SIUK

     During the third quarter of fiscal 2005, we sold our SIUK business for a nominal amount and recorded a loss on sale of $6.3 million. The transaction closed on May 24, 2005. This business had been included in our Professional Services segment. We classified this business as a discontinued operation in the third quarter of fiscal 2005.

     Metrica

     During the fourth quarter of fiscal 2004, we entered into an agreement to sell the business related to our Metrica service assurance software group to Vallent Corporation (“Vallent,” formerly known as WatchMark Corporation) for a cash purchase price of $35.0 million and a $3.9 million equity interest in Vallent. The cash purchase price was subject to adjustments under the sale agreement. The transaction closed on November 19, 2004. The equity interest constitutes less than a five percent ownership in Vallent and is therefore accounted for under the cost method. The Metrica business had been included in our Professional Services segment. We classified this business as a discontinued operation in the fourth quarter of fiscal 2004. In the first quarter of fiscal 2005 we recognized a gain on sale of $36.0 million.

     In the second, third and fourth quarters of fiscal 2005, we recorded adjustments to reduce the gain by $0.9 million, $1.0 million and $1.5 million, respectively. The adjustments were due to subsequent adjustments to the working capital balances used to determine the purchase price.

     Singl.eView

     During the third quarter of fiscal 2004, we entered into an agreement to sell the business related to our Singl.eView product line to Intec Telecom Systems PLC for a cash purchase price of $74.5 million. The price was subject to adjustments under the sale agreement. The transaction closed on August 27, 2004. This business had been included in our Professional Services segment. We classified this business as a discontinued operation in the third quarter of fiscal 2004. In the first quarter of fiscal 2005 and the third quarter of fiscal 2006, we recognized an income tax benefit of $3.1 million and $0.7 million, respectively, relating to resolution of certain income tax contingencies.

     The financial results of our APS France services business, SIUK, Metrica and Singl.eView businesses included in discontinued operations were:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Net sales		$	8.6			$	10.3			$	27.1			$	44.3
Loss from discontinued operations		$	(1.3	)		$	(6.2	)		$	(4.7	)		$	(6.8	)
Gain (loss) from sale or write-down of discontinued operations, net			(10.6	)			(7.4	)			(10.6	)			27.8
Total discontinued operations		$	(11.9	)		$	(13.6	)		$	(15.3	)		$	21.0

Note 5 — Net Income (Loss) from Continuing Operations Per Share:

     The following table presents a reconciliation of the numerators and denominators of basic and diluted income per share from continuing operations:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions, except								(In millions, except
		per share amounts)								per share amounts)
Numerator:
Net income from continuing operations		$	23.2			$	37.5			$	47.0			$	88.8
Interest expense for convertible notes			—				2.3				—				6.1
Net income from continuing operations — diluted		$	23.2			$	39.8			$	47.0			$	94.9
Denominator:
Weighted average common shares outstanding — basic			117.2				116.0				117.0				115.8
Convertible bonds converted to common stock			—				14.2				—				14.2
Employee options and other			0.2				1.2				0.5				0.8
Weighted average common shares outstanding — diluted			117.4				131.4				117.5				130.8
Basic income per share from continuing operations		$	0.20			$	0.32			$	0.40			$	0.77
Diluted income per share from continuing operations		$	0.20			$	0.30			$	0.40			$	0.73

     Excluded from dilutive securities are employee stock options to acquire 5.3 million and 3.4 million shares for the three months ended July 28, 2006 and July 29, 2005, respectively. Also excluded are employee stock options to acquire 4.3 million and 5.5 million shares for the nine months ended July 28, 2006 and July 29, 2005, respectively. All of these exclusions were made because the exercise price of these options exceeded the average market price of the common stock for the periods and would have an anti-dilutive effect.

     Warrants to acquire 14.2 million shares issued in connection with our convertible notes were excluded from dilutive securities for the three and nine months ended July 28, 2006 and July 29, 2005. The exclusions were made because the exercise price of these warrants was greater than the average market price of our common stock.

     Upon achieving positive net income in a reporting period, we are required to use the “if-converted” method for computing dilute d earnings per share with respect to the 14.2 million shares reserved for issuance upon conversion of our convertible notes. All 14.2 million shares reserved for issuance upon conversion of our convertible notes were excluded for the three and nine months ended July 28, 2006 because of their anti-dilutive effect. However, these shares were included for the three and nine months ended July 29 , 2005.

Note 6 — Inventories:

     Inventories consist of:

		July 28,				October 31,
		2006				2005
		(In millions)
Purchased materials		$	63.1			$	64.3
Manufactured products			134.1				102.6
Work-in-process			6.3				9.1
Less: Inventory reserve			(36.7	)			(35.6	)
Total inventories, net		$	166.8			$	140.4

Note 7 — Property & Equipment:

     Property & equipment consists of:

		July 28,				October 31,
		2006				2005
		(In millions)
Land and buildings		$	140.3			$	136.7
Machinery and equipment			382.7				360.5
Furniture and fixtures			40.8				50.5
Less: Accumulated depreciation			(367.8	)			(347.3	)
Total			196.0				200.4
Construction in progress			14.3				20.0
Total property & equipment, net		$	210.3			$	220.4

Note 8 — Goodwill and Intangible Assets:

     We recorded $240.2 million in goodwill in connection with our acquisitions of the KRONE group (“KRONE”) and FONS. All of the goodwill derived from these acquisitions has been assigned to our Broadband Infrastructure an d Access segment. Most of this goodwill is not deductible for tax purposes.

     The changes in the carrying amount of goodwill for the nine months ended July 28, 2006 are (in millions):

Balance as of October 31, 2005		$	240.5
Purchase accounting adjustments			(0.3	)
Balance as of July 28, 2006		$	240.2

     We recorded intangible assets of $78.1 million in connection with our acquisition of KRONE. The intangible assets consisted primarily of trademarks, technology and a distributor network. We recorded intangible assets of $83.3 million in connection with the acquisition of FONS. The intangible assets consisted primarily of customer relationships, existing technology and non-compete agreements. An additional $4.7 million was recorded related to patents and a non-compete agreement purchased from OpenCell.

Note 9 — Income Taxes:

     Under the liability method of accounting for income taxes, a deferred tax asset represents future tax benefits to be received when certain expenses and losses previously recognized in the financial statements become deductible under applicable income tax laws. The realization of a deferred tax asset is dependent on future taxable income against which these deductions can be applied. SFAS N o. 109, “Accounting for Income Taxes,” requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. As a result of the cumulative losses we incurred in prior years, we previously concluded that a nearly full valuation allowance should be recorded. We expect to maintain a nearly full valuation allowance against our deferred tax assets until we can sustain a level of profitability that demonstrates our ability to utilize these assets. We will not record significant income tax expense or benefits for pre-tax income (loss) until either our deferred tax assets are fully utilized to reduce future income tax liabilities or the value of our deferred tax assets is restored on the balance sheet. Our income tax provision for the three and nine months ended July 28, 2006 primarily relates to foreign income taxes and deferred tax liabilities attributable to U.S. tax amortization of purchased goodwill from the acquisition of KRONE.

     As of July 28, 2006, we had $943.0 million of net deferred tax assets that have a nearly full valuation allowance. This balance reflects a reduction of $89.1 million recorded during the quarter ended July 28, 2006, due to an adjustment of tax attributes on a prior year tax return. The net deferred tax assets are reflected on the Condensed Consolidated Balance Sheets in Other Assets at an insignificant amount. Most of our deferred tax assets are related to U.S. income taxes and are not expected to expire until after fiscal 2021, with the exception of $227.0 million relating to capital loss carry overs that can be utilized only against realized capital gains, which expire in fiscal 2009.

Note 10 — Comprehensive Income:

     Comprehensive income has no impact on our net income but is reflected in our balance sheets through adjustments to shareowners’ investment. Comprehensive income derives from foreign currency translation adjustments and unrealized losses on available-for-sale securities.

     The components of comprehensive income were:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Net income		$	11.3			$	23.9			$	32.3			$	109.8
Change in cumulative translation adjustment			2.4				(4.0	)			3.2				(4.6	)
Reclassification adjustment for realized losses on securities classified as available for sale			—				—				—				—
Unrealized gain (loss) from securities classified as available-for-sale			(0.2	)			0.1				0.5				(0.3	)
Total comprehensive income		$	13.5			$	20.0			$	36.0			$	104.9

Note 11 — Pension Benefits

     We sponsor a defined benefit pension plan that is an unfunded general obligation of one of our German subsidiaries. Cash payments are expected to approximate the net periodic benefit cost.

     Components of net periodic benefit cost were:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Service cost		$	0.1			$	—			$	0.2			$	0.1
Interest cost			0.7				0.8				2.2				2.4
Net periodic benefit cost		$	0.8			$	0.8			$	2.4			$	2.5

Note 12 — Segment and Geographic Information:

  Segment Information

     We have two reportable segments: the Broadband Infrastructure and Access segment and the Professional Services segment.

     Broadband Infrastructure and Access products include:

	•		Connectivity systems and components that provide the infrastructure to wireline, wireless, cable, broadcast and enterprise networks to connect high-speed Internet, data, video and voice services to the network over copper, coaxial and fiber-optic cables, and
	•		Access systems used in the last mile/kilometer of wireline and wireless networks to deliver high-speed Internet, data and voice services.

     Professional Services provides integration services for broadband, multiservice communications over wireline, wireless, cable and enterprise networks. Professional services are used to plan, deploy and maintain communications networks that deliver high-speed Internet, data, video and voice services.

     As a result of our KRONE acquisition, we implemented reporting at a regional level in addition to reporting at a business unit level during fiscal 2005. Business unit level reports present results through contribution margin. Regional level reports present fully allocated results to the operating income level, before restructuring costs. For presentation purposes, we have deducted allocations of regional and corporate costs from contribution margin in order to arrive at fully allocated operating income for segment disclosures. These allocations were made based on associated revenues. Assets are not allocated to the segments.

     Intersegment sales of $9.5 million and $30.0 million and operating income of $6.2 million and $19.6 million are eliminated from Professional Services for the three and nine months ended July 28, 2006, respectively. Additionally, intersegment sales of $11. 9 million and $35.5 million and operating income of $7.6 million and $23.2 million are eliminated from Professional Services for the three and nine months ended July 29, 2005, respectively. These intersegment sales primarily represent products of Broadband Infrastructure and Access sold by the Professional Services segment.

     The following table sets forth net sales information for each of our functional operating segments:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Broadband Infrastructure and Access:
Infrastructure Products (Connectivity)		$	267.5			$	217.0			$	755.1			$	592.2
Access Products (Wireline and Wireless)			25.6				42.4				72.4				102.2
Total Broadband Infrastructure and Access			293.1				259.4				827.5				694.4
Professional Services			50.5				47.6				147.0				142.4
Total		$	343.6			$	307.0			$	974.5			$	836.8

     The following table sets forth certain financial information for each of our functional operating segments:

		Broadband
		Infrastructure				Professional
		and Access				Services				Consolidated
		(In millions)
Three Months Ended July 28, 2006
External sales:
Products		$	293.1			$	14.4			$	307.5
Services			—				36.1				36.1
Total external sales			293.1				50.5				343.6
Contribution margin			73.0				5.1				78.1
Depreciation and amortization			14.7				1.8				16.5
Operating income (loss)		$	25.4			$	(1.4	)		$	24.0
Three Months Ended July 29, 2005
External sales:
Products		$	259.4			$	14.2			$	273.6
Services			—				33.4				33.4
Total external sales			259.4				47.6				307.0
Contribution margin			85.2				4.0				89.2
Depreciation and amortization			12.1				2.3				14.4
Operating income (loss)		$	39.3			$	(3.4	)		$	35.9

		Broadband
		Infrastructure				Professional
		and Access				Services				Consolidated
		(In millions)
Nine Months Ended July 28, 2006
External sales:
Products		$	827.5			$	42.8			$	870.3
Services			—				104.2				104.2
Total external sales			827.5				147.0				974.5
Contribution margin			198.6				14.9				213.5
Depreciation and amortization			44.2				6.1				50.3
Operating income (loss)		$	56.1			$	(9.3	)		$	46.8
Nine Months Ended July 29, 2005
External sales:
Products		$	694.4			$	44.1			$	738.5
Services			—				98.3				98.3
Total external sales			694.4				142.4				836.8
Contribution margin			224.0				14.9				238.9
Depreciation and amortization			34.2				7.2				41.4
Operating income (loss)		$	81.2			$	(8.1	)		$	73.1

Regional Information

     The following table sets forth operating income by region for the three and nine months ended July 28, 2006 and July 29, 2005. Operating income by region is allocated fully for all costs except restructuring costs.

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Americas (United States, Canada and Central and South America)		$	21.1			$	24.2			$	42.7			$	54.6
EMEA (Europe, Middle East and Africa)			3.5				7.8				3.5				16.6
Asia Pacific (China, Korea, Australia, India, Japan and Southeast Asia)			2.9				4.1				7.3				8.0
Operating income before restructuring costs			27.5				36.1				53.5				79.2
Restructuring costs			(3.5	)			(0.2	)			(6.7	)			(6.1	)
Operating income after restructuring costs		$	24.0			$	35.9			$	46.8			$	73.1

   Geographic Information

     The following table sets forth certain geographic information concerning our U.S. and foreign sales and ownership of property and equipment:

Geographic Sales Information:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Inside the United States		$	208.9			$	180.6			$	584.6			$	476.1
Outside the United States:
Asia Pacific (China, Korea, Australia, India, Japan and Southeast Asia)			27.7				28.0				77.7				74.9
EMEA (Europe (excluding Germany), Middle East and Africa)			50.5				33.0				131.6				97.5
Germany			32.0				41.5				112.1				127.6
Americas (Canada, Central and South America)			24.5				23.9				68.5				60.7
Total		$	343.6			$	307.0			$	974.5			$	836.8
Property and Equipment, Net:
Inside the United States		$	136.3
Outside the United States			74.0
Total		$	210.3

Note 13 — Restructuring and Impairment Charges:

     During the three and nine month periods ending July 28, 2006 and July 29, 2005, we incurred restructuring charges associated with workforce reductions as well as the consolidation of excess facilities. The restructuring charges are adjusted to exclude activities specifically related to discontinued operations. For the three and nine months ended July 28, 2006 and July 29, 2005 the restructuring charges by category were:

		Three Months Ended								Nine Months Ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Employee severance		$	1.3			$	(1.1	)		$	3.7			$	2.5
Facilities consolidation and lease termination			2.0				1.3				2.2				3.5
Fixed asset impairments			—				—				0.6				0.1
Other			0.2				—				0.2				—
Total restructuring and impairment charges		$	3.5			$	0.2			$	6.7			$	6.1

     We incurred impairment charges of $0.6 million for the nine months ended July 28, 2006 related to property and equipment as a result of our continued consolidation of excess facilities.

     Restructuring charges relate principally to employee severance costs and facility consolidation costs resulting from the closure of facilities and other workforce reductions attributable to our efforts to reduce costs. During the three and nine months ended July 28, 2006, a total of 44 and 123 employees, respectively, were impacted by reductions in force. These reductions were principally in our Broadband Infrastructure and Access segment. During the three and nine months ended July 29, 2005, a total of 17 and 73 employees, respectively, were impacted by reductions in force. These reductions also were principally in our Broadband Infrastructure and Access segment.

     Facility consolidation and lease termination costs represent costs associated with our decision to consolidate and close duplicative or excess manufacturing and office facilities. During the three and nine months ended July 28, 2006, we incurred charges of $2. 0 million and $2.2 million, respectively, related to facility consolidations. These charges primarily related to the lease on our Richmond facility which was restructured in 2004. This charge was the result of lower sublease income than we previously expected from subleases signed in May 2006. For the three and nine months ended July 29, 2005, we incurred charges of $1.3 million and $3.5 million, respectively. The charges primarily were due to lower sublease income caused by a continued softening of real estate markets and principally impacted our Broadband Infrastructure and Access segment.

     The following table provides details on our restructuring activity and the remaining accrual balance by category as of July 28, 2006:

						Continuing
		Accrual				Operations Net				Cash Payments				Accrual
Type of Charge		October 31, 2005				Additions				Charged to Accrual				July 28, 2006
						(In millions)
Employee severance costs		$	5.0			$	3.7			$	5.7			$	3.0
Facilities consolidation			24.6				2.2				9.8				17.0
Total		$	29.6			$	5.9			$	15.5			$	20.0

     Included in the October 31, 2005 accrual balance of $29.6 million is $0.3 million related to accruals acquired with the KRONE acquisition, substantially all of which were paid as of July 28, 2006.

     We expect that substantially all of the remaining $3.0 million accrual relating to employee severance costs as of July 28, 2006 will be paid from unrestricted cash by the end of the second quarter of fiscal 2007. Of the $17.0 million for the consolidation of facilities, we expect that approximately $5.1 million will be paid from unrestricted cash by the end of second quarter of fiscal 2007 and the balance will be paid from unrestricted cash over the respective lease terms of the facilities through 2015. Based on our intention to continue to consolidate and close duplicative or excess manufacturing operations in order to 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 operating results.

Note 14 — Other Income, Net:

     Other income, net consists of the following:

		Three months ended								Nine months ended
		July 28,				July 29,				July 28,				July 29,
		2006				2005				2006				2005
		(In millions)								(In millions)
Interest income on investments		$	6.1			$	5.8			$	15.4			$	13.4
Interest expense			(6.2	)			(3.0	)			(12.9	)			(8.2	)
Interest income (expense), net			(0.1	)			2.8				2.5				5.2
Foreign exchange income (loss)			(0.1	)			0.3				1.3				1.2
Gain on sale of note receivable			—				—				—				9.0
Gain (loss) on sale of fixed assets			0.6				0.1				(0.1	)			4.5
Other			1.9				(0.1	)			3.5				0.6
Non-operating income, net			2.4				0.3				4.7				15.3
Total other income, net		$	2.3			$	3.1			$	7.2			$	20.5

     Interest expense for the three and nine months ended July 28, 2006, includes $2.4 million for interest due on prior year income taxes.

     During fiscal 2006, other includes a $2.8 million reversal of a reserve for a customs tax contingency recorded in purchase accounting in connection with the KRONE acquisition.

     During the first quarter of fiscal 2005, fully reserved notes receivable of $15.8 million were sold. The sale resulted in a gain on sale of $9.0 million. During fiscal 2005, we recorded a $4.5 million gain on sale of fixed assets related to the sale of various buildings.

Note 15 — Commitments and Contingencies:

     Legal Contingencies: On May 19, 2003, we were served with a lawsuit that was filed in the United States District Court for the District of Minnesota. The complaint named ADC and several of our current and former officers, employees and directors as defendants. After this lawsuit was served, we were served with two substantially similar lawsuits. All three of these lawsuits were consolidated into a single lawsuit captioned In Re ADC Telecommunications, Inc. ERISA Litigation. This lawsuit was brought by individuals who sought to represent a class of participants in our Retirement Savings Plan who purchased our common stock as one of the investment alternatives under the Retirement Savings Plan from February 2000 through at least October 2005. The lawsuit alleged a breach of fiduciary duties under the Employee Retirement Income Security Act. On October 26, 2005, after mediation, the parties settled the case subject to various approvals, including approvals from an independent fiduciary and the court. In agreeing to settle this matter, ADC has made no admission of liability or wrongdoing. Under the terms of the pending settlement, ADC agreed to pay $3.25 million, which includes attorneys’ fees and expenses and all administrative fees. Payment of the settlement amount is expected to be covered by ADC’s insurance. Therefore, based on the conditional agreement, we do not expect the resolution of this matter to have a material impact on our financial statements.

     We are a party to various other lawsuits, proceedings and claims arising in the ordinary course of business or otherwise. Many of these disputes may be resolved without formal litigation. The amount of monetary liability resulting from the ultimate resolution of these matters cannot be determined at this time. As of July 28, 2006, we had recorded approximately $5.4 million in loss reserves for certain of these matters. In light of the reserves we have recorded, at this time we believe the ultimate resolution of these lawsuits, proceedings and claims will not have a material adverse impact on our business, results of operations or financial condition. Because of the uncertainty inherent in litigation, however, it is possible that unfavorable resolutions of one or more of these lawsuits, proceedings and claims could exceed the amount currently reserved and could have a material adverse affect on our business, results of operations or financial condition.

     Income Tax Contingencies: Our effective tax rate is impacted by reserve provisions and changes to reserves that we consider appropriate. We establish reserves when, despite our belief that our tax returns reflect the proper treatment of all matters, we believe that the treatment of certain tax matters is likely to be challenged and that we may not ultimately be successful.

     Significant judgment is required to evaluate and adjust the reserves in light of changing facts and circumstances, such as the progress of a tax audit. Further, a number of years may lapse before a particular matter for which we have established a reserve is audited and finally resolved. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies.

     Other Contingencies: As a result of the divestitures discussed in Note 4, we may incur charges related to obligations retained based on the sale agreements. At this time, none of those obligations are probable or estimable.

     Change of Control: Our board of directors has approved the extension of certain employee benefits, including salary continuation to key employees, in the event we undergo a change of control.

16 — Subsequent Event — Andrew Corporation Merger:

     On May 30, 2006, we entered into a definitive merger agreement with Andrew Corporation for an all-stock merger transaction pursuant to which Andrew would have become a wholly owned subsidiary of ADC.

     On August 9, 2006 ADC and Andrew entered into a definitive agreement to mutually terminate the merger agreement. To effect the mutual termination, Andrew paid ADC a fee of $10.0 million and has agreed to pay ADC an additional fee of $65 million in the event that an acquisition of Andrew is consummated within twelve months of the date of the termination agreement. The termination agreement further provides for the mutual release of any claims in connection with the merger agreement. Please see our 8-K filed on August 10, 2006 for a description of the termination agreement. We have capitalized $3.4 million of merger-related costs, consisting primarily of financial and legal advisory fees and a fairness opinion. In addition, we expect to incur additional expenses of approximately $2.5 million related primarily to financial advisory fees. These costs will be charged to expense during our fourth quarter and offset by the $10.0 million termination fee.

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

Overview

     We are a leading global provider of communications network infrastructure solutions and services. Our products and services provide connections for communications networks over copper, fiber, coaxial and wireless media and enable the use of high-speed Internet, data, video and voice services by residences, businesses and mobile communications subscribers. Our products include fiber optic, copper and coaxial based frames, cabinets, cables, connectors, cards and other physical components essential to enable the delivery of communications for wireline, wireless, cable, and broadcast networks by service providers and enterprises. Our products also include network access devices such as high-bit-rate digital subscriber line and wireless coverage solutions. Our products are primarily used in the “last mile/kilometer” portion of networks. These networks of copper, coaxial cable, fiber lines, wireless facilities and related equipment link voice, video and data traffic from the end-user of the communications service to the serving office of our customer. In addition, we provide professional services relating to the design, equipping and building of networks. The provision of such services allows us additional opportunities to sell our hardware products, thereby complementing our hardware business.

     Our customers include local and long-distance telephone companies, private enterprises that operate their own networks, cable television operators, wireless service providers, new competitive service providers, broadcasters, governments, system integrators and communications equipment manufacturers and distributors. We offer broadband connectivity systems, enterprise systems, wireless transport and coverage optimization systems, business access systems and professional services to our customers through the following two reportable business segments:

•		Broadband Infrastructure and Access; and
•		Professional Services.

     Our Broadband Infrastructure and Access business provides network infrastructure products for wireline, wireless, cable, broadcast and enterprise network applications. These products include:

•		connectivity systems and components that provide the infrastructure to networks to connect Internet, data, video and voice services over copper, coaxial and fiber-optic cables; and
•		access systems used in the last mile/kilometer of wireline and wireless networks to deliver high-speed Internet, data and voice services.

     Our Professional Services business provides integration services for broadband, multiservice communications over wireline, wireless, cable and enterprise networks. Professional services are used to plan, deploy and maintain communications networks that deliver Internet, data, video and voice services.

Marketplace Conditions

     In recent years, our industry has experienced modest overall spending increases from the historical low levels reached in fiscal 2001 through fiscal 2003. The prices at which we and other companies in our industry are able to sell many products, however, increasingly are subject to substantial pricing pressures that can reduce margins. As a result, even if companies succeed in increasing revenues they may not have the ability to increase profits correspondingly. We believe that to succeed in this type of business environment it is imperative that we not only find ways to increase revenues but also to become more cost efficient.

     We believe the communications industry is in the midst of a multi-year migration to next-generation networks. Among other changes, fiber optic networks are being deployed beyond the central office and closer to the ultimate service user and wireless networks are offering broadband services. These transformations are taking place largely because service providers are in fierce competition to win and retain customers and therefore attempt to offer a broader array of services at lower, often flat rate, prices. Competitive pressures are causing consolidation among service providers as they seek to gain greater scale and the ability to offer a greater breadth of wireline and wireless products. In this environment of network transformation and customer consolidation, we expect overall spending on communications equipment and services to increase. However, the increased buying power held by larger customers, who because of consolidation have fewer competitors, is likely to place pressure on the prices at which equipment vendors like us can sell products and services. Further, we believe that consolidation among our customers is likely to cause spending deferrals in the short-term while combined companies focus on integration activities. Ultimately, the rate at which our customers respond to each other’s competitive threats, the buying power they likely are to gain from consolidation and the products they elect to purchase will impact the sales growth and places pressure on the profit margins of equipment vendors.

     With respect to our business, the spending increases by our customers since fiscal 2003 have been focused primarily in specific areas such as FTTX and related fiber initiatives or on projects by enterprise customers. Products in these areas of potential revenue growth generally have lower margins than many of our historical revenue sources such as our copper connectivity products for central office infrastructure. Moreover, spending increases often reflect project-based sales, which have caused significant fluctuations in our financial results from quarter to quarter. We also believe that increases in spending in certain product areas can cause corresponding decreases in spending in other product areas. For instance, spending increases on FTTX and related fiber initiatives in recent years appear to have impacted spending adversely on other wireline initiatives. Finally, as these products are utilized in emerging next-generation networks, the deployment rates of these products can vary significantly from customer to customer. Among other things, these deployment rates can depend upon how quickly the customer is committed to constructing these networks as well as the degree to which a customer’s network architecture requires the use of a product.

     In fiscal 2005, the growth of our sales outpaced sales growth in our industry generally and achieving this level of growth has been one of our primary goals for fiscal 2006. We now believe our sales in fiscal 2006 will increase at a level consistent with the growth rate experienced generally within our industry. We believe there are two primary reasons for this slowed rate of growth. First, we believe one or more of our FTTX customers has become more efficient in their use of FTTX products in fiscal 2006 such that they need to buy less product to reach the same number of subscribers versus what was needed in fiscal 2005. Second, as customers have consolidated in significant business combinations, we believe they have deferred certain spending decisions while they focus on integration activities.

     Despite this, longer-term, we expect to continue seeing spending growth for our products, driven primarily by products for broadband initiatives as well as for enterprise products. Our ability to take advantage of any spending increases will depend on the acceptance of such products as our fiber connectivity for central offices and FTTX, our TrueNet^® and CopperTen™ structured cabling solutions, our Digivance wireless coverage and our WiFi and WiMax solutions.

     In addition to the need for revenue growth, we believe we must become more cost efficient in order to increase profitability on a consistent basis. We therefore focus aggressively on ways to conduct our operations more efficiently. For example, we intend to centralize our administrative functions for each geographic region and to effect other restructurings to better streamline our operations. In addition, we are still realizing cost synergies from our acquisitions of KRONE and FONS that were completed in fiscal 2004 and fiscal 2005, respectively.

     Our business is dependent largely on sales to telecommunications service providers, though our entry into enterprise markets in recent years has mitigated this dependence to some degree. Telecommunications service provider customers remain the focal point of our business and for the nine months ended July 28, 2006, our top five customers in that industry accounted for 36.7% of our revenue.

     We believe our expansion in recent periods into markets for FTTX, wireless and enterprise products has changed the historical seasonality of our business. We expect future sales in our first fiscal quarter will be lower than in other quarters. This is because of the number of holidays in that quarter and the development of annual capital spending budgets that many of our customers undertake during that time frame. In addition, in fiscal 2005 our sales in the fourth quarter were sequentially lower than third quarter sales in part due to customer inventory build-ups, a situation that we also expect to occur in fiscal 2006.

     We expect the consolidation that is taking place among our customers ultimately will result in significant consolidation in our industry as well. Our acquisition of KRONE in fiscal 2004 greatly enhanced our global footprint and provided us with an entry into the enterprise marketplace. Our recent attempt to merge with Andrew Corporation, which was terminated primarily over recent stock market concerns regarding the ability to obtain necessary shareholder approval, also was predicated on our belief that it is appropriate for companies in our industry to consolidate in order to gain greater scale and position themselves to offer a broader array of products. We continue to believe there could be circumstances under which it would be appropriate for us to acquire or combine with other significant vendors in our industry. We also intend to explore smaller scale product line or business acquisitions that are complementary to our business. Our acquisitions in the past two years of both FONS, which has enhanced our FTTX offerings, and OpenCell, which has enhanced the capabilities of our wireless Digivance offerings, are examples of this strategy. We expect to fund potential acquisitions with existing cash resources, the issuance of shares of common or preferred stock, the issuance of debt or equity-linked securities or through some combination of these alternatives. Finally, we continue to monitor all of our businesses and product lines and may determine that it is appropriate to sell or otherwise dispose of certain operations. For instance, we have recently determined that we will attempt to sell our APS France services business.

     A more detailed description of the risk factors associated with our business can be found in Item 1A of our Annual Report on Form 10-K for the year ended October 31, 2005 and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended January 27, 2006 and April 28, 2006.

Results of Operations

Net Sales

     The following table sets forth our net sales for the three and nine months ended July 28, 2006 and July 29, 2005 for each of our segments:

		Three Months Ended
		July 28, 2006								July 29, 2005
		Net Sales				%				Net Sales				%
		(In millions)								(In millions)
Broadband Infrastructure and Access		$	293.1				85.3	%		$	259.4				84.5	%
Professional Services:
Product			14.4				4.2	%			14.2				4.6	%
Service			36.1				10.5	%			33.4				10.9	%
Total Professional Services			50.5				14.7	%			47.6				15.5	%
Total		$	343.6				100.0	%		$	307.0				100.0	%