SEE ACCOMPANYING NOTES

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NOTES:

NOTES:

(Amounts in thousands, except share and per share data)

During fiscal year 2004, we identified certain cash equivalents and short-term investments which were misclassified. We have reclassified $12,904 and $27,514 from Cash and cash equivalents to Short-term investments at January 2, 2004 and June 27, 2003, respectively. The Consolidated Statements of Cash Flows for the six months ended January 2, 2004 has been restated to reflect these adjustments.

Scientific-Atlanta’s fiscal year ends on the Friday closest to June 30 of each year. Fiscal year 2004,2005, which ends on July 2, 2004,1, 2005, will include fifty threefifty-two weeks. The second quarter of fiscal year 20042005 and 20032004 each included thirteen weeks. The six months ended January 2,December 31, 2004 included twenty seventwenty-six weeks while the six months ended December 27, 2002January 2, 2004 included twenty sixtwenty-seven weeks.

Basic and diluted earnings per share are computed as follows:

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The following information pertains to options to purchase shares of common stock which were not included in the computation of diluted earnings per common share because the option’s exercise price was greater than the average market price of the common shares:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model which resulted in a weighted-averageweighted average fair value of $19.09$14.21 and $7.87$19.09 per option for grants in the second quarter of fiscal years 2005 and 2004, respectively, and 2003,$15.28 and $19.84 and $7.93 per option for grants in the six months ended December 31 and January 2, 2004, and December 27, 2002, respectively. The following weighted-average assumptions were used in the pricing model for grants in the three and six months ended December 31, 2004 and January 2, 2004 and December 27, 2002:2004:

We periodically compare our assumptions used in the pricing model for stock option grants with historical trends. During the second quarter of fiscal year 2005, we determined that the expected term of our stock option grants was 4.7 years rather than 5.0 years and we have adjusted our assumptions accordingly.

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Other income of $2,208 for the three months ended January 2, 2004 included a gain of $6,755 from the sale of shares of Kabelnetz NRW Limited (Kabelnetz), which had been received as part of the termination settlement with German cable operator ish GmbH & Co. KG (ish) in the second quarter of fiscal year 2003, foreign exchange gains, gains from the increase in the cash surrender value of life insurance and gains from various other items, none of which was individually significant. We also recorded a loss of $6,147 from the settlement of purchase price adjustments, which included a cash payment of $9,000, related to the sale of the satellite networks business to ViaSat, Inc. (ViaSat), of which $2,853 had been previously reserved for.

In addition to the gain from the sale of shares of Kabelnetz and the loss from the settlement of purchase price adjustments with ViaSat described above, other income of $1,307 for the six months ended January 2, 2004 included a gain of $1,907 from the sale of a marketable security, charges of $1,831 from other-than-temporary declines in the value of investments in privately-held companies, foreign exchange losses and losses from various other items, none of which was individually significant.

Other expense of $6,604 for the quarter ended December 27, 2002 included $6,465 of losses from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies. Other expense of $12,118 for the six months ended December 27, 2002 included losses of $11,042 from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies and $1,899 from the decline in the cash surrender value of life insurance. These losses were partially offset by net gain of $2,491 from the settlement of a collar on a warrant to purchase common stock of a public company and the related warrant. There were no other significant items in other (income) expense for the three or six months ended December 27, 2002.

During the first quarter of fiscal year 2005, we made a contribution of $3,594 to the defined benefit pension plan. We believe no additional contributions will be made to the defined benefit pension plan in fiscal year 2005.

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We also have unfunded defined benefit retirement plans for certain key officers and non-employee directors. Pension expense for these plans consists of the following:

In addition to providing pension benefits, we acquiredhave contributory plans that provide certain health care and life insurance benefits to retired employees. The components of postretirement benefit expense consist of the software, technology and other assets of ChanneLogics, Inc. (ChanneLogics) for $1,600 of cash. The acquired assets were recorded at their estimated fair value at the date of acquisition. The purchase price of ChanneLogics has been allocated to the assets acquired including $539 of goodwill and $550 of other identifiable intangible assets (primarily existing technology, which are being amortized over varying periods of up to five years).following:

In July 2002, we acquired a portion of the shares held by the minority shareholders of PowerTV, Inc., a majority-owned subsidiary, for $4,580 of cash. The entire purchase price was recorded as goodwill.

During the six months ended January 2,December 31, 2004, severance costs of $1,193$23 were paid to approximately 40 employees whose positions had been eliminated under the restructuring plan.

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The following reconciles the beginning restructuring liability at June 27, 2003July 2, 2004, which consisted of an accrual for contractual obligations under a canceled lease, to the restructuring liability at January 2,December 31, 2004:

Since the initiation of these restructurings, we have incurred expenses of $5,857$5,898 from the write-off of fixed assets, $6,625$6,519 from contractual obligations under canceled leases, $27,411$27,517 from severance and $7,030$6,989 from other miscellaneous costs.

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We offer extended warranties on certain products. Revenue from these extended warranty agreements is deferred at the time of the sale and recognized in future periods according to the terms of the warranty agreement. The warranty liability at January 2,December 31, 2004 consisted of $13,276$15,562 in Accrued liabilities and $20,757$26,004 in Other liabilities in the Consolidated Statements of Financial Position.

The following reconciles the beginning warranty liability at June 27, 2003July 2, 2004 to the warranty liability at January 2,December 31, 2004:

Other adjustments include changes in failure rates and costs to repair and adjustments for products whose warranty has expired.

The effective tax rate for the three months ended December 31, 2004 was 30 percent of pre-tax earnings, down from 35 percent in the prior year, due primarily to various discrete items in the quarter, the most significant of which was the reversal of valuation allowances on certain deferred tax assets. During the quarter ended December 31, 2004, we determined that valuation allowances on deferred tax assets related to net operating loss carryforwards generated by certain operations in Europe were no longer needed due to the recent and projected profitability of these operations. In addition, the second quarterrate was favorably impacted by the legislative, retroactive reinstatement, on October 4, 2004, of the research tax credit to June 30, 2004.

We believe that our effective tax rate will be approximately 33 percent of pre-tax earnings for fiscal year 2004, we identified transactions which had resulted in charges to paid in capital in excess of credits from treasury stock transactions and reclassified $31,131 from paid in capital to retained earnings. This reclassification of $31,131 included $10,507 and $20,624 related to treasury stock transactions in fiscal years 2004 and 2003, respectively.2005.

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In addition to our annual impairment test, Scientific-Atlanta continually evaluates whether events and circumstances have occurred that indicate that the remaining balance of goodwill may not be recoverable. The results of our assessments did not result in any determination of an impairment of goodwill during the first six months of fiscal year 2005.

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Adelphia Communications Corporation (Adelphia), a significant customer of Scientific-Atlanta, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in June 2002. In the third quarter of fiscal year 2002, during the 90 days prior to such filing by Adelphia, we received payments from Adelphia for goods sold and delivered of approximately $67,000. We$67,000, and we are unable to predict the portion, if any, of this amount which might be the subject of avoidance claims by the Chapter 11 estate of Adelphia in connection with its bankruptcy proceeding. During fiscal year 2004, we entered into a tolling agreement for any potential claims by the Adelphia estate where the statute of limitation has not yet run.

FSPIn December 2004, the FASB issued SFAS No. 106-1 provides guidance related123R, “Share-Based Payment,” which requires all companies to the accountingmeasure compensation cost for and disclosure of,all share-based payments, including the deferral of recognition of, a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that isemployee stock options, at least actuarially equivalent to Medicare Part D provided under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the ACT). FSP No. 106-1 isfair value effective for public companies for interim or annual financial statements of fiscal years ending after December 7, 2003. We are currently evaluating the impact of the ACT and the alternatives provided in FSP No. 106-1. We are unable to predict at this time the impact of the ACT and the provisions of FSP No. 106-1 on our results of operations or financial position.

SFAS No. 132 requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost of defined benefit plans and other postretirement benefit plans. The provisions of this Statement are effective for fiscal years ending after December 15, 2003 and for interim periods beginning after December 15, 2003. We plan to adopt the interim period disclosure provisions of SFAS No. 132 in the third quarter of fiscal year 2004.

Interpretation No. 46 addresses the consolidation by a reporting entity of variable interest entities with certain characteristics. This Interpretation was effective in January 2003 for variable interest entities created after January 31, 2003 and in the first fiscal year or interim period beginning after June 15, 2003. The FASB has issued FSPs which have deferred the effective date for applying the provisions of Interpretation2005. Scientific-Atlanta will adopt SFAS No. 46 for interests in certain variable interest entities or potential variable interest entities created before February 1, 2003 until the end of the first interim period ending after March 15, 2004. These FSPs also require certain disclosures about variable interest entities and potential variable interest entities.

We are still assessing the impact of Interpretation No. 46 on arrangements that we have with certain entities and therefore, are deferring the application of its provisions until the third quarter of fiscal year 2004. We have tentatively identified two entities that might require consolidation as variable interest entities under the provisions of Interpretation No. 46. One entity is a limited liability company, in which we have an equity interest, which licenses certain technology, receives a commission and remits the residual to the intellectual property owners. During the first six months of fiscal year 2004 and 2003, we made royalty payments of $4,743 and $4,349, respectively, to this company and received royalty payments of $4,965 and $5,974, respectively, from this company. We also recorded our equity in the income of the company of $483 and $500 in the first six months of fiscal years 2004 and 2003, respectively. Our equity investment in this limited liability company was $0 at January 2, 2004.

The second entity, Scientific-Atlanta of Shanghai, Ltd. (SASL), is a partially-owned subsidiary of Scientific-Atlanta that manufactures certain transmission products. During the first six months of fiscal years 2004 and 2003, we purchased $2,418 and $812, respectively, of transmission products from this subsidiary. We also sold $1,052 and $527 of components for transmission products to this company during the first six months of fiscal years 2004 and 2003, respectively. In addition, we recorded income of $241 in the first six months of fiscal year 2004 and losses of $179 in the first six months of fiscal year 2003 from our equity in the net earnings and losses of this company. Our equity investment in SASL was $2,232 at January 2, 2004.

Based on our initial assessment of the impact of Interpretation No. 46, we believe that our equity investment in each of these entities constitutes our maximum exposure to loss at January 2, 2004 from our involvement with the entity.

EITF No. 00-21 provides guidance on determining units of accounting in a revenue arrangement with multiple deliverables and the allocation of the consideration received from the arrangement. EITF No. 00-21, which was effective for revenue arrangements entered into in the first annual or interim period after June 15, 2003, was adopted123R in the first quarter of fiscal year 2004. The2006 using a modified version of prospective application.

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, recognize no compensation cost for employee stock options. Accordingly, the adoption of EITFSFAS No. 00-21 did not123R’s fair value method could have a significant impact on the recognitionour result of revenue or resultoperations. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the deferralfuture. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note C to our consolidated financial statements. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a significantfinancing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of revenueoperating cash flows recognized in prior periods for such excess tax deductions were $1,241 and $1,670 for the three and six months ended December 31, 2004, respectively, and $557 and $11,078 for the three and six months ended January 2, 2004, respectively.

The FASB also recently issued FSP No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” and FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (the Act). Under the guidance in FSP No. FAS 109-1, the deduction will be treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the firstperiod in which the deduction is claimed on our income tax return. FSP No. FAS 109-2 allows enterprises time beyond the financial reporting period of the enactment of the Act to evaluate the effects of the Act on its plan for reinvestment or second quartersrepatriation of fiscal year 2004.

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In EITF Issueapplying SFAS No. 03-5, the EITF concluded that, in an arrangement that includes software that is more than incidental109 due to the products or services aslack of clarification of certain provisions within the Act and the timing of the enactment. As such, we are not yet in a whole,position to decide on whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the software and software-related elements are includedU.S. Based on our analysis to date, however, it is reasonably possible that we may repatriate some amount ranging from $0 to $60,000, with the respective tax benefit ranging from $0 to $3,000. We expect to be in the scope of Statement of Position (SOP) 97-2, “Software Revenue Recognition.” EITF Issue No. 03-5, which was adopted in the second quarter of fiscal year 2004, was effective for arrangements entered into in the first annual or interim reporting period after August 13, 2003. The adoption of EITF Issue No. 03-5 did not have a significant impact on the recognition of revenue or result in the deferral of a significant amount of revenue in the second quarter of fiscal year 2004.position to finalize our assessment by December 31, 2005.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Sales for the three months ended January 2,December 31, 2004 were $416.6$441.7 million, an increase of 186 percent fromover the comparable quarterperiod of the prior year. The year-over-year increase was driven by higher sales volume of Explorer^® digital set-tops, including our Explorer 8000 set-top,certain models which provide digital video recording and / or high-definition functionality. Gross margins of 37.837.1 percent improved 6.2were 0.7 percentage points overlower than the prior yearyear. Operating expenses increased $1.2 million due primarily to the higher levelincremental hiring of sales volume, material cost reductionsengineers related to new set-top designs. The increase in research and improved efficienciesdevelopment expense was offset in manufacturing. The settlement with German cable operator ish discussed below negatively impacted gross marginspart by approximately $6.5 million, or 2.3 percentage points. Operating expenses declined slightly due primarily to lower restructuring costs in the second quarter of fiscal year 20042005 as compared to the prior year. Net earnings for the three months ended January 2,December 31, 2004 of $51.1$58.7 million were $36.0$7.6 million higher than the prior year due todriven primarily by the higher sales volume and improved gross marginslower effective tax rate in the second quarter of fiscal year 20042005 as compared to the prior year.

During the second quarter, we engaged in substantive discussions with Gemstar – TV Guide International, Inc. (Gemstar) regarding a possible settlement and cross-licensing agreement. No agreement has been reached at this time. If circumstances were to change during the third quarter of fiscal year 2005, we may include, as a result of any settlement, an additional expense or charge in our results of operations for the third quarter of fiscal year 2005. At this time, we can not assess the probability of a settlement and there can be no assurance as to the outcome of these settlement agreements.

FINANCIAL CONDITION AND LIQUIDITY

WeScientific-Atlanta had stockholders’ equity of $1.6$1.9 billion and cash on hand was $450.5$339.6 million at January 2, 2004. Cash increased $90.7 million during the first six months of fiscal yearDecember 31, 2004. Cash provided by operating activities for the six months ended January 2,December 31, 2004 of $118.2$130.1 million included net earnings of $93.8$114.6 million and increases indepreciation and amortization of $40.4 million. During the six months ended December 31, 2004, we received $22.7 million of income taxes payable of $23.7 milliontax refunds and in accounts payable and accrued liabilities of $13.9 million.related interest from a federal income tax settlement for certain fiscal years prior to 2003. These receipts were offset partially by increases in accounts receivable of $47.2$9.2 million and gainsa reduction in accrued liabilities of $18.8 million. The increase in accounts receivable relates primarily to the timing of payments from customers in the first six months of fiscal year 2005 as compared to July 2, 2004. Accrued expenses decreased primarily due to the payment of fiscal year 2004 incentives on the sale of marketable securities and investments in privately-held companies of $9.2 million.performance-based plans.

During the six months ended December 31, 2004, we increased our short-term investments by $58.6$120.6 million and acquired machineryproperty, plant and equipment for $11.6$58.1 million, received proceedsincluding a cash payment of $13.6$36.0 million fromfor the salepurchase of marketable securities and made a $9.0 million payment to settle purchase price adjustments related to the sale of the satellite networks businesses to ViaSat.buildings we had previously leased at our office site in Lawrenceville, Georgia. We also received $41.4 million from the issuancepurchased 1,836,600 shares of our common stock under our employee stock option and other benefit plans.at an aggregate cost of $50.7 million pursuant to a program announced in February 2003 to buy back up to 10,000,000 shares.

The current ratio of Scientific-Atlanta was 5.2:6.7:1 at January 2,December 31, 2004, up from 4.8:5.6:1 at June 27, 2003.July 2, 2004. At January 2,December 31, 2004, we had debt of $10.3$9.2 million, primarily mortgages on facilities we assumed in connection with the acquisition of BarcoNet NV (BarcoNet) during fiscal year 2002.

We believe that funds generated from operations, and existing cash balances and our available senior credit facility will be sufficient to support operations and fund capital expenditures. We do not anticipate borrowing on our available senior credit facility to support operations or fund capital expenditures.operations.

RESULTS OF OPERATIONS

Sales for the quarter ended December 31, 2004 were $441.7 million, up 6 percent or $25.1 million over the prior year. International sales for the second quarter of fiscal year 2005 were $116.1 million, up 27 percent over the prior year. Year-over-year international sales were up in all regions except the Asia / Pacific region.

Sales of subscriber products for the quarter ended January 2,December 31, 2004, increased 2911 percent from the prior year’s second quarter to $296.2$327.6 million. In the second quarter of fiscal year 2004,2005, we sold 958911 thousand Explorer digital set-tops as compared to 804958 thousand in the prior year. The 958 thousand digital set-tops sold included 260 thousand Explorer 8000 set-tops, an increase from 31 thousand sold the second quarter of the prior year. During the second quarter of fiscal year 2004,2005, we also sold 226460 thousand WebSTAR^™ cable modems, up from 189226 thousand in the prior year. Sales of transmission products during the second quarter of fiscal year 2005 totaled $114.1 million, a decline of 5 percent from the prior year.

During the first quarter of fiscal year 2003, we shipped Explorer set-tops and associated headend equipment to Cablevision Systems Corporation (Cablevision), for which we deferred the recognition of approximately $18 million of sales, pending the execution of an agreement supplementing the original binding agreement. During the second quarter of last year, we executed a supplemental agreement with Cablevision which enabled us to recognize $16 million of the sales that had been previously deferred.

Also during the second quarter of the prior year, we reached an agreement with German cable operator ish related to work orders which had been suspended or cancelled during the fourth quarter of fiscal year 2002 and our exposure in accounts receivable and inventory related to ish. We received a cash payment of $22.0 million, notes denominated at $19.0 million which we sold for $11.5 million, and preferred equity in a newly formed entity, Kabelnetz. In connection with this transaction, we recorded sales of $4.4 million and charged $10.9 million to cost of sales for in-process inventory retained by ish. We also removed from backlog approximately $19 million of orders from ish. During the second quarter of fiscal yearended December 31, 2004, we sold 449 thousand set-tops with digital video recording capability (DVRs), including 256 thousand units of our standard-definition model and 193 thousand units of our high-definition DVR model. We also sold 111 thousand high-definition set-tops without DVR capability. Together with the shares in Kabelnetz and recognized a gain of $6.8 million from the transaction.high-definition DVRs

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Sales of transmission products duringmentioned previously, we sold 304 thousand high-definition set-tops in the quarter, ended January 2, 2004 totaled $120.3 million, approximately the same as in the comparable period of the prior year. Increased sales to customers in North America and Latin America were partially offset by a decline in sales to customers in Europe.

Because there is considerable cross-over between satellite products and certain transmission products as a result of the BarcoNet acquisition, and because bookings and sales of our satellite products have been consistently less than five percent of company totals, we have included satellite products together with transmission products.

International sales in the second quarter of fiscal year 2004 were $91.2 million, an increase of 21more than 200 percent fromcompared to the secondsame quarter of last year. The increase in international sales was due primarily to an increase in shipments to customers in Canada partially offset by a decline in shipments to customers in the Asia Pacific region.

Sales for the six months ended January 2,December 31, 2004 were $812.2$894.3 million, up 2210 percent from $663.6$812.2 million in the first six months of the prior year. Sales of subscriber products were $572.1$660.7 million, an increase of 3516 percent from the prior year. We sold approximately 1.9 million digital set-tops during the six months ended January 2,December 31, 2004, which was relatively flat compared to approximately 1.3 million during the first six months of the prior fiscal year. Included inOf the approximately 1.9 million digital set-tops shipped weresold, more than 437845 thousand Explorer 8000of the digital set-tops included digital video recording capability. This is an increase from approximately 123438 thousand Explorer 8000 digital set-tops shipped during the six months ended December 27, 2002.of last year. Sales of transmission products were $240.1$233.7 million, approximately the same as ina decline of 3 percent compared to the first six months of last year. International sales for the first six months of fiscal year 2005 totaled $172.2$214.2 million, an increase of 2up 24 percent fromcompared to the first six months last year. The increase from the prior year was due primarily to an increase in shipments to customers in both Canada andall regions except the Asia / Pacific region.

Gross margin in the second quarter of fiscal year 2005 was 37.1 percent of sales, a decline of 0.7 percentage points from the second quarter of last year. Lower selling prices in the quarter ended December 31, 2004 as compared to last year were partially offset by amaterial and conversion cost reductions. The combined average selling price of our digital set-tops increased approximately 13 percent in the second quarter of fiscal year 2005 compared to the second quarter of 2004. The increase in the combined average selling price of digital set-tops is attributable to the increase in the shipments of Explorer 8000 set-tops to more than 448 thousand units, up more than 72 percent from 260 thousand units sold in the second quarter of last year. Explorer 8000 digital set-tops, which have digital video recording capability, currently have an average selling price higher than other set-tops, and gross margins lower than the company average. Although the price of individual models of digital set-tops may decline in salesthe future, the average selling price of digital set-tops will vary based on the mix of models sold during the period. We continue to customers in Europefocus on cost reductions through product design, procurement and Latin America.manufacturing.

Gross margins were 37.8 percent of sales for the three months ended January 2, 2004, 6.2 percentage points higher than the comparable quarter of the prior year. During the second quarter of last year, the ish settlement discussed above negatively impacted gross margins by approximately $6.5 million, or 2.3 percentage points. The increase in gross margin percent relative to last year was primarily the result of the increase in sales volume, material cost reductions achieved through the re-design of products, increased effectiveness of procurement, and improved efficiencies in manufacturing. These improvements more than offset the negative impact of declines in the average selling price of products and the shift to a higher mix of Explorer 8000 digital set-top shipments, which have a gross margin lower than the company average. In addition, gross margins on transmission products in the three months ended January 2, 2004 improved over the prior year due primarily to favorable product mix, reductions in material costs and the consolidation of certain BarcoNet product lines into our Juarez, Mexico factory.

Gross margins were 37.536.8 percent of sales for the six months ended January 2, 2004, 3.7of fiscal year 2005, 0.7 percentage points higherlower than the prior year. The leverage associated with a 22 percent increasedecline from last year was related primarily to lower selling prices of digital set-tops across most set-top models in sales, coupled with the continued benefits of cost reductions through product redesign, the increased effectiveness of procurement, and improved manufacturing efficiencies, more than offsetaddition to the negative impact of shipping a greater number of Explorer 8000 digital set-tops that currently have a lower gross margin than the company average. In addition,Lower material and conversion costs coupled with the gross marginsleverage of transmission products improved during the first six months of this year compared to the prior year. This improvement was related primarily to ana 10 percent increase in the shipments of higher margin BarcoNet and traditional access products fromsales compared to the first six months of last year combined with material costs savings gained throughpartially offset the efficienciesnegative impact of procurementthe lower selling prices and other costs savings obtained fromhigher mix of Explorer 8000 digital set-top shipments relative to the various restructuring actions taken over thefirst six months of last eighteen months.year.

SalesResearch and administrativedevelopment expenses of $48.0 million and $96.0 million infor the three and six months ended January 2,December 31, 2004 were both$37.9 million and $76.2 million, respectively, up approximately the same as insix percent over the comparable periods of the prior year due to higher incentive accrualsyear. The primary driver of the year-to-year increases was incremental hiring related to our improved profitability which were offset by lower professional fees and reductions in amortization expense of intangible assets.

Research and development expenses for the quarter ended January 2, 2004 were $36.0 million, down slightly from the prior year. Research and development expenses for the six months ended January 2, 2004 were $71.3 million, down $5.3 million or 7 percent from the prior year. The year-over-year decline was due to higher capitalization of software development costs in the first six months of fiscal year 2004 as compared to the prior year and the benefits realized from previously announced restructurings. During the first six months of fiscal year 2004, we capitalized $9.8 million of software development costs, compared to $2.2 million in the comparable period of the prior year. The year-over- year increase in the capitalization of software development costs was driven primarily by increased development costs related to the Explorer 8300 Multi-Room^™ DVR (digital video recorder) product, product enhancements for customers and products for expansion into new markets, such as a version of the Explorer interactive digital set-top for the Japanese market.designs. Research and development efforts continue to focus on advanced models of digital set-tops, network software enhancements and upgrades, data products, satellite products and transmission products.

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In August 2002, we announced a restructuring of our worldwide operations to align our costs with reduced sales levels. The restructuring included a reduction of our workforce by 400 positions, or approximately 6 percent of our total workforce, and was substantially completed by December 27, 2002. The positions eliminated were from manufacturing, engineering, marketing, sales, service and administrative functions. The restructuring also included the consolidation of certain office and manufacturing facilities. In addition, during the third quarter of fiscal year 2003, we reduced our workforce by approximately 120 positions, primarily in sales and other functions within the transmission sector, and reduced our workforce by an additional 30 positions in the fourth quarter of fiscal year 2003. WeDuring the three and six months ended January 2, 2004, we recorded restructuring charges of $0.6 million and $1.3 million, respectively, primarily for severance, during the quarter and six months ended January 2, 2004, respectively.severance. We do not anticipate recording additionalsignificant restructuring charges induring fiscal year 2004 that will total approximately $0.3 million.2005.

Interest income of $4.2$6.7 million and $8.0$12.5 million in the three and six months ended January 2,December 31, 2004, declined $1.6 million and $3.6 million, respectively, fromincreased over the comparable periods of the prior year. These declines wereyear due primarily to lowerhigher average interest ratescash and short-term investment balances and higher yields in these periods of fiscal year 20042005 as compared to the prior year.

Other expense of $1.0 million and $0.9 million for the three and six months ended December 31, 2004, respectively, included losses on short-term investments and from the other-than-temporary decline in the fair value of an investment in a privately-held company, gains from the increase in the cash surrender value of life insurance, partnership income, foreign exchange losses, and various other items, none of which was individually significant.

Other income of $2.2 million for the three months ended January 2, 2004 included a gain of $6.8 million from the sale of shares of Kabelnetz, which had been received as part of the termination settlement with German cable operator ish in the

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second quarter of fiscal year 2003, foreign exchange gains, gains from the increase in the cash surrender value of life insurance and gains from various other items, none of which was individually significant. We also recorded a loss of $6.1 million from the settlement of purchase price adjustments, which included a cash payment of $9.0 million, related to the sale of the satellite networks business to ViaSat. In connection with this transaction, we utilizedViaSat, of which $2.9 million of liabilities which had been previously established related to indemnifications to ViaSat, primarily for warranty.reserved for.

In addition to the gain from the sale of shares of Kabelnetz and the loss from the settlement of purchase price adjustments with ViaSat described above, other income of $1.3 million for the six months ended January 2, 2004 included a gain of $1.9 million from the sale of a marketable security, charges of $1.8 million from other-than-temporary declines in the value of investments in privately-held companies, foreign exchange losses and losses from various other items, none of which was individually significant.

Other expense of $6.6Earnings before income taxes were $83.5 million for the quarter ended December 27, 2002 included $6.5and $168.0 million of losses from other-than-temporary declines in the market value of marketable securitiesthree and investments in privately-held companies. Other expense of $12.1 million for the six months ended December 27, 2002 included losses31, 2004, respectively, up over the comparable periods of $11.0 million from other-than-temporary declinesthe prior year. The year-over-year improvements were due to higher sales volume in these periods of fiscal year 2005 as compared to the market value of marketable securities and investments in privately-held companies and $1.9 million from the decline in the cash surrender value of life insurance. These losses were partially offset by a net gain of $2.5 million from the settlement of a collar on a warrant to purchase common stock of a public company and the related warrant. There were no other significant items in other (income) expense for the three or six months ended December 27, 2002.prior year.

The effective tax rate for the three and six months ended January 2,December 31, 2004 was 35.230 percent of pre-tax earnings, updown from approximately 34.035 percent in the prior year, due primarily to various discrete items in the quarter, the most significant of which was the reversal of valuation allowances on certain deferred tax assets. During the quarter ended December 31, 2004, we determined that valuation allowances on deferred tax assets related to net operating loss carryforwards generated by certain operations in Europe were no longer needed due to the recent and projected profitability of these operations. In addition, the rate was favorably impacted by the legislative, retroactive reinstatement, on October 4, 2004, of the research tax credit to June 30, 2004.