Stratex Networks (STXN) 10-Q 2006 Q0 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

Commission file number: 0-15895

STRATEX NETWORKS, INC.

(Exact name of registrant specified in its charter)

Delaware	77-0016028
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)

120 Rose Orchard Way San Jose, CA	95134
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 943-0777

Registrant’s former name: DMC Stratex Networks, Inc.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

The number of outstanding shares of the Registrant’s common stock, par value $.01 per share, was 94,993,700 on July 29, 2005.

INDEX

		PAGE
COVER PAGE		1
INDEX		2
PART I	- FINANCIAL INFORMATION
Item 1	- Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6-20
Item 2	- Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-34
	Factors That May Affect Future Financial Results	35-49
Item 3	- Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	- Controls and Procedures	50
PART II	- OTHER INFORMATION
Item 1	- Legal Proceedings	52
Item 6	- Exhibits and Reports on Form 8-K	52
SIGNATURE		53
EXHIBIT INDEX		54

2

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	June 30, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	33,849		$	32,860
Short-term investments		11,614			15,831
Accounts receivable, net of allowance of $3,084 on June 30, 2005 and $ 2,769 on March 31, 2005		36,237			35,084
Inventories		30,990			36,780
Other current assets		11,647			10,572
Total current assets		124,337			131,127
Property and equipment, net		26,765			28,228
Other assets		954			1,276
Total assets	$	152,056		$	160,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,951		$	34,472
Short-term debt		6,250			6,250
Accrued liabilities		30,061			27,701
Total current liabilities		65,262			68,423
Long – term debt (Note 2)		11,979			13,542
Long – term liabilities		17,706			18,643
Total liabilities		94,947			100,608
Commitments and contingencies (Note 4)		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none outstanding		—			—
Common stock, $.01 par value; 150,000 shares authorized; 94,998 and 94,918 issued and outstanding at June 30, 2005 and March 31, 2005, respectively		951			948
Additional paid-in-capital		485,715			485,382
Accumulated deficit		(417,891	)		(413,725	)
Accumulated other comprehensive loss		(11,666	)		(12,582	)
Total stockholders’ equity		57,109			60,023
Total liabilities and stockholders’ equity	$	152,056		$	160,631

See accompanying Notes to Condensed Consolidated Financial Statements.

3

STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,
	2005			2004
Net sales	$	54,872		$	46,041
Cost of sales		42,271			39,115
Gross profit		12,601			6,926
Operating expenses:
Selling, general and administrative		11,994			9,630
Research and development		3,701			4,364
Amortization of intangible assets		—			395
Total operating expenses		15,695			14,389
Operating loss		(3,094	)		(7,463	)
Other income (expense):
Interest income		220			150
Interest expense		(501	)		(218	)
Other expenses, net		(514	)		(302	)
Total Other income (expense)		(795	)		(370	)
Loss before provision for income taxes		(3,889	)		(7,833	)
Provision for income taxes		277			151
Net loss	$	(4,166	)	$	(7,984	)
Basic and diluted loss per share	$	(0.04	)	$	(0.09	)
Basic and diluted weighted average shares outstanding		94,942			84,127

See accompanying Notes to Condensed Consolidated Financial Statements.

4

STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(4,166	)	$	(7,984	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		1,682			2,392
Changes in assets and liabilities
Accounts receivable		(1,186	)		367
Inventories		6,198			2,214
Other assets		(592	)		(762	)
Accounts payable		(5,539	)		(2,632	)
Accrued liabilities		2,744			257
Long-term liabilities		(938	)		(1,147	)
Net cash used for operating activities		(1,797	)		(7,295	)
Cash flows from investing activities:
Purchase of short-term investments		(16,716	)		(31,481	)
Proceeds from sale/maturity of short-term investments		20,953			22,075
Purchase of property and equipment		(529	)		(3,733	)
Net cash provided by (used for) investing activities		3,708			(13,139	)
Cash flows from financing activities:
Proceeds from sales of common stock		338			325
Borrowings from banks		—			25,000
Repayment of borrowing from bank		(1,562	)		(521	)
Net cash provided by (used for) financing activities		(1,224	)		24,804
Effect of exchange rate changes on cash		302			133
Net increase in cash and cash equivalents		989			4,503
Cash and cash equivalents at beginning of period		32,860			21,626
Cash and cash equivalents at end of period	$	33,849		$	26,129
SUPPLEMENTAL DATA
Interest paid	$	314		$	140
Income taxes paid	$	31		$	8

See accompanying Notes to Condensed Consolidated Financial Statements

5

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of Stratex Networks, Inc. and its wholly-owned subsidiaries (the “Company”). Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation.

While the financial information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in connection with the Company’s financial statements included in its annual report and Form 10-K for the fiscal year ended March 31, 2005, filed with the Securities and Exchange Commission on June 14, 2005.

CASH AND CASH EQUIVALENTS

The Company generally considers all highly liquid debt instruments purchased with a remaining maturity of three months or less at the time of purchase to be cash equivalents. Auction rate preferred securities are classified as short-term investments. Cash and cash equivalents consisted of cash, money market funds, and short-term securities as of June 30, 2005 and March 31, 2005.

SHORT- TERM INVESTMENTS

The Company invests its excess cash in high-quality marketable instruments to ensure that cash is readily available for use in its current operations. Accordingly, all of the marketable securities are classified as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115. All investments are reported at fair market value with the related unrealized holding gains and losses reported as a component of accumulated other comprehensive loss. Unrealized holding losses on the portfolio as of June 30, 2005 were insignificant. At June 30, 2005, the available-for-sale securities had contractual maturities ranging from 1 month to 15 months, with a weighted average maturity of 2 months.

6

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands):

	June 30, 2005		March 31, 2005
Raw materials	$	7,992	$	11,065
Work in process		1,413		488
Finished goods		21,585		25,227
	$	30,990	$	36,780

OTHER CURRENT ASSETS

Other current assets included the following (in thousands):

	June 30, 2005		March 31, 2005
Receivables from suppliers	$	1,133	$	2,566
Non-trade receivables		2,795		851
Prepaid expenses		6,017		5,615
Prepaid insurance		301		340
Tax refund		1,097		890
Other		304		310
	$	11,647	$	10,572

OTHER ASSETS

Included in other assets as of June 30, 2005 are long-term deposits of $0.4 million for premises leased by the Company and $0.6 million for long-term accounts receivable. The long-term accounts receivable is due to the extended terms of credit granted by the Company to some of its customers.

As of March 31, 2005, other assets included deposits of $0.4 million for premises leased by the Company and $0.9 million for long-term accounts receivable.

7

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ACCRUED LIABILITIES

Accrued liabilities included the following (in thousands):

	June 30, 2005		March 31, 2005
Customer deposits	$	1,663	$	1,822
Accrued payroll and benefits		2,290		2,250
Accrued commissions		3,671		2,117
Accrued warranty		5,209		5,340
Accrued restructuring		4,372		4,902
Accrual for customer discounts		4,592		3,688
Other		8,264		7,582
	$	30,061	$	27,701

The accrual for customer discount of $4.6 and $3.7 million as of June 30, 2005 and March 31, 2005, respectively was for discount on certain volume levels reached by a customer.

CURRENCY TRANSLATION

The functional currency of the Company’s subsidiaries located in the United Kingdom and New Zealand is the U.S. dollar. Accordingly, all of the monetary assets and liabilities of these subsidiaries are remeasured into U.S. dollars at the current exchange rate as of the applicable balance sheet date, and all non-monetary assets and liabilities are remeasured at historical rates. Sales and expenses are remeasured at the average exchange rate prevailing during the period. Gains and losses resulting from the remeasurement of the subsidiaries’ financial statements are included in the consolidated statements of operations. The Company’s other international subsidiaries use their local currency as their functional currency. Assets and liabilities of these subsidiaries are translated at the current exchange rates in effect at the balance sheet date, and income and expense accounts are translated at the average exchange rates during the period. The resulting translation adjustments are included in accumulated other comprehensive loss in the accompanying financial statements.

DERIVATIVE FINANCIAL INSTRUMENTS

In accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), all derivatives are recorded on the balance sheet at fair value.

We manufacture and sell products internationally subjecting us to currency risk. Derivatives are employed to eliminate, reduce, or transfer selected foreign currency risks that can be identified and quantified. The Company’s policy is to hedge forecasted and actual foreign currency risk with forward contracts that expire within twelve months. Specifically, the Company hedges foreign currency risks relating to firmly committed backlog, open purchase orders and non-functional currency monetary assets and liabilities. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance sheet at fair value and changes in fair value are recognized currently in earnings.

8

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company hedges forecasted non-U.S. dollar sales and non-U.S. dollar purchases. In accordance with SFAS 133, designates and documents the forward contracts as “cash flow hedges” which are evaluated for effectiveness, excluding time value, at least quarterly. The Company records effective changes in the fair value of these cash flow hedges in accumulated other comprehensive income (“OCI”) until the revenue is recognized or the related purchases are recognized in cost of sales, at which time the changes are reclassified to revenue and cost of sales, respectively. All amounts accumulated in OCI at the end of the quarter will be reclassified to earnings within the next 12 months.

The following table summarizes the activity in OCI, with regard to the changes in fair value of derivative instruments, for the first quarter of fiscal 2006 (in thousands):

	Three Months Ended June 30, 2005 Gains/ (Losses)			Three Months Ended June 30, 2004 Gains/ (Losses)
Beginning balance on April 1, 2005	$	90		23
Net changes		(214	)	(93	)
Reclassifications to revenue		500		119
Reclassifications to cost of sales		2		(46	)
Ending balance on June 30, 2005	$	378		3

An insignificant amount of loss was recognized in other income and expense in the first quarter of fiscal 2006 and fiscal 2005 related to the exclusion of time value from effectiveness testing. There was no gain/loss arising from ineffectiveness resulting from forecasted transactions that did not occur.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of investments to financial institutions evaluated as highly creditworthy. Investments, under the Company’s policy, must have a rating, at the time of purchase, of A1 or P1 for short-term paper and a rating of A or better for long-term notes or bonds.

Accounts receivable concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations may subject the Company to concentration of credit risk.

The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of our revenues, along with the percentage of revenues they individually represent.

9

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Three Months Ended
	June 30, 2005	June 30, 2004
Number of significant customers	1	2
Percentage of net sales	14%	19%, 18%

The Company actively markets and sells products in Africa, Asia, Europe, the Middle East and the Americas. The Company performs on-going credit evaluations of its customers’ financial conditions and generally requires no collateral, although sales to Asia, Africa and the Middle East are primarily paid through letters of credit.

REVENUE RECOGNITION

The Company recognizes revenue pursuant to Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

In accordance with SAB 104, revenues from product sales are generally recognized when title and risk of loss passes to the customer, except when product sales are combined with significant post-shipment installation services. Under this exception, revenue is deferred until such services have been performed. Installation service revenue is recognized when the related services are performed.

10

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

LOSS PER SHARE

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period. Net loss per share is computed using only the weighted average number of shares of common stock outstanding during the period, as the inclusion of potentially dilutive securities would be anti-dilutive.

STOCK-BASED COMPENSATION

The Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Accordingly, no compensation is recognized for employee stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the options.

In accordance with the disclosure requirements of SFAS No. 123, as amended by SFAS No.148, if the Company had elected to recognize compensation cost based on the fair market value of the options granted at grant date as prescribed, income and earnings per share would have been reduced to the pro forma amounts indicated in the table below.

	Three Months Ended June 30,
	2005			2004
	(in thousands, except per share amounts)
Net loss – as reported	$	(4,166	)	$	(7,984	)
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(1,114	)		(3,499	)
Net loss – pro forma	$	(5,280	)	$	(11,483	)
Basic and diluted loss per share – as reported	$	(0.04	)	$	(0.09	)
Basic and diluted loss per share – pro forma	$	(0.06	)	$	(0.14	)

For purposes of pro forma disclosure under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting period, using the multiple option method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

11

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Employee Stock Option Plan				Employee Stock Purchase Plans
	Three Months Ended June 30,				Three Months Ended June 30,
	2005		2004		2005		2004
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected stock volatility	96.9	%	96.5	%	74.7	%	96.5	%
Risk-free interest rate	3.9	%	3.7	%	2.9	%	1.1	%
Expected life of options from vest date	1.6 years		1.5 years		0.2 years		0.2 years
Forfeiture rate	Actual		Actual		—		—

The weighted average fair value of stock options granted during the period was $1.00 and $2.18 for the quarters ended June 30, 2005 and June 30, 2004, respectively.

COMPREHENSIVE INCOME

The following table reconciles net loss to comprehensive loss (in thousands):

	Three Months Ended June 30,
	2005			2004
Net loss	$	(4,166	)	$	(7,984	)
Other comprehensive income (loss):
Unrealized currency translation gain/(loss)		895			(563	)
Unrealized holding gain (loss) on investments		21			(81	)
Comprehensive loss	$	(3,250	)	$	(8,628	)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements,” (“EITF No. 05-6”) which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF No. 05-6 is effective for periods beginning after June 29, 2005. The Company does not expect the provisions of this consensus to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” (“SFAS No. 154”). SFAS No.154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements of the accounting for and reporting of a change in accounting principle. SFAS No. 154 also provides guidance on the accounting for and reporting of error corrections. The provisions of this statement are applicable for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the impact this statement will have on the financial position, results of operation or cash flows.

12

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. Interpretation No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The Company is currently evaluating the provision and does not expect the adoption of this standard to have a material impact on its results of operations or financial condition.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, which provides guidance on the implementation of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (see discussion below). In particular, SAB No. 107 provides key guidance related to valuation methods (including assumptions such as expected volatility and expected term), the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to the adoption of SFAS No. 123(R), the classification of compensation expense, capitalization of compensation cost related to share-based payment arrangements, first-time adoption of SFAS No. 123(R) in an interim period, and disclosures in Management’s Discussion and Analysis subsequent to the adoption of SFAS No. 123(R). SAB No. 107 became effective on March 29, 2005. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the fair value of stock options. SFAS 123(R) was to be effective for quarterly periods beginning after June 15, 2005, which is the Company’s first quarter of fiscal 2006. In April 2005, the SEC delayed the required compliance date for certain public companies to fiscal years beginning after June 15, 2005. Accordingly, the Company will be required to comply with FAS 123(R) in fiscal 2007. While the Company currently provides the pro forma disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure,” on a quarterly basis (see “Note 1-Stock-Based Compensation”), it is currently evaluating the impact this statement will have on its consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

13

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. LONG TERM DEBT

On May 27, 2004 the Company borrowed $25 million on a long-term basis against its $35 million credit facility with a commercial bank. This $25 million loan is payable in equal monthly installments of principal plus interest over a period of four years. This loan bears interest at a fixed interest rate of 6.38% per annum. In May 2005, the Company entered into an amendment to the existing Credit Facility Agreement it had with the bank which expanded the amount of credit available under the facility and extended it to April 2007. Under the original agreement the amount of the revolving credit portion of the facility was restricted to $10 million. Under the amended terms, the amount of revolving credit available was expanded to a total of $35 million less the outstanding balance of the term debt portion. The term debt portion of our credit facility was $18.2 million as of June 30, 2005. As the -term debt portion is repaid, additional credit will be available under the revolving credit portion of the facility. Short-term borrowings under the available $13.8 million of available credit under the revolving credit portion of the credit facility will be at the bank’s prime rate, which was 6.25% per annum at June 30, 2005, or LIBOR plus 2%. This facility is secured by the Company’s assets. As part of the loan agreement, there is a tangible net worth covenant and a liquidity ratio covenant.

At June 30, 2005, future long-term debt payment obligations were as follows:

	Years ending March 31,
	(in thousands)
2006	$	4,688
2007		6,250
2008		6,250
2009		1,041
Total	$	18,229

As of June 30, 2005, the Company had $3.0 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. These letters of credit generally expire in fiscal 2006.

14

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. RESTRICTED STOCK PLAN

On June 15, 2005, the Company granted 892,250 of shares of Common Stock to its employees under its 2002 Stock incentive plan. Per the plan the shares vest a minimum of one third annually for the next three fiscal years. In addition, the vesting schedule is subject to certain acceleration and adjustments if any or all of the performance goals defined in the Restricted Stock Award Agreement (“the agreement”) are achieved. In the first quarter of fiscal 2006, 133,838 shares vested upon achievement of certain performance goals defined in the agreement. The Company recorded compensation expense of $227,524 in the first quarter of fiscal 2006 for the 133,838 shares vested at the price of $1.70 per share, which was the market price of the share on the date of the grant. These shares are not considered outstanding as of June 30, 2005 as the issuance of stock certificates for these shares was still pending as of June 30, 2005.

NOTE 4. COMMITMENTS AND CONTINGENCIES

The Company is subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, these proceedings should not have a material adverse effect on the business, financial position, and results of operations of the Company.

Warranty

At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales, recorded as a component of cost of sales. The Company’s standard warranty is generally for a period of 27 months from the date of sale if the customer uses the Company’s or their approved installers to install the products, otherwise it is 15 months from the date of sale. Under certain circumstances warranty is extended beyond the standard warranty terms of 27 months. The Company’s warranty accrual represents the best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Warranty accrual is made based on forecasted returns and average cost of repair. Forecasted returns are based on trend of historical returns. While the Company believes that its warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.

15

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The changes in the warranty reserve balances during the periods indicated are as follows:

	Three Months Ended June 30,
	2005			2004
Balance at the beginning of the quarter	$	5,340		$	4,277
Additions related to current period sales		1,410			1,700
Warranty costs incurred in the current period		(1,330	)		(1,315	)
Adjustments to accruals related to prior period sales		(211	)		—
Balance at the end of the quarter	$	5,209		$	4,662

NOTE 5. RESTRUCTURING CHARGES

The Company did not record any restructuring charges in the first quarter of fiscal 2006 and the first quarter of fiscal 2005.

In fiscal 2005, the Company recorded $7.4 million of restructuring charges. In order to reduce expenses and increase operational efficiency, the Company implemented a restructuring plan in the third quarter of fiscal 2005 which included the decision to shut down operations in Cape Town, South Africa, outsource the manufacturing at the New Zealand and Cape Town, South Africa locations and spin off the sales and service offices in Argentina, Colombia and Brazil to independent distributors. As part of the restructuring plan, the Company reduced the workforce by 155 employees and recorded restructuring charges for employee severance and benefits of $3.8 million in fiscal 2005. The Company also recorded $2.3 million for building lease obligations, $0.8 million for fixed asset write-offs and $0.5 million for legal and other costs.

During fiscal 2003 and fiscal 2002, the Company announced several restructuring programs. These restructuring programs included the consolidation of excess facilities. Due to these actions, the Company recorded restructuring charges of $19.0 million in fiscal 2003 and $8.6 million in fiscal 2002 for vacated building lease obligations. In fiscal 2004, the Company recorded an additional $4.6 million of restructuring charges for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003.

The vacated building lease obligations recorded as restructuring charges in fiscal 2002, fiscal 2003, fiscal 2004 and fiscal 2005 included payments required under lease contracts, less estimated sublease income after the property has been vacated. To determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The $2.3 million and $4.6 million of charges for vacated building lease obligation recorded in fiscal 2005 and fiscal 2004, respectively, were primarily due to a decrease in estimated future sublease income.

16

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the activities of the restructuring accrual during the first quarter of fiscal 2006 and during the fiscal year ended March 31, 2005 (in millions):

	Severance and Benefits			Facilities and Other			Total
Balance as of March 31, 2004	$	1.1		$	21.7		$	22.8
Provision if fiscal 2005		3.8			3.6			7.4
Cash payments		(3.8	)		(4.0	)		(7.8	)
Non- cash expenses		—			(0.6	)		(0.6	)
Reclassification of related rent accruals		—			1.2			1.2
Balance as of March 31, 2005	$	1.1		$	21.9		$	23.0
Provision		—			—			—
Cash payments		(0.6	)		(0.9	)		(1.5	)
Reclassification		0.3			(0.3	)		—
Balance as of June 30, 2005	$	0.8		$	20.7		$	21.5
Current portion	$	0.8		$	3.6		$	4.4
Long-term portion	$	—		$	17.1		$	17.1

Of the remaining accrual balance of $21.5 million as of June 30, 2005, $21.3 million is expected to be paid out in cash. The Company expects $4.2 million of the remaining accrual balance ($0.8 million of severance and benefits, $0.3 million of legal and other costs and $3.1 million of vacated building lease obligations) to be paid out in the next twelve months and vacated building lease obligations of $17.1 million to be paid out during fiscal 2007 through fiscal 2012.

NOTE 6. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about products, geographic information, and major customers. Operating segment information for the first quarter of fiscal 2006 and 2005 is presented in accordance with SFAS 131.

The Company is organized into two operating segments: Products and Services. The Chief Executive Officer (“CEO”) has been identified as the Chief Operating Decision-Maker as defined by SFAS 131. Resources are allocated to each of these groups using information on their revenues and operating profits before interest and taxes.

The Products operating segment includes the Eclipse^™, XP4^™, Altium^®, DXR^® and Velox^™ digital microwave systems for digital transmission markets. The Company began commercial shipments of a new wireless platform consisting of an Intelligent Node Unit and a radio element, which combined are called Eclipse^™ (“Eclipse”), in January 2004. The Company designs and develops the above products in Wellington, New Zealand and San Jose, California. Prior to June 30, 2002, the Company manufactured the XP4 and Altium family of digital microwave radio products in San Jose, California. In June 2002, the Company entered into an agreement with

17

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Microelectronics Technology Inc. (MTI), a Taiwanese company, for outsourcing of the Company’s XP4 and Altium products manufacturing operations. In the third quarter of fiscal 2005, the Company outsourced its DXR manufacturing operations in New Zealand to GPC in Australia and Velox manufacturing operations in Cape Town, South Africa to Benchmark Electronics in Thailand.

On March 1, 2005, the Company entered into an exclusive licensing agreement with 2MG, Inc (also known as Radiolan) for its Bridgelink Orthogonal frequency-division multiplexing (“OFDM”) intellectual property. The product Bridgelink OFDM was introduced by the Company in May 2005.

Operating segments generally do not sell products to each other, and accordingly, there are no significant inter-segment revenues to be reported. The Company does not allocate interest and taxes to operating segments. The accounting policies for each reporting segment are the same.

18

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth net revenues and operating income (loss) by operating segments (in thousands):

	Three Months Ended June 30,
	2005			2004
Products:
Net revenues	$	48,362		$	38,493
Operating loss		(4,000	)		(8,372	)
Services:
Net revenues		6,510			7,548
Operating income		906			909
Total:
Net revenues	$	54,872		$	46,041
Operating loss		(3,094	)		(7,463	)

The following table sets forth net revenues from unaffiliated customers by product (in thousands):

	Three Months Ended June 30,
	2005		2004
XP4	$	9,512	$	20,984
DXR		6,590		4,504
Eclipse		24,750		4,680
Altium		6,341		6,357
Other products		1,169		1,968
Total products		48,362		38,493
Total services & repairs		6,510		7,548
Total revenue	$	54,872	$	46,041

19

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth net revenues from unaffiliated customers by geographic region (in thousands):

	Three Months Ended June 30,
	2005		2004
Russia	$	7,869	$	6,430
Other Europe		14,226		6,142
Middle East		3,421		5,865
United States		2,374		2,990
Other Americas		6,733		6,586
Asia/Pacific		9,049		5,126
Thailand		7,671		784
Nigeria		849		7,305
Other Africa		2,680		4,813
Total revenue	$	54,872	$	46,041

Long-lived assets by country consisting of net property and equipment was as follows (in thousands):

	June 30, 2005		March 31, 2005
United Kingdom	$	15,320	$	15,778
United States		4,207		4,774
Other foreign countries		7,238		7,676
Total property and equipment, net	$	26,765	$	28,228

20

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

The discussions in this Quarterly Report on Form 10-Q should be read in conjunction with our accompanying Financial Statements and the related notes thereto. This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify forward looking statements. The forward looking statements in this Quarterly Report on Form 10-Q are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements and include, without limitation, statements regarding:

• Our belief that the increase in net sales was primarily due to increased sales of our new product, Eclipse, which began shipping in the fourth quarter of fiscal 2004 and due to the $4.4 million of deferred revenue recognized in the quarter due to payments received. Eclipse sales were $24.8 million in the first quarter of fiscal 2006 as compared to $4.7 million in the first quarter of fiscal 2005;

• Our belief that improved market condition was also one of the factors contributing to the increase of net sales in first quarter of fiscal 2006 as compared to first quarter of fiscal 2005;

• Our expectation that gross margins to increase in the remaining quarters of fiscal 2006 due to increase in sales of our new product Eclipse which has higher margins as compared to our other products;

• Our expectation that cash requirements for product operation segment will continue to be primarily for working capital requirements, restructuring payments and research and development activities, although we expect the cash usage to decline in the second half of fiscal 2006 as the net losses decline;

• Our expectation that the cash requirements for our service operating segment will continue to be primarily for labor costs and spare parts;

• Our expectation that research and development expenses will remain fairly constant in the remainder of fiscal 2006 as we continue to invest in the Eclipse product line;

• Our expectation that selling, general and administrative expenses will decrease in the remainder of fiscal 2006 due to cost reduction efforts initiated in fiscal 2005 and high third party agent commissions in the first quarter of fiscal 2006 which are forecasted to reduce in the remaining quarters of fiscal 2006;

• Our plan to pay out in cash the $4.2 million of the remaining accrual balance ($0.8 million of severance and benefits, $0.3 million of legal and other costs and $3.1 million of vacated building lease obligations) in the next twelve months and vacated building lease obligations of $17.1 million during fiscal 2007 through fiscal 2012;

• Our plan to minimize our overall customer financing exposures by discounting receivables when possible, facilitating third party financing and arranging letters of credit;

• Our belief that we have the financial resources needed to meet our business requirements for at least the next 12 months;

• Our belief that our available cash and cash equivalents at June 30, 2005 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current

21

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

assets and our $13.8 million available credit on our revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures for the next twelve months;

• Our belief that the legal proceedings and claims that arise in the normal course of our business will not have a material adverse effect on our business, financial position, and results of operations;

• Our expectation that competition will increase;

• Our expectation that international sales will continue to account for the majority of our net product sales for the foreseeable future;

• Our expectation that we will continue to experience declining average sales prices for our products;

• Our expectation that the redevelopment of the Middle East regions will continue to provide sales opportunities in future periods;

• Our belief that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and are reluctant to switch thereafter;

• Our statements relating to improvements in the overall business outlook and global economic conditions;

• Our belief that we maintain adequate reserves to cover exposure for doubtful accounts; and

• Our belief that our ability to compete successfully will depend on a number of factors both within and outside our control.

All forward looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or statements. The reader should also consult the cautionary statements and risk factors listed in this Quarterly Report and those listed from time to time in our Reports on Forms 10-Q, 8-K, and our most recent Annual Report on Form 10-K for the year ended March 31, 2005, including those contained in the section, “Factors That May Affect Future Financial Results,” beginning on page 35 in this Quarterly Report, in evaluating these forward-looking statements.

Business Overview

We design, manufacture, market and sell advanced wireless solutions for worldwide mobile and fixed telephone network interconnection and access. Since our founding in 1984, we have introduced a number of innovative products in the telecommunications market and have delivered wireless transmission systems for the transport of data, voice and video communication, including comprehensive service and support. We market our products primarily to mobile wireless carriers around the world. Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We provide our customers with a broad product line, which contains products that operate using a variety of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a variety of transmission capacities, typically ranging from 64 Kilobits to 2OC-3 or 311 Megabits per second (Mbps). Our broad product line allows us to market and sell our products to service providers worldwide with varying interconnection and access requirements. We also sell our products to base station suppliers, who provide and install integrated systems to

22

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

service providers, and to distributors, including value-added resellers (VARs) and agents. We have equipment installed in over 150 countries, and a significant percentage of our revenue is derived from sales outside the United States. Our revenues from sales of equipment and services outside the United States were 96% in the first quarter of fiscal 2006, 94% in fiscal 2005 and 96% in fiscal 2004.

In the first quarter of fiscal 2006, our recently introduced, low capacity version of our product Eclipse E100 showed a good response from the customers. We received $26.9 million of Eclipse orders in the first quarter of fiscal 2006.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2005. There have been no changes to our critical accounting policies in the quarter ended June 30, 2005.

Results of Operations

Revenues

Net sales for the first quarter of fiscal 2006 increased to $54.9 million, compared to $46.0 million reported in the first quarter of fiscal 2005. We believe that this increase was primarily due to increased sales of our new product, Eclipse, which began shipping in the fourth quarter of fiscal 2004 plus the recognizing of $4.4 million of revenue primarily related to legacy products that had previously been deferred due to the extended payment terms. The outstanding balance for equipment purchases under this contract was paid in the June quarter and thus the revenue was recorded. Eclipse sales were $24.8 million in the first quarter of fiscal 2006 as compared to $4.7 million in the first quarter of fiscal 2005. We believe that improved market conditions were also one of the factors contributing to the increase of net sales in first quarter of fiscal 2006 as compared to first quarter of fiscal 2005. Capital spending in the telecommunications market showed an improvement over the past 12 months.

Revenue by geographic regions. The following table sets forth information on our sales to geographic regions for the periods indicated (in thousands):

	Three Months Ended June 30,
	2005		% of Total		2004		% of Total
Russia	$	7,869	14	%	$	6,430	14	%
Other Europe		14,226	26			6,142	13
Middle East		3,421	6			5,865	13
Americas		9,107	17			9,576	21
Asia/Pacific		9,049	16			5,126	11
Thailand		7,671	14			784	2
Nigeria		849	2			7,305	16
Other Africa		2,680	5			4,813	10
Total Revenues		54,872	100	%	$	46,041	100	%

23

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

Revenue in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 increased significantly in Other Europe region. The increase in sales in the Europe region was primarily due to increased sale to a customer in Poland. Revenue to Thailand also increased significantly to $7.7 million in the first quarter of fiscal 2006 as compared to $0.8 million in the first quarter of fiscal 2005. The increase in revenue in Thailand is the result of recognizing revenue of $4.4 million on one major sale of legacy equipment that had previously been deferred. Revenue in the Americas region remained relatively flat. Net sales to Nigeria decreased to $0.8 million in the first quarter of fiscal 2006 as compared to $7.3 million in the first quarter of fiscal 2005 primarily due to decreased sales to one customer in that region. Net sales to Asia/Pacific increased to $9.0 million in the first quarter of fiscal 2006 as compared to $5.1 million in the first quarter of fiscal 2005 primarily due to increase in sales to India and Bangladesh.

Orders and backlog.During the first quarter of fiscal 2006, we received $47.1 million in new orders shippable over the next 12 months, compared to $45.5 million in the first quarter of fiscal 2005. The backlog at June 30, 2005 was $56.2 million, compared to $58.0 million at June 30, 2004 and $69.7 million at March 31, 2005. We review our backlog on an ongoing basis and make adjustments to it as required. Orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period.

The following table summarizes the number of our customers, each of whom accounted for more than 10% of our backlog as at the end of the period indicated, along with the percentage of backlog they individually represent.

	Three Months Ended
	June 30, 2005	June 30, 2004
Number of customers	3	2
Percentage of backlog	19%, 13%, 10%	20%, 11%

Product operating segment. The revenue and operating income for the product operating segment for the periods indicated were as follows (in thousands):

	Three Months Ended June 30,
	2005			% of Total		2004			% of Total
XP4	$	9,512		20	%	$	20,984		55	%
DXR		6,590		14	%		4,504		12	%
Eclipse		24,750		51	%		4,680		12	%
Altium		6,341		13	%		6,357		16	%
Other Products		1,169		2	%		1,968		5	%
Total Revenue	$	48,362		100	%	$	38,493		100	%
Operating Loss	$	(4,000	)	(8	%)	$	(8,372	)	(22	%)

24

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

Net product revenues increased from $38.5 million in first quarter of fiscal 2005 to $48.4 million in fiscal 2006. This increase is due primarily to our new Eclipse product, which began shipping in the fourth quarter of fiscal 2004, which increased from $4.7 million in the first quarter of fiscal 2005 to $24.8 million in the first quarter of fiscal 2006. Our older XP4 product line sales decreased significantly to $9.5 million in the first quarter of fiscal 2006 as compared to $21.0 million in the first quarter of fiscal 2005 as demand for this product was replaced by our newer product Eclipse.

Operating loss of the product operating segment in the first quarter of fiscal 2006, as a percentage of total revenue, decreased to 8% as compared to 22% in the first quarter of fiscal 2005. This was primarily because of higher margins on the sales of our Eclipse product as compared to our older legacy product lines.

The cash used for the product operating segment was primarily due to operating losses incurred by that segment. The cash needs of this segment were also to fund research and development activities, capital expenses and restructuring payments. We expect cash requirements for this segment to continue to be primarily for working capital requirements, restructuring payments and research and development activities, although we expect the cash usage to decline in the second half of fiscal 2006 as the net losses decline.

Service Operating Segment. The revenue and operating income for the services operating segment for the three months ended June 30 were as follows: (in thousands)

	Three Months Ended June 30,
	2005			% of Revenue		2004			% of Revenue
Field Service revenue	$	3,322				$	4,595
Operating loss		(230	)	(7	%)		(39	)	(1	%)
Repair revenue		3,188					2,953
Operating income		1,136		36	%		948		32	%
Total Services Revenue	$	6,510				$	7,548
Total Operating income	$	906		14	%	$	909		12	%

Services revenue includes, but is not limited to, installation, network design, path surveys, integration, and other revenues derived from the services we provide to our customers. In the first quarter of fiscal 2006, field service revenue decreased to $3.3 million as compared to $4.6 million in the first quarter of fiscal 2005, primarily because of lower sales to one customer as a result of completion of the installation project. The operating loss for field service revenue, as a percentage of field service revenue, was 7% in the first quarter of fiscal 2006 as compared to operating loss of 1% in the first quarter of fiscal 2005. This increase was primarily due to the impact of fixed local costs on lower revenue

Repair revenue increased slightly in the first quarter of fiscal 2006 to $3.2 million from $3.0 million in the first quarter of fiscal 2005. Repair operating income, as a percentage of repair revenue, in the first quarter of fiscal 2006 increased to 36% as compared to 32% in the first quarter of fiscal 2005. This was primarily due to higher revenues resulting in higher absorption of fixed costs.

25

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

The cash requirements in the service operating segment were primarily to purchase spare parts to provide repair services to our customers and for payment of labor expenses. We also pay cash to several third party vendors for helping us in the installation of our products. We expect the cash requirements for this segment to continue to be primarily for labor costs and spare parts.

Gross Profit

	Three Months Ended June 30,
	2005		% of Net Sales		2004		% of Net Sales
Net sales	$	54,872	100	%	$	46,041	100	%
Cost of sales		42,271	77			39,115	85
Gross profit	$	12,601	23	%	$	6,926	15	%

Gross profit as a percentage of net sales increased to 23% in the first quarter of fiscal 2006 as compared to 15% in the first quarter of fiscal 2005. This increase in gross profit was primarily due to favorable product mix impact of approximately 6%. Higher sales of our product Eclipse contributed significantly to the increase of gross margins. Manufacturing period costs had a favorable impact of approximately 2%. Manufacturing period costs reduced in the first quarter of fiscal 2006 as compared to first quarter of fiscal 2005 due to the cost reduction initiatives taken in the third quarter of fiscal 2005 as explained in the restructuring note in the following paragraphs. We expect the gross profit percentage to increase in the remaining quarters of fiscal 2006 due to an increase in sales of our newer product Eclipse which has higher margins as compared to our legacy product lines.

Research and Development

	Three Months Ended June 30,
	2005			2004
Research and development	$	3,701		$	4,364
% of net sales		6.7	%		9.5	%

In the first quarter of fiscal 2006, research and development expenses decreased to $3.7 million from $4.4 million in the first quarter of fiscal 2005. This decrease is primarily due to the shut down of our Cape Town, South Africa operations in the third quarter of fiscal 2005 as part of a restructuring plan and the reduced engineering expenses related to our legacy products. We expect research and development expenses to remain at about the same level for the remainder of fiscal 2006 as we continue to focus on our efforts to expand our Eclipse product line features and capabilities.

26

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

Selling, General and Administrative

	Three Months Ended June 30,
	2005			2004
Selling, general and administrative	$	11,994		$	9,630
% of net sales		22.0	%		20.9	%

In the first quarter of fiscal 2006, selling, general and administrative expenses increased to $12.0 million from $9.6 million in the first quarter of fiscal 2005. This increase is due to higher third party agent commissions on sales of our products resulting from an increase in net sales, especially in the Asia/Pacific region. In addition, the increase was due to the increased costs and audit fees for documentation and testing related to implementation of requirements of the Sarbanes-Oxley Act 2002.

We expect selling, general and administrative expenses to decrease slightly in the balance fiscal 2006 due to the cost reduction efforts initiated in fiscal 2005.

Restructuring Charges

We did not record any restructuring charges in the first quarter of fiscal 2006 and the first quarter of fiscal 2005.

In fiscal 2005, we recorded $7.4 million of restructuring charges. In order to reduce expenses and increase operational efficiency, we implemented a restructuring plan in the third quarter of fiscal 2005 which included the decision to shut down operations in Cape Town, South Africa, outsource the manufacturing at the New Zealand and Cape Town, South Africa locations and spin off the sales and service offices in Argentina, Colombia and Brazil to independent distributors. As part of the restructuring plan, we reduced the workforce by 155 employees and recorded restructuring charges for employee severance and benefits of $3.8 million in fiscal 2005. We also recorded $2.3 million for building lease obligations, $0.8 million for fixed asset write-offs and $0.5 million for legal and other costs.

During fiscal 2003 and fiscal 2002, we announced several restructuring programs. These restructuring programs included the consolidation of excess facilities. Due to these actions, we recorded restructuring charges of $19.0 million in fiscal 2003 and $8.6 million in fiscal 2002 for vacated building lease obligations. In fiscal 2004, we recorded an additional of $4.6 million of restructuring charges for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003.

The vacated building lease obligations recorded as restructuring charges in fiscal 2002, fiscal 2003, fiscal 2004 and fiscal 2005 included payments required under lease contracts, less estimated sublease income after the property has been vacated. To determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The $2.3 million and $4.6 million of charges for vacated building lease obligation recorded in fiscal 2005 and fiscal 2004, respectively, were primarily due to a decrease in estimated future sublease income.

27

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

The following table summarizes the activities of the restructuring accrual during the first quarter of fiscal 2006 and during the fiscal year ended March 31, 2005 (in millions):

	Severance and Benefits			Facilities and Other			Total
Balance as of March 31, 2004	$	1.1		$	21.7		$	22.8
Provision if fiscal 2005		3.8			3.6			7.4
Cash payments		(3.8	)		(4.0	)		(7.8	)
Non-cash expenses		—			(0.6	)		(0.6	)
Reclassification of related rent accruals		—			1.2			1.2
Balance as of March 31, 2005	$	1.1		$	21.9		$	23.0
Provision		—			—			—
Cash payments		(0.6	)		(0.9	)		(1.5	)
Reclassification		0.3			(0.3	)		—
Balance as of June 30, 2005	$	0.8		$	20.7		$	21.5
Current portion	$	0.8		$	3.6		$	4.4
Long-term portion	$	—		$	17.1		$	17.1

Of the remaining accrual balance of $21.5 million as of June 30, 2005, $21.3 million is expected to be paid out in cash. We expect $4.2 million of the remaining accrual balance ($0.8 million of severance and benefits, $0.3 million of legal and other costs and $3.1 million of vacated building lease obligations) to be paid out in the next twelve months and vacated building lease obligations of $17.1 million to be paid out during fiscal 2007 through fiscal 2012.

Other Income (Expense)

	Three Months Ended June 30,
	2005			2004
Interest income	$	220		$	150
Interest expense		(501	)		(218	)
Other expenses, net		(514	)		(302	)
Provision for income taxes		277			151

Interest income increased slightly in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005. Though the average cash balances were lower in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005, interest rates were higher in the first quarter of fiscal 2006 as compared to first quarter of fiscal 2005, resulting in a slightly higher interest income in the first quarter of fiscal 2006.

Interest expense was $0.5 million in the first quarter of fiscal 2006 compared to $0.2 million in the first quarter of fiscal 2005. The increase was primarily due to bank borrowings of $25 million under our credit facility on May 27, 2005 and also due to an increase in letters of credit discounting fees.

28

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

Other expense was $0.5 million in the first quarter of fiscal 2006 compared to $0.3 million in the first quarter of fiscal 2005. This increase was primarily because of higher exchange losses and increase in cost of hedging our foreign currency exposure risk.

In the first quarter of fiscal 2006, we recorded income tax provision of $0.3 million related to profits generated by certain foreign subsidiaries.

Liquidity and Capital Resources

Net cash used for operating activities in the first quarter of fiscal 2006 was $1.8 million, compared to net cash used for operating activities of $7.3 million in the first quarter of fiscal 2005. The amount used in operating activities was due to net losses, as adjusted to exclude non-cash charges. Working capital uses of cash included significant decreases in accounts payable and increase in accounts receivable.

Accounts payable decreased by $5.5 million in the first quarter of fiscal 2006 primarily because of payments made to some of our major suppliers and also due to lower purchases of our legacy product which are reaching end of life status.

Accounts receivable increased by $1.2 million in the first quarter of fiscal 2006 as compared to a decrease of $0.4 million in the first quarter of fiscal 2005 mainly due to an increase in sales.

Inventories decreased in the first quarter of fiscal 2006 by $6.2 million as compared to a decrease of $2.2 million in the first quarter of fiscal 2005. This was primarily because of the inventory related to $4.4 million of revenue previously deferred which was recorded as income in the first quarter of fiscal 2006, as well as lower inventory purchases due to the outsourcing of our manufacturing.

Other accrued liabilities increased in the first quarter of fiscal 2006 by $2.7 million as compared to an increase of $0.3 million in the first quarter of fiscal 2005. This was primarily because of an increase in accrued agent commissions due to higher sales to the Asia/Pacific region where we use agents and also due to higher deferred revenue.

Net cash provided by investing activities in the first quarter of fiscal 2006 was $3.7 million, compared to net cash used by investing activities of $13.1 million in the first quarter of fiscal 2005. In the first quarter of fiscal 2006, proceeds from sales of investments, net of purchases, were $4.2 million as compared to net purchase of $9.4 million in the first quarter of fiscal 2005. Purchases of property and equipment were $0.5 million in the first quarter of fiscal 2006 compared to $3.7 million in the first quarter of fiscal 2005. In the first quarter of fiscal 2005, we incurred this one time bulk purchase of parts costing approximately $1.8 million for our Spectrum product line because our suppliers notified us that they would not continue manufacturing this equipment.

29

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

Net cash used by financing activities in the first quarter of fiscal 2006 was $1.2 million as compared to net cash provided by financing activities of $24.8 million in the first quarter of fiscal 2005. In the first quarter of fiscal 2005, we borrowed $25 million against our $35 million line of credit with a commercial bank. We repaid $1.6 million of this loan in the first quarter of fiscal 2006. Proceeds from the sale of common stock were derived from the exercise of employee stock options and the employee stock purchase plan.

Cash requirements

Our cash requirements for the next 12 months are primarily to fund:

• Operations

• Research and development

• Restructuring payments

• Capital expenditures

• Repayment of long term debt

Contractual obligations

As of June 31, 2005, we had $3.0 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to various customers. These letters of credit generally expire in fiscal 2006. Also, as of June 30, 2005, we had outstanding forward foreign exchange contracts in the aggregate amount of $40.4 million expiring within 6 months.

Contractual obligations

The following table provides information related to our contractual obligations:

	Payments due (in thousands): Years ending March 31,
	2006		2007		2008		2009		2010		2011 & beyond		Total Obligations
Operating leases (a)	$	4,346	$	5,602	$	5,810	$	5,945	$	6,100	$	5,138	$	32,941
Unconditional purchase obligations (b)	$	35,444		—		—		—		—		—	$	35,444
Long-term debt (c)	$	4,688	$	6,250	$	6,250	$	1,042		—		—		18,230

(a) Contractual cash obligations include $20.2 million of lease obligations that have been accrued as restructuring charges as of June 30, 2005.

(b) We have firm purchase commitments with various suppliers as of end of June 2005. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for potential cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We have made adequate provision for potential exposure related to inventory on order which may go unused.

(c) See discussion of “repayment of long-term debt” in the following paragraphs.

30

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

Restructuring payments

��

Of the remaining restructuring accrual balance of $21.5 million as of June 30, 2005, $21.3 million is expected to be paid out in cash. We expect $4.2 million of the remaining accrual balance ($0.8 million of severance and benefits, $0.3 million of legal and other costs and $3.1 million of vacated building lease obligations) to be paid out in the next twelve months and vacated building lease obligations of $17.1 million to be paid out during fiscal 2007 through fiscal 2012.

Customer financing

In fiscal 2004, we granted extended terms of credit to some of our customers in order to position ourselves in certain markets and to promote opportunities for our new Eclipse product line. As of June 30, 2005 we have $0.6 million recorded as long-term accounts receivable due to these extended terms of credit granted to our customers. Although we may commit to provide financing to customers in order to position ourselves in certain markets, we remain focused on minimizing our overall customer financing exposures by discounting receivables when possible, raising third party financing and arranging letters of credit.

Repayment of Long-term Debt

In the first quarter of fiscal 2005, we borrowed $25 million on a long-term basis against our $35 million credit facility with a commercial bank. This loan is payable in equal monthly installments of principal plus interest over a period of four years. This loan is at a fixed interest rate of 6.38%. As part of the loan agreement, we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth, as adjusted, of at least $60 million plus 25% of net income, as determined in accordance with GAAP, for such quarter and all preceding quarters since December 31, 2003 (exclusive of losses). We also have to maintain, as measured at the last day of each calendar month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term, marketable securities minus certain outstanding bank services divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00. As of June 30, 2005 we were in compliance with these financial covenants of the loan. As of June 30, 2005 we had repaid $6.8 million of this loan.

Sources of cash:

At June 30, 2005, our principal sources of liquidity consisted of $45.5 million in cash and cash equivalents and short term investments and $13.8 million of available credit under our credit facility of $35 million with a commercial bank.

Available credit facility

We have $13.8 million of credit available against our $35 million revolving credit facility with a commercial bank as mentioned above. This credit available is per an amendment to the existing Credit Facility Agreement with the commercial bank in May 2005 which expanded the amount of credit available under the facility and extended it to April 2007. Per the original agreement the amount of the revolving credit portion of the facility was restricted to $10 million. Under the amended terms, the total amount of revolving credit available was expanded to $35 million less the outstanding balance of the long-term debt portion. The term debt portion of our credit facility

31

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

was $18.2 million as of June 30, 2005. As the term debt portion is repaid, additional credit will be available under the revolving credit portion of the facility. Short-term borrowings under the this available credit facility will be at the bank’s prime rate, which was 6.25% per annum at June 30, 2005, or LIBOR plus 2%.

We used a significant amount of cash in fiscal 2005 and in the first quarter of fiscal 2006 primarily due to increased working capital requirements to support the higher first and second quarter anticipated demand for our Eclipse product and also for the quarterly repayment of our loan. Cash usage is expected to decline in the second half of fiscal 2006, as losses are expected to decline.

We believe that our available cash and cash equivalents at June 30, 2005 combined with anticipated receipts of outstanding accounts receivable and our revolving credit facility as explained above should be sufficient to meet our anticipated needs for working capital and capital expenditures for the next twelve months.

Depending on the growth of our business, we may require additional financing which may not be available to us in the required time frame on commercially reasonable terms, if at all. However, we believe that we have the financial resources needed to meet our business requirements for at least the next 12 months.

32

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

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk:

Exposure on Investments

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We invest in high-credit quality issues and, by policy, limit the amount of credit exposure to any one issuer and country. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs. This policy minimizes the requirement to sell securities in order to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.

The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio.

	Years Ended March 31 (In thousands)
	2006			2007
Cash equivalents and short-term investments (a)	$	34,972		$	2,198
Weighted average interest rate		3.1	%		2.9	%

(a) Does not include cash of $8.0 million held in bank checking and deposit accounts including those held by our foreign subsidiaries.

The primary objective of our short-term investment activities is to preserve principal while at the same time maximize yields, without significantly increasing risk. Our short-term investments are for fixed interest rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our investments prior to maturity have been immaterial. The average days to maturity for investments held at the end of first quarter of fiscal 2006 was 2 months and had an average yield of 3.1% per annum.

As of June 30, 2005, unrealized losses on investments were insignificant. The investments have been recorded at fair value on our balance sheet.

Exposure on Borrowings:

Any borrowings under our credit facility will be at an interest rate of the bank’s prime rate plus 2% or LIBOR plus 2%. As of June 30, 2005 we had $13.8 million of available credit. A hypothetical 10% change in interest rates would not have a material impact on our financial position, results of operations and cash flows.

33

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

Exchange Rate Risk:

We routinely use forward foreign exchange contracts to hedge our net exposures, by currency, related to the monetary assets and liabilities of our operations denominated in non-functional currencies. In addition, we enter into forward foreign exchange contracts to establish with certainty the U.S. dollar amount value of firmly committed backlog and open purchase orders denominated in a foreign currency. The primary business objective of these hedging programs is to minimize the gains and losses in both margin and other income resulting from exchange rate changes. At June 30, 2005 we held forward contracts in the aggregate amount of $40.4 million primarily in Thai Baht, Euro and Polish Zloty. The amount of unrealized loss on these contracts at June 30, 2005 was $0.6 million. Forward contracts are not available in certain currencies and are not purchased by the Company for certain currencies due to the cost. The exchange rate changes in these currencies, such as the Nigerian Naira, could result in significant gains and losses in future periods.

Given our exposure to various transactions in foreign currencies, a change in foreign exchange rates would result in exchange gains and losses. As these exposures are generally covered by forward contracts where such contracts are available, these exchange gains and losses would be offset by exchange gains and losses on the contracts designated as hedges against such exposures. We use sensitivity analysis to measure our foreign currency risk by computing the potential loss that may result from adverse changes in foreign exchange rates. The exposure that relates to the hedged firm commitments is not included in the analysis. A hypothetical unfavorable variance in foreign exchange rates of 10% is applied to each net source currency position using year-end rates, to determine the potential loss. Further, the model assumes no correlation in the movement of foreign exchange rates. A 10% adverse change in exchange rates would result in a potential loss of $0.1 million. This potential decrease would result primarily from our exposure to the Nigerian Naira and Argentine Peso.

We do not enter into foreign currency transactions for trading or speculative purposes. We attempt to limit our exposure to credit risk by executing foreign contracts with high-quality financial institutions. A discussion of our accounting policies for derivative financial instruments is included in Note 1 to the condensed consolidated financial statements.

34

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

Factors That May Affect Future Financial Results

We have a history of losses, and we may not achieve or sustain profitability on a quarterly or annual basis.

We have incurred losses in many of our fiscal years since inception. For the last five fiscal years we have continuously incurred losses. In the first quarter of fiscal 2006, we incurred a loss of $4.2 million. As of June 30, 2005 we have an accumulated deficit of $417.9 million. We may not achieve or sustain profitability on a quarterly or annual basis.

Competition could harm our ability to maintain or improve our position in the market and could decrease our revenues.

The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We expect competition in this segment to increase. Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and significantly greater financial, technical, and personnel resources than we have. In addition, some of our competitors have greater name recognition, broader product lines, a larger installed base of products and longer-standing customer relationships. Our competitors include established companies, such as Alcatel, L.M. Ericsson, the Microwave Communications Division of Harris Corporation, NEC, Nera Telecommunications, Nokia, and Siemens AG, as well as a number of smaller companies and private companies in selected markets. Some of our competitors are also base station suppliers through whom we market and sell our products. One or more of our largest customers could internally develop the capability to manufacture products similar to those manufactured or outsourced by us and, as a result, their demand for our products and services may decrease.

In addition, we compete for acquisition and expansion of opportunities with many entities that have substantially greater resources than we have. Furthermore, any acquisition that we contemplate and subsequently complete may encourage certain of our competitors to enter into additional business combinations, to accelerate product development, or to engage in aggressive price reductions or other competitive practices, resulting in even more powerful or aggressive competitors.

We believe that our ability to compete successfully will depend on a number of factors both within and outside our control, including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and our competitors, the ability of our customers to obtain financing, and uncertainty of regional socio- and geopolitical factors. We cannot give assurances that we will have the financial resources, technical expertise, or marketing, sales, distribution, customer service, and support capabilities to compete successfully.

35

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

Our average sales prices are declining.

Currently, manufacturers of telecommunications equipment are experiencing, and are likely to continue to experience, on-going price pressure. This price pressure has resulted in, and is expected to continue to result in, downward pricing pressure on our products. As a result, we have experienced, and expect to continue to experience, declining average sales prices for our products. Our future profitability is dependent upon our ability to improve manufacturing and supply chain efficiencies, reduce costs of materials used in our products, and to continue to introduce new products and product enhancements. Our inability to respond to increased price competition will harm our business, financial condition and results of operations. Since our customers frequently negotiate supply arrangements far in advance of delivery dates, we must often commit to price reductions for our products before we are aware of how, or if, cost reductions can be obtained. As a result, current or future price reduction commitments could, and any inability by us to respond to increased price competition would, harm our business, financial condition and results of operations.

If we do not successfully market our new product, Eclipse, our business would be harmed.

In January 2004, we began commercial shipments of our product, Eclipse. Eclipse is a wireless platform consisting of an Intelligent Node Unit and Outdoor Units. The platform utilizes a nodal architecture and combines multiplexing, routing and cross-connection functions with low to high capacity wireless transmission into a single system. To a large extent, our future profitability depends on the successful commercialization and price competitiveness of Eclipse. We began to market the Eclipse product in 2003 and recorded our first sales in January 2004. In fiscal 2005, we recorded $39.6 million of revenue from sales of Eclipse products. In the first quarter of fiscal 2006, we recorded $24.8 million of revenue from sales of Eclipse products. Because Eclipse represents a new innovative solution for wireless carriers, we cannot give assurances that we will be able to continue to successfully market this product. If Eclipse does not achieve market acceptance to the extent expected by us, we may not be able to recoup the significant amount of research and development expenses associated with the development and introduction of this product and our business could be negatively impacted. Should the ramp up of Eclipse be unsuccessful, there would be a material adverse effect on our business, financial condition and results of operations.

Because a significant amount of our revenues comes from a few customers, the termination of any of these customer relationships may harm our business.

Sales of our products are concentrated in a small number of customers. The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of our revenues for the period indicated, along with the percentage of revenues they individually represent.

36

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

	Three Months Ended
	June 30, 2005	June 30, 2004
Number of significant customers	1	2
Percentage of net sales	14%	19%, 18%

The worldwide telecommunications industry is dominated by a small number of large corporations, and we expect that a significant portion of our future product sales will continue to be concentrated in a limited number of customers. In addition, our customers typically are not contractually obligated to purchase any quantity of products in any particular period, and product sales to major customers have varied widely from period to period. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or our inability to gain additional customers could result in further declines in our revenues. If these revenue declines occur, our business, financial condition, and results of operations would be harmed.

37

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

Due to the significant volume of our international sales, we are susceptible to a number of political, economic and geographic risks that could harm our business.

We are highly dependent on sales to customers outside the United States. During the first quarter of fiscal 2006 sales to international customers accounted for 96% of the total net sales. During fiscal 2005 and 2004, sales to international customers accounted for 94% and 96% of our net sales, respectively. In the first quarter of fiscal 2006, sales to the Middle East/Africa region accounted for approximately 13%. In fiscal 2005, sales to the Middle East/Africa region accounted for approximately 25% of our sales. In the first quarter of fiscal 2006, sales to Russia accounted for approximately 14% of our sales. In fiscal 2005 and 2004, sales to Russia accounted for approximately 20% and 9% of our net sales, respectively. Also, significant portions of our international sales are in lesser developed countries. We expect that international sales will continue to account for the majority of our net product sales for the foreseeable future. As a result, the occurrence of any international, political, economic or geographic event that adversely affects our business could result in significant revenue shortfalls. Because the Company’s business is heavily concentrated in foreign markets, there is a significant risk of unforeseen governmental action, including but not limited to the denial of export and/or import licenses. These revenue shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks and challenges of doing business internationally include:

• unexpected changes in regulatory requirements;

• fluctuations in foreign currency exchange rates;

• imposition of tariffs and other barriers and restrictions;

• management and operation of an enterprise spread over various countries;

• burden of complying with a variety of foreign laws and regulations;

• general economic and geopolitical conditions, including inflation and trade relationships;

• war and acts of terrorism;

• currency exchange controls; and

• changes in export or import regulations.

38

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

If we fail to develop and maintain distribution relationships, our revenues may decrease.

Although a majority of sales are through our direct sales force, we also market our products through indirect sales channels such as independent agents, distributors, re-sellers, and telecommunication integrators. These relationships enhance our ability to pursue the limited number of major contract awards each year and, in some cases, are intended to provide our customers with easier access to financing and to integrated systems providers with a variety of equipment and service capabilities. We may not be able to continue to maintain and develop additional relationships or, if additional relationships are developed, they may not be successful. Our inability to establish or maintain these distribution relationships could restrict our ability to market our products and thereby result in significant reductions in revenue. If these revenue reductions occur, our business, financial condition and results of operations would be harmed.

Our industry is volatile and subject to frequent changes, and we may not be able to respond effectively or in a timely manner to these changes.

We participate in a highly volatile industry that is characterized by vigorous competition for market share and rapid technological development. These factors could result in aggressive pricing practices and growing competition both from start-up companies and from well-capitalized telecommunication systems providers, which, in turn, could decrease our revenues. In response to changes in our industry and market conditions, we may restructure our activities to more strategically realign our resources. This includes assessing whether we should consider disposing of, or otherwise exiting, businesses and reviewing the recoverability of our tangible assets. Any decision to limit investment in our tangible assets or to dispose of or otherwise exit businesses may result in the recording of accrued liabilities for special charges, such as workforce reduction costs. Additionally, accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets could change as a result of such assessments and decisions, and could harm our results of operations.

39

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

If we are unable to protect our intellectual property rights adequately, we may be deprived of legal recourse against those who misappropriate our intellectual property.

Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We currently rely upon a combination of trade secrets, trademarks, patents and contractual rights to protect our intellectual property. In addition, we enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. We cannot give assurances that any steps taken by us will be adequate to deter misappropriation or impede independent third party development of similar technologies. In the event that such intellectual property arrangements are insufficient, our business, financial condition and results of operations could be harmed. We have significant operations in the United States, United Kingdom and New Zealand, and outsourcing arrangements in Asia. We cannot provide assurances that the protection provided to our intellectual property by the laws and courts of foreign nations will be substantially similar to the protection and remedies available under United States law. Furthermore, we cannot provide assurances that third parties will not assert infringement claims against us based on foreign intellectual property rights and laws that are different from those established in the United States.

Defending against intellectual property infringement claims could be expensive and could disrupt our business.

The wireless telecommunications industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. We may in the future be notified that we are infringing upon certain patent or other intellectual property rights of others. Such litigation or claims could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages, cease the licensing of allegedly infringing technology or the sale of allegedly infringing products and expend significant resources to develop non-infringing technology or to obtain licenses for the infringing technology. We cannot give assurances that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be available to us on commercially reasonable terms, if at all.

Acts of terrorism can negatively impact our revenues.

The terrorist attack of September 11, 2001, the subsequent military response by the United States, the aftermath of the U.S. war in Iraq, and the general socio- and geopolitical conditions in the Middle East, have negatively impacted, and may continue to negatively impact, the economy in general. This could impact our current and future business in the Middle East and could result in our customers delaying or canceling the purchase of our products, which would have a significant negative impact on our revenues. However, the redevelopment of these regions has provided us with sales opportunities and may continue to provide sales opportunities in future periods.

40

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

Consolidation within the telecommunications industry and among suppliers could decrease our revenues.

The telecommunications industry has experienced consolidation among its participants, and we expect this trend to continue. Some operators in this industry have experienced financial difficulty and have filed, or may file, for bankruptcy protection. Other operators may merge and one or more of our competitors may supply products to such companies that have merged or will merge. This consolidation could result in purchasing decision delays by the merged companies and decreased opportunities for us to supply our products to the merged companies. We may also see consolidation among suppliers, which may further decrease our opportunity to market and sell our products.

Our success depends on new product introductions and acceptance.

The market for our products is characterized by rapid technological change, evolving industry standards and frequent new product introductions. Our future success will depend, in part, on continuous, timely development and introduction of new products and enhancements that address evolving market requirements and are attractive to customers. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and are reluctant to switch thereafter. We spend significant resources on internal research and development to support our effort to develop and introduce new products and enhancements. To the extent that we fail to introduce new and innovative products, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which would be difficult or impossible to regain. An inability, for technological or other reasons, to develop successfully and introduce new products quickly or on a cost-effective basis could reduce our growth rate or otherwise materially damage our business, financial condition and results of operations.

In the past we have experienced, and we are likely to experience in the future, delays in the development and introduction of products and enhancements. We cannot provide assurances that we will keep pace with the rapid rate of technological advances, or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance before our competitors offer products with performance, features and quality similar to or better than our products. Our revenues and earnings may suffer if we invest in developing and marketing technologies and technology standards that do not function as expected, are not adopted in the industry or are not accepted in the market within the time frame we expect or at all.

Our customers may not pay us in a timely manner, or at all, which would decrease our income and utilize our working capital.

Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment. Risks of nonpayment and nonperformance by customers are a major consideration in our business. Our accounts receivable balance is also concentrated among a few customers, increasing our credit risk, although no customer accounted for more than 10% of accounts receivable as of June 30, 2005 and as of June 30, 2004.

We generally require no collateral, although sales to Asia, Africa and the Middle East are often paid through letters of credit. Our credit procedures and policies may not adequately mitigate customer credit risk.

41

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

We may need additional capital in the future. If additional capital is not available, we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations.

During fiscal 2005 and the first quarter of fiscal 2006, we used a significant amount of cash. This use of cash was primarily because of net losses from operations, higher inventory levels to support the rollout of our new product Eclipse and our extension of terms of credit to some of our customers in order to establish and favorably position ourselves in certain key markets. If we continue to use cash at this rate we may need significant additional financing, which we may seek to raise through, among other things, public and private equity offerings and debt financing. In May 2005, we entered into an amendment to the existing Credit Facility Agreement we had with a commercial bank which expanded the amount of credit available under the facility and extended it to April 2007. Under the amended terms of the Credit Agreement, the total amount of revolving credit available was expanded to a total of $35 million less the outstanding balance of the term debt portion. The term debt portion was $18.2 million as of June 30, 2005. As the term debt portion is repaid, additional credit will be available under the revolving credit portion of the facility. We currently anticipate that our available cash and cash equivalents at June 30, 2005, combined with anticipated receipts of outstanding accounts receivable and the available credit under our $35 million credit facility as described above, should be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months.

42

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

However, if changes occur that would consume available capital resources significantly sooner than we expect, if there is any significant negative impact resulting from continued losses or poor collection performance, if we are unable to raise sufficient funds in the required time frame on commercially reasonable terms, or we are unable to liquidate other current assets, our working capital may not be sufficient to support our anticipated needs for working capital and capital expenditures through the next 12 months and we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations.

We may breach our covenants relating to our outstanding debt against our $35 million revolving credit facility with a commercial bank, resulting in a secured creditor claim action against us by the bank.

During the first quarter of fiscal 2005, we borrowed $25 million on a long-term basis against our $35 million credit facility with a commercial bank. As part of the loan agreement, we have to maintain, as measured at the last day of each fiscal quarter, adjusted tangible net worth of at least $60 million plus 25% of net income, as determined in accordance with GAAP, for such quarter and all preceding quarters since December 31, 2003 (exclusive of losses). We also have to maintain, as measured at the last day of each calendar month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term, marketable securities minus certain outstanding bank services divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00. As of June 30, 2005 we were in compliance with these financial covenants of the loan. We may be in breach of these covenants in future quarters, which will make the long-term outstanding debt due to the bank immediately. We may not have the cash to pay off the outstanding debt immediately resulting in a secured creditor legal action against us.

As part of the amendment to our credit agreement in May 2005, the tangible net worth requirement will include 50% of any equity proceeds received subsequent to December 31, 2004 and the cash ratio requirement, as defined above, is increased to 1.25 as of each quarter end, commencing with the quarter ended June 30, 2005.

The inability of our subcontractors to perform, or our key suppliers to manufacture and deliver materials, could cause our products to be produced in an untimely or unsatisfactory manner.

Our manufacturing operations, which have been substantially subcontracted, are highly dependent upon the delivery of materials by outside suppliers in a timely manner. Also, we depend in part upon subcontractors to assemble major components and subsystems used in our products in a timely and satisfactory manner. We do not generally enter into long-term or volume purchase agreements with any of our suppliers, and we cannot provide assurances that such materials, components and subsystems will be available to us at such time and in such quantities as we require, if at all. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and timely deliver our products to our customers. We cannot give assurances that we will not experience material supply problems or component or subsystem delays in the future. Also, our subcontractors may not be able to maintain the quality of our products, which might result in a large number of product returns by customers and could harm our business, financial condition and results of operations.

43

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

Additional risks associated with the outsourcing of our manufacturing operations to Microelectronics Technology, Inc. in Taiwan and Benchmark in Thailand could include, among other things: (i) political risks due to political issues between Taiwan and The People’s Republic of China, (ii) risk of natural disasters in Taiwan and Thailand, such as earthquakes, typhoons and tsunamis (iii) economic and regulatory developments, and (iv) other events leading to the disruption of manufacturing operations.

Negative changes in the capital markets available for telecommunications and mobile cellular projects may result in excess inventory, which we cannot sell or be required to sell at distressed prices, and may result in longer credit terms to our customers.

Many of our current and potential customers require significant capital funding to finance their telecommunications and mobile cellular projects, which include the purchase of our products and services. Although in the last year we have seen some growth in the capital spending in the wireless telecommunications market, changes in capital markets worldwide could negatively impact available funding for these projects and may continue to be unavailable to some customers. As a result, the purchase of our products and services may be slowed or halted. Reduction in demand for our products has resulted in excess inventories on hand in the past, and could result in additional excess inventories in the future. If funding is unavailable to our customers or their customers, we may be forced to write down excess inventory. In addition, we may have to extend more and longer credit terms to our customers, which could negatively impact our cash and possibly result in higher bad debt expense. We cannot give assurances that we will be successful in matching our inventory purchases with anticipated shipment volumes. As a result, we may fail to control the amount of inventory on hand and may be forced to write-off additional amounts. Such additional inventory write-offs, if required, would decrease our profits.

In addition, in order to maintain competitiveness in an environment of restrictive third party financing, we may have to offer customer financing that is recorded on our balance sheet. This may result in deferred revenue recognition, additional credit risk and substantial cash usage.

44

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

If we fail to manage our internal development or successfully integrate acquired businesses, we may not effectively manage our growth and our business may be harmed.

Future growth of our operations depends, in part, on our ability to introduce new products and develop enhancements to existing products to meet the emerging trends in our industry. We have pursued, and will continue to pursue, growth opportunities through internal development, minority investments and acquisitions of complementary businesses and technologies. For example, on October 3, 2003, we completed the acquisition of the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. Through this acquisition, we obtained a license-exempt telecommunications product line. In March 2005, we entered into an exclusive license agreement with Radiolan Marketing Group, Inc for its Bridgelink OFDM intellectual property including the assignment of their trademarks. We cannot provide assurances that we will be able to successfully integrate this product line into our operations and sales programs. We are unable to predict whether and when any other prospective acquisition candidate will become available or the likelihood that any other acquisition will be completed and successfully integrated. Once integrated, acquired businesses may not achieve comparable levels of revenues, profitability or productivity to our existing business or otherwise perform as expected. Also, acquisitions may involve difficulties in the retention of personnel, diversion of management’s attention, risks of our customers and the customers of acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition, unexpected legal liabilities and, tax and accounting issues. Our failure to manage growth effectively could harm our business, financial condition and results of operations.

45

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

The unpredictability of our quarter-to-quarter results may harm the trading price of our common stock.

Our quarterly operating results may vary significantly in the future for a variety of reasons, many of which are outside of our control, any of which may harm our business. These factors include:

• volume and timing of product orders received and delivered during the quarter;

• our ability and the ability of our key suppliers to respond to changes made by customers in their orders;

• timing of new product introductions by us or our competitors;

• changes in the mix of products sold by us;

• cost and availability of components and subsystems;

• downward pricing pressure on our products;

• adoption of new technologies and industry standards;

• competitive factors, including pricing, availability and demand for competing products;

• war and acts of terrorism;

• ability of our customers to obtain financing to enable their purchase of our products;

• fluctuations in foreign currency exchange rates;

• regulatory developments including denial of export and import licenses; and

• general economic conditions worldwide.

Our quarterly results are difficult to predict and delays in product delivery or closing of a sale can cause revenues and net income to fluctuate significantly from anticipated levels. In addition, we may increase spending in response to competition or in pursuit of new market opportunities. Accordingly, we cannot provide assurances that we will be able to achieve profitability in the future or that if profitability is attained, that we will be able to sustain profitability, particularly on a quarter-to-quarter basis.

Because of intense competition for highly skilled candidates, we may not be able to recruit and retain qualified personnel.

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key personnel and executive officers, including Charles D. Kissner, who currently serves as our Chairman of the Board and Chief Executive Officer. The

46

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

loss of any key personnel could harm our business. Our prospects depend upon our ability to attract and retain qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for personnel is intense and we may not be successful in attracting or retaining qualified personnel. The failure of any key employee to perform in his or her current position or our inability to attract and retain qualified personnel could harm our business and deter our ability to expand.

If sufficient radio frequency spectrum is not allocated for use by our products, and we fail to obtain regulatory approval for our products, our ability to market our products may be restricted.

Radio communications are subject to regulation by United States and foreign laws and international treaties. Generally, our products must conform to a variety of United States and international requirements established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of such products.

In addition, we are affected by the allocation and auction of the radio frequency spectrum by governmental authorities both in the United States and internationally. Such governmental authorities may not allocate sufficient radio frequency spectrum for use by our products or we may not be successful in obtaining regulatory approval for our products from these authorities. Historically, in many developed countries, the unavailability of frequency spectrum has inhibited the growth of wireless telecommunications networks. In addition, to operate in a jurisdiction, we must obtain regulatory approval for our products. Each jurisdiction in which we market our products has its own regulations governing radio communications. Products that support emerging wireless telecommunications services can be marketed in a jurisdiction only if permitted by suitable frequency allocations, auctions and regulations. The process of establishing new regulations is complex and lengthy. If we are unable to obtain sufficient allocation of radio frequency spectrum by the appropriate governmental authority or obtain the proper regulatory approval for our products, our business, financial condition and results of operations may be harmed.

We may not successfully adapt to regulatory changes in our industry, which could significantly impact the operation of our business.

The regulatory environment in which we operate is subject to change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact our operations by restricting development efforts by us and our customers, making current products and systems in the industry obsolete or increasing the opportunity for additional competition. Any such regulatory changes could harm our business, financial condition and results of operations. It may be necessary or advisable in the future to modify our products to operate in compliance with such regulations. Such modifications could be extremely expensive and time-consuming to complete.

47

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

Our stock price may be volatile, which may lead to losses by investors.

Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the telecommunications industry in which we compete, or the economies of the countries in which we do business and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could lower the market price of our common stock. If our bid price were to remain below $1.00 for 30 consecutive business days, Nasdaq could notify us of our failure to meet the continued listing standards, after which we would have 180 calendar days to correct such failure or be delisted from the Nasdaq National Market.

Changes in Accounting Standards for Stock Plans will reduce our future profitability.

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (SFAS 123(R)), we will be required to recognize, beginning in our first quarter of fiscal 2007, compensation expense in our statement of operations for the fair value of unvested employee stock options at the date of adoption, and new stock options granted to our employees after the adoption date over the related vesting periods of the stock options. The requirement to expense stock options granted to employees reduces the attractiveness of granting stock options because the expense associated with these grants may adversely affect our profitability. However, stock options remain an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program following the adoption of SFAS 123(R). We may decide to replace our stock option programs with other compensation arrangements, but those are likely to negatively impact profitability. Our employees are critical to our ability to develop and design systems that advance our productivity and technology goals, increase our sales goals and provide support to customers. Accordingly, as a result of the requirement under SFAS 123(R) to recognize the fair value of stock based compensation as compensation expense, beginning in the first quarter of fiscal 2007, our future profitability will be reduced.

48

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

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our operating results could be misstated, our reputation may be harmed and the trading price of our stock could be negatively affected. As described in Management’s Annual Report on Internal Control Over Financial Reporting, the Company has determined that two significant deficiencies in the Company’s internal control over financial reporting are considered to be “material weaknesses” in our internal controls as defined in standards established by the American Institute of Certified Public Accountants. In general, a “material weakness” (as defined in PCAOB Auditing Standard No. 2) is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. In the first quarter of 2006, we devoted significant resources to remediate and improve our internal controls related to these material weaknesses. We believe that these efforts have remediated the concerns that gave rise to the “material weakness” related to revenue recognition. We also believe we have improved internal controls related to financial close and reporting process as described in Item 4 on this quarterly report on Form 10-Q. However, we cannot be certain that our controls over our financial processes and reporting will continue to be adequate in the future. Any failure of our internal controls over financial reporting could cause us to fail to meet our reporting obligations.

49

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of our market risks, see page 28, “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation and disclosure controls and procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) or 15d-15(b). Based on this evaluation, and because of the material weaknesses in our internal control over financial reporting described below, our management, including our CEO and CFO, has concluded that, as of June 30, 2005, our disclosure controls and procedures were ineffective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

In light of the material weaknesses noted below, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, the Company believes that the accompanying financial statements fairly present the financial condition and results of operation for the quarter ended June 30, 2005.

b) Management’s Conclusions on Internal Control over Financial Reporting

Our management, with the participation of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. Our internal controls are designed to provide reasonable assurance to our management and members of our Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles of the United States of America (GAAP).

Our management had performed an assessment of our internal controls over financial reporting as of March 31, 2005 and had identified the following two material weaknesses in internal control over financial reporting existing as of March 31, 2005. For the March 31, 2005 reporting management concluded that the Company did not maintain effective controls over the determination of revenue recognition for a non routine complex revenue transaction and did not have enough review procedures on the financial closing and reporting process. Management believes that in the three months ended June 30, 2005 we have remediated the weakness related to revenue recognition due to the expansion of internal review and clarification of internal policies which have been distributed to

50

finance personnel worldwide. We have made improvements in the financial close and reporting process and related review procedures and hired additional staff including an Internal Audit Manager in the quarter ending June 30, 2005 and a Senior Compliance Auditor in July 2005 to increase the technical expertise and review within the corporate finance organization. However, we would not consider this remediated until we have performed internal testing over several quarters. Other than as described above, there has been no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected or is likely to materially affect our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls. Our management, including the Principal Executive Officer and Principal Financial Officer, do not expect that our disclosure controls or our internal controls for financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

51

PART II - OTHER INFORMATION

ITEM 1- LEGAL PROCEEDINGS

There are no material existing or pending legal proceedings against us. We are subject to legal proceedings and claims that arise in the normal course of our business.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

For a list of exhibits to this Quarterly Report on Form 10-Q, see the exhibit index located on page 54.

(b) Reports on Form 8-K

On April 15, 2005, we filed a current report on Form 8-K regarding a press release announcing our financial results for the fourth quarter of fiscal year 2005, which ended on March 31, 2005

On April 19, 2005, we filed a current report on Form 8-K announcing the appointment of Larry Brittain as Vice president, Worldwide Sales & Services.

On May 9, 2005, we filed a current report on Form 8-K furnishing information regarding our amendment to the Credit Facility Agreement with Silicon Valley Bank extending the $35 million credit facility until April 1, 2007.

On June 21, 2005, we filed a current report on Form 8-K furnishing information regarding the Restricted Stock Award Agreement entered into by the Company under its 2002 Stock Incentive Plan.

52

SIGNATURE

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

	STRATEX NETWORKS, INC.
Date: August 9, 2005	By	/s/ Carl A. Thomsen
		Carl A. Thomsen
		Senior Vice President, Chief Financial Officer and Secretary
		(Duly Authorized Officer and Principal Financial Officer)

53

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Charles D. Kissner, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Carl A. Thomsen, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Charles D. Kissner, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Carl A. Thomsen, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

54