##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934



|                                                  |  |                                
|------------------------------------------------- |  | -------------------------------
|For the quarterly period ended September 30, 2004 |  | Commission file number: 0-15895



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STRATEX NETWORKS, INC.

(Exact name of registrant specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 94,735,697 on November 1, 2004.

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##### Table of Contents

INDEX



|                               |  |                                                                                       |  |      
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | -----
|                               |  | PAGE                                                                                 
|COVER PAGE                     |  | 1                                                                                    
|                               | 
|INDEX                          |  | 2                                                                                    
|                               | 
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1 -                       |  | Unaudited 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                                  |  | 6-19 
|                               |  |                                                                                      
|Item 2 -                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20-34
|                               |  |                                                                                      
|                               |  | Factors That May Affect Future Financial Results                                      |  | 35-47
|                               |  |                                                                                      
|Item 3 -                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 48   
|                               |  |                                                                                      
|Item 4 -                       |  | Controls and Procedures                                                               |  | 48   
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1 -                       |  | Legal Proceedings                                                                     |  | 49   
|                               |  |                                                                                      
|Item 4                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 49   
|                               |  |                                                                                      
|Item 6 -                       |  | Exhibits and Reports on Form 8-K                                                      |  | 50   
|                               | 
|SIGNATURE                      |  | 51                                                                                   
|                               | 
|EXHIBIT INDEX                  |  | 52                                                                                   



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS



STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except per share amounts)

(Unaudited)



|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | -------------- | - | -------- | -
|                                                                                                                                                         |  | September 30, 2004 |          |   | March 31, 2004 |  
|ASSETS                                                                                                                                                   |  |                    |          |   |                |   |          |  
|                                                                                                                                                         |  |                   
|Current assets:                                                                                                                                          |  |                    |          |   |                |   |          |  
|Cash and cash equivalents                                                                                                                                |  | $                  | 31,911   |   |                | $ | 21,626   |  
|Short-term investments                                                                                                                                   |  |                    | 30,861   |   |                |   | 28,337   |  
|Accounts receivable, net of allowance of $1,516 on September 30, 2004 and $2,373 on March 31, 2004                                                       |  |                    | 43,303   |   |                |   | 34,295   |  
|Inventories                                                                                                                                              |  |                    | 36,775   |   |                |   | 33,101   |  
|Other current assets                                                                                                                                     |  |                    | 12,657   |   |                |   | 10,932   |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total current assets                                                                                                                                     |  |                    | 155,506  |   |                |   | 128,291  |  
|                                                                                                                                                         |  |                   
|Property and equipment, net                                                                                                                              |  |                    | 31,754   |   |                |   | 31,175   |  
|Intangible assets, net                                                                                                                                   |  |                    | 790      |   |                |   | 1,581    |  
|Other assets                                                                                                                                             |  |                    | 1,397    |   |                |   | 2,197    |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total assets                                                                                                                                             |  | $                  | 189,448  |   |                | $ | 163,244  |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                    |          |   |                |   |          |  
|                                                                                                                                                         |  |                   
|Current liabilities:                                                                                                                                     |  |                    |          |   |                |   |          |  
|Accounts payable                                                                                                                                         |  | $                  | 38,033   |   |                | $ | 40,033   |  
|Short-term debt                                                                                                                                          |  |                    | 6,250    |   |                |   |         |  
|Accrued liabilities                                                                                                                                      |  |                    | 20,558   |   |                |   | 21,718   |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total current liabilities                                                                                                                                |  |                    | 64,841   |   |                |   | 61,751   |  
|Long-term debt                                                                                                                                           |  |                    | 16,667   |   |                |   |         |  
|Restructuring and other long  term liabilities                                                                                                          |  |                    | 18,248   |   |                |   | 20,311   |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total liabilities                                                                                                                                        |  |                    | 99,756   |   |                |   | 82,062   |  
|                                                                                                                                                         |  |                   
|Commitments and contingencies (Note 4)                                                                                                                   |  |                    |          |   |                |   |          |  
|                                                                                                                                                         |  |                   
|Stockholders equity:                                                                                                                                    |  |                    |          |   |                |   |          |  
|Preferred stock, $.01 par value; 5,000 shares authorized; none outstanding                                                                               |  |                    |         |   |                |   |         |  
|Common stock, $.01 par value; 150,000 shares authorized; 94,638 and 84,048 issued and outstanding at September 30, 2004 and March 31, 2004,
respectively |  |                    | 947      |   |                |   | 840      |  
|Additional paid-in-capital                                                                                                                               |  |                    | 484,963  |   |                |   | 461,483  |  
|Accumulated deficit                                                                                                                                      |  |                    | (382,541 | ) |                |   | (367,779 | )
|Accumulated other comprehensive loss                                                                                                                     |  |                    | (13,677  | ) |                |   | (13,362  | )
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total stockholders equity                                                                                                                               |  |                    | 89,692   |   |                |   | 81,182   |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  
|Total liabilities and stockholders equity                                                                                                               |  | $                  | 189,448  |   |                | $ | 163,244  |  
|                                                                                                                                                         |  |                    |          |   |                |   |          |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



3



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##### Table of Contents

STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months Ended September 30, |        |   | Six Months Ended September 30, |  
|                                                      |  | 2004                             |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|Net sales                                             |  | $                                | 43,615 |   |                                | $ | 36,882 |      |  | $ | 89,656  |   |  | $ | 72,849  |  
|Cost of sales                                         |  |                                  | 35,187 |   |                                |   | 29,819 |      |  |   | 74,302  |   |  |   | 58,440  |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                  | 8,428  |   |                                |   | 7,063  |      |  |   | 15,354  |   |  |   | 14,409  |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating Expenses                                    |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                              |  |                                  | 4,189  |   |                                |   | 3,982  |      |  |   | 8,552   |   |  |   | 7,868   |  
|Selling, general and administrative                   |  |                                  | 9,979  |   |                                |   | 9,939  |      |  |   | 19,610  |   |  |   | 16,895  |  
|Amortization of intangible assets                     |  |                                  | 395    |   |                                |   |       |      |  |   | 790     |   |  |   |        |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                              |  |                                  | 14,563 |   |                                |   | 13,921 |      |  |   | 28,952  |   |  |   | 24,763  |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating loss                                        |  |                                  | (6,135 | ) |                                |   | (6,858 | )    |  |   | (13,598 | ) |  |   | (10,354 | )
|                                                      |  |                                  |        |  
|Other income (expense):                               |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                       |  |                                  | 153    |   |                                |   | 269    |      |  |   | 303     |   |  |   | 531     |  
|Interest expense                                      |  |                                  | (552   | ) |                                |   | (26    | )    |  |   | (770    | ) |  |   | (59     | )
|Other expense, net                                    |  |                                  | (42    | ) |                                |   | (107   | )    |  |   | (343    | ) |  |   | (284    | )
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes                |  |                                  | (6,576 | ) |                                |   | (6,722 | )    |  |   | (14,408 | ) |  |   | (10,166 | )
|                                                      |  |                                  |        |  
|Provision for income taxes                            |  |                                  | 202    |   |                                |   | 280    |      |  |   | 353     |   |  |   | 211     |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                                | (6,778 | ) |                                | $ | (7,002 | )    |  | $ | (14,761 | ) |  | $ | (10,377 | )
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share                      |  | $                                | (0.08  | ) |                                | $ | (0.08  | )    |  | $ | (0.17   | ) |  | $ | (0.13   | )
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted weighted average shares outstanding |  |                                  | 84,922 |   |                                |   | 82,922 |      |  |   | 84,528  |   |  |   | 82,877  |  
|                                                      |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



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STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  |                               |         |   |      |   |          |  
|---------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | -------- | -
|                                                                             |  | Six Months EndedSeptember 30, |        
|                                                                             |  | 2004                          |         |   | 2003 |  
|Cash flows from operating activities:                                        |  |                               |         |   |      |   |          |  
|Net loss                                                                     |  | $                             | (14,761 | ) |      | $ | (10,377  | )
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                               |         |   |      |   |          |  
|Depreciation and amortization                                                |  |                               | 5,108   |   |      |   | 4,223    |  
|Changes in assets and liabilities                                            |  |                               |         |   |      |   |          |  
|Accounts receivable                                                          |  |                               | (9,089  | ) |      |   | 2,831    |  
|Inventories                                                                  |  |                               | (3,255  | ) |      |   | 288      |  
|Other assets                                                                 |  |                               | 175     |   |      |   | 1,274    |  
|Accounts payable                                                             |  |                               | (2,142  | ) |      |   | 1,291    |  
|Income tax payable                                                           |  |                               | 461     |   |      |   | 133      |  
|Accrued liabilities                                                          |  |                               | (1,649  | ) |      |   | (9,021   | )
|Long term liabilities                                                        |  |                               | (1,934  | ) |      |   | (1,948   | )
|                                                                             |  |                               |         |   |      |   |          |  
|Net cash used for operating activities                                       |  |                               | (27,086 | ) |      |   | (11,306  | )
|                                                                             |  |                               |         |   |      |   |          |  
|Cash flows from investing activities:                                        |  |                               |         |   |      |   |          |  
|Purchase of short-term investments                                           |  |                               | (61,157 | ) |      |   | (139,332 | )
|Proceeds from sale of short term investments                                 |  |                               | 58,575  |   |      |   | 152,648  |  
|Purchase of property and equipment                                           |  |                               | (5,549  | ) |      |   | (4,647   | )
|                                                                             |  |                               |         |   |      |   |          |  
|Net cash provided by (used in) investing activities                          |  |                               | (8,131  | ) |      |   | 8,669    |  
|                                                                             |  |                               |         |   |      |   |          |  
|Cash flows from financing activities:                                        |  |                               |         |   |      |   |          |  
|Borrowing from banks                                                         |  |                               | 25,000  |   |      |   |         |  
|Repayment of bank borrowings                                                 |  |                               | (2,083  | ) |      |   |         |  
|Proceeds from sales of common stock                                          |  |                               | 23,587  |   |      |   | 600      |  
|                                                                             |  |                               |         |   |      |   |          |  
|Net cash provided by financing activities                                    |  |                               | 46,504  |   |      |   | 600      |  
|                                                                             |  |                               |         |   |      |   |          |  
|Effect of exchange rate changes on cash                                      |  |                               | (1,002  | ) |      |   | 86       |  
|                                                                             |  |                               |         |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                         |  |                               | 10,285  |   |      |   | (1,951   | )
|Cash and cash equivalents at beginning of period                             |  |                               | 21,626  |   |      |   | 34,036   |  
|                                                                             |  |                               |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                   |  | $                             | 31,911  |   |      | $ | 32,085   |  
|                                                                             |  |                               |         |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                             |  |                               |         |   |      |   |          |  
|Interest paid                                                                |  | $                             | 598     |   |      | $ | 74       |  
|Income taxes paid                                                            |  | $                             | 94      |   |      | $ | 222      |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



5



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##### Table of Contents

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, 2004, filed with the Securities and Exchange Commission on May 27, 2004.



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 considered as short-term investments. Cash and cash equivalents consist of cash, money market funds, and short-term
securities as of September 30, 2004 and March 31, 2004.



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##### Table of Contents

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 gains on the portfolio as of September 30, 2004 were insignificant. At September 30, 2004, the available-for-sale securities had contractual maturities
ranging from 1 month to 10 months, with a weighted average maturity of 2 months.



INVENTORIES



Inventories are stated at the lower of cost
(first-in, first-out) or market, where cost includes material, labor and manufacturing overhead. Inventories consist of (in thousands):



|                |  |                    |        |                |   |       
|--------------- |  | ------------------ | ------ | -------------- | - | ------
|                |  | September 30, 2004 |        | March 31, 2004
|Raw materials   |  | $                  | 14,530 |                | $ | 20,594
|Work in process |  |                    | 3,468  |                |   | 1,719 
|Finished goods  |  |                    | 18,777 |                |   | 10,788
|                |  |                    |        |                |   |       
|                |  | $                  | 36,775 |                | $ | 33,101
|                |  |                    |        |                |   |       



In the second quarter of fiscal 2004,
the Company realized a $0.5 million benefit due to sale of excess inventory, which had been fully reserved in prior periods. There was no benefit recorded in the second quarter of fiscal 2005.



OTHER CURRENT ASSETS



Other current assets included the following (in thousands):



|                          |  |                    |        |                |   |       
|------------------------- |  | ------------------ | ------ | -------------- | - | ------
|                          |  | September 30, 2004 |        | March 31, 2004
|Receivable from suppliers |  | $                  | 3,335  |                | $ | 3,886 
|Non-trade receivables     |  |                    | 1,064  |                |   | 1,037 
|Prepaid expenses          |  |                    | 6,335  |                |   | 4,730 
|Prepaid insurance         |  |                    | 645    |                |   | 569   
|Tax refund                |  |                    | 1,008  |                |   | 423   
|Other                     |  |                    | 270    |                |   | 287   
|                          |  |                    |        |                |   |       
|                          |  | $                  | 12,657 |                | $ | 10,932
|                          |  |                    |        |                |   |       



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##### Table of Contents

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



OTHER ASSETS - LONGTERM



Included in other assets as of September 30, 2004 and March 31, 2004 are long-term accounts receivable of $1.0 million and $1.8 million as
of September 30, 2004 and March 31, 2004, respectively. The long-term accounts receivable is due to the extended terms of credit granted by the Company in fiscal 2004 to some of its customers in order to position itself favorably in certain markets.
Other assets also included long-term deposits for premises leased by the Company.



ACCRUED LIABILITIES



Accrued liabilities included the
following (in thousands):



|                                      |  |                    |        |                |   |       
|------------------------------------- |  | ------------------ | ------ | -------------- | - | ------
|                                      |  | September 30, 2004 |        | March 31, 2004
|Customer deposits                     |  | $                  | 1,190  |                | $ | 1,175 
|Accrued payroll and benefits          |  |                    | 2,692  |                |   | 2,891 
|Accrued commissions                   |  |                    | 1,955  |                |   | 2,041 
|Accrued warranty                      |  |                    | 4,810  |                |   | 4,277 
|Accrued restructuring-current portion |  |                    | 3,638  |                |   | 4,255 
|Accrual for contingent liabilities    |  |                    |       |                |   | 1,866 
|Other                                 |  |                    | 6,273  |                |   | 5,213 
|                                      |  |                    |        |                |   |       
|                                      |  | $                  | 20,558 |                | $ | 21,718
|                                      |  |                    |        |                |   |       



Accrual for contingent liability of
$1.9 million at March 31, 2004 was for claims made by trustees for unsecured creditors in the bankruptcy proceedings of the Companys prior customers. In July 2004, the Company reached a settlement on the claims for $1.6 million. The remaining
$0.3 million of accrual was reversed in the second quarter of fiscal 2005 and is included in the selling general and administrative expenses on the income statement.



CURRENCY TRANSLATION



The functional currency of the Companys United Kingdom and New Zealand subsidiaries 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 these 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.



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##### Table of Contents

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 in earnings.



Additionally, the Company hedges forecasted non-U.S. dollar sales and non-U.S.
dollar purchases. In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as cash flow hedges, and 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 half
of fiscal 2005 and fiscal 2004 (in thousands):



|                                   |  |                                                   |      |   |                                                   |    
|---------------------------------- |  | ------------------------------------------------- | ---- | - | ------------------------------------------------- | ---
|                                   |  | Six Months EndedSeptember 30, 2004Gains/ (Losses) |      |   | Six Months EndedSeptember 30, 2003Gains/ (Losses)
|Beginning balance on April 1       |  | $                                                 | 23   |   |                                                   | 56 
|Net changes                        |  |                                                   | (229 | ) |                                                   | 157
|Reclassifications to revenue       |  |                                                   | 64   |   |                                                   | 4  
|Reclassifications to cost of sales |  |                                                   | (37  | ) |                                                   | 11 
|                                   |  |                                                   |      |   |                                                   |    
|Ending balance on September 30     |  | $                                                 | (179 | ) |                                                   | 228
|                                   |  |                                                   |      |   |                                                   |    



An insignificant amount of loss was
recognized in other income and expense in the first half of fiscal 2004 and the first half of fiscal 2005 related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not
occur.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 policy, must have a rating 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 as a percentage of our accounts receivable balance at September 30, 2004 and March 31, 2004, along with the percentage of
accounts receivable balance they individually represent. No other customer accounted for more than 10% of the accounts receivable balance at the dates indicated.



|                                          |  |                    |  |               
|----------------------------------------- |  | ------------------ |  | --------------
|                                          |  | September 30, 2004 |  | March 31, 2004
|Number of significant customers           |  | 2                  |  | 3             
|Percentage of accounts receivable balance |  | 19%, 15%           |  | 30%, 22%, 11% 



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.



|                                |  |                                     |  |                                    |  |                                   |  |                                  
|------------------------------- |  | ----------------------------------- |  | ---------------------------------- |  | --------------------------------- |  | ---------------------------------
|                                |  | Three MonthsEnded September 30,2004 |  | Three MonthsEndedSeptember 30,2003 |  | Six MonthsEnded September 30,2004 |  | Six MonthsEnded September 30,2003
|Number of significant customers |  | 1                                   |  | 2                                  |  | 2                                 |  | 2                                
|Percentage of net sales         |  | 22%                                 |  | 17%, 14%                           |  | 21%, 12%                          |  | 14%, 12%                         



The Company actively markets and sells
products in Russia, Africa, Asia, Europe, the Middle East and the Americas. The Company performs ongoing credit evaluations of its customers financial conditions and generally requires no collateral, although sales to Asia, Eastern Europe 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 in Financial Statements. 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.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



In accordance with SAB 104, revenues from product sales are generally recognized when title
and risk of loss pass 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.



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 revenue. The Companys standard warranty is generally for a period of 27 months from the date of sale
if the customer uses the Company or its approved installers to install the products, otherwise it is 15 months from the date of sale. 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 the 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.



NET 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. Diluted 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.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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, loss per share would have been reduced to the pro forma amounts indicated in the table below.



|                                                                                                                     |  |                                          |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                     |  | Three months endedSeptember 30,          |         |   | Six months endedSeptember 30, |  
|                                                                                                                     |  | 2004                                     |         |   | 2003                          |   |        | 2004 |  |   | 2003    |  
|                                                                                                                     |  | (in thousands, except per share amounts) |        
|Net loss  as reported                                                                                               |  | $                                        | (6,778  | ) |                               | $ | (7,002 | )    |  | $ | (14,761 | ) |  | $ | (10,377 | )
|Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |                                          | (3,431  | ) |                               |   | (2,151 | )    |  |   | (6,930  | ) |  |   | (4,932  | )
|                                                                                                                     |  |                                          |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                                 |  | $                                        | (10,209 | ) |                               | $ | (9,153 | )    |  | $ | (21,691 | ) |  | $ | (15,309 | )
|                                                                                                                     |  |                                          |         |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share  as reported                                                                       |  | $                                        | (0.08   | ) |                               | $ | (0.08  | )    |  | $ | (0.17   | ) |  | $ | (0.13   | )
|Basic and diluted loss per share  pro forma                                                                         |  |                                          | (0.12   | ) |                               |   | (0.11  | )    |  |   | (0.26   | ) |  |   | (0.18   | )



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:



|                                        |  |                                 |   |  |                               |   |  |            |   |  |            |  
|--------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - |  | ---------- | - |  | ---------- | -
|                                        |  | Three months endedSeptember 30, |   |  | Six months endedSeptember 30, |  
|                                        |  | 2004                            |   |  | 2003                          |   |  | 2004       |   |  | 2003       |  
|Expected dividend yield                 |  | 0.0                             | % |  | 0.0                           | % |  | 0.0        | % |  | 0.00       | %
|Expected stock volatility               |  | 96.7                            | % |  | 96.0                          | % |  | 96.7       | % |  | 96.0       | %
|Risk-free interest rate                 |  | 3.5                             | % |  | 2.8                           | % |  | 3.62       | % |  | 2.8        | %
|Expected life of options from vest date |  | 1.53 years                      |   |  | 1.68 years                    |   |  | 1.29 years |   |  | 1.68 years |  
|                                        |  |                                 |   | 
|Forfeiture rate                         |  | Actual                          |   |  | Actual                        |   |  | Actual     |   |  | Actual     |  



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The fair value of each share granted under the employee stock purchase plan is estimated on
the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|                                        |  |                                 |   |  |                               |   |  |           |   |  |           |  
|--------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - |  | --------- | - |  | --------- | -
|                                        |  | Three months endedSeptember 30, |   |  | Six months endedSeptember 30, |  
|                                        |  | 2004                            |   |  | 2003                          |   |  | 2004      |   |  | 2003      |  
|Expected stock volatility               |  | 80.6                            | % |  | 95.63                         | % |  | 83.67     | % |  | 89.36     | %
|Risk-free interest rate                 |  | 1.5                             | % |  | 0.9                           | % |  | 1.2       | % |  | 1.0       | %
|Expected life of options from vest date |  | 0.2 years                       |   |  | 0.3 years                     |   |  | 0.2 years |   |  | 0.3 years |  



The weighted average fair value of
stock options granted during the quarters ended September 30, 2004 and September 30, 2003 was $1.38 and $1.67, respectively.



COMPREHENSIVE INCOME



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



|                                             |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                             |  | 2004                            |        |   | 2003                          |   |        | 2004 |  |   | 2003    |  
|Net loss                                     |  | $                               | (6,778 | ) |                               | $ | (7,002 | )    |  | $ | (14,761 | ) |  | $ | (10,377 | )
|Other comprehensive income (loss):           |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Unrealized currency translation gain/ (loss) |  |                                 | 305    |   |                               |   | (412   | )    |  |   | (258    | ) |  |   | 899     |  
|Unrealized holding gain on investments       |  |                                 | 24     |   |                               |   | 90     |      |  |   | (57     | ) |  |   | 42      |  
|                                             |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                           |  | $                               | (6,449 | ) |                               | $ | (7,324 | )    |  | $ | (15,076 | ) |  | $ | (9,436  | )
|                                             |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  



NEW ACCOUNTING PRONOUNCEMENTS



In July 2004, the Emerging Issues Task Force (EITF) issued
EITF Issue No. 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock. This issue addresses the determination of whether an investment is in-substance common stock and when to
perform that evaluation, but does not address the determination of whether an investor has the ability to exercise significant influence over the operating and financial policies of the investee. The pronouncement is effective for fiscal periods
beginning after September 15, 2004. For existing investments, the investor should make an initial determination as to whether the investment is in-substance common stock based on the circumstances existing as of the date of first application of this
issue. The Company does not believe that the adoption of this standard will have a material impact on its consolidated balance sheet or statement of operations.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF No. 03-01). EITF No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments
and disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under the Financial Accounting Standards Board (FASB) Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The additional
disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. For investments accounted for under FAS 115, the disclosures are effective in annual financial statements for fiscal years ending after December 15,
2003. The adoption of this standard did not have a material impact on the Companys consolidated balance sheet or statement of operations.



The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, in
January 2003, and a revised interpretation of FIN 46 (FIN 46-R) in December 2003. On February 12, 2004, FASB issued FASB staff positions FIN 46 (R)-1, FIN 46 (R)-2 and FIN 46 (R)-3 which are applicable to all entities to which FIN 46 (R)
is applied. FIN 46 requires certain variable interest entities (VIEs) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after
January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities for which the Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company
was required to continue to apply FIN 46 through March 15, 2004. The Company was required to adopt the provisions of FIN 46-R after March 15, 2004. The adoption of FIN 46-R did not have an impact on the financial position, results of operations or
cash flows of the Company.



NOTE 2. ACQUIRED INTANGIBLE ASSETS



In fiscal 2004, the Company acquired the net assets of Plessey Broadband
Wireless, a division of Tellumat (Pty) Ltd. (Tellumat) located in Cape Town, South Africa. As part of the purchase agreement the Company acquired $2.4 million of intangible assets. This $2.4 million of intangible assets has been assigned
to intellectual property and is estimated to have a useful life of 18 months.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table summarizes the gross and net balance of the intangible assets as of
September 30, 2004 (in thousands):



|                      |  |                          |       |                         |   |                    |  |   |    
|--------------------- |  | ------------------------ | ----- | ----------------------- | - | ------------------ |  | - | ---
|                      |  | As of September 30, 2004
|                      |  | Gross CarryingAmount     |       | AccumulatedAmortization |   | Net CarryingAmount
|Intellectual Property |  | $                        | 2,371 |                         | $ | 1,581              |  | $ | 790



Aggregate Amortization Expense (in thousands):



|                                                   |  |      
|-------------------------------------------------- |  | -----
|For the three months ended September 30, 2004      |  | $ 395
|                                                  
|Estimated Amortization Expense (in thousands):    
|                                                   | 
|For the remainder of the year ended March 31, 2005 |  | $790 



NOTE 3. BANK LINE OF CREDIT



On May 27, 2004 the Company borrowed $25 million on a long-term basis
against its $35 million revolving 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. Short-term borrowings under the $10 million revolving credit portion of the credit facility will be at the banks prime rate, which was 4.75% per annum at September 30, 2004, or LIBOR plus 2%. This facility is secured by the
Companys assets. During the six months ended September 30, 2004 the Company repaid $2.1 million of the loan and recorded interest expense of $0.1 million in the quarter ended June 30, 2004 and $0.4 million in the quarter ended September 30,
2004. As part of the loan agreement, there is a tangible net worth covenant and a liquidity ratio covenant. As of September 30, 2004 we were in compliance with these financial covenants of the loan.



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. The
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.



15



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##### Table of Contents

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                                      |  |                                |        |   |      |   |        |  
|----------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                      |  | Six Months Ended September 30, |       
|                                                      |  | 2004                           |        |   | 2003 |  
|Balance at the beginning of period                    |  | $                              | 4,277  |   |      | $ | 4,219  |  
|Additions related to current period sales             |  |                                | 3,400  |   |      |   | 3,788  |  
|Warranty costs incurred in the current period         |  |                                | (2,867 | ) |      |   | (3,864 | )
|Adjustments to accruals related to prior period sales |  |                                |       |   |      |   |       |  
|                                                      |  |                                |        |   |      |   |        |  
|Balance at the end                                    |  | $                              | 4,810  |   |      | $ | 4,143  |  
|                                                      |  |                                |        |   |      |   |        |  



NOTE 5. RESTRUCTURING CHARGES



The Company did not record any restructuring charges in the first half of
fiscal 2005 and the first half of fiscal 2004.



In the fourth quarter of fiscal
2004, the Company recorded $5.5 million of restructuring charges. In order to reduce expenses and increase operational efficiency, the Company reduced the workforce by 34 employees and recorded restructuring charges for employee severance and
benefits of $0.9 million. As of September 30, 2004, all affected employees had been terminated. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003 as explained in
the following paragraphs. The vacated building lease obligations recorded as restructuring charges in fiscal 2003 and in fiscal 2002 included payments required under lease contracts, less estimated sublease income after the property has been
abandoned. 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 lease loss represents
managements estimate of time to sublease and actual sublease rates. In fiscal 2004, the Company recorded the additional $4.6 million charges primarily due to a decrease in estimated future sublease income.



During fiscal 2003 and 2002, the Company announced several restructuring programs to reduce
expenses and improve operational efficiency. These restructuring programs included consolidation of additional 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.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table summarizes the activities of the restructuring accrual during the first
half of fiscal 2005 and during the fiscal year ended March 31, 2004 (in millions):



|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|-------------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                                 |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of March 31, 2003     |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision                        |  |                       | 0.9  |   |                     |   | 4.6  |       |  |   | 5.5  |  
|Cash payments                    |  |                       | (1.3 | ) |                     |   | (5.6 | )     |  |   | (6.9 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of March 31, 2004     |  |                       | 1.1  |   |                     |   | 21.7 |       |  |   | 22.8 |  
|Provision                        |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                    |  |                       | (0.2 | ) |                     |   | (1.2 | )     |  |   | (1.4 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of June 30, 2004      |  |                       | 0.9  |   |                     |   | 20.5 |       |  |   | 21.4 |  
|Provision                        |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                    |  |                       | (0.3 | ) |                     |   | (0.9 | )     |  |   | (1.2 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of September 30, 2004 |  | $                     | 0.6  |   |                     | $ | 19.6 |       |  | $ | 20.2 |  
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion                  |  | $                     | 0.6  |   |                     | $ | 3.1  |       |  | $ | 3.7  |  
|Long-term portion                |  | $                     |     |   |                     | $ | 16.5 |       |  | $ | 16.5 |  



The remaining accrual balance of $20.2
as of September 30, 2004 is expected to be paid out in cash. The Company expects $2.2 million of the remaining accrual balance ($0.6 million of severance and benefits, $0.2 million of legal costs and $1.4 million of vacated building lease
obligations) to be paid out in the remainder of fiscal 2005 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2006 through fiscal 2012.



NOTE 6. ISSUE OF COMMON STOCK AND WARRANTS



During the second quarter of fiscal 2005, the Company raised $22.9 million cash (net of expenses) by issuing 10,327,120 shares of common stock at a price of $2.36 per
share. In connection with the closing of this sale of shares on September 24, 2004, the Company issued 2,581,780 warrants to purchase up to 2,581,780 shares of the Companys common stock at an exercise price of $2.95 per share as an incentive
to invest in the Company. The warrants expire five years from the date of issue. The Company allocated $2.6 million of the sales price to the warrants based on the relative fair value of the warrants. The value of the warrants was determined using
the Black-Scholes option-pricing model and the following weighted average assumptions: contractual term of two years from date of grant, risk free interest rate of 2.53%, volatility of 96.74%, and expected dividend yield of 0%.



NOTE 7. 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 2005 and 2004 is presented in accordance with SFAS 131.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 announced a
new wireless platform consisting of an Intelligent Node Unit and a radio element, which combined are called Eclipse (Eclipse) in July 2003. The Company designs and develops the above products in Wellington, New Zealand, Capetown, South Africa 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 Microelectronics Technology Inc.
(MTI), a Taiwanese company for outsourcing of the Companys XP4 and Altium products manufacturing operations. The Company manages the manufacturing of the DXR product family from Wellington, New Zealand, where most manufacturing for the product
takes place, except for a portion of the DXR product family that is outsourced. The Services operating segment includes, but is not limited to, installation, repair, spare parts, network design, path surveys, integration, and other revenues. The
Company maintains regional service centers in Lanarkshire, Scotland and Clark Field, Pampanga, Philippines.



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.



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



|                 |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                 |  | Three Months Ended September 30, |        |   | Six Months Ended September 30, |  
|                 |  | 2004                             |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|Products:        |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Revenues         |  | $                                | 36,264 |   |                                | $ | 30,205 |      |  | $ | 74,757  |   |  | $ | 58,782  |  
|Operating loss   |  |                                  | (7,472 | ) |                                |   | (8,262 | )    |  |   | (15,844 | ) |  |   | (13,256 | )
|                 |  |                                  |        |  
|Services:        |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Revenues         |  |                                  | 7,351  |   |                                |   | 6,677  |      |  |   | 14,899  |   |  |   | 14,067  |  
|Operating income |  |                                  | 1,337  |   |                                |   | 1,404  |      |  |   | 2,246   |   |  |   | 2,902   |  
|                 |  |                                  |        |  
|Total:           |  |                                  |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Revenues         |  | $                                | 43,615 |   |                                | $ | 36,882 |      |  | $ | 89,656  |   |  | $ | 72,849  |  
|Operating loss   |  |                                  | (6,135 | ) |                                |   | (6,858 | )    |  |   | (13,598 | ) |  |   | (10,354 | )



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##### Table of Contents

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|               |  |                                 |        |                               |   |        |  |      |        |  |   |       
|-------------- |  | ------------------------------- | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|               |  | Three Months EndedSeptember 30, |        | Six Months EndedSeptember 30,
|               |  | 2004                            |        | 2003                          |   | 2004   |  | 2003
|XP4            |  | $                               | 12,645 |                               | $ | 10,292 |  | $    | 33,629 |  | $ | 22,422
|Altium         |  |                                 | 8,435  |                               |   | 12,395 |  |      | 14,792 |  |   | 22,288
|Eclipse        |  |                                 | 8,051  |                               |   |       |  |      | 12,731 |  |   |      
|DXR            |  |                                 | 5,251  |                               |   | 4,670  |  |      | 9,755  |  |   | 10,788
|Other Products |  |                                 | 1,882  |                               |   | 2,848  |  |      | 3,850  |  |   | 3,284 
|               |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Total Products |  |                                 | 36,264 |                               |   | 30,205 |  |      | 74,757 |  |   | 58,782
|Total Services |  |                                 | 7,351  |                               |   | 6,677  |  |      | 14,899 |  |   | 14,067
|               |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Total Revenues |  | $                               | 43,615 |                               | $ | 36,882 |  | $    | 89,656 |  | $ | 72,849
|               |  |                                 |        |                               |   |        |  |      |        |  |   |       



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



|              |  |                                 |        |                               |   |        |  |      |        |  |   |       
|------------- |  | ------------------------------- | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|              |  | Three Months EndedSeptember 30, |        | Six Months EndedSeptember 30,
|              |  | 2004                            |        | 2003                          |   | 2004   |  | 2003
|Americas      |  | $                               | 10,120 |                               | $ | 5,586  |  | $    | 19,696 |  | $ | 11,438
|Russia        |  |                                 | 9,696  |                               |   | 5,668  |  |      | 16,126 |  |   | 9,385 
|Other Europe  |  |                                 | 8,644  |                               |   | 9,517  |  |      | 14,786 |  |   | 18,122
|Middle East   |  |                                 | 4,400  |                               |   | 3,810  |  |      | 10,265 |  |   | 6,510 
|Nigeria       |  |                                 | 1,116  |                               |   | 3,801  |  |      | 8,421  |  |   | 7,731 
|Other Africa  |  |                                 | 5,786  |                               |   | 2,432  |  |      | 10,599 |  |   | 5,225 
|Asia/Pacific  |  |                                 | 3,853  |                               |   | 6,068  |  |      | 9,763  |  |   | 14,438
|              |  |                                 |        |                               |   |        |  |      |        |  |   |       
|Total Revenue |  | $                               | 43,615 |                               | $ | 36,882 |  | $    | 89,656 |  | $ | 72,849
|              |  |                                 |        |                               |   |        |  |      |        |  |   |       



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



|                                  |  |                    |        |                |   |       
|--------------------------------- |  | ------------------ | ------ | -------------- | - | ------
|                                  |  | September 30, 2004 |        | March 31, 2004
|United Kingdom                    |  | $                  | 16,778 |                | $ | 15,388
|United States                     |  |                    | 6,302  |                |   | 6,912 
|New Zealand                       |  |                    | 4,956  |                |   | 4,655 
|Other foreign countries           |  |                    | 3,718  |                |   | 4,220 
|                                  |  |                    |        |                |   |       
|Total property and equipment, net |  | $                  | 31,754 |                | $ | 31,175
|                                  |  |                    |        |                |   |       



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##### Table of Contents

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 expectation that gross margins will improve by the end of fiscal year 2005 due to the continued increase in sales of our new product Eclipse which has higher margins as compared
to our other products;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that cash usage will decline by the end of fiscal year;
| | - | -----------------------------------------------------------------------



| |  | Our expectation that net losses will decline by the end of fiscal year;
| | - | -----------------------------------------------------------------------



| |  | Our expectation that cash requirements for the product operating segment will continue to be primarily for working capital requirements, restructuring payments and research and
development activities;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 relatively flat in the third quarter of fiscal 2005 as compared to the second quarter of fiscal 2005;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that there will be no significant change in selling, general and administrative expenses in the remainder of fiscal 2005;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to pay out in cash the $2.2 million of the remaining accrual balance ($0.6 million of severance and benefits, $0.2 million of legal costs and $1.4 million of vacated
building lease obligations) in fiscal 2005 and vacated building lease obligations of $18.0 million during fiscal 2006 through fiscal 2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to minimize our overall customer financing exposures by discounting receivables when possible, raising 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 September 30, 2004 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current
assets and our $8.8 million available credit on our revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



| |  | Our expectation that the redevelopment of the Middle East region 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
including those contained in the section, Factors That May Affect Future Financial Results, beginning on page 36 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, 2004, in evaluating these forward-looking statements.



Business Overview



Stratex Networks,
Inc. was founded in 1984. We design, manufacture, market and sell advanced wireless solutions for worldwide mobile and fixed telephone network interconnection and access. 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 also sell our products to base station suppliers, who provide and install integrated systems
to service providers, and to distributors, including value-added resellers (VARs) and agents.



We provide our customers with a broad product line. In June 2003, we announced a new wireless platform consisting of an Intelligent Node Unit (INU) and a radio element, which combined are called Eclipse (Eclipse). Our products 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 2XOC-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 design our products to meet the requirements of mobile communications networks and fixed wireless broadband access networks worldwide. Our
products are designed to enable our customers to deploy and expand their wireless infrastructure and market their services rapidly to subscribers, so that service providers can realize a return on their investments in frequency allocation licenses
and network equipment.



We have equipment installed in over 100 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 92% in the first half of fiscal 2005, 98% in fiscal 2004 and 95% in fiscal
2003.



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##### Table of Contents

Our newly introduced product Eclipse showed good progress in the second quarter of fiscal 2005. New order bookings for
Eclipse were a little over $12 million. During the second quarter we focused our efforts on successfully rolling out Eclipse in the market. Sales of Eclipse product were $8.1 million for the second quarter of fiscal 2005 and accounted for 22% of our
revenue for that quarter.



Gross margin also improved in the second quarter of
fiscal 2005 as compared to the prior quarter as noted in the table below.



|              |  |                    |   |  |               |  
|------------- |  | ------------------ | - |  | ------------- | -
|              |  | Three months ended |  
|              |  | September 30, 2004 |   |  | June 30, 2004 |  
|Gross Margins |  | 19                 | % |  | 15            | %



Our gross margins in the first quarter
of fiscal 2005 were 15%. Gross margin in the second quarter improved to 19%. We expect gross margins to continue to improve by the end of fiscal year 2005 due to the increase in sales of our new product Eclipse which generally has higher margins as
compared to our other products.



We utilized a significant amount of cash in
the second quarter of fiscal 2005. This utilization was primarily because of additional working capital used in accounts receivable and inventory. During the quarter we raised $22.9 million (net of expenses related to the issuance of stock) by the
sale of 10,327,120 shares of common stock at a price of $2.36 per share. We expect cash usage to decline later in the fiscal year as net losses decline.



Critical Accounting Policies and Estimates



There have been no changes to our critical accounting policies since March 31, 2004. For a description of our critical accounting policies, see our Annual Report on Form
10-K for the year ended March 31, 2004.



Revenues



Net sales for the second quarter of fiscal 2005 increased to $43.6 million, compared to
$36.9 million reported in the second quarter of fiscal 2004, and increased to $89.7 million for the first half of fiscal 2005, compared to $72.8 million in the first half of fiscal 2004. We believe that this increase was primarily attributable to an
increase in the demand for our products in Russia and the Americas.



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##### Table of Contents

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



|               |  |                                  |        |           |                               |   |      |   |           |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  
|-------------- |  | -------------------------------- | ------ | --------- | ----------------------------- | - | ---- | - | --------- |  | --- | ---- |  | --------- | ------ |  | ---- | - | --------- | - | ------ |  | --- | -
|               |  | Three Months Ended September 30, |        |           | Six Months Ended September 30 |  
|               |  | 2004                             |        | % ofTotal |                               |   | 2003 |   | % ofTotal |  |     | 2004 |  | % ofTotal |        |  | 2003 |   | % ofTotal |  
|Americas       |  | $                                | 10,120 |           | 23                            | % |      | $ | 5,586     |  | 15  | %    |  | $         | 19,696 |  | 22   | % |           | $ | 11,438 |  | 16  | %
|Russia         |  |                                  | 9,696  |           | 22                            | % |      |   | 5,668     |  | 16  | %    |  |           | 16,126 |  | 18   | % |           |   | 9,385  |  | 13  | %
|Other Europe   |  |                                  | 8,644  |           | 20                            | % |      |   | 9,517     |  | 26  | %    |  |           | 14,786 |  | 17   | % |           |   | 18,122 |  | 24  | %
|Middle East    |  |                                  | 4,400  |           | 10                            | % |      |   | 3,810     |  | 10  | %    |  |           | 10,265 |  | 11   | % |           |   | 6,510  |  | 9   | %
|Nigeria        |  |                                  | 1,116  |           | 3                             | % |      |   | 3,801     |  | 10  | %    |  |           | 8,421  |  | 9    | % |           |   | 7,731  |  | 11  | %
|Other Africa   |  |                                  | 5,786  |           | 13                            | % |      |   | 2,432     |  | 7   | %    |  |           | 10,599 |  | 12   | % |           |   | 5,225  |  | 7   | %
|Asia/Pacific   |  |                                  | 3,853  |           | 9                             | % |      |   | 6,068     |  | 16  | %    |  |           | 9,763  |  | 11   | % |           |   | 14,438 |  | 20  | %
|               |  |                                  |        |           |                               |   |      |   |           |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  
|Total Revenues |  | $                                | 43,615 |           | 100                           | % |      | $ | 36,882    |  | 100 | %    |  | $         | 89,656 |  | 100  | % |           | $ | 72,849 |  | 100 | %



Net sales to Russia increased to $9.7
million in the second quarter of fiscal 2005 as compared to $5.7 million in the second quarter of fiscal 2004 primarily due to an increase in sales to an existing customer in that region. Net sales to Russia increased to $16.1 million in the first
half of fiscal 2005 from $9.4 million in the first half of fiscal 2004 primarily due to the same reason as noted above. Net sales in the Americas region also increased to $10.1 million in the second quarter of fiscal 2005 from $5.6 million in the
second quarter of fiscal 2004, an 81% increase. Net sales to the Americas region in the first half of fiscal 2005 increased to $19.7 million as compared to $11.4 million in the first half of fiscal 2004. This increase in sales in the Americas region
was primarily because of higher sales of our license exempt product which we acquired in the beginning of the third quarter of fiscal 2004. Net sales in the Other Europe region decreased to $14.8 million in the first half of fiscal 2005 from $18.1
million in the first half of fiscal 2004, primarily because there were less sales to Eastern European customers. Net sales in the Other Africa region also showed improvement because we secured one significant new customer in that region. Net sales
in the Asia/Pacific region in the first half of fiscal 2005 decreased to $9.8 million from $14.4 million in the first half of fiscal 2004 primarily due to the completion of certain projects in Thailand and India in the first half of fiscal 2004
which did not repeat in the first half of fiscal 2005. Net sales to Nigeria decreased in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004 as customer network rollout plans were focused on installations but net sales
in the first half of fiscal 2005 to Nigeria increased as compared to the first half of fiscal 2004 primarily due to increased sales to one customer in that region.



Orders and backlog.During the second quarter of fiscal 2005, we received $45.9 million in new orders shippable over the next 12
months, compared to $44.5 million in the second quarter of fiscal 2004. During the first half of fiscal 2005, we received $91.4 million in new orders shippable over the next 12 months, compared to $86.3 million in the first half of fiscal 2004. The
backlog at September 30, 2004 was $58.3 million, compared to $45.5 million at September 30, 2003 and $59.1 million at March 31, 2004. 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.



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##### Table of Contents

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.



|                      |  |                   |  |                   
|--------------------- |  | ----------------- |  | ------------------
|                      |  | September 30,2004 |  | September 30, 2003
|Number of customers   |  | 2                 |  | 2                 
|Percentage of backlog |  | 13%, 12%          |  | 12%, 10%          



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 September 30, |        |   | Six Months Ended September 30, |    
|               |  | 2004                             |        |   | % ofTotal                      |     |    | 2003 |   |        | % ofTotal |  |     | 2004 |  |   | % ofTotal |   |  | 2003 |    |  | % ofTotal |        
|XP4            |  | $                                | 12,645 |   |                                | 35  | %  |      | $ | 10,292 |           |  | 34  | %    |  | $ | 33,629    |   |  | 45   | %  |  | $         | 22,422  |   |  | 38  | % 
|Altium         |  |                                  | 8,435  |   |                                | 23  | %  |      |   | 12,395 |           |  | 41  | %    |  |   | 14,792    |   |  | 20   | %  |  |           | 22,288  |   |  | 38  | % 
|Eclipse        |  |                                  | 8,051  |   |                                | 22  | %  |      |   |       |           |  |    |      |  |   | 12,731    |   |  | 17   | %  |  |           |        |   |  |    |   
|DXR            |  |                                  | 5,251  |   |                                | 15  | %  |      |   | 4,670  |           |  | 16  | %    |  |   | 9,755     |   |  | 13   | %  |  |           | 10,788  |   |  | 18  | % 
|Other Products |  |                                  | 1,882  |   |                                | 5   | %  |      |   | 2,848  |           |  | 9   | %    |  |   | 3,850     |   |  | 5    | %  |  |           | 3,284   |   |  | 6   | % 
|               |  |                                  |        |   |                                |     |    |      |   |        |           |  |     |      |  |   |           |   |  |      |    |  |           |         |   |  |     |   
|Total Revenue  |  | $                                | 36,264 |   |                                | 100 | %  |      | $ | 30,205 |           |  | 100 | %    |  | $ | 74,757    |   |  | 100  | %  |  | $         | 58,782  |   |  | 100 | % 
|               |  |                                  |        |   |                                |     |    |      |   |        |           |  |     |      |  |   |           |   |  |      |    |  |           |         |   |  |     |   
|Operating Loss |  |                                  | (7,472 | ) |                                | (21 | )% |      |   | (8,262 | )         |  | (27 | )%   |  |   | (15,844   | ) |  | (21  | )% |  |           | (13,256 | ) |  | (23 | )%
|               |  |                                  |        |   |                                |     |    |      |   |        |           |  |     |      |  |   |           |   |  |      |    |  |           |         |   |  |     |   



24



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Net sales of our new product Eclipse that we began shipping in January 2004 was $8.1 million in the second quarter of
fiscal 2005 and $12.7 million in the first half of fiscal 2005. Net sales of our older product Altium declined to $8.4 million in the second quarter of fiscal 2005 and to $14.8 million in the first half of fiscal 2005 as compared to $12.4 million in
the second quarter of fiscal 2004 and $22.3 million in the first half of fiscal 2004, respectively, primarily because the demand for this product was replaced by our new product Eclipse. Net sales of our XP4 product line increased to $12.6 million
in the second quarter of fiscal 2005 from $10.3 million in the second quarter of fiscal 2004, primarily due to an increase in sales to our existing customers in Russia who are adding more access points to their existing networks. Net sales of XP4
also increased significantly in the first half of fiscal 2005 as compared to first half of fiscal 2004 primarily due to the same reason stated above. Operating loss of the product operating segment as a percentage of product revenue in the second
quarter of fiscal 2005 was lower by 6% as compared to second quarter of fiscal 2004 primarily because of increase in revenues resulting in higher absorption of fixed costs. Operating loss of the product operating segment as a percentage of product
revenue in the first half of fiscal 2005 as compared to first half of fiscal 2004 did not change significantly.



The cash used for the product operating segment was primarily due to operating losses incurred by that segment and an increase in the inventory levels of our new product,
Eclipse, in order to support its rollout in the market. Accounts receivable also increased significantly due to shipping most of our products in the last month of the quarter. The cash used by this segment was 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 next couple of quarters as the net losses decline.



Service Operating Segment. The revenue and operating income for the service operating segment for the periods indicated in the table below were as follows: (in thousands)



|                       |  |                                  |       |             |                                |   |      |   |             |  |    |      |  |             |        |  |      |   |             |   |        |  |    |  
|---------------------- |  | -------------------------------- | ----- | ----------- | ------------------------------ | - | ---- | - | ----------- |  | -- | ---- |  | ----------- | ------ |  | ---- | - | ----------- | - | ------ |  | -- | -
|                       |  | Three Months Ended September 30, |       |             | Six Months Ended September 30, |  
|                       |  | 2004                             |       | % ofRevenue |                                |   | 2003 |   | % ofRevenue |  |    | 2004 |  | % ofRevenue |        |  | 2003 |   | % ofRevenue |  
|Service revenue        |  | $                                | 4,191 |             |                                |   |      | $ | 3,380       |  |    |      |  | $           | 8,786  |  |      |   |             | $ | 7,085  |  |    |  
|Operating income       |  |                                  | 179   |             | 4                              | % |      |   | 383         |  | 11 | %    |  |             | 140    |  | 2    | % |             |   | 431    |  | 6  | %
|                       |  |                                  |       |             |                                |   |      |  
|Repair revenue         |  |                                  | 3,160 |             |                                |   |      |   | 3,297       |  |    |      |  |             | 6,113  |  |      |   |             |   | 6,982  |  |    |  
|Operating income       |  |                                  | 1,158 |             | 37                             | % |      |   | 1,021       |  | 31 | %    |  |             | 2,106  |  | 34   | % |             |   | 2,471  |  | 35 | %
|                       |  |                                  |       |             |                                |   |      |   |             |  |    |      |  |             |        |  |      |   |             |   |        |  |    |  
|Total Revenue          |  | $                                | 7,351 |             |                                |   |      | $ | 6,677       |  |    |      |  | $           | 14,899 |  |      |   |             | $ | 14,067 |  |    |  
|Total Operating income |  | $                                | 1,337 |             | 18                             | % |      | $ | 1,404       |  | 21 | %    |  | $           | 2,246  |  | 15   | % |             | $ | 2,902  |  | 21 | %



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 second quarter of fiscal 2005, service revenue increased to $4.2 million as compared to $3.4
million in the second quarter of fiscal 2004, in line with the increase in product revenues in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. The operating income for service revenue, as a percentage of service
revenue, was lower in the second quarter



25



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##### Table of Contents

of fiscal 2005 and in the first half of fiscal 2005 as compared to operating income in the second quarter of fiscal 2004
and the first half of fiscal 2004, respectively, primarily due to aggressive pricing on the installation of our new product Eclipse for one of our major projects in South Asia in order to successfully rollout our product in that market.



There was no significant change in repair revenue in the second quarter of fiscal 2005 as
compared to the second quarter of fiscal 2004. Repair revenue decreased to $6.1 million in the first half of fiscal 2005 from $7.0 million in the first half of fiscal 2004. Repair operating income, as a percentage of repair revenue, in the second
quarter of fiscal 2005 increased to 37% as compared to 31% in the second quarter of fiscal 2004 was primarily due to lower material costs for repair as we used the existing inventory on hand to repair our products instead of purchasing them from
third parties.



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 paid cash to several third party vendors for assistance in the installation of our products. In the first half of fiscal 2005,
we purchased approximately $1.8 million of spare parts for our discontinued Spectrum product line. We incurred this bulk purchase of parts for our Spectrum product line because our suppliers notified us that they would not continue manufacturing
this equipment. We expect the cash requirements for this segment to continue to be primarily for labor costs and spare parts.



Gross Profit



|              |  |                                  |        |              |                                |   |      |   |              |  |     |      |  |              |        |  |      |   |              |   |        |  |     |  
|------------- |  | -------------------------------- | ------ | ------------ | ------------------------------ | - | ---- | - | ------------ |  | --- | ---- |  | ------------ | ------ |  | ---- | - | ------------ | - | ------ |  | --- | -
|              |  | Three Months Ended September 30, |        |              | Six Months Ended September 30, |  
|              |  | 2004                             |        | % ofNetSales |                                |   | 2003 |   | % ofNetSales |  |     | 2004 |  | % ofNetSales |        |  | 2003 |   | % ofNetSales |  
|Net sales     |  | $                                | 43,615 |              | 100                            | % |      | $ | 36,882       |  | 100 | %    |  | $            | 89,656 |  | 100  | % |              | $ | 72,849 |  | 100 | %
|Cost of sales |  |                                  | 35,187 |              | 81                             | % |      |   | 29,819       |  | 81  | %    |  |              | 74,302 |  | 83   | % |              |   | 58,440 |  | 80  | %
|              |  |                                  |        |              |                                |   |      |   |              |  |     |      |  |              |        |  |      |   |              |   |        |  |     |  
|Gross profit  |  | $                                | 8,428  |              | 19                             | % |      | $ | 7,063        |  | 19  | %    |  | $            | 15,354 |  | 17   | % |              | $ | 14,409 |  | 20  | %



Gross profit as a percentage of net
sales was 19% in the second quarter of fiscal 2005, as well as in the second quarter of fiscal 2004. Product mix and pricing had an unfavorable impact of approximately 2% and manufacturing period costs had a favorable impact of approximately 2% on
the gross profit of second quarter of fiscal 2005 as compared to the gross profit of second quarter of fiscal 2004.



The decrease in gross margin in the first half of fiscal 2005, as compared to the first half of fiscal 2004, was primarily due to a negative pricing impact of
approximately 2% and a negative product mix impact of approximately 2% which was partially offset by a favorable manufacturing costs impact of approximately 1%. The inventory valuation benefit of $0.5 million recorded in the second quarter of fiscal
2004 had a favorable impact on gross profit of approximately 1% on the second quarter of fiscal 2004 and the first half of fiscal 2004. This inventory valuation benefit was due to the sale of some of our excess inventory, which was reserved in prior
periods.



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Our gross profit percentage increased in the second quarter of fiscal 2005 as compared to the first quarter of fiscal
2005 as indicated in the table below.



|                          |  |                    |        |   |               |   |        |  
|------------------------- |  | ------------------ | ------ | - | ------------- | - | ------ | -
|                          |  | Three Months ended |       
|                          |  | September 30, 2004 |        |   | June 30, 2004 |  
|Net Revenue               |  | $                  | 43,615 |   |               | $ | 46,041 |  
|Gross Margin              |  |                    | 8,428  |   |               |   | 6,926  |  
|Percentage of Net Revenue |  |                    | 19     | % |               |   | 15     | %



We expect gross profit, as a
percentage of sales, to continue to increase in the remaining quarters of fiscal 2005 due to an increase in sales of our new product Eclipse which will have higher margins as compared to our other product lines.



Research and Development



|                         |  |                                  |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|------------------------ |  | -------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                         |  | Three Months Ended September 30, |       |   | Six Months Ended September 30, |  
|                         |  | 2004                             |       |   | 2003                           |   |       | 2004 |  |   | 2003  |  
|Research and development |  | $                                | 4,189 |   |                                | $ | 3,982 |      |  | $ | 8,552 |   |  | $ | 7,868 |  
|% of net sales           |  |                                  | 9.6   | % |                                |   | 10.8  | %    |  |   | 9.5   | % |  |   | 10.8  | %



There was no significant change in
research and development expenses in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. In the first half of fiscal 2005, research and development expenses increased slightly to $8.6 million from $7.9 million in the
first half of fiscal 2004, primarily due to inclusion of expenses of the Plessey Broadband Wireless product line which we acquired at the beginning of the third quarter of fiscal 2004. As a percentage of net sales, research and development expenses
decreased in the second quarter of fiscal 2005 and in the first half of fiscal 2005 as compared to the second quarter of fiscal 2004 and first half of fiscal 2004, respectively, primarily due to an increase in net sales.



We expect research and development expenses to remain relatively flat in the third quarter of
fiscal 2005 as compared to second quarter of fiscal 2005.



Selling,
General and Administrative



|                                    |  |                                  |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------- |  | -------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                    |  | Three Months Ended September 30, |       |   | Six Months Ended September 30, |  
|                                    |  | 2004                             |       |   | 2003                           |   |       | 2004 |  |   | 2003   |  
|Selling, general and administrative |  | $                                | 9,979 |   |                                | $ | 9,939 |      |  | $ | 19,610 |   |  | $ | 16,895 |  
|% of net sales                      |  |                                  | 22.9  | % |                                |   | 26.9  | %    |  |   | 21.9   | % |  |   | 23.2   | %



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In the second quarter of fiscal 2005, selling, general and administrative expenses increased slightly to $10.0 million
from $9.9 million in the second quarter of fiscal 2004. This increase was primarily due to higher selling expenses partially offset by reductions in insurance, communication and facility costs, and the settlement of a legal claim at $0.3 million
less than accrued.



Selling, general and administrative expenses in the first
half of fiscal 2004 were offset by a $3.5 million reduction of reserves on settlement of a legal claim that was reserved in prior periods. Selling, general and administrative expenses in the first half of fiscal 2005 decreased prior to accounting
for the reversal of reserve mentioned above, primarily due to reductions in the same expenses as noted in the quarter to quarter discussion above. As a percentage of net sales, selling, general and administrative expenses decreased to 21.9% in the
first half of fiscal 2005, compared to 23.2% in the first half of fiscal 2004 due the increase in revenues.



We do not expect our selling, general and administrative expenses to change significantly in the remaining quarters of fiscal 2005.



Amortization of intangible assets



In fiscal 2004, we acquired the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (Tellumat) located in Cape Town, South Africa. As
part of the purchase agreement we acquired $2.4 million of intangible assets. This $2.4 million of intangible assets has been assigned to intellectual property and is estimated to have a useful life of 18 months. In the second quarter of fiscal
2005, we recorded $0.4 million of amortization expense and in the first half of fiscal 2005 we recorded $0.8 million of amortization expense on these intangible assets.



Restructuring Charges



The Company did not record any restructuring charges in the first half of fiscal 2005 and the first half of fiscal 2004.



In the fourth quarter of fiscal 2004, the Company recorded $5.5 million of restructuring
charges. In order to reduce expenses and increase operational efficiency, the Company reduced the workforce by 34 employees and recorded restructuring charges for employee severance and benefits of $0.9 million. As of September 30, 2004, all
affected employees had been terminated. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003 as explained in the following paragraphs. The vacated building lease
obligations recorded as restructuring charges in fiscal 2003 and in fiscal 2002 included payments required under lease contracts, less estimated sublease income after the property has been abandoned. 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 lease loss represents managements estimate of time to sublease and actual
sublease rates. In fiscal 2004, the Company recorded the additional $4.6 million charges primarily due to a decrease in estimated future sublease income.



During fiscal 2003 and 2002, the Company announced several restructuring programs to reduce expenses and improve operational efficiency. These restructuring programs
included consolidation of additional 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.



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##### Table of Contents

The following table summarizes the activities of the restructuring accrual during the first half of fiscal 2005 and
during the fiscal year ended March 31, 2004 (in millions):



|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|-------------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                                 |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of March 31, 2003     |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision if fiscal 2004         |  |                       | 0.9  |   |                     |   | 4.6  |       |  |   | 5.5  |  
|Cash payments                    |  |                       | (1.3 | ) |                     |   | (5.6 | )     |  |   | (6.9 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of March 31, 2004     |  |                       | 1.1  |   |                     |   | 21.7 |       |  |   | 22.8 |  
|Provision                        |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                    |  |                       | (0.2 | ) |                     |   | (1.2 | )     |  |   | (1.4 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of June 30, 2004      |  |                       | 0.9  |   |                     |   | 20.5 |       |  |   | 21.4 |  
|Provision                        |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                    |  |                       | (0.3 | ) |                     |   | (0.9 | )     |  |   | (1.2 | )
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of September 30, 2004 |  | $                     | 0.6  |   |                     | $ | 19.6 |       |  | $ | 20.2 |  
|                                 |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion                  |  | $                     | 0.6  |   |                     | $ | 3.1  |       |  | $ | 3.7  |  
|Long-term portion                |  | $                     |     |   |                     | $ | 16.5 |       |  | $ | 16.5 |  



The remaining accrual balance of $20.2
as of September 30, 2004 is expected to be paid out in cash. The Company expects $2.2 million of the remaining accrual balance ($0.6 million of severance and benefits, $0.2 million of legal costs and $1.4 million of vacated building lease
obligations) to be paid out in the remainder of fiscal 2005 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2006 through fiscal 2012.



Other Income (Expense)



|                           |  |                                  |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|-------------------------- |  | -------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                           |  | Three Months Ended September 30, |      |   | Six Months Ended September 30, |  
|                           |  | 2004                             |      |   | 2003                           |   |      | 2004 |  |   | 2003 |  
|Interest income            |  | $                                | 153  |   |                                | $ | 269  |      |  | $ | 303  |   |  | $ | 531  |  
|Interest expense           |  |                                  | (551 | ) |                                |   | (26  | )    |  |   | (770 | ) |  |   | (59  | )
|Other expenses, net        |  |                                  | (43  | ) |                                |   | (107 | )    |  |   | (343 | ) |  |   | (284 | )
|Provision for income taxes |  |                                  | 202  |   |                                |   | 280  |      |  |   | 353  |   |  |   | 211  |  



Interest income was $0.2 million in
the second quarter of fiscal 2005 compared to $0.3 million in the second quarter of fiscal 2003. The decrease was primarily due to lower interest rates and lower cash balances in the second quarter of fiscal 2005 as compared to the second quarter of
fiscal 2004. In the first half of fiscal 2005, interest income decreased to $0.3 million from $0.5 million in the first half of fiscal 2004 primarily due to the same reasons stated above.



Interest expense was $0.5 million in the second quarter of fiscal 2005 compared to the second quarter of fiscal 2003 and increased $0.6
million for the first half of fiscal 2005 compared to the first half of fiscal 2004 due to bank borrowings under our credit facility.



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Other expense increased to $0.6 million in the second quarter of fiscal 2005 compared to $0.1 million in the second
quarter of fiscal 2003. Other expense also increased significantly to $1.1 million in the first half of fiscal 2005 compared to $0.3 million in the first half of fiscal 2004. This increase was primarily due to interest expense incurred on our
long-term debt.



In the first half of fiscal 2005 and the first half of fiscal
2004, we provided for income taxes to cover foreign subsidiaries that have generated taxable income, while recording no provision or benefit from U.S. operations due to the net loss for the period.



Liquidity And Capital Resources



Net cash used for operating activities in the first half of fiscal 2005 was $27.1 million,
compared to net cash used of $11.3 million in the first half of fiscal 2004. The discussion below related to changes in assets and liabilities exclude the impact of changes in foreign exchange rates. The amount used in operating activities was due
to net losses, as adjusted to exclude non-cash charges and benefits and changes in working capital requirements, including significant increases in accounts receivable and inventory in the first half of fiscal 2005. Accrued liabilities and accounts
payable also decreased significantly.



Inventories increased in first half of
fiscal 2004 by $9.1 million as compared to a decrease of $2.8 million in first half of fiscal 2004. This was primarily because we increased our inventory levels to support the rollout of our new product line, Eclipse. Accounts receivable increased
by $3.3 million in the first half of fiscal 2005 as compared to a decrease of $0.3 million in the first half of fiscal 2004. Days sales outstanding (DSO) for receivables increased from 70 days as of March 31, 2004 to 89 days as of
September 30, 2004. Our accounts receivable and DSO were primarily affected by timing of shipments and slower collections.



Accrued liabilities decreased by $1.6 million in the first half of fiscal 2005 as compared to a decrease of $9.0 million in the first half of fiscal 2004. In the first
half of fiscal 2004, we settled a preferential payment claim related to a customers bankruptcy process and reduced our accrued liabilities by $5.8 million and we made severance and other restructuring payments of $1.2 million. Long-term
liabilities decreased primarily due to payment of restructuring costs which were accrued in prior periods.



Net cash used by investing activities in first half of fiscal 2005 was $8.1 million, compared to net cash provided by investing activities of $8.7 million in the first half of fiscal 2004. Purchases of property and
equipment were $5.5 million in the first half of fiscal 2005 compared to $4.6 million in the first half of fiscal 2004. The increase in capital expenditures was primarily due to the purchase of service parts to provide support to the existing
customers of our discontinued Spectrum product line. We incurred a 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.



Net cash provided by financing activities in the first half of
fiscal 2005 was $46.5 million as compared to $0.6 million in the first half of fiscal 2004. In the first half of fiscal 2005, we borrowed $25 million against our line of credit of $35 million with a commercial bank. In



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##### Table of Contents

addition, proceeds from the sale of common stock included $22.9 million (net of expenses of issue) raised by issuing
10,327,120 shares of common stock at a price of $2.36 per share. Proceeds from sales of stock also included cash 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
| | - | --------------------



Commercial commitments



As of September 30, 2004, we had $1.9 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to
various customers. The majority of these letters of credit expire in within twelve months. Also, as of September 30, 2004, we had outstanding forward foreign exchange contracts in the aggregate amount of $31.3 million to support our foreign exchange
rate risk exposure management program.



Contractual obligations



The following table
provides information related to our contractual obligations:



|                                    |  |                              |        |      |   |       |  |      |       |      |   |               |  |                   |       |  |   |        |  |   |       
|----------------------------------- |  | ---------------------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ------------- |  | ----------------- | ----- |  | - | ------ |  | - | ------
|                                    |  | Payments due (in thousands):
|                                    |  | Years ending March 31,      
|                                    |  | 2005                         |        | 2006 |   | 2007  |  | 2008 |       | 2009 |   | 2010 & beyond |  | Total Obligations
|Operating leases (a)                |  | $                            | 2,991  |      | $ | 5,722 |  | $    | 5,576 |      | $ | 5,784         |  | $                 | 5,945 |  | $ | 11,247 |  | $ | 37,265
|Non-cancelable purchase obligations |  | $                            | 43,053 |      |   |      |  |      |      |      |   |              |  |                   |      |  |   |       |  |   |       

---

|(a) | Contractual cash obligations include $19.5 million of lease obligations that have been accrued as restructuring charges as of September 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



Restructuring payments



The accrued liability of $20.2 million for restructuring payments as of September 30, 2004
is expected to be paid out in cash. We expect $2.2 million of the remaining accrual balance ($0.6 million of severance and benefits, $0.2 million of legal costs and $1.4 million of vacated building lease obligations) to be paid out in the remainder
of fiscal 2005 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2006 through fiscal 2012.



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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 September 30, 2004 we have $1.0 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.



Long-term debt



In the first quarter of fiscal 2005, we borrowed $25 million, on a long-term basis, against
our $35 million revolving 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 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 September 30, 2004 we were in compliance with these financial covenants of the loan.



Sources of cash:



At September 30, 2004, our principal sources of liquidity consisted of:



| |  | $62.8 million in cash and cash equivalents and short-term investments and
| | - | -------------------------------------------------------------------------



| |  | $8.8 million of available credit under our credit facility with a major bank. Short-term borrowings under this revolving facility will be at the banks prime rate, which was
4.75% at September 30, 2004, or LIBOR plus 2%.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash usage in the
first half of fiscal 2005 was significant. We expect the cash usage to decline later in the fiscal year as the net losses are expected to decline once our new product Eclipse has rolled out successfully in the market. We believe that our available
cash and cash equivalents at September 30, 2004 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current assets and our $8.8 million available credit on our revolving credit facility should be
sufficient to meet our anticipated needs for working capital and capital expenditures through September 30, 2005.



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.



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Quantitative and Qualitative Disclosures about Market Risk



Interest Rate Risk:



Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio and our bank debt. 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) |       
|                                                |  | 2005                               |        |   | 2006 |  
|Cash equivalents and short-term investments (a) |  | $                                  | 49,410 |   |      | $ | 6,822 |  
|Weighted average interest rate                  |  |                                    | 1.63   | % |      |   | 1.52  | %

---

|(a) | Does not include cash of $6.6 million held by foreign subsidiaries in bank checking and deposit accounts and
|--- | ------------------------------------------------------------------------------------------------------------



The primary objective of our short-term investment activities is to preserve principal while
maximizing yields, without significantly increasing risk. Our short-term investments are at 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 September 30, 2004 were 62 days and these investments had an average yield of 1.61% per annum.



As of September 30, 2004, unrealized losses on investments were insignificant.
The investments have been recorded at fair value on our balance sheet.



The
Company borrowed $25 million on a long-term basis against its $35 million revolving 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. Short-term borrowings under the $10 million revolving credit portion of the credit facility will be at the banks prime rate, which was 4.75% per annum at September 30, 2004, or
LIBOR plus 2%. We expect to incur interest expense of $1.2 million in fiscal 2005 and $1.8 million over the following twenty-six months. If short-term interest rates increase, the interest expense we would incur on the outstanding portion of our
credit facility will increase accordingly.



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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 of future firm commitments denominated in a foreign currency. The primary
business objective of this hedging program is to minimize the gains and losses resulting from exchange rate changes. At September 30, 2004 we held forward contracts in the aggregate amount of $31.3 million primarily in Thai Baht and the Euro. The
amount of unrealized losses on these contracts at September 30, 2004 was $0.2 million. At September 30, 2003 we held forward contracts in the aggregate amount of $26.6 million primarily in Thai Baht and the Euro. The amount of unrealized losses on
these contracts at September 30, 2003 was $0.3 million.



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 generally be offset by exchange gains and losses on the contracts designated as hedges against such exposures.



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 the notes to the condensed consolidated financial statements.



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Factors That May Affect Future Financial Results



Numerous factors, including the risk factors discussed below, economic and competitive conditions, timing and volume of incoming orders, shipment volumes, product margins and foreign exchange rates could cause actual
results to differ materially from those described in our forward-looking statements. Readers should carefully consider these factors set forth below and elsewhere in evaluating our forward-looking statements.



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 four fiscal years we have continuously incurred losses. In the first half of fiscal 2005, we incurred a loss of $14.8 million. As of September 30, 2004 we have an accumulated deficit of $383
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 opportunities with many entities that have substantially greater resources than we have. Furthermore, any acquisition 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.



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Our average sales prices are declining.



Currently, manufacturers of digital microwave 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 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 July 2003, we introduced our latest product, Eclipse. Eclipse is a wireless platform consisting of an Intelligent Node Unit and an Outdoor Unit. 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 of Eclipse. We began to market the Eclipse product
in 2003 and recorded our first sales in January 2004. Because Eclipse represents a new innovative solution for wireless carriers, we cannot give assurances that we will be able to successfully market this product. If Eclipse does not achieve broad
market acceptance, 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 introduction 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.



|                                |  |                                    |  |                                    |  |                                   |  |                                  
|------------------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- |  | ---------------------------------
|                                |  | Three MonthsEndedSeptember 30,2004 |  | Three MonthsEndedSeptember 30,2003 |  | Six MonthsEnded September 30,2004 |  | Six MonthsEnded September 30,2003
|Number of significant customers |  | 1                                  |  | 2                                  |  | 2                                 |  | 2                                
|Percentage of net sales         |  | 22%                                |  | 17%, 14%                           |  | 21%, 12%                          |  | 14%, 12%                         



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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. In addition, as a result of the ongoing global tightening of the capital markets for telecommunications and mobile cellular projects, the demand for our products and
services has decreased and may continue to decrease. 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.



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 half of fiscal 2005 sales to international customers accounted for 92% of the total net sales. During fiscal 2003 and 2004, sales to international customers accounted for 95% and 98% of our net sales, respectively. In
the first half of fiscal 2005, sales to the Middle East/Africa region accounted for approximately 33% of our sales for that period. In fiscal 2004 and 2003, sales to the Middle East/Africa region accounted for approximately 33% and 24% 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. 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 regulations.
| | - | ------------------------------



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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 and intangible assets. Any decision to limit investment in our tangible and intangible 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.



Because of the severe economic downturn in the world economy and the telecommunications industry, the demand for our products and services may continue to decrease.



Due to the downturn in the world economy, as well as the global tightening of the capital markets for telecommunications and
mobile cellular projects, our business opportunities have decreased globally over the past two years. To the extent that the economic downturn and the global tightening of the capital markets continue, the demand for our products and services may
decrease further in certain countries and geographic regions.



In addition, the terrorist attack of September 11, 2001, the subsequent military response by the United States, the aftermath of the U.S. war against 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 recently and may continue to provide sales opportunities in future periods.



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



The telecommunications industry has experienced significant 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 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.



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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. The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of accounts receivable at the end of the period indicated, along with the percentage of accounts receivable
they individually represent. No other customer accounted for more than 10% of the accounts receivable balance at the end of the periods indicated.



|                                          |  |                    |  |               
|----------------------------------------- |  | ------------------ |  | --------------
|                                          |  | September 30, 2004 |  | March 31, 2004
|Number of significant customers           |  | 2                  |  | 3             
|Percentage of accounts receivable balance |  | 19%, 15%           |  | 30%, 22%, 11% 



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.



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We will 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 2004 and the first half of fiscal 2005, we used a significant amount of cash. This use of cash was primarily because of higher inventory
levels to support the rollout of our new product Eclipse, net losses from operations, our acquisition of Plessey Broadband Wireless 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. We currently anticipate
that our available cash and cash equivalents at September 30, 2004 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current assets and the $8.8 million available credit on our $35 million revolving
credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through the next twelve months. However, if changes occur that would consume available capital resources significantly sooner than we
expect, if there is any significant negative impact resulting from 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 twelve 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, 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 September 30, 2004 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.



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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. We have significant operations in San Jose,
California, the United Kingdom, New Zealand and South Africa and outsourcing arrangements in Asia. 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. In addition, due to the rapid and increasingly severe economic downturn, our suppliers have experienced and are continuing to experience various financial difficulties, which may impact their ability to supply the materials, components
and subsystems that we require. 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.



Additional risks associated with the outsourcing of our manufacturing operations to Microelectronics Technology, Inc. in Taiwan 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, such as earthquakes and typhoons, (iii) economic and regulatory developments, and (iv) other events leading to the disruption of manufacturing operations.



The global tightening of capital markets 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. Due to the ongoing restrictions in capital markets worldwide, available funding for these projects has been and may continue to be unavailable to some customers and
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, and could result in additional excess inventories in the future. If funding continues to be
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.



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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. We cannot provide assurances that we will be able to successfully integrate this product line or this division 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.



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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; 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 loss of any key personnel could harm our
business. Our prospects depend upon our ability to attract



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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 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 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.



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.



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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.



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 and cause our
stock to be delisted from the Nasdaq National Market.



If our independent
registered certified public accounting firm is unable to provide us with the attestation of the adequacy of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence
in the reliability of our financial statements, which could result in a decrease in the value of your shares.



As directed by Section 404 of the Act, the SEC adopted rules requiring public companies to include a report of management on the companys internal
control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the companys internal control over financial reporting. In addition, the public



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accounting firm auditing the companys financial statements must attest to and report on managements
assessment of the effectiveness of the companys internal control over financial reporting. While we intend to conduct a rigorous review of our internal control over financial reporting in order to assure compliance with the Section 404
requirements, if our independent registered certified public accounting firm interprets the Section 404 requirements and the related rules and regulations differently from us or if our independent registered certified public accounting firm is not
satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to managements assessment or issue a qualified report. This could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For a description of our market risks see 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, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this
report.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has
materially affected or is reasonably 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



(a) We held our annual meeting of stockholders on August 16, 2004.



(b) The following directors were elected at the meeting, by the following votes:



|                     |  |            |  |           
|-------------------- |  | ---------- |  | ----------
|Nominee              |  | In favor   |  | Withheld  
|Richard C. Alberding |  | 46,876,857 |  | 31,467,023
|John W. Combs        |  | 74,441,373 |  | 3,902,507 
|William A. Hasler    |  | 62,553,339 |  | 15,790,541
|Charles D. Kissner   |  | 78,168,817 |  | 175,063   
|James D. Meindl      |  | 74,434,353 |  | 3,909,527 
|V. Frank Mendicino   |  | 74,425,053 |  | 3,918,827 
|Edward F. Thompson   |  | 62,550,734 |  | 15,793,146



(c) At the annual meeting, the
following other matter was voted upon:



The proposal to ratify the appointment
of Deloitte & Touche LLP as our independent auditors for fiscal 2005:



|           |  |            |  |         |  |                
|---------- |  | ---------- |  | ------- |  | ---------------
|For        |  | Against    |  | Abstain |  | Broker Non-Vote
|62,230,511 |  | 16,075,950 |  | 37,419  |  |               



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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 52.



|(b) | Reports on Form 8-K
|--- | -------------------



On July 21, 2004, we furnished a current report on Form 8-K, under items 12 and 7, regarding a press release announcing our financial results for the
second quarter of fiscal year 2005, which ended on September 30, 2004.



On September 22, 2004 we filed a current report on form 8-K, under items 8.01 and 9.01, regarding a press release announcing the sale of 2,581,780 units of common stock and warrants at a price of $9.44 per unit through a registered direct
offering.



On September 24, 2004 we filed a current report on
form 8-K, under items 1.01 and 9.01, regarding a Placement Agency Agreement with CIBC World Markets Corp. relating to the issuance and sale of 2,581,780 units of common stock and warrants at a price of $9.44 per unit through a registered direct
offering.



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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: November 9, 2004 |  | By                     |  | /S/ Carl A. Thomsen                                         
|                       |  |                        |  | Carl A. Thomsen                                             
|                       |  |                        |  | Senior Vice President, Chief Financial Officer and Secretary
|                       |  |                        |  | (Duly Authorized Officer and Principal Financial Officer)   



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                           
|10.1          |  | Placement Agency Agreement between Stratex Networks, Inc., and CIBC World Markets Corp., dated September 20, 2004 (incorporated by reference to exhibit 10.1 of Form 8-K filed on September 24,
2004.)
|              | 
|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.                                                                                 



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