---



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended December 31, 2003



Commission file number: 0-15895



STRATEX NETWORKS, INC.

(Exact name of registrant specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 77-0016028                         
|(State or other jurisdictionof incorporation or organization) |  | (IRS employeridentification number)



|                                         |  |           
|---------------------------------------- |  | ----------
|120 Rose Orchard WaySan 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 84,011,262 on February 5, 2004.



---



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INDEX



|                                                                                               |  |      
|---------------------------------------------------------------------------------------------- |  | -----
|                                                                                               |  | PAGE 
|                                                                                               | 
|COVER PAGE                                                                                     |  | 1    
|                                                                                               | 
|INDEX                                                                                          |  | 2    
|                                                                                               | 
|PART I - FINANCIAL INFORMATION                                                                 |  |      
|                                                                                               | 
|Item 1 - Financial Statements                                                                  |  |      
|                                                                                               | 
|Condensed Consolidated Balance Sheets                                                          |  | 3    
|                                                                                               | 
|Condensed Consolidated Statements of Operations                                                |  | 4    
|                                                                                               | 
|Condensed Consolidated Statements of Cash Flows                                                |  | 5-6  
|                                                                                               | 
|Notes to Condensed Consolidated Financial Statements                                           |  | 7-23 
|                                                                                               | 
|Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24-50
|                                                                                               | 
|Item 3 -
Quantitative and Qualitative Disclosures About Market Risk                            |  | 51   
|                                                                                               | 
|Item 4 -
Controls and Procedures                                                               |  | 51   
|                                                                                               | 
|PART II - OTHER INFORMATION                                                                    |  |      
|                                                                                               | 
|Item 1 -
Legal Proceedings                                                                     |  | 52   
|                                                                                               | 
|Item 6 -
Exhibits and Reports on Form 8-K                                                      |  | 52   
|                                                                                               | 
|SIGNATURE                                                                                      |  | 53   
|                                                                                               | 
|EXHIBIT INDEX                                                                                  |  | 54   



2



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PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS



STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share amounts)

(Unaudited)



|                                                                                           |  |                  |          |   |               |   |          |  
|------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ------------- | - | -------- | -
|                                                                                           |  | December 31,2003 |          |   | March 31,2003 |  
|ASSETS                                                                                     |  |                  |          |   |               |   |          |  
|Current assets:                                                                            |  |                  |          |   |               |   |          |  
|Cash and cash equivalents                                                                  |  | $                | 12,527   |   |               | $ | 34,036   |  
|Short-term investments                                                                     |  |                  | 42,719   |   |               |   | 56,146   |  
|Accounts receivable, net                                                                   |  |                  | 35,193   |   |               |   | 31,072   |  
|Inventories                                                                                |  |                  | 27,324   |   |               |   | 20,307   |  
|Other current assets                                                                       |  |                  | 10,402   |   |               |   | 14,032   |  
|                                                                                           |  |                  |          |   |               |   |          |  
|Total current assets                                                                       |  |                  | 128,165  |   |               |   | 155,593  |  
|Property and equipment, net                                                                |  |                  | 30,230   |   |               |   | 28,836   |  
|Intangible assets, net                                                                     |  |                  | 2,007    |   |               |   |         |  
|Other assets                                                                               |  |                  | 1,499    |   |               |   | 356      |  
|                                                                                           |  |                  |          |   |               |   |          |  
|Total assets                                                                               |  | $                | 161,901  |   |               | $ | 184,785  |  
|                                                                                           |  |                  |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  |                  |          |   |               |   |          |  
|Current liabilities:                                                                       |  |                  |          |   |               |   |          |  
|Accounts payable                                                                           |  | $                | 26,354   |   |               | $ | 23,095   |  
|Accrued liabilities                                                                        |  |                  | 22,136   |   |               |   | 29,745   |  
|                                                                                           |  |                  |          |   |               |   |          |  
|Total current liabilities                                                                  |  |                  | 48,490   |   |               |   | 52,840   |  
|Restructuring and other long  term liabilities                                            |  |                  | 16,207   |   |               |   | 19,145   |  
|                                                                                           |  |                  |          |   |               |   |          |  
|Total liabilities                                                                          |  |                  | 64,697   |   |               |   | 71,985   |  
|Stockholders equity:                                                                      |  |                  |          |   |               |   |          |  
|Preferred stock, $.01 par value; 5,000,000 shares authorized; none outstanding             |  |                  |         |   |               |   |         |  
|Common stock, $.01 par value; 150,000,000 shares authorized; 83,862,802 shares outstanding |  |                  | 839      |   |               |   | 827      |  
|Additional paid-in-capital                                                                 |  |                  | 461,034  |   |               |   | 457,147  |  
|Accumulated deficit                                                                        |  |                  | (350,989 | ) |               |   | (330,711 | )
|Accumulated other comprehensive loss                                                       |  |                  | (13,680  | ) |               |   | (14,463  | )
|                                                                                           |  |                  |          |   |               |   |          |  
|Total stockholders equity                                                                 |  |                  | 97,204   |   |               |   | 112,800  |  
|                                                                                           |  |                  |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                 |  | $                | 161,901  |   |               | $ | 184,785  |  
|                                                                                           |  |                  |          |   |               |   |          |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



3



---

STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedDecember 31, |        |   | Nine Months EndedDecember 31, |  
|                                                      |  | 2003                           |        |   | 2002                          |   |         | 2003 |  |   | 2002    |  
|Net sales                                             |  | $                              | 40,250 |   |                               | $ | 49,265  |      |  | $ | 113,099 |   |  | $ | 151,144 |  
|Cost of sales                                         |  |                                | 34,151 |   |                               |   | 35,411  |      |  |   | 92,591  |   |  |   | 114,006 |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                | 6,099  |   |                               |   | 13,854  |      |  |   | 20,508  |   |  |   | 37,138  |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Operating Expenses                                    |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Research and development                              |  |                                | 4,396  |   |                               |   | 3,351   |      |  |   | 12,264  |   |  |   | 10,433  |  
|Selling, general and administrative                   |  |                                | 10,873 |   |                               |   | 12,418  |      |  |   | 27,768  |   |  |   | 40,194  |  
|Restructuring charges                                 |  |                                |       |   |                               |   | 13,189  |      |  |   |        |   |  |   | 27,362  |  
|Amortization of intangible assets                     |  |                                | 407    |   |                               |   |        |      |  |   | 407     |   |  |   |        |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                              |  |                                | 15,676 |   |                               |   | 28,958  |      |  |   | 40,439  |   |  |   | 77,989  |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                                        |  |                                | (9,577 | ) |                               |   | (15,104 | )    |  |   | (19,931 | ) |  |   | (40,851 | )
|Other income (expense):                               |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                       |  |                                | 175    |   |                               |   | 480     |      |  |   | 706     |   |  |   | 1,364   |  
|Other income (expense), net                           |  |                                | (371   | ) |                               |   | (1,124  | )    |  |   | (713    | ) |  |   | (2,204  | )
|Write down of investments and other assets            |  |                                |       |   |                               |   | (20     | )    |  |   |        |   |  |   | (412    | )
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes                |  |                                | (9,773 | ) |                               |   | (15,768 | )    |  |   | (19,938 | ) |  |   | (42,103 | )
|Provision for income taxes                            |  |                                | 128    |   |                               |   | 396     |      |  |   | 340     |   |  |   | 1,339   |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                              | (9,901 | ) |                               | $ | (16,164 | )    |  | $ | (20,278 | ) |  | $ | (43,442 | )
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share                      |  | $                              | (0.12  | ) |                               | $ | (0.20   | )    |  | $ | (0.24   | ) |  | $ | (0.53   | )
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted weighted average shares outstanding |  |                                | 83,801 |   |                               |   | 82,615  |      |  |   | 83,151  |   |  |   | 82,496  |  
|                                                      |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |         |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



4



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STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                           |  |                               |          |   |      |   |          |  
|------------------------------------------------------------------------------------------ |  | ----------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                           |  | Nine Months EndedDecember 31, |         
|                                                                                           |  | 2003                          |          |   | 2002 |  
|Cash flows from operating activities:                                                      |  |                               |          |   |      |   |          |  
|Net loss                                                                                   |  | $                             | (20,278  | ) |      | $ | (43,442  | )
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |  |                               |          |   |      |   |          |  
|Depreciation expense                                                                       |  |                               | 6,699    |   |      |   | 8,402    |  
|Amortization of intangible assets                                                          |  |                               | 407      |   |      |   |         |  
|Provision for uncollectible accounts                                                       |  |                               |         |   |      |   | 98       |  
|Provision for warranty reserves                                                            |  |                               | 5,269    |   |      |   | 7,650    |  
|Provision for inventory reserves                                                           |  |                               |         |   |      |   | (1,745   | )
|Non-cash restructuring expenses                                                            |  |                               |         |   |      |   | 3,965    |  
|Write down of investments and other assets                                                 |  |                               |         |   |      |   | 412      |  
|Changes in assets and liabilities                                                          |  |                               |          |   |      |   |          |  
|Accounts receivable                                                                        |  |                               | (4,086   | ) |      |   | 8,952    |  
|Inventories                                                                                |  |                               | (2,863   | ) |      |   | 12,584   |  
|Other assets                                                                               |  |                               | 2,477    |   |      |   | 385      |  
|Accounts payable                                                                           |  |                               | 2,209    |   |      |   | (2,248   | )
|Income tax payable                                                                         |  |                               | 374      |   |      |   | 664      |  
|Other accrued liabilities                                                                  |  |                               | (13,357  | ) |      |   | (2,458   | )
|Long term liabilities                                                                      |  |                               | (2,939   | ) |      |   | 13,097   |  
|                                                                                           |  |                               |          |   |      |   |          |  
|Net cash provided by (used for) operating activities                                       |  |                               | (26,088  | ) |      |   | 6,316    |  
|                                                                                           |  |                               |          |   |      |   |          |  
|Cash flows from investing activities:                                                      |  |                               |          |   |      |   |          |  
|Purchase of short-term investments                                                         |  |                               | (195,238 | ) |      |   | (239,677 | )
|Proceeds from sale of short term investments                                               |  |                               | 208,661  |   |      |   | 226,532  |  
|Purchase of net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd.    |  |                               | (2,578   | ) |      |   |         |  
|Purchase of property and equipment                                                         |  |                               | (7,444   | ) |      |   | (3,372   | )
|                                                                                           |  |                               |          |   |      |   |          |  
|Net cash provided by (used for) investing activities                                       |  |                               | 3,401    |   |      |   | (16,517  | )
|                                                                                           |  |                               |          |   |      |   |          |  
|Cash flows from financing activities:                                                      |  |                               |          |   |      |   |          |  
|Proceeds from sales of common stock                                                        |  |                               | 899      |   |      |   | 862      |  
|                                                                                           |  |                               |          |   |      |   |          |  
|Effect of exchange rate changes on cash                                                    |  |                               | 279      |   |      |   | 856      |  
|                                                                                           |  |                               |          |   |      |   |          |  
|Net decrease in cash and cash equivalents                                                  |  |                               | (21,509  | ) |      |   | (8,483   | )
|Cash and cash equivalents at beginning of period                                           |  |                               | 34,036   |   |      |   | 35,888   |  
|                                                                                           |  |                               |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                 |  | $                             | 12,527   |   |      | $ | 27,405   |  
|                                                                                           |  |                               |          |   |      |   |          |  
|SUPPLEMENTAL DATA:                                                                         |  |                               |          |   |      |   |          |  
|Interest paid                                                                              |  | $                             | 103      |   |      | $ | 538      |  
|Income taxes paid                                                                          |  | $                             | 237      |   |      | $ | 721      |  



5



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STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                                                          |  |                               |            |      |   |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | ---- | - | -
|                                                                                                                                                          |  | Nine Months EndedDecember 31,
|                                                                                                                                                          |  | 2003                          |            | 2002
|SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:                                                                                                    |  |                               |            |      |   |  
|Non-cash purchase consideration for the acquisition of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. through the issuance of
common stock |  | $                             | 3,000,0000 |      | $ | 



See
accompanying Notes to Condensed Consolidated Financial Statements.



6



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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, 2003, filed with the Securities and Exchange Commission on May 19, 2003.



CASH AND CASH EQUIVALENTS



The Company generally considers all highly liquid debt instruments purchased with a remaining maturity of three months or less 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 December 31, 2003, the Company had $5.7 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds
issued to various customers. In connection with the issuance of these letters of credit, as of December 31, 2003, the Company has restricted $0.2 million of cash, which is included in cash and cash equivalents in the accompanying consolidated
balance sheet, as collateral for these specific obligations, which generally expire within one year.



SHORT- TERM INVESTMENTS



The Company
invests its excess cash in high-quality and easily marketable instruments. All the marketable securities are classified as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). All investments are reported at fair market value with the related unrealized holding gains and losses reported as a
component of accumulated other comprehensive loss. Unrealized holding losses on the portfolio as of December 31, 2003 were insignificant. At December 31, 2003, the available-for-sale securities had remaining contractual maturities ranging from 1 day
to 500 days, with a weighted average remaining maturity of 97 days.



7



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



INVENTORIES



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



|                |  |                  |        |               |   |       
|--------------- |  | ---------------- | ------ | ------------- | - | ------
|                |  | December 31,2003 |        | March 31,2003
|Raw materials   |  | $                | 18,367 |               | $ | 13,100
|Work in process |  |                  | 2,728  |               |   | 4,267 
|Finished goods  |  |                  | 6,229  |               |   | 2,940 
|                |  |                  |        |               |   |       
|                |  | $                | 27,324 |               | $ | 20,307
|                |  |                  |        |               |   |       



There was no benefit recorded in the
third quarter of fiscal 2004 from the sale of excess inventories. In the first nine months of fiscal 2004, the Company realized a $0.5 million benefit due to the sale of excess inventory, which had been fully reserved. In the first nine months of
fiscal 2003, the Company realized a $2.1 million benefit due to the sale of inventory that had been fully reserved, due primarily to excess inventories not expected to be sold.



OTHER CURRENT ASSETS



Other current assets include the following (in thousands):



|                           |  |                   |        |                |   |       
|-------------------------- |  | ----------------- | ------ | -------------- | - | ------
|                           |  | December 31, 2003 |        | March 31, 2003
|Receivables from suppliers |  | $                 | 1,394  |                | $ | 5,722 
|Non-trade receivables      |  |                   | 869    |                |   | 2,370 
|Prepaid expenses           |  |                   | 3,933  |                |   | 2,436 
|Prepaid insurance          |  |                   | 952    |                |   | 737   
|Tax refund                 |  |                   | 932    |                |   | 787   
|Deferred taxes             |  |                   | 2,060  |                |   | 1,743 
|Other                      |  |                   | 262    |                |   | 237   
|                           |  |                   |        |                |   |       
|                           |  | $                 | 10,402 |                | $ | 14,032
|                           |  |                   |        |                |   |       



Non-trade receivables as of March 31,
2003 included $1.6 million due from Microelectronics Technology, Inc. (MTI) in connection with the sale of certain of Companys manufacturing assets to MTI related to an outsourcing agreement executed in June 2002. This non-trade receivable of
$1.6 million was fully paid by MTI by September 30, 2003.



8



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



OTHER ASSETS



Included in other assets as of December 31, 2003 are long-term deposits of $0.4 million for premises leased by the Company and a $1.1 million for long-term accounts
receivable. The long-term accounts receivable is due to the extended terms of credit granted by the Company to some of its customers in order to position itself favorably in certain markets.



As of March 31, 2003, other assets included long-term deposits for premises leased by the
Company.



ACCRUED LIABILITIES



Accrued liabilities include the following (in thousands):



|                                   |  |                  |        |               |   |       
|---------------------------------- |  | ---------------- | ------ | ------------- | - | ------
|                                   |  | December 31,2003 |        | March 31,2003
|Customer deposits                  |  | $                | 1,425  |               | $ | 1,100 
|Accrued payroll and benefits       |  |                  | 2,572  |               |   | 1,782 
|Accrued commissions                |  |                  | 1,938  |               |   | 1,959 
|Accrued warranty                   |  |                  | 4,319  |               |   | 4,219 
|Accrued restructuring              |  |                  | 4,809  |               |   | 6,346 
|Accrual for contingent liabilities |  |                  | 1,866  |               |   | 7,500 
|Other                              |  |                  | 5,207  |               |   | 6,839 
|                                   |  |                  |        |               |   |       
|                                   |  | $                | 22,136 |               | $ | 29,745
|                                   |  |                  |        |               |   |       



Accrual for contingent liabilities was
$1.9 million at December 31, 2003 as compared to $7.5 million at March 31, 2003. The $7.5 million accrual at March 31, 2003 was for claims made by trustees for unsecured creditors in the bankruptcy proceedings of the Companys prior competitive
local exchange carrier (CLEC) customers. During the first quarter of fiscal 2004 the Company reduced this accrual by $3.5 million due to the settlement of one of the above mentioned claims. This reduction of accrual was credited to
selling, general and administrative expenses on the income statement. During the second quarter of fiscal 2004 the Company paid $2.1 million for the settlement of one of these claims.



Short-term accrued restructuring was $4.8 million as of December 31, 2003 compared to $6.3 million as of March 31, 2003. (See Note 7
Restructuring Charges).



9



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



CURRENCY TRANSLATION



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



DERIVATIVE FINANCIAL INSTRUMENTS



In accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended by SFAS No. 149 Amendment of Statement 133 on Derivative and Hedging Activities (SFAS 149), all derivatives are recorded on the balance sheet at fair value.



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



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.



10



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table summarizes the activity in OCI, with regard to the changes in fair value of derivative
instruments, for the first nine months of fiscal 2004 (in thousands):



|                                       |  |                                                  |      |  
|-------------------------------------- |  | ------------------------------------------------ | ---- | -
|                                       |  | Nine Months EndedDecember 31, 2003Gains/(Losses) |     
|Beginning balance as of April 1, 2003  |  | $                                                | (56  | )
|Net changes                            |  |                                                  | 231  |  
|Reclassifications to revenue           |  |                                                  | (334 | )
|Reclassifications to cost of sales     |  |                                                  | (5   | )
|                                       |  |                                                  |      |  
|Ending balance as of December 31, 2003 |  | $                                                | (164 | )
|                                       |  |                                                  |      |  



An insignificant amount of loss was
recognized in other income and expense in the first nine months of fiscal 2004 related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur. In the first nine months
of fiscal 2003, a gain of $0.1 million was recognized in other income and expense related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur.



CONCENTRATION OF CREDIT RISK



Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of investments to financial
institutions evaluated as highly creditworthy. Investments, under the 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. One customer accounted for approximately 16% of net sales for the third quarter of fiscal 2004. For the first nine months of fiscal 2004, one customer accounted for 15% of net sales. One customer
accounted for approximately 12% of net sales for the third quarter of fiscal 2003. For the first nine months of fiscal 2003, one customer accounted for 12% of net sales. Three customers accounted for approximately 28%, 13% and 11% of the total
accounts receivable balance at December 31, 2003, respectively. No other customer accounted for more than 10% of the total accounts receivable balance at December 31, 2003. One customer accounted for approximately 14% of the total accounts
receivable balance at March 31, 2003.



In the third quarter of fiscal 2004, the
Company also granted extended terms of credit to some of its customers. See Other Assets footnote.



11



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The Company actively markets and sells products in 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. 101 (SAB 101) Revenue Recognition in Financial
Statements as amended by Staff Accounting Bulletin No. 104 (SAB 104) Revenue Recognition, corrected copy. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that the
arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.



In accordance with SAB 101, 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 Companys 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.



12



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 (loss) 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 expense is recognized for employee stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant.
If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the options.



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



|                                                                                                                     |  |                                          |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                     |  | Three months endedDecember 31,           |         |   | Nine months endedDecember 31, |  
|                                                                                                                     |  | 2003                                     |         |   | 2002                          |   |         | 2003 |  |   | 2002    |  
|                                                                                                                     |  | (in thousands, except per share amounts) |        
|Net loss  as reported                                                                                               |  | $                                        | (9,901  | ) |                               | $ | (16,164 | )    |  | $ | (20,278 | ) |  | $ | (43,442 | )
|Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |                                          | (1,929  | ) |                               |   | (3,161  | )    |  |   | (6,861  | ) |  |   | (10,379 | )
|                                                                                                                     |  |                                          |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                                 |  | $                                        | (11,830 | ) |                               | $ | (19,325 | )    |  | $ | (27,139 | ) |  | $ | (53,821 | )
|                                                                                                                     |  |                                          |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share  as reported                                                                       |  | $                                        | (0.12   | ) |                               | $ | (0.20   | )    |  | $ | (0.24   | ) |  | $ | (0.53   | )
|Basic and diluted loss per share  pro forma                                                                         |  |                                          | (0.14   | ) |                               |   | (0.23   | )    |  |   | (0.33   | ) |  |   | (0.65   | )



13



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 endedDecember 31, |   |  | Nine months endedDecember 31, |  
|                                        |  | 2003                           |   |  | 2002                          |   |  | 2003   |   |  | 2002   |  
|Expected dividend yield                 |  | 0.00                           | % |  | 0.00                          | % |  | 0.00   | % |  | 0.00   | %
|Expected stock volatility               |  | 95.8                           | % |  | 96.3                          | % |  | 95.8   | % |  | 96.3   | %
|Risk-free interest rate                 |  | 3.25                           | % |  | 3.51                          | % |  | 2.94   | % |  | 3.51   | %
|Expected life of options from vest date |  | 1.68                           |   |  | 1.70                          |   |  | 1.68   |   |  | 1.70   |  
|Forfeiture rate                         |  | Actual                         |   |  | Actual                        |   |  | Actual |   |  | Actual |  



The weighted average fair value of
stock options granted during the quarters ended December 31, 2003 and December 31, 2002 was $3.09 and $1.41, respectively.



COMPREHENSIVE INCOME



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



|                                              |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                              |  | Three Months EndedDecember 31, |         |   | Nine Months EndedDecember 31, |  
|                                              |  | 2003                           |         |   | 2002                          |   |         | 2003 |  |   | 2002    |  
|Net loss                                      |  | $                              | (9,901  | ) |                               | $ | (16,164 | )    |  | $ | (20,278 | ) |  | $ | (43,442 | )
|Other comprehensive income (loss):            |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Unrealized currency translation gain (loss)   |  |                                | (112    | ) |                               |   | (600    | )    |  |   | 787     |   |  |   | (4,232  | )
|Unrealized holding gain (loss) on investments |  |                                | (46     | ) |                               |   | 38      |      |  |   | (4      | ) |  |   | 224     |  
|                                              |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                            |  | $                              | (10,059 | ) |                               | $ | (16,726 | )    |  | $ | (19,495 | ) |  | $ | (47,450 | )
|                                              |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  



14



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NEW ACCOUNTING PRONOUNCEMENTS



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS
148). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Although SFAS 148 does not require the use of the fair value method of accounting for stock-based employee compensation, it does
provide alternative methods of transition. SFAS 148 also amends the disclosure provisions of SFAS 123 and Accounting Principles Board (APB) No. 28, Interim Financial Reporting (APB 28), to require disclosure in the summary of
significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS 148s
amendment of the transition and annual disclosure requirements is effective for fiscal years ending after December 15, 2002. The amendment of disclosure requirements of APB 28 is effective for interim periods beginning after December 15, 2002. The
Company does not plan to adopt the fair value based method of accounting for stock-based employee compensation. As a result, adoption of SFAS 148 will only require expanded disclosure to include the effect of stock-based compensation in the
Companys interim reporting.



In December 2002, the Emerging Issues Task
Force (EITF) issued EITF 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the
deliverables. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. EITF 00-21 addresses when and, if so, how an arrangement
involving multiple deliverables should be divided into separate units of accounting. This EITF Issue does not change otherwise applicable revenue recognition criteria. This EITF Issue is applicable for the Company after June 2003. The adoption of
EITF 00-21 did not have an impact on revenue recognition of sales transactions.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Companys operating results or financial condition.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances). Many of those instruments were previously classified as equity. Such instruments include mandatory



15



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



redeemable preferred and common stock, and certain options and warrants. SFAS 150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position (FSP) No. 150-3, Effective Date, Disclosures, and Transition for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS No. 150, which defers the effective date for various provisions of SFAS No. 150. The adoption of SFAS
150 did not have a material impact on the Companys operating results or financial condition.



On December 17, 2003, the Securities Exchange Commission (SEC) issued new Staff Accounting Bulletin SAB 104, Revenue Recognition, corrected copy (SAB 104) which replaces Staff
Accounting Bulletin SAB 101, Revenue Recognition (SAB 101). SAB 104 integrates the set of Frequently Asked Questions, and recognizes the role of Emerging Issues Task Force (EITF) Consensus on EITF 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). SAB 104 provides guidance on how companies have to coordinate revenue recognition guidance from SEC and EITF 00-21. As explained above, EITF 00-21 contains criteria to determine
when to treat the elements of sales arrangements with more than one deliverable as separate units of accounting. Per SAB 104, if the deliverables in a sales arrangement constitute separate units of accounting according to EITF
00-21s separation criteria, the revenue recognition policy must be determined for each identified unit. If the arrangement is a single unit of accounting under the separation criteria, the revenue recognition policy must be determined for the
entire arrangement. SAB 104 had no material impact on the future operating results and financial condition of the Company.



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. 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 is required to continue to apply FIN 46 through March 15, 2004. The Company is required to adopt the provisions of FIN 46-R after March 15, 2004. The Company does not
expect the adoption of FIN 46-R to have an impact on the financial position, results of operations or cash flows of the Company.



16



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE 2. ACQUISITION



On October 3, 2003 the Company completed the acquisition of the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (Tellumat)
located in Cape Town, South Africa. The Company signed the purchase agreement to acquire the net assets of Plessey Broadband Wireless on September 11, 2003. With the acquisition of these net assets, the Company has obtained a license-exempt
telecommunications product line. The Company believes that this product line compliments its existing licensed product lines and will expand its market presence in the license-exempt market. As part of the purchase agreement the Company paid $2.6
million in cash and issued 730,238 shares of its common stock to Tellumat which shares were valued at $3.0 million. The Companys consolidated financial statements include the operating results of Plessey Broadband Wireless from the date of
acquisition. The acquisition has been accounted for under the purchase method of accounting. In connection with the acquisition, the Company incurred acquisition costs of approximately $0.1 million.



A preliminary valuation of the intangible assets related to the acquisition was completed by
the management in the third quarter of fiscal 2004. A summary of the allocation of purchase price is as follows (in thousands):



|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Current assets         |  | $ | 4,160  |  
|Property and equipment |  |   | 254    |  
|Intangible assets      |  |   | 2,414  |  
|                       |  |   |        |  
|Total assets acquired  |  |   | 6,828  |  
|Current liabilities    |  |   | (1,250 | )
|                       |  |   |        |  
|Net assets acquired    |  | $ | 5,578  |  
|                       |  |   |        |  



The $2.4 million of intangible assets
acquired has preliminarily been assigned to intellectual property and is estimated to have a useful life of 18 months.



Proforma results of operations, to reflect the acquisition as if it had occurred on the first date of all periods presented, would not be significantly different than the
Companys results of operations as stated.



17



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE 3. ACQUIRED INTANGIBLE ASSETS



The following table summarizes the gross and net balance of the intangible assets as of December 31, 2003 (in thousands):



|                      |  |                         |       |                         |   |      |                    |  |   |      
|--------------------- |  | ----------------------- | ----- | ----------------------- | - | ---- | ------------------ |  | - | -----
|                      |  | As of December 31, 2003
|                      |  | Gross CarryingAmount    |       | AccumulatedAmortization |   |      | Net CarryingAmount
|Intellectual Property |  | $                       | 2,414 |                         | $ | (407 | )                  |  | $ | 2,007



Aggregate Amortization expense (in thousands):



|                                        |  |   |    
|--------------------------------------- |  | - | ---
|For the quarter ended December 31, 2003 |  | $ | 407



Estimated Amortization Expense (in thousands):



|                                  |  |   |      
|--------------------------------- |  | - | -----
|For the year ended March 31, 2004 |  | $ | 804  
|For the year ended March 31, 2005 |  | $ | 1,610



NOTE 4. PRODUCT WARRANTY LIABILITY



Product warranty liability included the following (in thousands):



|                                                            |  |                                    |        |   |                                    |   |         |  
|----------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---------------------------------- | - | ------- | -
|                                                            |  | Nine Months EndedDecember 31, 2003 |        |   | Twelve Months Ended March 31, 2003 |  
|Beginning balance                                           |  | $                                  | 4,219  |   |                                    | $ | 4,674   |  
|Payments                                                    |  |                                    | (5,169 | ) |                                    |   | (10,123 | )
|Increase in liability (warranties issued during the period) |  |                                    | 5,269  |   |                                    |   | 9,668   |  
|                                                            |  |                                    |        |   |                                    |   |         |  
|Ending balance                                              |  | $                                  | 4,319  |   |                                    | $ | 4,219   |  
|                                                            |  |                                    |        |   |                                    |   |         |  



NOTE 5. BANK LINE OF CREDIT



The Company has a $22.5 million revolving credit facility with a
commercial bank. The credit facility has an interest rate of either the banks prime rate, which was 4% at December 31, 2003, or LIBOR plus 2%. The Company had no amounts borrowed under this facility as of December 31, 2003. This facility
expired in January 2004 and was replaced with a new facility with the same bank. See Note 9 (Subsequent Events) for further details of the new facility.



18



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE 6. LITIGATION 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. See Note 1 Accrued Liabilities for the accruals made by the Company for contingent liabilities.



NOTE 7. RESTRUCTURING CHARGES



The Company did not record any restructuring charges in the first nine months of fiscal
2004.



In fiscal 2003, the Company entered into an agreement for outsourcing
its San Jose, California manufacturing operations to Microelectronics Technology Inc. (MTI), the Companys manufacturing partner in Taiwan. As a result of changes associated with this agreement, as well as reductions in workforce
and consolidation of additional excess facilities, the Company recorded restructuring charges of $28.2 million in fiscal 2003. These restructuring charges consisted of $3.8 million for employee severance and benefits, $19.0 million for vacated
building lease obligations, $0.6 million for legal costs, $3.3 million for transition costs related to outsourcing of the Companys manufacturing operations as mentioned above and $4.0 million as a write off of manufacturing equipment in the
Companys San Jose, California location, related to the transfer of certain manufacturing operations to MTI. These restructuring costs were reduced by $2.5 million, which represented the amount reimbursable from MTI for the costs relating to
the transfer of certain of the Companys manufacturing assets to MTI. The severance and benefit charges of $3.8 million taken in fiscal 2003 were for a reduction in workforce of 176 employees, with reductions primarily affecting the
manufacturing operations area due to the outsourcing of the Companys San Jose, California manufacturing operations. As of June 30, 2003 all affected employees had been terminated.



The vacated building lease obligations of $19.0 million and $8.6 million recorded in fiscal 2003 and in fiscal 2002, respectively, 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.



19



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following table summarizes the balance of the restructuring accrual as of December 31, 2003 and the type and
amount of restructuring costs utilized during the first nine months of fiscal 2004 (in millions):



|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|------------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                                |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of April 1, 2003     |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision                       |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                   |  |                       | (1.2 | ) |                     |   | (3.5 | )     |  |   | (4.7 | )
|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of December 31, 2003 |  | $                     | 0.3  |   |                     | $ | 19.2 |       |  | $ | 19.5 |  
|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion                 |  | $                     | 0.3  |   |                     | $ | 4.4  |       |  | $ | 4.7  |  
|Long-term portion               |  | $                     |     |   |                     | $ | 14.8 |       |  | $ | 14.8 |  



The remaining accrual balance of $19.5
as of December 31, 2003 is expected to be paid out in cash. The Company expects $1.5 million of the remaining accrual balance ($0.3 million of severance and benefits, $0.2 million of legal costs and $1.0 million of vacated building lease
obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2005 through fiscal 2012.



NOTE 8. 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 third quarter of fiscal 2004 and 2003 and the first nine months of fiscal 2004 and
fiscal 2003 are presented in accordance with SFAS 131.



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



The Products operating segment includes the XP4, Altium®, DXR® and Spectrum II digital microwave systems for digital transmission markets. The Company announced a
new wireless platform consisting of an Intelligent Node Unit called Eclipse (Eclipse) in August 2003 and expects to record customer revenue for this product by the end of fiscal 2004. The Company designs and develops the above products in Wellington, New Zealand and San Jose,
California. Prior to June 30, 2002, the Company manufactured the XP4 and Altium family of digital microwave radio products in San Jose, California. In June 2002, the Company entered into an agreement with 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 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,



20



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



integration, and other revenues. The Company maintains regional service centers in Lanarkshire, Scotland and Clark Field, Pampanga, Philippines.



The Company does not identify or allocate assets or depreciation by operating segment, nor
does the CEO evaluate these groups on these criteria. Total depreciation expense of $6.7 million and $8.4 million for the first nine months of fiscal 2004 and 2003, respectively, has been included in the product operating segment. 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.



21



---

STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                 |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|---------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                 |  | Three Months EndedDecember 31, |         |   | Nine Months EndedDecember 31, |  
|                 |  | 2003                           |         |   | 2002                          |   |         | 2003 |  |   | 2002    |  
|Products:        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Revenues         |  | $                              | 32,696  |   |                               | $ | 41,781  |      |  | $ | 91,478  |   |  | $ | 128,619 |  
|Operating loss   |  |                                | (11,491 | ) |                               |   | (16,861 | )    |  |   | (24,747 | ) |  |   | (45,997 | )
|Services:        |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Revenues         |  |                                | 7,554   |   |                               |   | 7,484   |      |  |   | 21,621  |   |  |   | 22,525  |  
|Operating income |  |                                | 1,914   |   |                               |   | 1,757   |      |  |   | 4,816   |   |  |   | 5,146   |  
|Total:           |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Revenues         |  | $                              | 40,250  |   |                               | $ | 49,265  |      |  | $ | 113,099 |   |  | $ | 151,144 |  
|Operating loss   |  |                                | (9,577  | ) |                               |   | (15,104 | )    |  |   | (19,931 | ) |  |   | (40,851 | )



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



|               |  |                                |        |                                |   |        |  |      |         |  |   |        
|-------------- |  | ------------------------------ | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|               |  | Three Months EndedDecember 31, |        | Nine Months Ended December 31,
|               |  | 2003                           |        | 2002                           |   | 2003   |  | 2002
|XP4            |  | $                              | 16,017 |                                | $ | 17,655 |  | $    | 38,439  |  | $ | 60,219 
|ALTIUM         |  |                                | 10,097 |                                |   | 13,555 |  |      | 32,385  |  |   | 33,096 
|DXR            |  |                                | 4,649  |                                |   | 9,968  |  |      | 15,437  |  |   | 31,750 
|SPECTRUM II    |  |                                |       |                                |   | 73     |  |      | 29      |  |   | 2,456  
|Other Products |  |                                | 1,933  |                                |   | 530    |  |      | 5,188   |  |   | 1,098  
|               |  |                                |        |                                |   |        |  |      |         |  |   |        
|Total Products |  |                                | 32,696 |                                |   | 41,781 |  |      | 91,478  |  |   | 128,619
|Total Services |  |                                | 7,554  |                                |   | 7,484  |  |      | 21,621  |  |   | 22,525 
|               |  |                                |        |                                |   |        |  |      |         |  |   |        
|Total Revenues |  | $                              | 40,250 |                                | $ | 49,265 |  | $    | 113,099 |  | $ | 151,144
|               |  |                                |        |                                |   |        |  |      |         |  |   |        



22



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                   |  |                                |        |                               |   |        |  |      |         |  |   |        
|------------------ |  | ------------------------------ | ------ | ----------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                   |  | Three Months EndedDecember 31, |        | Nine Months EndedDecember 31,
|                   |  | 2003                           |        | 2002                          |   | 2003   |  | 2002
|Russia             |  | $                              | 1,116  |                               | $ | 5,959  |  | $    | 10,501  |  | $ | 6,184  
|Other Europe       |  |                                | 11,001 |                               |   | 8,182  |  |      | 29,123  |  |   | 30,825 
|Nigeria            |  |                                | 8,503  |                               |   | 3,346  |  |      | 13,942  |  |   | 11,935 
|Other Africa       |  |                                | 2,405  |                               |   | 6,034  |  |      | 7,630   |  |   | 10,628 
|Middle East        |  |                                | 1,148  |                               |   | 2,448  |  |      | 9,950   |  |   | 9,448  
|India              |  |                                | 2,763  |                               |   | 631    |  |      | 6,586   |  |   | 9,121  
|Thailand           |  |                                | 1,463  |                               |   | 4,837  |  |      | 3,079   |  |   | 21,533 
|Other Asia/Pacific |  |                                | 5,260  |                               |   | 10,020 |  |      | 14,259  |  |   | 29,899 
|Americas           |  |                                | 6,591  |                               |   | 7,808  |  |      | 18,029  |  |   | 21,571 
|                   |  |                                |        |                               |   |        |  |      |         |  |   |        
|Total Revenue      |  | $                              | 40,250 |                               | $ | 49,265 |  | $    | 113,099 |  | $ | 151,144
|                   |  |                                |        |                               |   |        |  |      |         |  |   |        



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



|                                  |  |                  |        |               |   |       
|--------------------------------- |  | ---------------- | ------ | ------------- | - | ------
|                                  |  | December 31,2003 |        | March 31,2003
|United States                     |  | $                | 7,240  |               | $ | 8,822 
|United Kingdom                    |  |                  | 15,107 |               |   | 13,230
|Other foreign countries           |  |                  | 7,883  |               |   | 6,784 
|                                  |  |                  |        |               |   |       
|Total property and equipment, net |  | $                | 30,230 |               | $ | 28,836
|                                  |  |                  |        |               |   |       



NOTE 9. SUBSEQUENT EVENTS



In January 2004, the Company renegotiated its revolving credit facility
with a commercial bank, increasing the total credit facility amount from $22.5 million to $35 million and adding a long-term borrowing option. Under the new facility the Company can borrow up to $25 million on a long-term basis until June 30, 2004.
The facility reverts to a $25 million revolving credit facility on June 30, 2004 if no long-term borrowings are made by that date. Short-term borrowings under the revolving facility will be at the banks prime rate, which was 4% at December 31,
2003, or LIBOR plus 2%. Any long-term borrowings will be at either the banks prime rate plus 2% or a fixed interest rate equal to the 5 year treasury yield at the time of borrowing plus 2-1/2%. Long-term borrowings amortize monthly over a
four-year term. This facility is secured by the Companys assets.



23



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The discussions in this Quarterly Report 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 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 plan not to adopt the fair value based method of accounting for stock-based employee compensation;
| | - | ------------------------------------------------------------------------------------------------------



| |  | Our belief that the adoption of Emerging Issues Task Force issued EITF 00-21, Revenue Arrangements with Multiple Deliverables will not have an impact on revenue
recognition of future sales transactions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to pay out in cash the remaining restructuring accrual balance as of December 31, 2003 of $19.5 million;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | Our expectation that $1.5 million of the remaining accrual balance ($0.3 million of severance and benefits, $0.2 million of legal costs and $1.0 million of vacated building lease
obligations) will be paid out in fiscal 2004;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that further vacated building lease obligations of $18.0 million will be paid out during fiscal 2005 through fiscal 2012;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that revenue in the fourth quarter of fiscal 2004 will be in the range of $44 million to $46 million;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | 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 our selling, general and administrative expenses will remain approximately the same in the remainder of fiscal 2004 as compared to the third quarter of fiscal
2004;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that gross profit will remain approximately the same in the fourth quarter of fiscal 2004 as compared to the third quarter of fiscal 2004 and improve slightly in the
subsequent quarters due to increase in sales of our new product Eclipse;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that research and development expenses will increase slightly in the remainder of fiscal 2004 as we focus on the introduction of our new Eclipse product line;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Our expectation that we will not experience material foreign exchange gains and losses from unhedged foreign currency exposures;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that competition will increase;
| | - | -----------------------------------------------



| |  | The possibility that we may restructure our activities to more strategically realign our resources in response to changes in our industry and market conditions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



| |  | Our belief that we maintain adequate reserves to cover exposure for doubtful accounts;
| | - | --------------------------------------------------------------------------------------



| |  | Our plan to grant extended terms of credit to our customers in the near future in order to position ourselves in certain markets and to promote opportunities for our new product
Eclipse;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that we may have to utilize the credit facility that we have with a bank in the future quarters in order to meet our working capital requirements as we increase our
inventory levels to support the rollout of our new product line, Eclipse;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our intent to record initial customer revenue on our new product called Eclipse by the end of fiscal 2004;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Our belief that our acquisition of Plessey Broadband Wireless will increase our market presence in the license-exempt market;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that our ability to compete successfully will depend on a number of factors both within and outside our control;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to continue to pursue growth opportunities through internal development, minority investments and acquisitions of complementary businesses and technologies;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Our belief that we have made the appropriate reserves to account for the contingency for our being a named defendant in a preference claim matter pursuant to the U.S. Bankruptcy
Code;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that a significant portion of our future product sales will continue to be concentrated in a limited number of customers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that our available cash and cash equivalents at December 31, 2003 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other
current assets and our $35 million revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through December 31, 2004; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that upgrade and expansion of existing networks and the deployment of new networks will continue to offer us opportunities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



All forward looking statements included in this document are made as of the date hereof,
based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or statements. The reader should also consult the cautionary statements and risk factors listed in this Quarterly Report
and those listed from time to time in our Reports on Forms 10-Q, 8-K, and our most recent Annual Report on Form 10-K for the year ended March 31, 2003, including those contained in the section, Factors That May Affect Future Financial
Results, beginning on page 40 in this Quarterly Report, in evaluating these forward-looking statements.



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 provide our customers with a broad product line, which contains products that
operate using a variety of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a



25



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 broadband access networks worldwide. Our
products typically 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 recently announced a new wireless platform consisting of an Intelligent Node Unit called Eclipse (Eclipse). The Eclipse wireless network transmission system enables wireless network node configurations in the smallest form factor
available, supporting up to six independent radio traffic paths from a compact and highly modular Intelligent Node Unit (INU). An integral high speed TDM bus architecture enables traffic routing between traffic paths by software, without local
cabling. Eclipse nodes enable a dramatic reduction in the amount of equipment required to build a network, leading to cost savings, faster installation and higher network reliability. We expect to record customer revenue for Eclipse by end of fiscal
2004.



In fiscal 2001 and 2002, we experienced a significant slowdown in the
wireless telecommunications market primarily because of slowdown of the global economy. But in the past couple of quarters we are seeing some stabilization in our markets. The upgrade and expansion of existing networks and the deployment of new
networks are both expected to continue to offer business opportunities to us. Our near term strategy is to remain focused on the successful rollout of our new product Eclipse.



Since inception, we have shipped over 266,000 microwave radios worldwide. We have equipment installed in over 150 countries, and a
significant percentage of our revenue is derived from sales outside the United States. Our revenues from sales of equipment and services outside the United States were 92% in the first nine months of fiscal 2004 and 95% in fiscal 2003.



26



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Critical Accounting Policies and Estimates



There have been no changes to our critical accounting policies since March 31, 2003. For a description of our critical accounting policies,
see our Annual Report on Form 10-K for the year ended March 31, 2003.



Acquisition



On October 3, 2003 the Company completed the
acquisition of the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (Tellumat) located in Cape Town, South Africa. The Company signed the purchase agreement to acquire the net assets of Plessey Broadband
Wireless on September 11, 2003. With the acquisition of these net assets, the Company has obtained a license-exempt telecommunications product line. The Company believes that this product line compliments its existing licensed product lines and will
expand its market presence in the license-exempt market. As part of the purchase agreement the Company paid $2.6 million in cash and issued 730,238 shares of its common stock to Tellumat which shares valued at $3.0 million. The Companys
consolidated financial statements include the operating results of Plessey Broadband Wireless from the date of acquisition. The acquisition has been accounted for under the purchase method of accounting. In connection with the acquisition, the
Company incurred acquisition costs of approximately $0.1 million.



A
preliminary valuation of the intangible assets related to the acquisition was completed by the management in the third quarter of fiscal 2004. A summary of the allocation of purchase price is as follows (in thousands):



|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Current assets         |  | $ | 4,160  |  
|Property and equipment |  |   | 254    |  
|Intangible assets      |  |   | 2,414  |  
|                       |  |   |        |  
|Total assets acquired  |  |   | 6,828  |  
|Current liabilities    |  |   | (1,250 | )
|                       |  |   |        |  
|Net assets acquired    |  | $ | 5,578  |  
|                       |  |   |        |  



The $2.4 million of intangible assets
acquired was preliminarily assigned to intellectual property and is estimated to have a useful life of 18 months.



27



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Results of Operations



The following table sets forth the percentage relationships of certain items from the Companys condensed consolidated statements of
operations as percentages of net sales:



|                                           |  |                                 |    |  |                                |    |  |       |    |  |       |   
|------------------------------------------ |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                           |  | Three Months Ended December 31, |    |  | Nine Months Ended December 31, |   
|                                           |  | 2003                            |    |  | 2002                           |    |  | 2003  |    |  | 2002  |   
|Net sales                                  |  | 100.0                           | %  |  | 100.0                          | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of sales                              |  | 84.8                            |    |  | 71.9                           |    |  | 81.9  |    |  | 75.4  |   
|Gross profit                               |  | 15.2                            |    |  | 28.1                           |    |  | 18.1  |    |  | 24.6  |   
|Research and development                   |  | 11.0                            |    |  | 6.8                            |    |  | 10.8  |    |  | 6.9   |   
|Selling, general and administrative        |  | 27.0                            |    |  | 25.2                           |    |  | 24.5  |    |  | 26.6  |   
|Amortization of intangible assets          |  | 1.0                             |    |  |                                |    |  | 0.4   |    |  |       |   
|Restructuring and other charges            |  |                                |    |  | 26.8                           |    |  |      |    |  | 18.1  |   
|                                           |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Operating loss                             |  | (23.8                           | )  |  | (30.7                          | )  |  | (17.6 | )  |  | (27.0 | ) 
|Interest income                            |  | 0.4                             |    |  | 1.0                            |    |  | 0.6   |    |  | 0.9   |   
|Other expense, net                         |  | (0.9                            | )  |  | (2.3                           | )  |  | (0.6  | )  |  | (1.4  | ) 
|Write down of investments and other assets |  |                                |    |  |                               |    |  |      |    |  | (0.3  | ) 
|                                           |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss before provision for income taxes     |  | (24.3                           | )  |  | (32.0                          | )  |  | (17.6 | )  |  | (27.8 | ) 
|Provision for income taxes                 |  | 0.3                             |    |  | 0.8                            |    |  | 0.3   |    |  | 0.9   |   
|                                           |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Net loss                                   |  | (24.6                           | )% |  | (32.8                          | )% |  | (17.9 | )% |  | (28.7 | )%
|                                           |  |                                 |    |  |                                |    |  |       |    |  |       |   



Net Sales



Net sales in the third quarter of fiscal 2004 decreased to $40.3 million, compared to $49.3
million in the third quarter of fiscal 2003. The decline in net revenue was primarily due to limited capital expenditures by telecommunication carriers and lower average selling prices for our products. We aggressively priced some of our orders in
the first nine months of fiscal 2004 in order to maintain and establish our position in certain key markets in anticipation of the release of our new wireless platform consisting of an Intelligent Node Unit called Eclipse
(Eclipse). The impact of this aggressive pricing was seen on our revenues for the third quarter of fiscal 2004.



In the third quarter of fiscal 2004, our Altium® product line net sales decreased to $10.1 million from $13.6 million in the comparable quarter of fiscal 2003. Net
sales of our DXR® product



28



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



line decreased significantly to $4.6 million in the third quarter of fiscal 2004 compared to $10.0 million in the third quarter of fiscal 2003. This decrease
was primarily because of the completion of several large one-time network projects in Thailand in fiscal 2003, which did not reoccur, in fiscal 2004. Net sales of our XP4 product line decreased to $16.0 million in the third quarter of fiscal 2004, from $17.7 million in the third quarter of
fiscal 2003. We did not have any sales of our Spectrum product line in the third quarter of fiscal 2004 because the product has reached its planned end of life. Net sales of Spectrum product line in the third quarter of fiscal 2003 were insignificant. Service revenue was
$7.6 million in the third quarter of fiscal 2004, compared to $7.5 million in the third quarter of fiscal 2003. Though product revenue in the third quarter of fiscal 2004 declined significantly as compared to the third quarter of fiscal 2003,
service and repair revenue increased slightly. This increase in revenue is primarily due to an increase in annual maintenance contracts and installation services as a result of our increased efforts to position ourselves as a complete solutions
provider in the market.



Net sales of our XP4 product line decreased
significantly to $38.4 million in the first nine months of fiscal 2004 as compared to $60.2 million in the first nine months of fiscal 2003 primarily because we lost some major customers in the Middle East and Asia/Pacific region. Net sales of our
DXR product line also decreased significantly to $15.4 million in the first nine months of fiscal 2004 as compared to $31.8 million in the first nine months of fiscal 2003 due to the reasons mentioned above. Net sales of Spectrum product line was
$2.5 million in the first nine months of fiscal 2003 but was insignificant in the first nine months of fiscal 2004 because the product is reaching its planned end of life.



Net sales in the third quarter of fiscal 2004 as compared to the third quarter of fiscal 2003 decreased in all the regions except Nigeria,
India and Europe. Net sales in Nigeria increased in the third quarter of fiscal 2004 to $8.5 million from $3.3 million in the third quarter of fiscal 2003. This increase was due to shipments to one customer in Nigeria. Net sales in Europe increased
to $11.0 million in the third quarter of fiscal 2004, compared to $8.2 million in the third quarter of fiscal 2003. Net sales in India increased to $2.8 million in the third quarter of fiscal 2004 from $0.6 million in the third quarter of fiscal
2003, primarily due to sales to a new customer in that region. Net sales in the Other Asia/Pacific region decreased significantly to $5.3 million in the third quarter of fiscal 2004 from $10.0 million in the third quarter of fiscal 2003 primarily
due to the completion of a significant project in Pakistan and a decline in our sales to China. Net sales to Russia decreased to $1.1 million in the third quarter of fiscal 2004 from $6.0 million in the third quarter of fiscal 2003. Though net sales
to Russia decreased in the third quarter of fiscal 2004 as compared to third quarter of fiscal 2003, it increased in the first nine months of fiscal 2004 as compared to first nine months of fiscal 2003. Net sales to Russia in the first nine months
of fiscal 2004 increased to $10.5 million from $6.2 million in the first nine months of fiscal 2003. This increase was primarily due to winning one large customer in that region.



Net sales for the first nine months of fiscal 2004 were $113.1 million, compared to $151.1 million reported in the first nine months of
fiscal 2003. We experienced a significant decline in net sales in Thailand in the first nine months of fiscal 2004. However this decline was partially offset by increases in sales in Russia and Nigeria. Net sales in Thailand decreased to $3.1
million in the first nine months of fiscal 2004 from $21.5 million in the first nine months of fiscal 2003



29



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



primarily due to the completion of several large network projects in Thailand in fiscal 2003. Net sales to Russia region increased in the first nine months
of fiscal 2004 as compared to first nine months of fiscal 2003 due to the reasons mentioned in the preceding paragraph. Net sales to Other Asia/Pacific region decreased to $14.3 million in the first nine months of fiscal 2004 from $29.9 million in
the first nine months of fiscal 2003 primarily due to the reasons mentioned in the preceding paragraph. Net sales in India decreased to $6.6 million in the first nine months of fiscal 2004 from $9.1 million in the first nine months of fiscal 2003,
primarily due to completion of a large project in that region which did not repeat in the comparable period in fiscal 2004.



One customer accounted for approximately 16% of net sales for the third quarter of fiscal 2004. For the first nine months of fiscal 2004, one customer accounted for 15%
of net sales. One customer accounted for 12% of net sales for the third quarter of fiscal 2003. For the first nine months of fiscal 2003, one customer accounted for 12% of net sales.



During the third quarter of fiscal 2004, we received $50.4 million in new orders shippable over the next 12 months compared to $50.1 million
in the third quarter of fiscal 2003. During the first nine months of fiscal 2004, we received $136.7 million in new orders shippable over the next 12 months compared to $150.1 million new orders in the first nine months of fiscal 2003, representing
a decrease of approximately 9%. 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.



Looking forward, we anticipate that revenue in fourth quarter of fiscal 2004 will be in the range of $44 million to $46 million. We are
beginning to see signs of stabilization in our markets. Order activity continued to be strong subsequent to the third quarter of fiscal 2004. However, we continue to experience extremely limited long-term visibility. Our near term strategy is to
focus on the successful rollout of our new product Eclipse.



Gross Profit



Gross profit as a percentage of net sales in the third quarter of
fiscal 2004 was 15.2% compared to a gross profit of 28.1% in the third quarter of fiscal 2003. The decrease in gross margin in the third quarter of fiscal 2004, as compared to the third quarter of fiscal 2003, was primarily due to a negative pricing
impact of approximately 10% due to competitive market conditions. As mentioned earlier, we had aggressively priced some of our orders in the first half of fiscal 2004 in order to maintain and establish our position in certain key markets in
anticipation of the release of our new Eclipse product line. The impact of this aggressive pricing was seen on our revenues for the third quarter of fiscal 2004. A decline in sales of our higher priced DXR product line in the third quarter of fiscal
2004 as compared to the third quarter of fiscal 2003 was also one of the causes of the significant negative pricing impact. Product mix had an unfavorable impact of approximately 1%. Inventory valuation benefit which was $0.6 million in the third
quarter of fiscal 2003 and zero in the third quarter of fiscal 2004 had a negative impact on the gross margin of approximately 1%. Increase in manufacturing costs also had a negative impact on gross margin of approximately 1%. We expect gross profit
as a percentage of sales to be approximately the same in the fourth quarter of fiscal 2004 as compared to the third quarter of fiscal 2004 and



30



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



improve slightly in the subsequent quarters due to increase in sales of our new product Eclipse for which we plan to record initial customer revenue by the
end of fiscal 2004.



Gross profit as a percentage of net sales was 18.1% in the
first nine months of fiscal 2004 compared to a gross profit of 24.6% in the first nine months of fiscal 2003. The decrease in gross margin in the first nine months of fiscal 2004, as compared to the first nine months of fiscal 2003, was primarily
due to a negative pricing impact of approximately 9%. Pricing had a negative impact due to the same reasons as mentioned in the preceding paragraph. Product mix had a favorable impact of approximately 1%. Inventory valuation benefit was only $0.5
million in the first nine months of fiscal 2004 as compared to $2.1 million in the first nine months of fiscal 2003, resulting in an unfavorable impact on the gross margin of approximately 1%. For the first nine months of fiscal 2004 as compared to
the first nine months of fiscal 2003, lower manufacturing spending had a positive impact on gross profit of approximately 2%, as a percentage of net sales.



Research and Development



In the third quarter of fiscal 2004, research and development expenses increased to $4.4 million from $3.4 million in the third quarter of fiscal 2003. This increase was
primarily due to inclusion of expenses of Plessey Broadband Wireless, which we acquired at the beginning of the third quarter of fiscal 2004, and an increase in material purchases and temporary services for prototype builds of our new product
Eclipse. As a percentage of net sales, research and development expenses increased to 11.0% in the third quarter of fiscal 2004 from 6.8% in the third quarter of fiscal 2003.



We expect research and development expenses to increase slightly in the remainder of fiscal 2004 as we focus on the introduction of our new
Eclipse product line.



In the first nine months of fiscal 2004, research and
development expenses increased to $12.3 million from $10.4 million in the first nine months of fiscal 2003. This planned increase was primarily due to the same reasons as mentioned in the preceding paragraph. As a percentage of net sales, research
and development expenses increased to 10.8% in the first nine months of fiscal 2004, compared to 6.9% in the first nine months of fiscal 2003.



Selling, General and Administrative



In the third quarter of fiscal 2004, selling, general and administrative expenses decreased to $10.9 million from $12.4 million in the third quarter of fiscal 2003. This
decrease was due to lower third party agent commissions on sales of our products resulting from a decline in net sales, especially in the Asia/Pacific region where we use agents for the sale of our products. The decrease was also due to reductions
in advertising, communication and software maintenance costs. As a percentage of net sales, selling, general and administrative expenses increased to 27% in the third quarter of fiscal 2004, compared to 25% in third quarter of fiscal 2003, primarily
because the rate of the decrease in net sales exceeded the rate of the decrease in selling, general and administrative expenses.



We expect selling, general and administrative expenses to remain approximately the same in the remainder of fiscal 2004 as compared to the third quarter of fiscal 2004.



31



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Selling, general and administrative expenses in the first nine months of fiscal 2004 decreased significantly to $27.8
million compared to $40.2 million in the first nine months of fiscal 2003, primarily due to the cost reduction measures undertaken as part of the restructuring plan of June 2002 and also due to all the reasons mentioned above. In addition, selling,
general and administrative expenses decreased by $3.5 million due to a reduction in reserves in connection with a settlement of a legal claim that was reserved in periods prior to fiscal 2004. As a percentage of net sales, selling, general and
administrative expenses decreased to 24.5% in the first nine months of fiscal 2004, compared to 26.6% in the first nine months of fiscal 2003.



Amortization of Intangible Assets



Amortization of purchased intangible assets, in the third quarter of fiscal 2004 was $0.4 million. This amortization is of the intellectual property that we acquired from
Plessey Broadband Wireless, an acquisition that was completed in the third quarter of fiscal 2004. There was no amortization expense recorded in the comparable period of fiscal 2003.



The following table summarizes the gross and net balance of the intangible assets as of December 31, 2003 (in thousands):



|                      |  |                         |       |                         |   |      |                    |  |   |      
|--------------------- |  | ----------------------- | ----- | ----------------------- | - | ---- | ------------------ |  | - | -----
|                      |  | As of December 31, 2003
|                      |  | Gross CarryingAmount    |       | AccumulatedAmortization |   |      | Net CarryingAmount
|Intellectual Property |  | $                       | 2,414 |                         | $ | (407 | )                  |  | $ | 2,007



Estimated Amortization Expense (in thousands):



|                                  |  |   |      
|--------------------------------- |  | - | -----
|For the year ended March 31, 2004 |  | $ | 804  
|For the year ended March 31, 2005 |  | $ | 1,610



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Restructuring Charges



The Company did not record any restructuring charges in the first nine months of fiscal 2004.



In fiscal 2003, the Company entered into an agreement for outsourcing its San Jose,
California manufacturing operations to Microelectronics Technology Inc. (MTI), the Companys manufacturing partner in Taiwan. As a result of changes associated with this agreement, as well as reductions in workforce and
consolidation of additional excess facilities, the Company recorded restructuring charges of $28.2 million in fiscal 2003. These restructuring charges consisted of $3.8 million for employee severance and benefits, $19.0 million for vacated building
lease obligations, $0.6 million for legal costs, $3.3 million for transition costs related to outsourcing of the Companys manufacturing operations as mentioned above and $4.0 million as a write off of manufacturing equipment in the
Companys San Jose, California location, related to the transfer of certain manufacturing operations to MTI. These restructuring costs were reduced by $2.5 million, which represented the amount reimbursable from MTI for the costs relating to
the transfer of certain of the Companys manufacturing assets to MTI. The severance and benefit charges of $3.8 million taken in fiscal 2003 were for a reduction in workforce of 176 employees, with reductions primarily affecting the
manufacturing operations area due to the outsourcing of the Companys San Jose, California manufacturing operations. As of June 30, 2003 all affected employees had been terminated.



The vacated building lease obligations of $19.0 million and $8.6 million recorded in fiscal 2003 and in fiscal 2002, respectively, 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.



The following table summarizes the balance of the restructuring accrual as of December 31, 2003 and the type and amount of restructuring
costs utilized during the first nine months of fiscal 2004 (in millions):



|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|------------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                                |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of April 1, 2003     |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision                       |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                   |  |                       | (1.2 | ) |                     |   | (3.5 | )     |  |   | (4.7 | )
|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of December 31, 2003 |  | $                     | 0.3  |   |                     | $ | 19.2 |       |  | $ | 19.5 |  
|                                |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion                 |  | $                     | 0.3  |   |                     | $ | 4.4  |       |  | $ | 4.7  |  
|Long-term portion               |  | $                     |     |   |                     | $ | 14.8 |       |  | $ | 14.8 |  



The remaining accrual balance of $19.5
as of December 31, 2003 is expected to be paid out in cash. The Company expects $1.5 million of the remaining accrual balance ($0.3 million of severance and benefits, $0.2 million of legal costs and $1.0 million of vacated building lease
obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2005 through fiscal 2012.



33



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Other Income (Expense)



Interest income was $0.2 million in the third quarter of fiscal 2004 compared to $0.5 million in the third quarter of fiscal 2003. The
decrease was primarily due to lower interest rates and lower average cash balances in the third quarter of fiscal 2004 as compared to the third quarter of fiscal 2003. Other expense was $0.4 million in the third quarter of fiscal 2004 compared to
$1.1 million in the third quarter of fiscal 2003. The decrease was primarily due to a decrease in foreign exchange losses and fees for discounting letters of credit.



In the first nine months of fiscal 2004, interest income decreased to $0.7 million from $1.4 million in the first nine months of fiscal
2003, primarily due to lower interest rates and lower average cash balances in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003. Other expense decreased to $0.7 million in the first nine months of fiscal 2004
from $2.2 million in the first nine months of fiscal 2003 due to the same reasons as mentioned in the preceding paragraph.



Write down of investments and other assets



There was no impairment loss recorded in the third quarter of fiscal 2004 and an insignificant amount of impairment loss recorded in the third quarter of fiscal 2003.



During the first nine months of fiscal 2003, we recorded $0.4 million as
impairment loss on our equity investments in marketable securities. We determined that the recorded value for these certain investments exceeded their fair value and that these losses were other than temporary in nature. There was no impairment loss
in the first nine months of fiscal 2004.



Provision for Income Taxes



In the first nine months of fiscal 2004 and first nine months of
fiscal 2003, 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.



34



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Liquidity and Capital Resources



Net cash used for operating activities in the first nine months of fiscal 2004 was $26.1 million, compared to net cash provided by operating
activities of $6.3 million in the first nine months of fiscal 2003. 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 decreases in accrued liabilities, long term liabilities and a significant increase in accounts receivable.



Accrued liabilities decreased by $13.4 million primarily due to payment of $2.1 million to the bankruptcy trustee of one of our former CLEC customers, reduction of our
accrual by $3.5 million, payment of warranty claims and payment of restructuring costs, which were accrued prior to fiscal 2004. The payment of $2.1 million to the bankruptcy trustee was for settlement of a legal claim made by a former CLEC
customer. The reduction of our accrued liabilities by $3.5 million was due to the favorable settlement of a legal claim, which was reserved in periods prior to fiscal 2004.



Long-term liabilities decreased by $2.9 million primarily due to payment of restructuring costs, which were accrued in periods prior to
fiscal 2004.



Accounts receivable increased by $4.1 million in the first nine
months of fiscal 2004 as compared to a decrease of $9.0 million in the first nine months of fiscal 2003. Accounts receivable increased primarily because of slower collections. Days sales outstanding (DSO) for receivables increased from
59 days as of March 31, 2003 to 80 days as of December 31, 2003. Our accounts receivable and DSO are primarily affected by shipment linearity and collections performance. Shipment linearity is a measure of the level of shipments throughout a
particular quarter. A steady level of shipments and good collections performance will result in reduced DSO compared with a higher level of shipments toward the end of the quarter, which will result in a shorter amount of time to collect the related
accounts receivable and will result in increased DSO.



Inventories increased by
$2.9 million in the first nine months of fiscal 2004 as compared to a decrease of $12.6 million in the first nine months of fiscal 2003. The increase in inventories was primarily due to the acquisition of inventory of Plessey Broadband Wireless as
part of the net assets purchased from them in the third quarter of fiscal 2004. We also increased our inventory levels to support the rollout of our new product line, Eclipse.



Net cash provided by investing activities in the first nine months of fiscal 2004 was $3.4 million, compared to net cash used by investing
activities of $16.5 million in the first nine months of fiscal 2003. Purchases of property and equipment were $7.4 million in the first nine months of fiscal 2004 compared to $3.4 million in the first nine months of fiscal 2003. The increase in
capital expenditures was primarily due to the purchase of test equipment for our new Eclipse product and also due to the purchase of service parts to provide support to the existing customers of our discontinued Spectrum product line. We were
required to make this one time bulk purchase of parts for our Spectrum product line because our suppliers notified us that they would not continue manufacturing this equipment, as it is not profitable for them to do so.



35



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



In the third quarter of fiscal 2004, we paid $2.6 million in cash to Tellumat (Pty) Ltd. for the acquisition of net
assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd.



Proceeds from the sale of common stock were derived from the exercise of employee stock options and the employee stock purchase plan.



Cash requirements



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



| |  | Operations
| | - | ----------



| |  | Research and development
| | - | ------------------------



| |  | Restructuring payments
| | - | ----------------------



| |  | Capital expenditures
| | - | --------------------



| |  | Acquisitions
| | - | ------------



Commercial commitments



Through several financial institutions, we have issued $5.7 million of standby letters of credit to various customers for bid and performance bonds. In connection with
the issuance of these letters of credit, we have restricted $0.2 million of cash as collateral to meet these specific obligations. These letters of credit generally expire within one year.



Contractual obligations



The following table provides information related to our remaining contractual obligations:



Payments due (in thousands):

Years ending March 31,



|                                   |  |      |        |      |       |      |       |      |       |      |       |               |        |                   |   |       
|---------------------------------- |  | ---- | ------ | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ------------- | ------ | ----------------- | - | ------
|                                   |  | 2004 |        | 2005 |       | 2006 |       | 2007 |       | 2008 |       | 2009 & Beyond |        | Total Obligations
|Operating leases(a)                |  | $    | 1,932  |      | 5,845 |      | 5,762 |      | 5,781 |      | 5,970 |               | 19,313 |                   | $ | 44,603
|Unconditional purchase obligations |  | $    | 34,129 |      |      |      |      |      |      |      |      |               |       |                   | $ | 34,129



|(a) | Contractual cash obligations include $19.0 million of lease obligations that have been
included in the restructuring accrual.
|--- | -----------------------------------------------------------------------------------------------------------------------------



Restructuring payments



The accrued liability for
restructuring payments of $19.5 million as of December 31, 2003, is expected to be paid out in cash. The Company expects $1.5 million of the remaining accrual balance ($0.3 million of severance and benefits, $0.2 million of legal costs and $1.0
million of vacated building lease obligations) to be paid out in fiscal 2004 and vacated building lease obligations of $18.0 million to be paid out during fiscal 2005 through fiscal 2012.



36



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Customer financing



In the first nine months of 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 December 31, 2003 we have $1.1 million recorded as long-term accounts receivable due to these extended terms of credit granted to our customers. Although we may
commit to provide customer 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.



Sources of cash:



At December 31, 2003, our principal sources of liquidity consisted of $55.2 million in cash and cash equivalents and short-term investments.



Available credit facility



In addition to our cash balances, at December 31, 2003 we had a $22.5 million line of credit
with a major bank. The credit facility was at an interest rate of either the banks prime rate, which was 4% at December 31, 2003, or LIBOR plus 2%. We had no amounts borrowed under this facility as of December 31, 2003. This facility expired
in January 2004 and was replaced with a new facility with the same bank. See Subsequent Events for further details of the new facility. We may have to utilize this credit facility in future quarters in order to meet our working capital
requirements as we increase our inventory levels to support the rollout of our new product Eclipse. In addition, granting extended terms of credit to some of our customers could also have a negative impact on our cash balances and could require us
to utilize the credit facility.



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. If we require additional financing we may consider raising additional cash through debt or equity offerings.
However, we believe that we have the financial resources needed to meet our business requirements for at least the next 12 months.



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. 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.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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) |       
|                                               |  | 2004                                |        |   | 2005 |   |        | 2006 | 
|Cash equivalents and short-term investments(a) |  | $                                   | 30,149 |   |      | $ | 12,925 |      |  | $ | 5,695 |  
|Weighted average interest rate                 |  |                                     | 1.21   | % |      |   | 1.39   | %    |  |   | 1.37  | %



|(a) | Does not include non-interest bearing cash of $6.5 million.
|--- | -----------------------------------------------------------



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 December 31, 2003 was 97 days and these investments had an average yield of 1.27% per annum.



As of December 31, 2003, unrealized losses on investments were insignificant. Our investments have been recorded at fair value on our
balance sheet. During the first nine months of fiscal 2003, we recorded a permanent impairment for certain equity investments of $0.4 million. No impairment of investments was recorded in the first nine months of fiscal 2004.



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 December 31, 2003 we held forward contracts in the aggregate amount of $28.9
million primarily in Thai Baht and the euro. The amount of unrealized losses on these contracts at December 31, 2003 was $0.3 million. At December 31, 2002 we held forward contracts in the aggregate amount of $17.5 million primarily in British
pounds and the euro. The amount of unrealized losses on these contracts at December 31, 2002 was immaterial.



Given our foreign exchange position, a change in the foreign exchange rates upon which these foreign exchange contracts are based would result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be offset by exchange gains and losses on the underlying net monetary exposures and firm commitments for which the contracts are designated as hedges. We do not expect material foreign exchange gains and losses from unhedged
foreign currency exposures.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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.



Subsequent Events



In January 2004, we renegotiated our revolving credit facility with a commercial bank,
increasing the total credit facility amount from $22.5 million to $35 million and adding a long-term borrowing option. Under the new facility we can borrow up to $25 million on a long-term basis until June 30, 2004. The facility reverts to a $25
million revolving credit facility on June 30, 2004 if no long-term borrowings are made by that date. Short-term borrowings under the revolving facility will be at the banks prime rate, which was 4% at December 31, 2003, or LIBOR plus 2%. Any
long-term borrowings will be at either the banks prime rate plus 2% or a fixed interest rate equal to the 5 year treasury yield at the time of borrowing plus 2-1/2%. Long-term borrowings amortize monthly over a four-year term. This credit
facility is secured by our assets.



39



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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.



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, 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.



40



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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. 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 have only recently begun to market the Eclipse
product and have not yet recorded any sales. Further, 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. One customer
accounted for approximately 16% of net sales for the third quarter of fiscal 2004. For the first nine months of fiscal 2004, one customer accounted for 15% of net sales. One customer accounted for 12% of net sales for the third quarter of fiscal
2003. For the first nine months of fiscal 2003, one customer accounted for 12% of net sales. 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 the 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



41



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 nine months of fiscal 2004 net sales to international customers
accounted for 92% of the net sales for that period. During fiscal 2002 and 2003, sales to international customers accounted for 92% and 95% of our net sales, respectively. In fiscal 2002 and 2003, sales to the Middle East/Africa region accounted for
approximately 16% and 31% 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;
| | - | ---------------------------------------------------



| |  | general economic and geopolitical conditions, including inflation and trade relationships;
| | - | ------------------------------------------------------------------------------------------



| |  | war and acts of terrorism;
| | - | --------------------------



| |  | currency exchange controls; and
| | - | -------------------------------



| |  | changes in export regulations.
| | - | ------------------------------



42



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



Although a majority of sales are through our direct sales force, we also
market our products through independent agents and distributors. In addition, we generate sales through base station suppliers. 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 extended 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 continued 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



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



redevelopment of these regions has provided us with sales opportunities recently and may continue to provide sales opportunities in future periods.



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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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our customers may not pay us in a timely manner, or at all, which would decrease our revenues.



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. Three customers
accounted for approximately 28%, 13% and 11% of the total accounts receivable balance at December 31, 2003, respectively. One customer accounted for approximately 14% of the total accounts receivable balance at December 31, 2002. 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.



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 the third quarter of fiscal 2004, we used a significant amount of cash. This use of cash was primarily because of unfavorable pricing and product mix, our
acquisition of the 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 December 31, 2003 combined with
anticipated receipts of outstanding accounts receivable, the liquidation of other current assets and our $35 million revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through
December 31, 2004. 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 will not be sufficient to support our anticipated needs for working capital and capital
expenditures through December 31, 2004 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.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 and New Zealand 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 the 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. This reduction in demand 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 take additional reserves for 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 take unanticipated
additional reserves. Such additional inventory reserves, if required, would decrease our profits.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 and additional credit risk.



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 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. 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, tax and accounting issues. Our failure to manage growth effectively could harm our business, financial condition and results of
operations.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



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



| |  | volume and timing of product orders received and delivered during the quarter;
| | - | ------------------------------------------------------------------------------



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



| |  | timing of new product introductions by us or our competitors;
| | - | -------------------------------------------------------------



| |  | changes in the mix of products sold by us;
| | - | ------------------------------------------



| |  | cost and availability of components and subsystems;
| | - | ---------------------------------------------------



| |  | downward pricing pressure on our products;
| | - | ------------------------------------------



| |  | adoption of new technologies and industry standards;
| | - | ----------------------------------------------------



| |  | competitive factors, including pricing, availability and demand for competing products;
| | - | ---------------------------------------------------------------------------------------



| |  | war and acts of terrorism;
| | - | --------------------------



| |  | ability of our customers to obtain financing to enable their purchase of our products;
| | - | --------------------------------------------------------------------------------------



| |  | fluctuations in foreign currency exchange rates;
| | - | ------------------------------------------------



| |  | regulatory developments;
| | - | ------------------------



| |  | general economic conditions worldwide; and
| | - | ------------------------------------------



| |  | claims or litigation related to the continuing decline in financial conditions of CLECs including but not limited to those CLECs currently involved in bankruptcy proceedings.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 sustain profitability in the future, particularly on a quarter-to-quarter basis.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 engineering 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 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.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



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



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



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



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



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.



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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
of 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 Principal Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. 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 control over financial reporting. There has been no significant 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.



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PART II - OTHER INFORMATION



ITEM 1  LEGAL PROCEEDINGS



We are currently
a named defendant in a preference claim matter pursuant to the U.S. Bankruptcy Code. We believe that we have made the appropriate reserve to account for this contingency in prior quarters. We are vigorously defending this matter but, as with any
litigation, we make no representation or prediction with respect to the outcome of the litigation. In addition, we are subject to legal proceedings and claims that arise in the normal course of our business.



ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



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



(b) Reports on Form 8-K



On October 22, 2003, we furnished a current report on Form 8-K regarding a press release
announcing our financial results for the second quarter of fiscal year 2004, which ended on September 30, 2003.



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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: February 12, 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                                                                                                                                                                                                                
|              | 
|2.1           |  | Certificate of Ownership and Merger merging Stratex Networks, Inc. into Digital Microwave Corporation (incorporated by reference to Exhibit 2.1 to the Companys Quarterly Report on Form
10-Q filed on August 11, 2000).  
|              | 
|3.1           |  | Certificate of Amendment to the Restated Certificate of Incorporation amended as of August 9, 2000 (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q filed on August 11, 2000).     
|              | 
|3.2           |  | Amended and Restated Bylaws, dated as of October 17, 2001 (incorporated by reference to Exhibit 3.2 to the companys Quarterly Report on Form 10-Q filed on November 13,
2001).                                            
|              | 
|3.3           |  | Certificate of Amendment to the Restated Certificate of Incorporation, amended as of September 9, 2002 (incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form
10Q filed on November 14, 2002).
|              | 
|4.1           |  | Form of Indenture (incorporated by reference to Exhibit 4.3 to the companys registration statement filed on Form S-3 on November 28, 2000).                                                                               
|              | 
|4.2           |  | Form of Debt Warrant Agreement, including form of Debt Warrant Certificate (incorporated by reference to Exhibit 4.4 to the companys Registration Statement filed on Form S-3 on November
28, 2000).                      
|              | 
|4.3           |  | Form of Common Stock Warrant Agreement, including form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.5 to the Companys Registration Statement filed on Form
S-3 on November 28, 2000).      
|              | 
|4.4           |  | Form of Senior Debenture (incorporated by reference to Exhibit 4.6 to the Companys Registration Statement filed on Form S-3 on November 28, 2000).                                                                        
|              | 
|4.5           |  | Loan and Security Agreement between Stratex Networks, Inc. and Silicon Valley Bank dated January 21, 2003 (incorporated by reference to Exhibit 4.5 filed on Form 10-K on May 19,
2003).                                   
|              | 
|10.1          |  | Amended and Restated Loan and Security Agreement between Stratex Networks, Inc and Silicon Valley Bank, dated January 21, 2004 (incorporated by reference to exhibit 10.1 filed on Form 8-K on
January 22, 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.                                                                                                      



54