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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 |  | Commission file number: 0-15895
|September 30, 2003             |  |                                

STRATEX NETWORKS, INC.




(Exact name of registrant specified in its charter)


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

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

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

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

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

Yes  [X]   No  [  ]

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

The number of outstanding shares of the Registrants common stock, par value
$.01 per share, was 83,847,237 on November 7, 2003.





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TABLE OF CONTENTS



|                               |                                                                                                |                                                      |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I - FINANCIAL INFORMATION
|                               | ITEM I - FINANCIAL STATEMENTS                                                                 
|                               |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               |                                                                                                | Factors That May Affect Future Financial Results    
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|                               | ITEM 4. CONTROLS AND PROCEDURES                                                               
|PART II  OTHER INFORMATION   
|                               | ITEM 1  LEGAL PROCEEDINGS                                                                    
|                               | ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                               | ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                     
|EXHIBIT INDEX                 
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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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     | 
|                               |                                                                                                | Notes to Condensed Consolidated Financial Statements |    |       | 6-19  | 
|                               | Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                      |    | 20-30 |      
|                               |                                                                                                | Factors That May Affect Future Financial Results     |    |       | 31-41 | 
|                               | Item 3 - Quantitative and Qualitative Disclosures About Market Risk                            |                                                      |    | 42    |      
|                               | Item 4 - Controls and Procedures                                                               |                                                      |    | 42    |      
|PART II - OTHER INFORMATION    |                                                                                                |                                                      |    |      
|                               | Item 1 - Legal Proceedings                                                                     |                                                      |    | 43    |      
|                               | Item 4 - Submission of Matters to a Vote of Security Holders                                   |                                                      |    | 43    |      
|                               | Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                      |    | 44    |      
|SIGNATURE                      |                                                                                                |                                                      | 45 |      
|EXHIBIT INDEX                  |                                                                                                |                                                      | 46 |      

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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS




STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

|                                                |                                                                                     |                                            |        |                    |         |                |        |          |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------------ | ------- | -------------- | ------ | -------- | ------- | 
|                                                |                                                                                     |                                            |        | September 30, 2003 |         | March 31, 2003
|                                                |                                                                                     |                                            |        |                    |         |               
|ASSETS                                          |                                                                                     |                                            |        |                    |         |                |        |         
|Current assets:                                 |                                                                                     |                                            |        |                    |         |                |        |         
|                                                | Cash and cash equivalents                                                           |                                            | $      | 32,085             |         |                | $      | 34,036   |        
|                                                | Short-term investments                                                              |                                            |        | 42,872             |         |                |        | 56,146   |        
|                                                | Accounts receivable, net                                                            |                                            |        | 28,932             |         |                |        | 31,072   |        
|                                                | Inventories                                                                         |                                            |        | 20,289             |         |                |        | 20,307   |        
|                                                | Other current assets                                                                |                                            |        | 13,103             |         |                |        | 14,032   |        
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|                                                |                                                                                     | Total current assets                       |        |                    | 137,281 |                |        |          | 155,593 | 
|Property and equipment, net                     |                                                                                     |                                            | 29,521 |                    |         |                | 28,836 |         
|Other assets                                    |                                                                                     |                                            | 353    |                    |         |                | 356    |         
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|                                                |                                                                                     | Total assets                               |        | $                  | 167,155 |                |        | $        | 184,785 | 
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                     |                                            |        |                    |         |                |        |         
|Current liabilities:                            |                                                                                     |                                            |        |                    |         |                |        |         
|                                                | Accounts payable                                                                    |                                            | $      | 24,454             |         |                | $      | 23,095   |        
|                                                | Accrued liabilities                                                                 |                                            |        | 21,581             |         |                |        | 29,745   |        
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|                                                |                                                                                     | Total current liabilities                  |        |                    | 46,035  |                |        |          | 52,840  | 
|Restructuring and other long  term liabilities |                                                                                     |                                            | 17,157 |                    |         |                | 19,145 |         
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|Total liabilities                               |                                                                                     |                                            | 63,192 |                    |         |                | 71,985 |         
|Commitments and contingencies (Note 3)          |                                                                                     |                                            |        |                    |         |                |        |         
|Stockholders equity:                           |                                                                                     |                                            |        |                    |         |                |        |         
|                                                | Preferred stock, $.01 par value; 5,000,000
shares authorized; none outstanding      |                                            |        |                   |         |                |        |         |        
|                                                | Common stock, $.01 par value; 150,000,000
shares authorized; 83,017,912 outstanding |                                            |        | 830                |         |                |        | 827      |        
|                                                | Additional paid-in-capital                                                          |                                            |        | 457,744            |         |                |        | 457,147  |        
|                                                | Accumulated deficit                                                                 |                                            |        | (341,089           | )       |                |        | (330,711 | )      
|                                                | Accumulated other comprehensive loss                                                |                                            |        | (13,522            | )       |                |        | (14,463  | )      
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|                                                |                                                                                     | Total stockholders equity                 |        |                    | 103,963 |                |        |          | 112,800 | 
|                                                |                                                                                     |                                            |        |                    |         |                |        |         
|                                                |                                                                                     | Total liabilities and stockholders equity |        | $                  | 167,155 |                |        | $        | 184,785 | 
|                                                |                                                                                     |                                            |        |                    |         |                |        |         

See accompanying Notes to Condensed Consolidated Financial Statements.

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STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |        |  
|----------------------------------------------------- | ------------------------------------------ | - | ------------------ | ----- | ---------------- | - | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                      |                                            |   | Three Months Ended |       | Six Months Ended
|                                                      |                                            |   | September 30,      |       | September 30,   
|                                                      |                                            |   |                    |       |                 
|                                                      |                                            |   | 2003               |       | 2002             |   | 2003   |        | 2002
|                                                      |                                            |   |                    |       |                  |   |        |        |     
|Net sales                                             |                                            | $ | 36,882             |       |                  | $ | 52,560 |        |      | $ | 72,849  |        |   | $ | 101,879 |       
|Cost of sales                                         |                                            |   | 29,819             |       |                  |   | 39,826 |        |      |   | 58,440  |        |   |   | 78,595  |       
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Gross profit                                          |                                            |   | 7,063              |       |                  |   | 12,734 |        |      |   | 14,409  |        |   |   | 23,284  |       
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Operating Expenses                                    |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|                                                      | Research and development                   |   |                    | 3,982 |                  |   |        | 3,460  |      |   |         | 7,868  |   |   |         | 7,082  |  
|                                                      | Selling, general and administrative        |   |                    | 9,939 |                  |   |        | 13,179 |      |   |         | 16,895 |   |   |         | 27,776 |  
|                                                      | Restructuring charges                      |   |                    |      |                  |   |        |       |      |   |         |       |   |   |         | 14,173 |  
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Total operating expenses                              |                                            |   | 13,921             |       |                  |   | 16,639 |        |      |   | 24,763  |        |   |   | 49,031  |       
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Operating loss                                        |                                            |   | (6,858             | )     |                  |   | (3,905 | )      |      |   | (10,354 | )      |   |   | (25,747 | )     
|Other income (expense):                               |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|                                                      | Interest income                            |   |                    | 269   |                  |   |        | 465    |      |   |         | 531    |   |   |         | 884    |  
|                                                      | Other income (expense), net                |   |                    | (133  | )                |   |        | (583   | )    |   |         | (343   | ) |   |         | (1,080 | )
|                                                      | Write down of investments and
other assets |   |                    |      |                  |   |        | (246   | )    |   |         |       |   |   |         | (392   | )
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Loss before provision
for income taxes                |                                            |   | (6,722             | )     |                  |   | (4,269 | )      |      |   | (10,166 | )      |   |   | (26,335 | )     
|Provision for income taxes                            |                                            |   | 280                |       |                  |   | 146    |        |      |   | 211     |        |   |   | 943     |       
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Net loss                                              |                                            | $ | (7,002             | )     |                  | $ | (4,415 | )      |      | $ | (10,377 | )      |   | $ | (27,278 | )     
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Basic and diluted loss per share                      |                                            | $ | (0.08              | )     |                  | $ | (0.05  | )      |      | $ | (0.13   | )      |   | $ | (0.33   | )     
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       
|Basic and diluted weighted average
shares outstanding |                                            |   | 82,922             |       |                  |   | 82,500 |        |      |   | 82,877  |        |   |   | 82,438  |       
|                                                      |                                            |   |                    |       |                  |   |        |        |      |   |         |        |   |   |         |       

See accompanying Notes to Condensed Consolidated Financial Statements.

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STRATEX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                             |                                              |                       |         |                  |         |      |         |          |        |  
|---------------------------------------------------------------------------- | -------------------------------------------- | --------------------- | ------- | ---------------- | ------- | ---- | ------- | -------- | ------ | -
|                                                                             |                                              |                       |         | Six Months Ended
|                                                                             |                                              |                       |         | September 30,   
|                                                                             |                                              |                       |         |                 
|                                                                             |                                              |                       |         | 2003             |         | 2002
|                                                                             |                                              |                       |         |                  |         |     
|Cash flows from operating activities:                                        |                                              |                       |         |                  |         |      |         |         
|Net loss                                                                     |                                              | $                     | (10,377 | )                |         | $    | (27,278 | )       
|Adjustments to reconcile net loss to net cash used for operating activities: |                                              |                       |         |                  |         |      |         |         
|                                                                             | Depreciation and amortization                |                       |         | 4,223            |         |      |         | 5,811    |       
|                                                                             | Provision for uncollectible accounts         |                       |         |                 |         |      |         | 95       |       
|                                                                             | Provision for warranty reserves              |                       |         | 3,788            |         |      |         | 5,220    |       
|                                                                             | Non-cash restructuring expenses              |                       |         |                 |         |      |         | 1,784    |       
|                                                                             | Write down of investments and other assets   |                       |         |                 |         |      |         | 392      |       
|                                                                             | Changes in assets and liabilities            |                       |         |                  |         |      |         |          |       
|                                                                             |                                              | Accounts receivable   |         |                  | 2,831   |      |         |          | (4,443 | )
|                                                                             |                                              | Inventories           |         |                  | 288     |      |         |          | 7,916  |  
|                                                                             |                                              | Other assets          |         |                  | 1,274   |      |         |          | (3,580 | )
|                                                                             |                                              | Accounts payable      |         |                  | 1,291   |      |         |          | 5,584  |  
|                                                                             |                                              | Income tax payable    |         |                  | 133     |      |         |          | 471    |  
|                                                                             |                                              | Accrued liabilities   |         |                  | (12,809 | )    |         |          | 1,884  |  
|                                                                             |                                              | Long term liabilities |         |                  | (1,948  | )    |         |          | 5,496  |  
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Net cash used for operating activities                                       |                                              |                       | (11,306 | )                |         |      | (648    | )       
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Cash flows from investing activities:                                        |                                              |                       |         |                  |         |      |         |         
|                                                                             | Purchase of short-term investments           |                       |         | (139,332         | )       |      |         | (160,981 | )     
|                                                                             | Proceeds from sale of short term investments |                       |         | 152,648          |         |      |         | 154,449  |       
|                                                                             | Purchase of property and equipment           |                       |         | (4,647           | )       |      |         | (2,782   | )     
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Net cash provided by (used for) investing activities                         |                                              |                       | 8,669   |                  |         |      | (9,314  | )       
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Cash flows from financing activities:                                        |                                              |                       |         |                  |         |      |         |         
|                                                                             | Proceeds from sales of common stock          |                       |         | 600              |         |      |         | 603      |       
|Effect of exchange rate changes on cash                                      |                                              |                       | 86      |                  |         |      | 347     |         
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Net decrease in cash and cash equivalents                                    |                                              |                       | (1,951  | )                |         |      | (9,012  | )       
|Cash and cash equivalents at beginning of period                             |                                              |                       | 34,036  |                  |         |      | 35,888  |         
|                                                                             |                                              |                       |         |                  |         |      |         |         
|Cash and cash equivalents at end of period                                   |                                              | $                     | 32,085  |                  |         | $    | 26,876  |         
|                                                                             |                                              |                       |         |                  |         |      |         |         
|SUPPLEMENTAL DATA                                                            |                                              |                       |         |                  |         |      |         |         
|                                                                             | Interest paid                                |                       | $       | 74               |         |      | $       | 5        |       
|                                                                             | Income taxes paid                            |                       | $       | 222              |         |      | $       | 707      |       

See accompanying Notes to Condensed Consolidated Financial Statements.

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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 September 30, 2003, the Company had $5.5 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 September 30, 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.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SHORT- TERM INVESTMENTS

The Company invests its excess cash in high-quality marketable instruments to
ensure that cash is readily available for use in its current operations.
Accordingly, all of the marketable securities are classified as
available-for-sale in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115. All investments are reported
at fair market value with the related unrealized holding gains and losses
reported as a component of accumulated other comprehensive loss.

Unrealized holding gains on the portfolio as of September 30, 2003 were
insignificant. At September 30, 2003, the available-for-sale securities had
contractual maturities ranging from 1 month to 20 months, with a weighted
average maturity of 5 months.

INVENTORIES

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

|                |  |               |        |                |  |   |        | 
|--------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                |  | September 30, |        |                |  |  
|                |  | 2003          |        | March 31, 2003
|                |  |               |        |               
|Raw materials   |  | $             | 11,957 |                |  | $ | 13,100 | 
|Work in process |  |               | 5,901  |                |  |   | 4,267  | 
|Finished goods  |  |               | 2,431  |                |  |   | 2,940  | 
|                |  |               |        |                |  |   |        | 
|                |  | $             | 20,289 |                |  | $ | 20,307 | 
|                |  |               |        |                |  |   |        | 

In the second quarter of fiscal 2004, the Company realized a $0.5 million
benefit due to the sale of excess inventory, which had been fully reserved in
periods prior to the quarter ending September 30, 2003. There was no benefit
recorded in the first quarter of fiscal 2004 from the sale of excess
inventories. In the second quarter of fiscal 2003, the Company realized a $0.4
million benefit from the sale of excess inventories that had been reserved in
prior periods. In the first half of fiscal 2003 the Company realized a benefit
of $1.5 million from the sale of excess inventories which were written down in
prior periods.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

OTHER CURRENT ASSETS

Other current assets included the following (in thousands):

|                          |  |               |        |                |  |   |        | 
|------------------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                          |  | September 30, |        |                |  |  
|                          |  | 2003          |        | March 31, 2003
|                          |  |               |        |               
|Receivable from suppliers |  | $             | 5,097  |                |  | $ | 5,722  | 
|Non-trade receivables     |  |               | 1,035  |                |  |   | 2,370  | 
|Prepaid expenses          |  |               | 3,985  |                |  |   | 2,436  | 
|Prepaid Insurance         |  |               | 165    |                |  |   | 737    | 
|Tax refund                |  |               | 734    |                |  |   | 787    | 
|Deferred Taxes            |  |               | 1,870  |                |  |   | 1,743  | 
|Other                     |  |               | 217    |                |  |   | 237    | 
|                          |  |               |        |                |  |   |        | 
|                          |  | $             | 13,103 |                |  | $ | 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
manufacturing assets to them related to an outsourcing agreement executed in
June 2002. This receivable of $1.6 million was fully paid by MTI prior to
September 30, 2003.

OTHER ASSETS

Included in other assets as of September 30, 2003 and March 31, 2003 are
long-term deposits for premises leased by the Company.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ACCRUED LIABILITIES

Accrued liabilities included the following (in thousands):

|                                   |  |               |        |                |  |   |        | 
|---------------------------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                                   |  | September 30, |        |                |  |  
|                                   |  | 2003          |        | March 31, 2003
|                                   |  |               |        |               
|Customer deposits                  |  | $             | 2,105  |                |  | $ | 1,100  | 
|Accrued payroll and benefits       |  |               | 2,192  |                |  |   | 1,782  | 
|Accrued commissions                |  |               | 1,128  |                |  |   | 1,959  | 
|Accrued warranty                   |  |               | 4,144  |                |  |   | 4,219  | 
|Accrued restructuring              |  |               | 5,092  |                |  |   | 6,346  | 
|Accrual for contingent liabilities |  |               | 1,866  |                |  |   | 7,500  | 
|Other                              |  |               | 5,054  |                |  |   | 6,839  | 
|                                   |  |               |        |                |  |   |        | 
|                                   |  | $             | 21,581 |                |  | $ | 29,745 | 
|                                   |  |               |        |                |  |   |        | 

Accrual for contingent liabilities was $1.9 million at September 30, 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 favorable settlement of one of
the above mentioned claims. During the second quarter of fiscal 2004 the
Company paid $2.1 million for the settlement of one of these claims.

Accrued restructuring was $5.1 million as of September 30, 2003 compared to
$6.3 million as of March 31, 2003. (See Note 4).

CURRENCY TRANSLATION

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

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

DERIVATIVE FINANCIAL INSTRUMENTS

In accordance with SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), 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.

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

|                                     |  |                    |      |  
|------------------------------------ |  | ------------------ | ---- | -
|                                     |  | Six Months Ended  
|                                     |  | September 30, 2003
|                                     |  | Gain/(Loss)       
|                                     |  |                   
|Beginning balance on April 1, 2003   |  | $                  | (56  | )
|Net changes                          |  |                    | 23   |  
|Reclassifications to revenue         |  |                    | (195 | )
|                                     |  |                    |      |  
|Ending balance on September 30, 2003 |  | $                  | (228 | )
|                                     |  |                    |      |  

An insignificant amount of loss was recognized in other income and expense in
the first half 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 half 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.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONCENTRATION OF CREDIT RISK

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

Accounts receivable concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations may subject the
Company to concentration of credit risk. Two customers accounted for
approximately 17% and 14% of net sales for the second quarter of fiscal 2004.
Three customers accounted for approximately 13%, 12%, and 10% of net sales for
the second quarter of fiscal 2003, respectively. Two customers accounted for
approximately 14% and 12% of net sales for the first half of fiscal 2004,
respectively. For the first half of fiscal 2003, one customer accounted for
approximately 14% of net sales for that period. Two customers accounted for
approximately 18% and 10% of the total accounts receivable balance at September
30, 2003, respectively. One customer accounted for approximately 14% of the
total accounts receivable balance at March 31, 2003.

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. 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 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

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

returns are based on the trend of historical returns. While
the Company believes that its warranty accrual is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable
could differ materially from what will actually transpire in the future.

NET LOSS PER SHARE

Basic earnings (loss) per share are computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings (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 is recognized for
employee stock options granted with exercise prices greater than or equal to
the fair value of the underlying common stock at date of grant. If the exercise
price is less than the market value at the date of grant, the difference is
recognized as deferred compensation expense, which is amortized over the
vesting period of the options.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

|                                                                                                                     |  |                                          |        |                                |  |      |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | ------------------------------ |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                     |  | Three months ended September 30,         |        | Six months ended September 30,
|                                                                                                                     |  |                                          |        |                               
|                                                                                                                     |  | 2003                                     |        | 2002                           |  | 2003 |        | 2002
|                                                                                                                     |  |                                          |        |                                |  |      |        |     
|                                                                                                                     |  | (in thousands, except per share amounts)
|Net loss  as reported                                                                                               |  | $                                        | (7,002 | )                              |  | $    | (4,415 | )    |  | $ | (10,377 | ) |  | $ | (27,278 | )
|Less: Stock-based
compensation expense
determined under fair
value method for all
awards, net of
related tax effects |  |                                          | (2,151 | )                              |  |      | (3,554 | )    |  |   | (4,932  | ) |  |   | (7,218  | )
|                                                                                                                     |  |                                          |        |                                |  |      |        |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                                 |  | $                                        | (9,153 | )                              |  | $    | (7,969 | )    |  | $ | (15,309 | ) |  | $ | (34,496 | )
|                                                                                                                     |  |                                          |        |                                |  |      |        |      |  |   |         |   |  |   |         |  
|Basic and diluted
loss per share  as
reported                                                                       |  | $                                        | (0.08  | )                              |  | $    | (0.05  | )    |  | $ | (0.13   | ) |  | $ | (0.33   | )
|Basic and diluted
loss per share  pro
forma                                                                         |  |                                          | (0.11  | )                              |  |      | (0.10  | )    |  |   | (0.19   | ) |  |   | (0.42   | )

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 ended |      | Six months ended
|                                        |  | September 30,      |      | September 30,   
|                                        |  |                    |      |                 
|                                        |  | 2003               |      | 2002             |  | 2003   |      | 2002  
|                                        |  |                    |      |                  |  |        |      |       
|Expected dividend yield                 |  |                    | 0.00 | %                |  |        | 0.00 | %      |  |  | 0.00 | % |  |  | 0.00 | %
|Expected stock volatility               |  |                    | 96.0 | %                |  |        | 96.3 | %      |  |  | 96.0 | % |  |  | 96.3 | %
|Risk-free interest rate                 |  |                    | 2.8  | %                |  |        | 3.51 | %      |  |  | 2.8  | % |  |  | 3.51 | %
|Expected life of options
from vest date |  |                    | 1.68 |                  |  |        | 1.70 |        |  |  | 1.68 |   |  |  | 1.70 |  
|Forfeiture rate                         |  | Actual             |      | Actual           |  | Actual |      | Actual

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The weighted average fair value of stock options granted during the quarters
ended September 30, 2003 and September 30, 2002 was $1.67 and $1.18,
respectively.

COMPREHENSIVE INCOME

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

|                                   |                                              |   |                    |      |                  |   |        |        |      |   |         |     |  |   |         |        |  
|---------------------------------- | -------------------------------------------- | - | ------------------ | ---- | ---------------- | - | ------ | ------ | ---- | - | ------- | --- |  | - | ------- | ------ | -
|                                   |                                              |   | Three Months Ended |      | Six Months Ended
|                                   |                                              |   | September 30,      |      | September 30,   
|                                   |                                              |   |                    |      |                 
|                                   |                                              |   | 2003               |      | 2002             |   | 2003   |        | 2002
|                                   |                                              |   |                    |      |                  |   |        |        |     
|Net loss                           |                                              | $ | (7,002             | )    |                  | $ | (4,415 | )      |      | $ | (10,377 | )   |  | $ | (27,278 | )     
|Other comprehensive income
(loss): |                                              |   |                    |      |                  |   |        |        |      |   |         |     |  |   |         |       
|                                   | Unrealized currency
translation gain/
(loss) |   |                    | (412 | )                |   |        | (1,424 | )    |   |         | 899 |  |   |         | (3,632 | )
|                                   | Unrealized holding
gain on investments       |   |                    | 90   |                  |   |        | 19     |      |   |         | 42  |  |   |         | 186    |  
|                                   |                                              |   |                    |      |                  |   |        |        |      |   |         |     |  |   |         |       
|Comprehensive loss                 |                                              | $ | (7,324             | )    |                  | $ | (5,820 | )      |      | $ | (9,436  | )   |  | $ | (30,724 | )     
|                                   |                                              |   |                    |      |                  |   |        |        |      |   |         |     |  |   |         |       

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

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 will not have an impact on
revenue recognition of future 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. 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. The adoption of SFAS 150 did not have a material impact on
the Companys operating results or financial condition.

NOTE 2. BANK LINE OF CREDIT

The Company has a $22.5 million revolving credit facility with a commercial
bank. The credit facility expires in January 2004, and has one-year renewable
terms and an interest rate of either the banks prime rate, which was 4% at
September 30, 2003, or LIBOR plus 2%. The Company had no amounts borrowed
under this facility as of September 30, 2003.

NOTE 3. 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.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 4. RESTRUCTURING CHARGES

The Company did not record any restructuring charges in the first half 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
September 30, 2003 and the type and amount of restructuring costs utilized
during the first half of fiscal 2004 (in millions):

|                                 |                   |   |              |      |            |   |       |      |   |   |      |      |  
|-------------------------------- | ----------------- | - | ------------ | ---- | ---------- | - | ----- | ---- | - | - | ---- | ---- | -
|                                 |                   |   | Severance    |      | Facilities |   |       |      |  
|                                 |                   |   | and Benefits |      | and Other  |   | Total
|                                 |                   |   |              |      |            |   |      
|Balance as of April 1, 2003      |                   | $ | 1.5          |      |            | $ | 22.7  |      |   | $ | 24.2 |     
|                                 | Provision         |   |              |     |            |   |       |     |   |   |      |     |  
|                                 | Cash payments     |   |              | (1.1 | )          |   |       | (2.3 | ) |   |      | (3.4 | )
|                                 |                   |   |              |      |            |   |       |      |   |   |      |      |  
|Balance as of September
30, 2003 |                   | $ | 0.4          |      |            | $ | 20.4  |      |   | $ | 20.8 |     
|                                 |                   |   |              |      |            |   |       |      |   |   |      |      |  
|                                 | Current portion   |   | $            | 0.4  |            |   | $     | 4.7  |   |   | $    | 5.1  |  
|                                 | Long-term portion |   | $            |     |            |   | $     | 15.7 |   |   | $    | 15.7 |  

The remaining accrual balance of $20.8 as of September 30, 2003 is expected to
be paid out in cash. The Company expects $2.8 million of the remaining accrual
balance ($0.4 million of severance and benefits, $0.2 million of legal costs
and $2.2 million of vacated building lease

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 5. 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 second quarter of fiscal 2004 and 2003 and the fist half 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
groups 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 network element product called Eclipse (Eclipse) in August
2003 and plans to record customer revenue for this product by the end of fiscal
2004. The Company designs, develops, markets and sells 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,
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 $4.2 million and $5.8 million for the first half 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.

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STRATEX NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

|          |                  |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         |  
|--------- | ---------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|          |                  |  | Three Months Ended |        | Six Months Ended
|          |                  |  | September 30,      |        | September 30,   
|          |                  |  |                    |        |                 
|          |                  |  | 2003               |        | 2002             |  | 2003 |        | 2002
|          |                  |  |                    |        |                  |  |      |        |     
|Products: |                  |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        
|          | Revenues         |  | $                  | 30,205 |                  |  | $    | 44,467 |      |  | $ | 58,782  |   |  | $ | 86,838  |  
|          | Operating loss   |  |                    | (8,262 | )                |  |      | (6,142 | )    |  |   | (13,256 | ) |  |   | (29,136 | )
|Services: |                  |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        
|          | Revenues         |  |                    | 6,677  |                  |  |      | 8,093  |      |  |   | 14,067  |   |  |   | 15,041  |  
|          | Operating income |  |                    | 1,404  |                  |  |      | 2,237  |      |  |   | 2,902   |   |  |   | 3,389   |  
|Total:    |                  |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        
|          | Revenues         |  | $                  | 36,882 |                  |  | $    | 52,560 |      |  | $ | 72,849  |   |  | $ | 101,879 |  
|          | Operating loss   |  |                    | (6,858 | )                |  |      | (3,905 | )    |  |   | (10,354 | ) |  |   | (25,747 | )

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

|               |                |   |                    |        |                  |   |        |        |      |   |        |        |  |   |         |        | 
|-------------- | -------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------- | ------ | 
|               |                |   | Three Months Ended |        | Six Months Ended
|               |                |   | September 30,      |        | September 30,   
|               |                |   |                    |        |                 
|               |                |   | 2003               |        | 2002             |   | 2003   |        | 2002
|               |                |   |                    |        |                  |   |        |        |     
|XP4            |                | $ | 10,292             |        |                  | $ | 22,607 |        |      | $ | 22,422 |        |  | $ | 42,564  |       
|ALTIUM         |                |   | 12,395             |        |                  |   | 12,989 |        |      |   | 22,288 |        |  |   | 19,541  |       
|DXR            |                |   | 4,670              |        |                  |   | 8,309  |        |      |   | 10,788 |        |  |   | 21,782  |       
|SPECTRUM II    |                |   |                   |        |                  |   | 273    |        |      |   | 29     |        |  |   | 2,383   |       
|Other Products |                |   | 2,848              |        |                  |   | 289    |        |      |   | 3,255  |        |  |   | 568     |       
|               |                |   |                    |        |                  |   |        |        |      |   |        |        |  |   |         |       
|               | Total Products |   |                    | 30,205 |                  |   |        | 44,467 |      |   |        | 58,782 |  |   |         | 86,838 | 
|               | Total Services |   |                    | 6,677  |                  |   |        | 8,093  |      |   |        | 14,067 |  |   |         | 15,041 | 
|               |                |   |                    |        |                  |   |        |        |      |   |        |        |  |   |         |       
|Total Revenues |                | $ | 36,882             |        |                  | $ | 52,560 |        |      | $ | 72,849 |        |  | $ | 101,879 |       
|               |                |   |                    |        |                  |   |        |        |      |   |        |        |  |   |         |       

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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 Ended |        | Six Months Ended
|                   |  | September 30,      |        | September 30,   
|                   |  |                    |        |                 
|                   |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                   |  |                    |        |                  |  |      |        |     
|Russia             |  | $                  | 5,668  |                  |  | $    |       |      |  | $ | 9,385  |  |  | $ | 225     | 
|Other Europe       |  |                    | 9,517  |                  |  |      | 8,222  |      |  |   | 18,122 |  |  |   | 22,643  | 
|Nigeria            |  |                    | 3,801  |                  |  |      | 6,081  |      |  |   | 7,731  |  |  |   | 8,589   | 
|Middle East        |  |                    | 3,810  |                  |  |      | 4,614  |      |  |   | 6,510  |  |  |   | 7,000   | 
|India              |  |                    | 1,806  |                  |  |      | 2,053  |      |  |   | 3,823  |  |  |   | 8,490   | 
|Thailand           |  |                    | 1,612  |                  |  |      | 6,882  |      |  |   | 1,616  |  |  |   | 16,696  | 
|Other Africa       |  |                    | 2,432  |                  |  |      | 3,112  |      |  |   | 5,225  |  |  |   | 4,594   | 
|Americas           |  |                    | 5,586  |                  |  |      | 5,986  |      |  |   | 11,438 |  |  |   | 13,763  | 
|Other Asia/Pacific |  |                    | 2,650  |                  |  |      | 15,610 |      |  |   | 8,999  |  |  |   | 19,879  | 
|                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         | 
|Total Revenue      |  | $                  | 36,882 |                  |  | $    | 52,560 |      |  | $ | 72,849 |  |  | $ | 101,879 | 
|                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |         | 

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

|                                  |  |                    |        |                |  |   |        | 
|--------------------------------- |  | ------------------ | ------ | -------------- |  | - | ------ | 
|                                  |  | September 30, 2003 |        | March 31, 2003
|                                  |  |                    |        |               
|United States                     |  | $                  | 7,617  |                |  | $ | 8,822  | 
|United Kingdom                    |  |                    | 14,491 |                |  |   | 13,230 | 
|Other foreign countries           |  |                    | 7,413  |                |  |   | 6,784  | 
|                                  |  |                    |        |                |  |   |        | 
|Total property and
equipment, net |  | $                  | 29,521 |                |  | $ | 28,836 | 
|                                  |  |                    |        |                |  |   |        | 

NOTE 6. SUBSEQUENT EVENTS

On October 3, 2003 the Company completed its 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 Plessey Broadband Wireless, the Company has obtained a
license-exempt telecommunications product line. The Company believes that this
product line will expand its market presence. 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 valued at $3.0 million. On October 21, 2003 the
Company filed a registration statement on Form S-3 under the Securities Act of
1933 with the Securities and Exchange Commission in order to register the
730,238 shares of the Companys Common Stock issued to Tellumat.

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

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



| |  | Our plan to pay out in cash the remaining restructuring accrual balance as of September 30, 2003 of $20.8 million;                                                                                                                                     
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Our expectation that $2.8 million of the remaining cash restructuring charges will be paid out in fiscal 2004 (including
$0.4 million for severance and benefits, $0.2 million of legal costs and $2.2 million for vacated building lease
obligations);
| 
| |  | Our anticipation that further vacated building lease obligations of $18.0 million will be paid out during fiscal 2005
through fiscal 2012;                                                                                                             
| 
| |  | 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 continue to decrease in fiscal 2004 in absolute
dollars as a result of ongoing cost reduction measures in fiscal 2004;                                                      
| 
| |  | Our expectation that gross profit percentage will decline in the remaining quarters of fiscal 2004 due to competitive
pricing pressures;                                                                                                               
| 
| |  | 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;                                                                                       
| 
| |  | 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 network element product line, Eclipse;                                      
| 
| |  | Our expectation that we may have to utilize the credit facility that we have with a bank;                                                                                                                                                              
| 
| |  | Our intent to record initial
customer revenue on our new network element product called Eclipse by the end of fiscal 2004;                                                                                                                            

20



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



| |  | Our belief that our acquisition of Plessey Broadband Wireless will
increase our market presence;                                                                                      
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | 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; and                                                                              
| 
| |  | Our belief that we have made the appropriate reserve to account for
the contingency for our being a named defendant in a preference claim
matter pursuant to the U.S. Bankruptcy Code.

All forward-looking statements included in this document are made as of the
date hereof, based on information available to us as of the date hereof, and we
assume no obligation to update any forward-looking statement or statements. The
reader should also consult the cautionary statements and risk factors listed in
this Quarterly Report
including those contained in the section, Factors That May Affect Future
Financial Results, beginning on page 32 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, in evaluating
these forward-looking statements.

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.

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##### Table of Contents



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 |       | Six Months Ended
|                                           |  | September 30,      |       | September 30,   
|                                           |  |                    |       |                 
|                                           |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                           |  |                    |       |                  |  |      |       |     
|Net sales                                  |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | %  |  |  | 100.0 | % 
|Cost of sales                              |  |                    | 80.8  |                  |  |      | 75.8  |      |  |  | 80.2  |    |  |  | 77.1  |   
|                                           |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Gross profit                               |  |                    | 19.2  |                  |  |      | 24.2  |      |  |  | 19.8  |    |  |  | 22.9  |   
|Research and development                   |  |                    | 10.8  |                  |  |      | 6.6   |      |  |  | 10.8  |    |  |  | 6.9   |   
|Selling, general and administrative        |  |                    | 26.9  |                  |  |      | 25.1  |      |  |  | 23.2  |    |  |  | 27.4  |   
|Restructuring and other charges            |  |                    |      |                  |  |      |      |      |  |  |      |    |  |  | 13.9  |   
|                                           |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Operating loss                             |  |                    | (18.5 | )                |  |      | (7.5  | )    |  |  | (14.2 | )  |  |  | (25.3 | ) 
|Interest income                            |  |                    | 0.7   |                  |  |      | 0.9   |      |  |  | 0.7   |    |  |  | 0.9   |   
|Other income (expense), net                |  |                    | (0.4  | )                |  |      | (1.1  | )    |  |  | (0.5  | )  |  |  | (1.1  | ) 
|Write down of investments and
other assets |  |                    |      |                  |  |      | (0.5  | )    |  |  |      |    |  |  | (0.4  | ) 
|                                           |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Loss before provision for income
taxes     |  |                    | (18.2 | )                |  |      | (8.2  | )    |  |  | (14.0 | )  |  |  | (25.9 | ) 
|Provision for income taxes                 |  |                    | 0.8   |                  |  |      | 0.3   |      |  |  | 0.2   |    |  |  | 0.9   |   
|                                           |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|Net loss                                   |  |                    | (19.0 | )%               |  |      | (8.5  | )%   |  |  | (14.2 | )% |  |  | (26.8 | )%
|                                           |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   

Net Sales

In the second quarter of fiscal 2004, net sales declined significantly to $36.9
million as compared to $52.6 million in the second quarter of fiscal 2003. This
decline was across all segments and we believe that this decrease is due to the
continuing restrictions on capital spending in the telecommunications industry
in response to the weak economic conditions. There were also continued pricing
pressures on the sale of certain of our products due to severe competition in
the mobile cellular market worldwide. In the second quarter of fiscal 2004 we
aggressively priced several of our orders to maintain and establish our
position in certain key markets in anticipation of the release of our new
Eclipse (Eclipse) product line.

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

Net sales of our XP4 product line decreased significantly to $10.3 million in
the second quarter of fiscal 2004 from $22.6 million in the second quarter of
fiscal 2003. Our Altium product line net sales decreased slightly to $12.4
million in the second quarter of fiscal 2004, from $13.0 million in the second
quarter of fiscal 2003. We did not have any sales of our Spectrum II product
line in the second quarter of fiscal 2004 due to the product reaching its
planned end of life. Net sales of Spectrum II product line in the second
quarter of fiscal 2003 were $0.3 million. Net sales of our DXR product line
decreased to $4.7 million in the second quarter of fiscal 2004 as compared to
$8.3 million in the second quarter of fiscal 2003. Net sales of our DXR product
line were higher in the second quarter of fiscal 2003 as compared to the second
quarter of fiscal 2004 primarily because of recognition of revenue during the
second quarter of fiscal 2003 on several large network projects in Thailand,
which were completed in fiscal 2003. Service revenue was $6.7 million in the
second quarter of fiscal 2004, compared to $8.1 million in the second quarter
of fiscal 2003.

While we continued to see limited capital expenditures by industry
participants, we have seen some growth in our business in certain regions.



| |  |  | Net sales to Russia were $5.7 million in the second quarter of
fiscal 2004 primarily due to securing a major new customer in that
region. There were no sales to Russia in the second quarter of fiscal
2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Net sales in the Other Europe region increased slightly to $9.5
million in the second quarter of fiscal 2004, compared to $8.2 million
in the second quarter of fiscal 2003.                                 

Net sales in the following regions decreased in the second quarter of fiscal
2004 as compared to the second quarter of fiscal 2003 primarily due to
completion of several big projects in those regions during that time period
which did not repeat in the comparable period of fiscal 2004.



| |  |  | Net sales in Nigeria decreased to $3.8 million in the second
quarter of fiscal 2004 as compared to $6.1 million in the second
quarter of fiscal 2003.                                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Net sales in the Thailand region decreased to $1.6 million in the
second quarter of fiscal 2004 from $6.9 million in the second quarter
of fiscal 2003.                                                                                                                              
|
| |  |  | Net sales in the India region decreased to $1.8 million in the
second quarter of fiscal 2004 from $2.1 million in the second quarter
of fiscal 2003.                                                                                                                                 
|
| |  |  | Net sales in the Other Asia/Pacific region decreased significantly
to $2.7 million in the second quarter of fiscal 2004 from $15.6 million
in the second quarter of fiscal 2003 primarily due to the completion of
a significant project in Pakistan and a decline in sales to China.

Two customers accounted for approximately 17% and 14% of net sales for the
second quarter of fiscal 2004 and three customers accounted for approximately
13%, 12%, and 10% of net sales for the second quarter of fiscal 2003,
respectively.

Net sales for the first half of fiscal 2004 were $72.8 million, compared to
$101.9 million reported in the first half of fiscal 2003. Net sales of our XP4
product line decreased to $22.4 million in first half of fiscal 2004 from $42.6
million in the first half of fiscal 2003, primarily due to the completion of a
significant project in Pakistan, a decline of sales to customers in China and a
decline in average sales prices due to the reasons mentioned above. Net sales
of our DXR product line decreased to $10.8 million in the first half of fiscal
2004 from $21.8 million in the

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

first half of fiscal 2003 due to the recognition of revenue during the second
quarter of fiscal 2003 on several large network projects in Thailand, which
were completed in fiscal 2003.

We experienced a significant decline in net sales in India, Thailand and the
Other Asia/Pacific region due to the same reasons as mentioned in the quarter
to quarter comparisons above. This decline was partially offset by increases in
sales in the Russia region. Net sales to Russia were $9.4 million in the first
half of fiscal 2004 as compared to $0.2 million in the first half of fiscal
2003. Net sales in Other Europe region decreased to $18.1 million in the first
half of fiscal 2004 from $22.6 million in the first half of fiscal 2003, due to
ongoing restrictions on capital spending. Net sales to Thailand decreased
significantly to $1.6 million in the first half of fiscal 2004 from $16.7 in
the first half of fiscal 2003. Net sales in the Other Asia/Pacific region
decreased significantly to $9.0 million in the first half of fiscal 2004, from
$19.9 million in the first half of fiscal 2003.

For the first half of fiscal 2004 two customers accounted for approximately 14%
and 12% of our net sales for that period, respectively. For the first half of
fiscal 2003, one customer accounted for approximately 14% of net sales for that
period. Two customers accounted for approximately 12% and 10% of our backlog as
of September 30, 2003, respectively.

During the second quarter of fiscal 2004, we received $44.5 million in new
orders shippable over the next 12 months, compared to $46.7 million in the
second quarter of fiscal 2003. During the first half of fiscal 2004, we
received $86.3 million in new orders shippable over the next 12 months,
compared to $100 million in the first half of fiscal 2002, representing a
decrease of 13.7%. The backlog at September 30, 2003 was $45.5 million,
compared to $50.1 million at March 31, 2003. 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.

Gross Profit

Gross profit as a percentage of net sales was 19.2% in the second quarter of
fiscal 2004 compared to a gross profit of 24.2% in the second quarter of fiscal
2003. The decrease in gross margin in the second quarter of fiscal 2004, as
compared to the second quarter of fiscal 2003, was primarily due to a negative
pricing impact of approximately 8%, which was partially offset by a favorable
product mix impact of approximately 2% and a favorable impact of inventory
valuation benefit of approximately 1%. The inventory valuation benefit of $0.5
million and $0.4 million in the second quarter of fiscal 2004 and second
quarter of fiscal 2003, respectively, were due to the sale of some of our
excess inventories, which were reserved in prior periods. We expect gross
profit, as a percentage of sales, to decline further in the remaining quarters
of fiscal 2004 due to continued competitive pricing pressures.

Gross profit as a percentage of net sales was 19.8% in the first half of fiscal
2004 compared to a gross profit of 22.9% in the first half of fiscal 2003. The
decrease in gross margin in the first half of fiscal 2004, as compared to the
first half of fiscal 2003, was primarily due to a negative pricing impact of
approximately 7%, which was partially offset by a favorable product mix impact
of approximately 3% and lower manufacturing costs impact of approximately 2%.

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

Inventory valuation benefit was only $0.5 million in the first half of fiscal
2004 as compared to $1.5 million in the first half of fiscal 2003, resulting in
an unfavorable impact on gross margin of approximately 1%. The inventory
valuation benefit was due to the sale of some of our excess inventories, which
were reserved as inventory valuation charges in prior periods.

Research and Development

In the second quarter of fiscal 2004, research and development expenses
increased to $4.0 million from $3.5 million in the second quarter of fiscal
2002. This planned increase was primarily due to increase in prototype builds
of our new network element product Eclipse for which we plan to
record initial customer revenue by the end of fiscal year 2004. As a
percentage of net sales, research and development expenses increased to 10.8%
in the second quarter of fiscal 2004 from 6.6% in the second 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 half of fiscal 2004, research and development expenses increased
to $7.9 million from $7.1 million in the first half of fiscal 2003, due to the
reasons mentioned above. As a percentage of net sales, research and
development expenses increased to 10.8% in the first half of fiscal 2004,
compared to 6.9% in the first half of fiscal 2003.

Selling, General and Administrative

In the second quarter of fiscal 2004, selling, general and administrative
expenses decreased to $9.9 million from $13.2 million in the second quarter of
fiscal 2003. This decrease was primarily 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 workforce and noticeable
reductions in advertising, communication and software maintenance costs. As a
percentage of net sales, selling, general and administrative expenses increased
to 26.9% in the second quarter of fiscal 2004, compared to 25.1% in second
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 our selling, general and administrative expenses will
continue to increase in the third quarter of fiscal 2004 as a result of the
acquisition of Plessey Broadband Wireless operations in South Africa.

Selling, general and administrative expenses in the first half of fiscal 2004
decreased to $16.9 million compared to $27.8 million in the first half of
fiscal 2003. This decrease was primarily due to 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 23.2%
in the first half of fiscal 2004, compared to 27.4% in the first half of fiscal
2003.

Restructuring Charges

We did not record any restructuring charges in the first half of fiscal 2004.

In fiscal 2003, we entered into an agreement for outsourcing our San Jose,
California manufacturing operations to Microelectronics Technology Inc.
(MTI), our manufacturing partner in Taiwan. As a result of changes associated
with this agreement, as well as other

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

reductions in workforce and consolidation
of additional excess facilities, we 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 our manufacturing operations as mentioned above and
$4.0 million as a write off of manufacturing equipment in our 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 our 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 our 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
September 30, 2003 and the type and amount of restructuring costs utilized
during the first half of fiscal 2004 (in millions):

|                                 |                   |   |               |      |            |   |       |      |   |   |      |      |  
|-------------------------------- | ----------------- | - | ------------- | ---- | ---------- | - | ----- | ---- | - | - | ---- | ---- | -
|                                 |                   |   | Severance and |      | Facilities |   |       |      |  
|                                 |                   |   | Benefits      |      | and Other  |   | Total
|                                 |                   |   |               |      |            |   |      
|Balance as of April 1, 2003      |                   | $ | 1.5           |      |            | $ | 22.7  |      |   | $ | 24.2 |     
|                                 | Provision         |   |               |     |            |   |       |     |   |   |      |     |  
|                                 | Cash payments     |   |               | (1.1 | )          |   |       | (2.3 | ) |   |      | (3.4 | )
|                                 |                   |   |               |      |            |   |       |      |   |   |      |     
|Balance as of September
30, 2003 |                   | $ | 0.4           |      |            | $ | 20.4  |      |   | $ | 20.8 |     
|                                 |                   |   |               |      |            |   |       |      |   |   |      |     
|                                 | Current portion   |   | $             | 0.4  |            |   | $     | 4.7  |   |   | $    | 5.1  |  
|                                 | Long-term portion |   | $             |     |            |   | $     | 15.7 |   |   | $    | 15.7 |  

The remaining accrual balance of $20.8 as of September 30, 2003 is expected to
be paid out in cash. We expect $2.8 million of the remaining accrual balance
($0.4 million of severance and benefits, $0.2 million of legal costs and $2.2
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.

Other Income (Expense)

Interest income was $0.3 million in the second quarter of fiscal 2004 compared
to $0.5 million in the second quarter of fiscal 2003. The decrease was
primarily due to lower interest rates and lower interest bearing funds in the
second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003.
Other expense was $0.1 million in the second quarter of fiscal 2004 compared to
$0.6 million in the second quarter of fiscal 2003. The decrease was primarily
due to a decrease in foreign exchange losses and fees for discounting letters
of credit.

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

In the first half of fiscal 2004, interest income decreased to $0.5 million
from $0.9 million in the first half of fiscal 2003 primarily due to lower
interest rates in the first half of fiscal 2004 compared to the first half of
fiscal 2003. Other expense was $0.3 million in the first half of fiscal 2004
compared to $1.1 million in the first half of fiscal 2003. The decrease was
primarily due to a decrease in foreign exchange losses and fees for discounting
letters of credit.

Write down of investments and other assets

During the second quarter of fiscal 2003, we recorded a $0.2 million as an
impairment loss on our equity investments in marketable securities. During the
second quarter of fiscal 2004, we did not record any impairment losses. We
determined that the recorded value for these certain investments exceeded their
fair value and that these losses were other than temporary in nature.

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

Provision for Income Taxes

In the first half of fiscal 2004 and the first half 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.

Liquidity And Capital Resources

Net cash used for operating activities in the first half of fiscal 2004 was
$11.3 million, compared to net cash used of $0.6 million in the first half 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
and long term liabilities.

Accrued liabilities decreased by $12.8 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 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 primarily due to payment of
restructuring costs which were accrued in periods prior to fiscal 2004.
Accounts receivable decreased by $2.8 million in the first half of fiscal 2004
as compared to an increase of $4.4 million in the first half of fiscal 2003.
Accounts receivable decreased primarily because of lower volume of sales.

Purchases of property and equipment were $4.6 million in the first half of
fiscal 2004 compared to $2.8 million in the first half of fiscal 2003. The
increase in capital expenditures was primarily due to the purchase of test
equipment for our new product Eclipse and also due to the purchase of equipment
to provide support to the existing customers of our discontinued
Spectrum product line. We were required to make this one time bulk
purchase of equipment for our Spectrum

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

product line because our suppliers notified us that they will
not continue manufacturing this equipment as it is not profitable for them to
do so.

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

At September 30, 2003, our principal sources of liquidity consisted of $ 75.0
million in cash and cash equivalents and short-term investments. In addition to
our cash balances, we have a $22.5 million line of credit with a major bank. We
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 Eclipse product line. This may negatively impact our cash balances and
we may have to utilize the credit facility in the remaining quarters of fiscal
2004 in order to meet our working capital requirements. We are also considering
raising additional cash through debt or equity offerings. Our cash requirements
for fiscal 2004 are primarily to fund operations, research and development,
capital expenditures, acquisitions and restructuring activities.

Commercial commitments

Through several financial institutions, we have issued $5.5 million of 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 contractual
obligations:

|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |             |       |  |  |   |       |  |  |        |        |       |  |   |        | 
|---------------------------------- |  | ---------------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ------ |  | ----------- | ----- |  |  | - | ----- |  |  | ------ | ------ | ----- |  | - | ------ | 
|                                   |  | Payments due (in thousands):
|                                   |  | Years ending March 31,      
|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |             |       |  |  |   |       |  |  | 2009 & |        | Total
|                                   |  | 2004                         |        | 2005 |  | 2006 |       | 2007 |  | 2008 |       | beyond |  | Obligations
|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |            
|Operating leases (a)               |  | $                            | 3,335  |      |  | $    | 5,802 |      |  | $    | 5,762 |        |  | $           | 5,781 |  |  | $ | 5,970 |  |  | $      | 19,313 |       |  | $ | 45,963 | 
|Unconditional
purchase
obligations |  | $                            | 30,800 |      |  |      |      |      |  |      |      |        |  |             |      |  |  |   |      |  |  |        |       |       |  | $ | 30,800 | 



| | (a) |  | Contractual cash obligations include $20.2 million of lease
obligations that have been included in the restructuring accrual.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------

Restructuring payments

The accrued liability for restructuring payments of $20.8 million as of
September 30, 2003, is expected to be paid out in cash. We expect $2.8 million
of this accrual balance ($0.4 million of severance and benefits, $0.2 million
of legal costs and $2.2 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.

Depending on the growth of our business, we may require additional financing
which may not be available to us in the required time frame on commercially
reasonable terms, if at all. However,

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

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.

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) |  |                      | 41,855 |      |  |      | 13,248 |   |  |  | 5,553 |  
|Weighted average interest rate                  |  |                      | 1.14   | %    |  |      | 1.31   | % |  |  | 1.29  | %

(a)  Does not include non interest bearing cash of $14.3 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 September 30, 2003 was 150 days and these
investments had an average yield of 1.22% per annum.

As of September 30, 2003, unrealized losses on investments were insignificant.
Our investments have been recorded at fair value on our balance sheet. During
the first half 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 half of fiscal 2004.

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

Exchange Rate Risk:

We routinely use forward foreign exchange contracts to hedge our net exposures,
by currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currencies. In addition, we enter into forward
foreign exchange contracts to establish with certainty the U.S. dollar amount
of future firm commitments denominated in a foreign currency. The primary
business objective of this hedging program is to minimize the gains and losses
resulting from exchange rate changes. At September 30, 2003 we held forward
contracts in the aggregate amount of $26.6 million primarily in Thai Baht and
the euro. The amount of unrealized losses on these contracts at September 30,
2003 was $0.3 million. At September 30, 2002 we held forward contracts in the
aggregate amount of $19.8 million primarily in British pounds and the euro. The
amount of unrealized losses on these contracts at September 30, 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.

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

On October 3, 2003 we completed the acquisition the net assets of Plessey
Broadband Wireless, a division of Tellumat (Pty) Ltd. (Tellumat) located in
Cape Town, South Africa. We signed the agreement to acquire the assets of
Plessey Broadband Wireless on September 11, 2003. With the acquisition of
Plessey Broadband Wireless we obtained a license-exempt telecommunications
product line. We believe that this product line will expand our market
presence. As part of the purchase agreement, we paid $2.6 million in cash and
issued 730,238 shares of our common stock to Tellumat valued at $3.0 million.
On October 21, 2003 we filed a registration statement on Form S-3 under the
Securities Act of 1933 with the Securities and Exchange Commission to register
these 730,238 shares of our common stock issued to Tellumat.

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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 that competition in this segment 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.

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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, 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, 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, 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. Two
customers accounted for approximately 14% and 12% of net sales for the first
half of fiscal 2004, respectively. For the first half of fiscal 2003, one
customer accounted for approximately 14% of net sales for that period. Two
customers accounted for approximately 11% and 10% of net sales for fiscal 2003.
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 additional customers could result
in further declines in our

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

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 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. Sales to international customers in the first half of
fiscal 2004 were 93% of our net sales for that period. 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                                                           
|
| |  |  | unforeseen changes in export regulations.                                                 

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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.

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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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. 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. The continued decline in financial
condition of CLECs, including those currently involved in bankruptcy
proceedings, may also have a negative impact on our financial results. In the
fourth quarter of fiscal 2003, we received demand letters from the bankruptcy
estate trustees of former CLEC customers who had previously declared
bankruptcy. The bankruptcy trustees for these companies are claiming that we
received preference payments, as defined in the United States Bankruptcy Code,
totaling $10.8 million. We recorded an amount of $7.5 million in the fourth
quarter of fiscal year 2003 for these outstanding claims. In the first quarter
of fiscal 2004, we reduced our accrual by $3.5 million because we reached a
settlement on one of the claims. We intend to vigorously defend ourselves
against any other claim. In the second quarter of fiscal 2004 we paid $2.1
million to bankruptcy court in settlement of one of these claims. We believe
the balance of $1.9 million is appropriate for the settlement of the
outstanding claims. Repayment in excess of the amounts reserved could have a
negative impact on our results of operations.

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, 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. But
the redevelopment of these regions might provide us with an opportunity in
subsequent periods.

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

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

The telecommunications industry has experienced 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, 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.
Two customers accounted for approximately 18% and 10% of the total accounts
receivable balance at September 30, 2003, respectively. One customer accounted
for approximately 21% of the total accounts receivable balance at September 30,
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 be adequate to fully eliminate customer credit risk.

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 delivery of 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.

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RESULTS OF 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
tightening of 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 maybe 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.

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 Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief 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 the previous fiscal quarter. 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)  We held our annual meeting of stockholders on July 15, 2003.

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

|                     |  |          |            |          |  |  |            | 
|-------------------- |  | -------- | ---------- | -------- |  |  | ---------- | 
|Nominee              |  | In favor |            | Withheld
|                     |  |          |            |         
|Richard C. Alberding |  |          | 37,426,654 |          |  |  | 38,128,390 | 
|John W. Combs        |  |          | 68,989,000 |          |  |  | 6,566,044  | 
|William A. Hasler    |  |          | 71,492,124 |          |  |  | 4,062,920  | 
|Charles D. Kissner   |  |          | 71,440,242 |          |  |  | 4,114,802  | 
|James D. Meindl      |  |          | 69,756,282 |          |  |  | 5,798,762  | 
|V. Frank Mendicino   |  |          | 69,769,028 |          |  |  | 5,786,016  | 
|Edward F. Thompson   |  |          | 71,499,176 |          |  |  | 4,055,868  | 

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

The proposal to approve amendments to the Stratex Networks, Inc. 2002 Stock
Incentive Plan, DMC Stratex Networks, Inc. 1999 Stock Incentive Plan, and
Digital Microwave Corporation 1994 Stock Incentive Plan was approved by the
following votes:

|           |  |         |            |         |  |                 |        |  |  |  |   | 
|---------- |  | ------- | ---------- | ------- |  | --------------- | ------ |  |  |  | - | 
|For        |  | Against |            | Abstain |  | Broker Non-Vote
|           |  |         |            |         |  |                
|51,293,207 |  |         | 24,190,869 |         |  |                 | 70,868 |  |  |  |  | 

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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | For a list of exhibits to this Quarterly Report on Form 10-Q, see the
exhibit index located on page 46.                                                                                                                    
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                        
|   
|    |  | On July 03, 2003, we furnished a current report on Form 8-K regarding a
press release announcing our preliminary revenue and earnings
expectations for the first quarter of fiscal year 2004, which ended on
June 30, 2003.
|   
|    |  | On July 23, 2003, we furnished a current report on Form 8-K regarding a
press release announcing our financial results for the first quarter of
fiscal year 2004, which ended on June 30, 2003.                            
|   
|    |  | On September 12, 2003 we filed a current report on form 8-K regarding a
press release announcing the proposed acquisition of Plessey Broadband
Wireless, a division of Tellumat (Pty) Ltd.                                 

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SIGNATURE

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

|      |  |                   |  |                                                             
|----- |  | ----------------- |  | ------------------------------------------------------------
|      |  |                   |  | STRATEX NETWORKS, INC.                                      
|      |  |                   |  |                                                             
|Date: |  | November 13, 2003 |  | 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

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

46