##### Table of Contents






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
|                              
|                              
|                              
|                              
|June 30, 2002                  |  |                                

DMC 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)
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |  |                       
|                                                   
|                                                   
|                                                   
|                                                   
|170 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: Digital Microwave Corporation

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 | xbox |  |  | No | box

The number of outstanding shares of the Registrants common stock, par value
$.01 per share, was 82,533,977 on August 06, 2002.





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TABLE OF CONTENTS



|                               |                                                                                                |                                                      |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|COVER PAGE                    
|INDEX                         
|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                            
|PART II  OTHER INFORMATION   
|                               | ITEM 1  LEGAL PROCEEDINGS                                                                    
|                               | ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                     
|EXHIBIT 10.1                  



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##### Table of Contents






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 |    |       | 6-16  | 
|                              
|                              
|                              
|                              
|                               | Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                      |    | 17-25 |      
|                              
|                              
|                              
|                              
|                               |                                                                                                | Factors That May Affect Future Financial Results     |    |       | 26-33 | 
|                              
|                              
|                              
|                              
|                               | Item 3 - Quantitative and Qualitative Disclosures About Market Risk                            |                                                      |    | 34    |      
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION    |                                                                                                |                                                      |    |      
|                              
|                              
|                              
|                              
|                               | Item 1  Legal Proceedings                                                                     |                                                      |    | 35    |      
|                              
|                              
|                              
|                              
|                               | Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                      |    | 35    |      
|                              
|                              
|                              
|                              
|SIGNATURE                      |                                                                                                |                                                      | 36 |      

2



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##### Table of Contents









PART I  FINANCIAL INFORMATION
ITEM I  FINANCIAL STATEMENTS




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

|                                     |                                      |                                            |        |               |         |                |        |          |         | 
|------------------------------------ | ------------------------------------ | ------------------------------------------ | ------ | ------------- | ------- | -------------- | ------ | -------- | ------- | 
|                                     |                                      |                                            |        | June 30, 2002 |         | March 31, 2002
|                                     |                                      |                                            |        |               |         |               
|ASSETS                               |                                      |                                            |        |               |         |                |        |         
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                      |                                            |        |               |         |                |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents            |                                            | $      | 27,926        |         |                | $      | 35,888   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term investments               |                                            |        | 53,222        |         |                |        | 49,786   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net             |                                            |        | 47,687        |         |                |        | 42,953   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                          |                                            |        | 25,085        |         |                |        | 31,094   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other current assets                 |                                            |        | 13,821        |         |                |        | 10,775   |        
|                                     |                                      |                                            |        |               |         |                |        |         
|                                     |                                      | Total current assets                       |        |               | 167,741 |                |        |          | 170,496 | 
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                      |                                            | 38,019 |               |         |                | 41,694 |         
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                      |                                            | 704    |               |         |                | 1,927  |         
|                                     |                                      |                                            |        |               |         |                |        |         
|                                     |                                      | Total assets                               |        | $             | 206,464 |                |        | $        | 214,117 | 
|                                     |                                      |                                            |        |               |         |                |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                      |                                            |        |               |         |                |        |         
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                      |                                            |        |               |         |                |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                     |                                            | $      | 24,321        |         |                | $      | 20,579   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Income taxes payable                 |                                            |        | 914           |         |                |        |         |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                  |                                            |        | 25,611        |         |                |        | 19,406   |        
|                                     |                                      |                                            |        |               |         |                |        |         
|                                     |                                      | Total current liabilities                  |        |               | 50,846  |                |        |          | 39,985  | 
|                                    
|                                    
|                                    
|                                    
|Long  term liabilities              |                                      |                                            | 12,711 |               |         |                | 6,675  |         
|                                     |                                      |                                            |        |               |         |                |        |         
|Total liabilities                    |                                      |                                            | 63,557 |               |         |                | 46,660 |         
|                                    
|                                    
|                                    
|                                    
|Commitments and contingencies        |                                      |                                            |       |               |         |                |       |         
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                      |                                            |        |               |         |                |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock and paid-in capital     |                                            |        | 457,264       |         |                |        | 456,910  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                  |                                            |        | (302,019      | )       |                |        | (279,156 | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss |                                            |        | (12,338       | )       |                |        | (10,297  | )      
|                                     |                                      |                                            |        |               |         |                |        |         
|                                     |                                      | Total stockholders equity                 |        |               | 142,907 |                |        |          | 167,457 | 
|                                     |                                      |                                            |        |               |         |                |        |         
|                                     |                                      | Total liabilities and stockholders equity |        | $             | 206,464 |                |        | $        | 214,117 | 
|                                     |                                      |                                            |        |               |         |                |        |         

See accompanying Notes to Condensed Consolidated Financial Statements.

3



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##### Table of Contents






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

|                                                      |                                                |   |                    |        |      |   |         |        |  
|----------------------------------------------------- | ---------------------------------------------- | - | ------------------ | ------ | ---- | - | ------- | ------ | -
|                                                      |                                                |   | Three Months Ended
|                                                      |                                                |   | June 30,          
|                                                      |                                                |   |                   
|                                                      |                                                |   | 2002               |        | 2001
|                                                      |                                                |   |                    |        |     
|Net sales                                             |                                                | $ | 49,319             |        |      | $ | 76,684  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of sales                                         |                                                |   | 39,876             |        |      |   | 56,537  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Inventory valuation charges (benefit)                 |                                                |   | (1,107             | )      |      |   | 23,944  |       
|                                                      |                                                |   |                    |        |      |   |         |       
|Gross profit (loss)                                   |                                                |   | 10,550             |        |      |   | (3,797  | )     
|                                                      |                                                |   |                    |        |      |   |         |       
|Operating expenses                                    |                                                |   |                    |        |      |   |         |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Selling, general and administrative            |   |                    | 14,596 |      |   |         | 15,718 |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Research and development                       |   |                    | 3,622  |      |   |         | 5,919  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Restructuring costs                            |   |                    | 14,173 |      |   |         | 11,001 |  
|                                                      |                                                |   |                    |        |      |   |         |       
|Total operating expenses                              |                                                |   | 32,391             |        |      |   | 32,638  |       
|                                                      |                                                |   |                    |        |      |   |         |       
|Operating loss                                        |                                                |   | (21,841            | )      |      |   | (36,435 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|Other income (expense):                               |                                                |   |                    |        |      |   |         |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Interest income                                |   |                    | 418    |      |   |         | 549    |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Interest expense                               |   |                    | (142   | )    |   |         | (22    | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Other expense, net                             |   |                    | (355   | )    |   |         | (1,200 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Other than temporary impairment of investments |   |                    | (146   | )    |   |         | (8,339 | )
|                                                      |                                                |   |                    |        |      |   |         |       
|Loss before provision
for income taxes                |                                                |   | (22,066            | )      |      |   | (45,447 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|Provision for income taxes                            |                                                |   | 797                |        |      |   | 622     |       
|                                                      |                                                |   |                    |        |      |   |         |       
|Net loss                                              |                                                | $ | (22,863            | )      |      | $ | (46,069 | )     
|                                                      |                                                |   |                    |        |      |   |         |       
|Basic and diluted loss per share                      |                                                | $ | (0.28              | )      |      | $ | (0.62   | )     
|                                                      |                                                |   |                    |        |      |   |         |       
|Basic and diluted weighted average shares
outstanding |                                                |   | 82,380             |        |      |   | 73,840  |       
|                                                      |                                                |   |                    |        |      |   |         |       

See accompanying Notes to Condensed Consolidated Financial Statements.

4



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##### Table of Contents






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

|                                                                             |                                                                               |                                                   |         |                    |        |      |         |         |         |  
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------- | ------- | ------------------ | ------ | ---- | ------- | ------- | ------- | -
|                                                                             |                                                                               |                                                   |         | Three Months Ended
|                                                                             |                                                                               |                                                   |         | June 30,          
|                                                                             |                                                                               |                                                   |         |                   
|                                                                             |                                                                               |                                                   |         | 2002               |        | 2001
|                                                                             |                                                                               |                                                   |         |                    |        |     
|Cash flows from operating activities:                                        |                                                                               |                                                   |         |                    |        |      |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net loss                                                                     |                                                                               | $                                                 | (22,863 | )                  |        | $    | (46,069 | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                               |                                                   |         |                    |        |      |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation and amortization                                                 |                                                   |         | 3,613              |        |      |         | 4,837   |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Loss on disposal of property and equipment                                    |                                                   |         | 51                 |        |      |         |        |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Provision for uncollectible accounts                                          |                                                   |         | 99                 |        |      |         | 30      |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Inventory valuation charges and provision for
inventory and warranty reserves |                                                   |         | 1,432              |        |      |         | 27,620  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Non-cash restructuring charges                                                |                                                   |         | 1,784              |        |      |         | 1,105   |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Permanent impairment of investments                                           |                                                   |         | 146                |        |      |         | 8,339   |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Changes in assets and liabilities                                             |                                                   |         |                    |        |      |         |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | (Increase) decrease in accounts receivable        |         |                    | (5,437 | )    |         |         | 27,397  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | (Increase) decrease in inventories                |         |                    | 5,139  |      |         |         | (27,382 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | Increase in other current assets and other assets |         |                    | (2,245 | )    |         |         | (94     | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | Increase (decrease) in accounts payable           |         |                    | 3,814  |      |         |         | (2,637  | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | Increase (decrease) in income taxes payable       |         |                    | 911    |      |         |         | (381    | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | Increase in accrued liabilities                   |         |                    | 4,013  |      |         |         | 7,689   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                               | Increase in long-term liabilities                 |         |                    | 6,036  |      |         |         |        |  
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Net cash provided by (used for) operating activities                         |                                                                               |                                                   | (3,507  | )                  |        |      | 454     |        
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Cash flows from investing activities:                                        |                                                                               |                                                   |         |                    |        |      |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Purchase of short-term investments                                            |                                                   |         | (67,712            | )      |      |         | (20,345 | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Proceeds from sale of short-term investments                                  |                                                   |         | 64,277             |        |      |         | 11,234  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Purchase of property and equipment                                            |                                                   |         | (1,246             | )      |      |         | (1,853  | )      
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Net cash used for investing activities                                       |                                                                               |                                                   | (4,681  | )                  |        |      | (10,964 | )      
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Cash flows from financing activities:                                        |                                                                               |                                                   |         |                    |        |      |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Proceeds from sales of common stock                                           |                                                   |         | 354                |        |      |         | 840     |        
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Net cash provided by financing activities                                    |                                                                               |                                                   | 354     |                    |        |      | 840     |        
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Effect of exchange rate changes in cash                                      |                                                                               |                                                   | (128    | )                  |        |      | (216    | )      
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Net decrease in cash and cash equivalents                                    |                                                                               |                                                   | (7,962  | )                  |        |      | (9,886  | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents at beginning of period                             |                                                                               |                                                   | 35,888  |                    |        |      | 25,963  |        
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|Cash and cash equivalents at end of period                                   |                                                                               | $                                                 | 27,926  |                    |        | $    | 16,077  |        
|                                                                             |                                                                               |                                                   |         |                    |        |      |         |        
|SUPPLEMENTAL DATA                                                            |                                                                               |                                                   |         |                    |        |      |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest paid                                                                 |                                                   | $       | 3                  |        |      | $       | 23      |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Income taxes paid                                                             |                                                   | $       | 18                 |        |      | $       | 161     |        

See accompanying Notes to Condensed Consolidated Financial Statements.

5



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##### Table of Contents






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

BASIS OF PRESENTATION



| |  | The condensed consolidated financial statements include the accounts of DMC
Stratex Networks, Inc. and its wholly-owned subsidiaries (the Company).
Intercompany accounts and transactions have been eliminated. Certain prior
years 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, 2002, filed with the Securities and Exchange
Commission on May 15, 2002.

CASH AND CASH EQUIVALENTS



| |  | For purposes of the consolidated statement of cash flows, we consider all
highly liquid debt instruments purchased with a remaining maturity of three
months or less to be cash equivalents.                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We have issued letters of credit to various customers through several
financial institutions for bid and performance bonds. In connection with
the issuance of these letters of credit, we have restricted $0.7 million of
cash as collateral for these specific obligations. In addition, we have
restricted $0.1 million of cash as collateral to cover the foreign exchange
contracts made with one of the financial institutions to hedge our foreign
currency risk exposure.

SHORT- TERM INVESTMENTS



| |  | We invest our excess cash in high-quality and easily marketable instruments
to ensure that cash is readily available for use in our current operations.
Accordingly, all of our marketable securities are classified as
available-for-sale in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115. All investments are
reported at fair market value with the related unrealized holding gains and
losses reported as a component of accumulated other comprehensive loss.
Unrealized holding losses on the portfolio as of June 30, 2002 were
insignificant. At June 30, 2002, our available-for-sale securities had
contractual maturities ranging from 1 day to 319 days, with a weighted
average maturity of 91 days.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | There were no impairment losses on our short-term investments in marketable
securities in the first quarter of fiscal 2003. There were impairment
losses of approximately $8.3 million during the first quarter of fiscal
2002. Of this $8.3 million loss, $0.9 million was on our short-term
investments in marketable securities and the remaining $7.4 million was on
our equity investments which are discussed in the Other Assets footnote
below. We                                                                                                                                                                                                                                                                                                          

6



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##### Table of Contents



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



| |  | determined that the recorded value for these certain investments exceeded
their fair value and that these losses were other than temporary in nature.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

INVENTORIES



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

|                |  |               |        |                |  |   |        | 
|--------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                |  | June 30, 2002 |        | March 31, 2002
|                |  |               |        |               
|Raw materials   |  | $             | 12,873 |                |  | $ | 19,346 | 
|               
|               
|               
|               
|Work in process |  |               | 7,980  |                |  |   | 5,527  | 
|               
|               
|               
|               
|Finished goods  |  |               | 4,232  |                |  |   | 6,221  | 
|                |  |               |        |                |  |   |        | 
|                |  | $             | 25,085 |                |  | $ | 31,094 | 
|                |  |               |        |                |  |   |        | 



| |  | In the first quarter of fiscal 2003, we realized a $1.1 million benefit
due to sale of excess inventory which had been fully reserved in periods
prior to the quarter ending June 30, 2002.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OTHER ASSETS



| |  | Included in other assets are equity investments and long-term deposits
for premises leased by us. The equity investments were purchased for the
promotion of business and strategic objectives. Equity investments
represent voting interest of less than 20% and are accounted for under
the cost method because the Company is not able to exercise significant
influence over the investee. Equity investments in marketable securities
are classified as available-for-sale in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115 and
reported at fair value with unrealized gains and losses recorded in
accumulated other comprehensive income (loss). Equity investments in
non-marketable securities are recorded at cost. We continually review
these equity investments to evaluate whether conditions have occurred
that would suggest an impairment of carrying value. Impairment losses of
$0.1 million were recorded in the first quarter of fiscal 2003 on our
equity investments in marketable securities. During the first quarter of
fiscal 2002 we had recorded an impairment loss of $7.4 million on our
equity investments. This loss consisted of a $3.3 million loss on our
equity investments in marketable securities and a $4.1 million loss on
our equity investments in non-marketable securities. We determined that
the recorded value for these certain investments exceeded their fair
value and that these losses were other than temporary in nature.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### Table of Contents



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

ACCRUED LIABILITIES



| |  | Accrued liabilities included the following (in thousands):
| |  | ----------------------------------------------------------

|                             |  |               |        |                |  |   |        | 
|---------------------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                             |  | June 30, 2002 |        | March 31, 2002
|                             |  |               |        |               
|Customer deposits            |  | $             | 1,236  |                |  | $ | 1,804  | 
|                            
|                            
|                            
|                            
|Accrued payroll and benefits |  |               | 2,365  |                |  |   | 2,461  | 
|                            
|                            
|                            
|                            
|Accrued commissions          |  |               | 2,637  |                |  |   | 2,533  | 
|                            
|                            
|                            
|                            
|Accrued warranty             |  |               | 4,792  |                |  |   | 4,674  | 
|                            
|                            
|                            
|                            
|Accrued restructuring        |  |               | 10,480 |                |  |   | 3,534  | 
|                            
|                            
|                            
|                            
|Other                        |  |               | 4,101  |                |  |   | 4,400  | 
|                             |  |               |        |                |  |   |        | 
|                             |  | $             | 25,611 |                |  | $ | 19,406 | 
|                             |  |               |        |                |  |   |        | 

CURRENCY TRANSLATION



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

DERIVATIVE FINANCIAL INSTRUMENTS



| |  | Effective April 1, 2001, we adopted Financial Accounting Standard No. 133
Accounting for Derivative Instruments and Hedging Activities (FAS
133), which requires that all derivatives be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives that are
not designated, or are not effective as hedges, must be recognized
currently in earnings.                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Our policy is to hedge forecasted and actual foreign currency risk with
forward contracts that generally expire within nine months. Derivatives
are employed to eliminate, reduce, or transfer selected foreign currency
risks that can be identified and quantified with confidence.
Specifically, we hedge foreign currency risks relating to firmly
committed backlog, open purchase orders and non-functional currency
monetary assets and liabilities. Derivatives hedging non-functional
currency monetary assets and liabilities are recorded on the balance
sheet at fair value and changes in fair value are recognized currently in
earnings.

8



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##### Table of Contents



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



| |  | Additionally, we hedge forecasted non-U.S. dollar sales and non-U.S.
dollar purchases. In accordance with FAS 133, hedges of such anticipated
transactions are designated and documented at inception as cash flow
hedges and are evaluated for effectiveness, excluding time value, at
least quarterly. We record effective changes in the fair value of these
cash flow hedges in accumulated other comprehensive income (OCI) until
the transaction occurs, at which time the changes are reclassified to
revenue and cost of sales, respectively. All amounts accumulated in OCI
at quarter end will be reclassified to earnings within the next 12
months. A gain of $0.1 million was recognized in other income and
expense in first quarter of fiscal 2003 related to excluding time value
from effectiveness testing and ineffectiveness resulting from forecasted
transactions that did not occur.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table summarizes the activity in OCI, with regard to the
changes in fair value of derivative instruments, for the first quarter of
fiscal 2003 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                      |  |                                  |      |  
|------------------------------------- |  | -------------------------------- | ---- | -
|                                      |  | Three Months Ended June 30, 2002
|                                      |  |                                 
|Beginning balance as on April 1, 2002 |  | $                                | 142  |  
|                                     
|                                     
|                                     
|                                     
|Net changes                           |  |                                  | (227 | )
|                                     
|                                     
|                                     
|                                     
|Reclassifications to revenue          |  |                                  | (172 | )
|                                      |  |                                  |      |  
|Ending balance                        |  | $                                | (257 | )
|                                      |  |                                  |      |  

CONCENTRATION OF CREDIT RISK



| |  | Financial instruments that potentially subject us to concentrations
of credit risk consist principally of temporary cash investments and
trade receivables. We have 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, with a short-term bond rating of A/A2 or
better or a long-term bond rating of A or better. Accounts receivable
concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations may
subject us to concentration of credit risk. One customer accounted
for approximately 17% of net sales for the first quarter of fiscal
2003. Two customers accounted for approximately 19% and 17%,
respectively, of the total accounts receivable balance at June 30,
2002. No other customer accounted for more than 10% of the total
accounts receivable balance at the end of first quarter of fiscal
2003. We actively market and sell products in Africa, Asia, Europe,
the Middle East and the Americas. We perform on-going credit
evaluations of our customers financial conditions and generally
require no collateral, although sales to Asia, Eastern Europe and the
Middle East are primarily paid through letters of credit.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



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##### Table of Contents



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

REVENUE RECOGNITION



| |  | We recognize 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 passes to the customer, except
when product sales are combined with significant post-shipment
installation services. Under this exception, revenue is deferred until
such services have been performed. Service and repair revenue, which is
l4.1% of net sales for the first quarter of fiscal 2003, is recognized
when the related services and repairs are delivered. Service revenue for
the first quarter of fiscal 2003 is 8.3% of net sales for that quarter.                                                                                                                                                                                                                                               
|
| |  | At the time revenue is recognized, we establish an accrual for estimated
warranty expenses associated with our sales, recorded as a component of
cost of revenue. Our standard warranty is generally for a period of 27
months from the date of sale (which includes 3 months for installation
either by us or the buyer) and our warranty accrual represents our best
estimate of the amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While we believe that our
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. If our actual
warranty costs are greater than the accrual, cost of revenues will
increase in the future.

NET LOSS PER SHARE



| |  | Basic earnings per share (EPS) excludes dilution and is computed by
dividing net loss attributable to common shareholders by the weighted
average number of common shares outstanding for the period excluding the
weighted average common shares subject to repurchase. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (common stock options and warrants using
the treasury stock method) were exercised into common stock. Potential
common shares in the diluted EPS computation are excluded in net loss
periods, as their effect would be antidilutive.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



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##### Table of Contents



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

RESTRUCTURING CHARGES



| |  | During fiscal 2002, the industry experienced a severe downturn in the
global economy which impacted our revenues significantly. In response to
this downturn, we announced several restructuring programs in fiscal 2002
to focus on profit contribution by reducing expenses and improving
operational efficiency. These restructuring programs included
consolidation of our U.S. manufacturing operations by relocating our
Seattle, Washington operations to our San Jose, California facility, a
worldwide reduction in workforce and a consolidation of additional excess
facilities. In the first quarter of fiscal 2003, we continued to see
slowdown in the economy and tightening in the capital market. As we do
not expect any significant recovery in the economy in the near future we
took steps in the first quarter of fiscal 2003 to further improve
processes, to reduce costs and to improve asset management. As part of
this improvement program we entered into an agreement for outsourcing our
San Jose manufacturing operations to Microelectronics Technology Inc.
(MTI), our manufacturing partner in Taiwan. We believe this transition of
manufacturing operations will help us lower fixed costs and improve our
gross margins and asset turnover. As a result of changes associated with
this agreement, as well as other reductions in operating expenses and
facilities, we recorded restructuring charges of $14.2 million in the
first quarter of fiscal 2003. This restructuring charge consisted of
$2.8 million for employee severance and benefits, $8.2 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 $1.8 for the write off of manufacturing
equipment. These restructuring costs were reduced by $2.5 million which
represented the amount reimbursable from MTI for the costs relating to
transfer of certain of our manufacturing assets by MTI in accordance with
our agreement with them.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The severance and benefit charges of $2.8 million are for our reduction
in workforce by approximately 153 employees, with reductions affecting
primarily the manufacturing area due to the outsourcing of San Jose,
California manufacturing operations. As of June 30, 2002 almost all
affected employees had been notified and 40 employees had been
terminated. The remaining affected employees will be terminated by
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | During fiscal 2002, we had recorded restructuring and receivable
valuation charges of $24.6 million. This consisted of $8.4 million for
employee severance and benefits, $11.2 million for facility-related and
other costs (including $8.6 million for vacated building lease
obligations, $2.1 million for the loss on impairment of equipment, $0.1
million for legal costs and $0.4 million for the write off of goodwill)
and $5.0 million for uncollectible accounts receivable. There were
cumulative cash payments and non-cash expenses against this provision of
$7.7 million and $7.5 million, respectively, resulting in an ending
provision balance at March 31, 2002 of $9.4 million. The cash payments
related primarily to workforce reduction payments and the non-cash
expenses related primarily to equipment and receivable valuation charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The vacated building lease obligations of $8.2 million and $8.6 million
recorded in first quarter of fiscal 2003 and in fiscal 2002,
respectively, included payments required under lease contracts, less
estimated sublease income after the property was abandoned. To determine
the lease loss, certain assumptions were made related to the (1) time
period over which the building will remain vacant, (2) sublease terms,
(3) sublease rates and (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

11



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



| |  | an estimate of brokerage fees. Should operating lease rental rates
continue to decline in the current market or should it take longer than
expected to find a suitable tenant to sublease the Seattle, Washington;
San Jose, California and Coventry, United Kingdom facilities, adjustments
to the facilities lease losses reserve will be made in future periods, if
necessary, based upon the future actual events and circumstances.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table summarizes the balance of the restructuring accrual as
of June 30, 2002 and the type and amount of restructuring costs utilized
during the first quarter of fiscal 2003 (in millions):                                                                                                                                                                                                                              

|                              |  |               |      |                      |  |       |      |   |  |   |      |  
|----------------------------- |  | ------------- | ---- | -------------------- |  | ----- | ---- | - |  | - | ---- | -
|                              |  | Severance and |      |                      |  |       |      |   |  |  
|                              |  | Benefits      |      | Facilities and Other |  | Total
|                              |  |               |      |                      |  |      
|Balance as of April 1, 2002   |  | $             | 2.3  |                      |  | $     | 7.1  |   |  | $ | 9.4  |  
|                             
|                             
|                             
|                             
|Provision                     |  |               | 2.8  |                      |  |       | 11.4 |   |  |   | 14.2 |  
|                             
|                             
|                             
|                             
|Cash payments                 |  |               | (1.2 | )                    |  |       | (0.8 | ) |  |   | (2.0 | )
|                             
|                             
|                             
|                             
|Non-cash expenses             |  |               |     |                      |  |       | (1.8 | ) |  |   | (1.8 | )
|                             
|                             
|                             
|                             
|Reimbursable transition costs |  |               |     |                      |  |       | 2.5  |   |  |   | 2.5  |  
|                              |  |               |      |                      |  |       |      |   |  |   |      |  
|Balance as of June 30, 2002   |  | $             | 3.9  |                      |  | $     | 18.4 |   |  | $ | 22.3 |  
|                              |  |               |      |                      |  |       |      |   |  |   |      |  



| |  | The remaining accrual balance as of June 30, 2002 of $22.3 million is
expected to be paid out in cash. We expect all of the remaining cash
restructuring charges of $22.3 million to be paid out in fiscal 2003 with
the exception of severance and benefit costs of approximately $0.3
million, which will be paid out in fiscal 2004 and vacated building lease
obligations of $14.0 million and $0.6 million, which are expected to be
paid out over the next nine years and sixteen years, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COMPREHENSIVE INCOME



| |  | In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose
financial statements. The following table reconciles comprehensive income
under the provisions of SFAS 130 (in thousands):
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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

|                   |                                               |                                               |         |                    |        |      |         |   |       |  
|------------------ | --------------------------------------------- | --------------------------------------------- | ------- | ------------------ | ------ | ---- | ------- | - | ----- | -
|                   |                                               |                                               |         | Three Months Ended
|                   |                                               |                                               |         | June 30,          
|                   |                                               |                                               |         |                   
|                   |                                               |                                               |         | 2002               |        | 2001
|                   |                                               |                                               |         |                    |        |     
|Net loss           |                                               | $                                             | (22,863 | )                  |        | $    | (46,069 | )
|                  
|                  
|                  
|                  
|                   | Other comprehensive income (loss) net of tax: |                                               |         |                    |        |      |         |   |      
|                  
|                  
|                  
|                  
|                   |                                               | Unrealized currency translation loss          |         |                    | (2,208 | )    |         |   | (921  | )
|                  
|                  
|                  
|                  
|                   |                                               | Unrealized holding gain (loss) on
investments |         |                    | 167    |      |         |   | 2,688 |  
|                   |                                               |                                               |         |                    |        |      |         |  
|Comprehensive loss |                                               | $                                             | (24,904 | )                  |        | $    | (44,302 | )
|                   |                                               |                                               |         |                    |        |      |         |  



| |  | As of June 30, 2002, the reduction in the unrealized holding gain (loss)
was due to realized losses on investments.
| |  | -------------------------------------------------------------------------------------------------------------------

NEW ACCOUNTING PRONOUNCEMENTS



| |  | In June 2001, the FASB issued FASB Statement No. 143 (FAS 143),
Accounting for Asset Retirement Obligations. FAS 143 requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period which it is incurred if a reasonable estimate of
fair value can be made. Companies are required to adopt FAS 143 for
fiscal years beginning after June 15, 2002, but early adoption is
encouraged. We are in the process of determining the impact this standard
will have on our financial position and results of operations, although
we do not anticipate that the adoption of this standard will have a
material impact on our financial position or results of operations.                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In October 2001, the FASB issued SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes
SFAS No. 121 by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired and by broadening the presentation of discontinued
operations to include more disposal transactions. The Statement will be
effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 will not have a material impact on our financial
position or results of operations.                                                                                                                                                                                                                                                                                     
|
| |  | In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. The
Company will adopt the provisions of SFAS 146 for restructuring
activities initiated after December 31, 2002. SFAS 146 requires that
the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability
for an exit cost was recognized at the date of the Companys commitment
to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly,
SFAS 146
may affect the timing of recognizing future restructuring costs as well
as the amounts recognized.

13



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##### Table of Contents



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

OPERATING SEGMENT AND GEOGRAPHIC INFORMATION



| |  | The Company is organized into two operating segments: products and
services. Service revenue includes repair revenue. The Companys Chief
Executive Officer has been identified as the Chief Operating
Decision-Maker as defined by Statement of Financial Accounting Standards
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information. Resources are allocated to each of these segments
using information on their revenues and operating profits before interest
and taxes.                                                                                                                                                                                                                                                                                                                                                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Products operating segment includes the SPECTRUM II, XP4, Altium, and
DXR digital microwave systems for digital transmission markets. We design
and develop these products in New Zealand and California. We manufacture
the DXR product in New Zealand. Prior to June 30, 2002, we manufactured
the XP4 and Altium family of products in San Jose, California. In June
2002, we entered into an agreement with Microelectronics Technology, Inc
(MTI) in Taiwan for outsourcing of our XP-4 and Altium products
manufacturing operations to MTI. We expect to complete the transition of
manufacturing operations by the end of calendar year 2002. The Services
operating segment includes, but is not limited to, installation, repair,
spare parts, network design, path surveys, integration, and other
revenues. We maintain regional service centers in Scotland and the
Philippines.
|
| |  | We do not identify or allocate assets or depreciation by operating
segment, nor does the CEO evaluate these groups on these criteria.
Operating segments generally do not sell products to each other, and
accordingly, there are no significant inter-segment revenues to be
reported. We do not allocate interest and taxes to operating segments.
The accounting policies for each reporting segment are the same.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The following table sets forth net revenues and operating income (loss)
by operating segments (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                      |                  |  |                    |         |      |  |   |         |  
|--------------------- | ---------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                      |                  |  | Three Months Ended
|                      |                  |  | June 30,          
|                      |                  |  |                   
|                      |                  |  | 2002               |         | 2001
|                      |                  |  |                    |         |     
|Products:             |                  |  |                    |         |      |  |   |        
|                     
|                     
|                     
|                     
|                      | Net revenues     |  | $                  | 42,371  |      |  | $ | 70,025  |  
|                     
|                     
|                     
|                     
|                      | Operating loss   |  |                    | (22,993 | )    |  |   | (37,333 | )
|                     
|                     
|                     
|                     
|Services and Repairs: |                  |  |                    |         |      |  |   |        
|                     
|                     
|                     
|                     
|                      | Net revenues     |  |                    | 6,948   |      |  |   | 6,659   |  
|                     
|                     
|                     
|                     
|                      | Operating income |  |                    | 1,152   |      |  |   | 898     |  
|                     
|                     
|                     
|                     
|Total:                |                  |  |                    |         |      |  |   |        
|                     
|                     
|                     
|                     
|                      | Net revenues     |  | $                  | 49,319  |      |  | $ | 76,684  |  
|                     
|                     
|                     
|                     
|                      | Operating loss   |  |                    | (21,841 | )    |  |   | (36,435 | )

14



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



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

|               |                          |   |                    |        |      |   |        |        | 
|-------------- | ------------------------ | - | ------------------ | ------ | ---- | - | ------ | ------ | 
|               |                          |   | Three Months Ended
|               |                          |   | June 30,          
|               |                          |   |                   
|               |                          |   | 2002               |        | 2001
|               |                          |   |                    |        |     
|SPECTRUM II    |                          | $ | 2,110              |        |      | $ | 19,382 |       
|              
|              
|              
|              
|XP4            |                          |   | 19,957             |        |      |   | 22,418 |       
|              
|              
|              
|              
|DXR            |                          |   | 13,473             |        |      |   | 8,268  |       
|              
|              
|              
|              
|Xltium         |                          |   | 6,552              |        |      |   | 19,635 |       
|              
|              
|              
|              
|Other products |                          |   | 279                |        |      |   | 322    |       
|               |                          |   |                    |        |      |   |        |       
|               | Total products           |   |                    | 42,371 |      |   |        | 70,025 | 
|              
|              
|              
|              
|               | Total services & repairs |   |                    | 6,948  |      |   |        | 6,659  | 
|               |                          |   |                    |        |      |   |        |       
|Total revenue  |                          | $ | 49,319             |        |      | $ | 76,684 |       
|               |                          |   |                    |        |      |   |        |       



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

|                   |  |                    |        |      |  |   |        | 
|------------------ |  | ------------------ | ------ | ---- |  | - | ------ | 
|                   |  | Three Months Ended
|                   |  | June 30,          
|                   |  |                   
|                   |  | 2002               |        | 2001
|                   |  |                    |        |     
|Europe             |  | $                  | 14,421 |      |  | $ | 20,957 | 
|                  
|                  
|                  
|                  
|Middle East/Africa |  |                    | 6,601  |      |  |   | 7,764  | 
|                  
|                  
|                  
|                  
|China              |  |                    | 252    |      |  |   | 19,914 | 
|                  
|                  
|                  
|                  
|India              |  |                    | 6,437  |      |  |   | 1,968  | 
|                  
|                  
|                  
|                  
|Thailand           |  |                    | 9,814  |      |  |   |       | 
|                  
|                  
|                  
|                  
|Brazil             |  |                    | 2,442  |      |  |   | 5,772  | 
|                  
|                  
|                  
|                  
|United States      |  |                    | 1,092  |      |  |   | 5,788  | 
|                  
|                  
|                  
|                  
|Other Americas     |  |                    | 4,243  |      |  |   | 10,389 | 
|                  
|                  
|                  
|                  
|Other Asia/Pacific |  |                    | 4,017  |      |  |   | 4,132  | 
|                   |  |                    |        |      |  |   |        | 
|Total revenue      |  | $                  | 49,319 |      |  | $ | 76,684 | 
|                   |  |                    |        |      |  |   |        | 



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

|                                  |  |               |        |                |  |   |        | 
|--------------------------------- |  | ------------- | ------ | -------------- |  | - | ------ | 
|                                  |  | June 30, 2002 |        | March 31, 2002
|                                  |  |               |        |               
|United States                     |  | $             | 16,217 |                |  | $ | 19,872 | 
|                                 
|                                 
|                                 
|                                 
|United Kingdom                    |  |               | 15,068 |                |  |   | 15,732 | 
|                                 
|                                 
|                                 
|                                 
|Other foreign countries           |  |               | 6,734  |                |  |   | 6,090  | 
|                                  |  |               |        |                |  |   |        | 
|Total property and equipment, net |  | $             | 38,019 |                |  | $ | 41,694 | 
|                                  |  |               |        |                |  |   |        | 

15



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##### Table of Contents



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

SUBSEQUENT EVENTS



| |  | Under the terms of our agreement with Microelectronics Technology Inc.
(MTI) for transfer of our manufacturing operations to MTI in Taiwan, MTI
will assume assembly, integration and testing of our Altium product
family, as well as assembly and testing of the Outdoor Unit (ODU) portion
of its XP4 product. The agreement also provides for continuing
cooperation between the companies for future products now being
developed. Under terms of the agreement, MTI will acquire certain of our
manufacturing assets related to the production of the Altium and XP4
product lines, and we will provide assistance in the transition of the
operation. In addition, we will consign certain inventory associated with
these products to MTI and MTI will purchase such inventory, as it is
utilized in manufacturing. We will retain product design and R&D
functions for these products. MTI will purchase certain of our
manufacturing assets related to the production of our Altium and XP4
product lines. We expect to transition the affected manufacturing
operations and transfer all of these assets to MTI in the second quarter
of fiscal 2003 and record a note receivable from MTI for the assets with
a net present value of $3.4 million which will be paid by MTI in equal
quarterly installments over a period of three years. The transaction
includes a five-year supply agreement between the two companies. As a
result of the agreement, MTI will be our primary manufacturer of the
Outdoor Unit portion of Altium products and of the XP4 products. Sales of
our Altium and XP4 products for the first quarter of fiscal 2003, account
for 54% of total revenues for that quarter.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






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

The discussion in Managements Discussion and Analysis of Financial Condition
and Results of Operations contains trend analyses and other forward-looking
statements. The statements contained in this Quarterly Report on Form 10-Q that
are not purely historical concerning our future products, expenses, revenues,
gross margins, liquidity and cash needs, as well as our plans and strategies,
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act of 1934, as amended. Such
forward-looking statements include statements relating to collection of our
accounts receivable, sales of all of our products, occurrences of restructuring
charges, facilities leases, warranty accruals, selling, general and
administrative expenses, research and development expenses, cash charges for
restructuring, the need for additional financing, exchange rate gains or
losses, cost savings from outsourcing of manufacturing operations to MTI and
recording of a note receivable and use of proceeds from the sale of our common
stock. All statements, trend analyses and other information contained herein
about the markets for our services and products and trends in revenue, as well
as other statements identified by the use of forward-looking terminology,
including anticipate, believe,
plan, estimate, expect,
goal and intend or the negative of these terms or other similar
expressions constitute forward-looking statements. These forward-looking
statements are based on current expectations, and we assume no obligation to
update this information. 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 these
statements, and prospective investors and stockholders should carefully
consider these factors set forth elsewhere herein, including those contained in
the section, Factors That May Affect Future Financial Results, beginning on
page 26, in evaluating these forward-looking statements.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies since March 31,
2002. For a description of our critical accounting policies, see our Annual
Report on Form 10-K for the year ended March 31, 2002.

17



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##### Table of Contents



Results of Operations

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

|                                       |          |  |                    |       |      |  |       |       |   
|-------------------------------------- | -------- |  | ------------------ | ----- | ---- |  | ----- | ----- | --
|                                       |          |  | Three Months Ended
|                                       |          |  | June 30,          
|                                       |          |  |                   
|                                       |          |  | 2002               |       | 2001
|                                       |          |  |                    |       |     
|Net sales                              |          |  | 100.0              | %     |      |  | 100.0 | %    
|                                      
|                                      
|                                      
|                                      
|Cost of sales                          |          |  | 80.8               |       |      |  | 73.7  |      
|                                      
|                                      
|                                      
|                                      
|Inventory valuation charges (benefit)  |          |  | (2.2               | )     |      |  | 31.3  |      
|                                       |          |  |                    |       |      |  |       |      
|Gross profit (loss)                    |          |  | 21.4               |       |      |  | (5.0  | )    
|                                      
|                                      
|                                      
|                                      
|Selling, general & administrative      |          |  | 29.6               |       |      |  | 20.5  |      
|                                      
|                                      
|                                      
|                                      
|Research & development                 |          |  | 7.3                |       |      |  | 7.7   |      
|                                      
|                                      
|                                      
|                                      
|Restructuring costs                    |          |  | 28.8               |       |      |  | 14.3  |      
|                                       |          |  |                    |       |      |  |       |      
|Operating loss                         |          |  | (44.3              | )     |      |  | (47.5 | )    
|                                      
|                                      
|                                      
|                                      
|Interest income                        |          |  | 0.8                |       |      |  | 0.7   |      
|                                      
|                                      
|                                      
|                                      
|Interest expense                       |          |  | (0.3               | )     |      |  | 0.0   |      
|                                      
|                                      
|                                      
|                                      
|Other expense, net                     |          |  | (0.7               | )     |      |  | (1.6  | )    
|                                      
|                                      
|                                      
|                                      
|Permanent impairment of investments    |          |  | (0.3               | )     |      |  | (10.9 | )    
|                                       |          |  |                    |       |      |  |       |      
|Loss before provision for income
taxes |          |  | (44.8              | )     |      |  | (59.3 | )    
|                                      
|                                      
|                                      
|                                      
|Provision for income taxes             |          |  | 1.6                |       |      |  | 0.8   |      
|                                       |          |  |                    |       |      |  |       |      
|                                       | Net loss |  |                    | (46.4 | )%   |  |       | (60.1 | )%
|                                       |          |  |                    |       |      |  |       |      

Net Sales
In 2001, the telecommunications industry underwent a significant adjustment,
particularly in the United States. Following a period of rapid infrastructure
build-out and strong economic growth in 1999 and 2000, we saw a continued
tightening in the capital markets and slowdown in the telecommunications
industry throughout 2001. This resulted in lower capital spending by industry
participants and substantially less demand for our products and services and,
as a result, our revenues declined during fiscal 2002. In the first quarter of
fiscal 2003, we continued to see limited capital expenditures by industry
participants. Net sales for the first quarter of fiscal 2003 decreased
significantly to $49.3 million, compared to $76.7 million reported in the first
quarter of fiscal 2002. Revenues of all the product lines declined except for
our DXR product line. Our Altium product line net sales decreased to $6.6
million in the first quarter of fiscal 2003 from $19.6 million in the
comparable quarter of fiscal 2002. Our XP4 product line net sales decreased to
$19.9 million in the first quarter of fiscal 2003 from $22.4 million in the
comparable quarter of fiscal 2002. Net sales of our Spectrum II product line decreased to $2.1 million in the
first quarter of fiscal 2003 from $19.4 million in the comparable
quarter of fiscal 2002, primarily due to the product continuing towards its planned end of
life. Our DXR product line net sales increased to $13.5 million in the first
quarter of fiscal 2003, from $8.3 million in the comparable

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quarter of fiscal 2002, primarily due to winning a large project in Southeast
Asia. Service revenue was $6.9 million in the first quarter of fiscal 2003,
compared to $6.6 million in the first quarter of fiscal 2002. Though product
revenue in the first quarter of fiscal 2003 declined significantly as compared
to the first quarter of fiscal 2002, service revenue increased slightly. This
is primarily due to an increase in service contracts and projects as a result
of our increased efforts to position ourselves as a complete solutions provider
in the market.

We experienced a decline in net sales in Europe, North America and Latin
America due to slowdown in telecommunications industry and weak economic
conditions. However this decline was partially offset by an increase in sales
in the Southeast Asia region. Net sales to U.S. customers were $1.1 million in
the first quarter of fiscal 2003, compared to $5.8 million in the first quarter
of fiscal 2002. Net sales to China decreased significantly to $0.3 million in
the first quarter of fiscal 2003, from $19.9 million in the first quarter of
fiscal 2002, primarily due to lower sales to customers in China, who are
continuing to utilize existing inventory on hand to meet the demands in that
region, which has slowed down dramatically due to continuing weakness in the
global economy. Net sales in Europe decreased to $14.4 million in the first
quarter of fiscal 2003 from $21.0 million in the first quarter of fiscal 2002.
Net sales to India increased significantly to $6.4 million in the first quarter
of Fiscal 2003, from $2.0 million in the first quarter of fiscal 2002 primarily
due to winning a large customer in that region. Net sales to Thailand increased
significantly to $9.8 million in the first quarter of fiscal 2003 from zero in
the first quarter of fiscal 2002 due to acquiring market share in that region.

One of our customers accounted for 17% of our net sales for the first quarter
of fiscal 2003. No other customer accounted for 10% or more of our net sales
for the period. For the first quarter of fiscal 2002, one of our customers
accounted for 22% of net sales for that quarter.

During the first quarter of fiscal 2003, we received $53.3 million in new
orders shippable over the next 12 months, compared to $81.1 million in the
first quarter of fiscal 2002. The backlog at June 30, 2002 was $98.0 million,
compared to $132 million at June 30, 2001 and $94.1 million at March 31, 2002.
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, before inventory valuation benefit,
was 19.1 % in the first quarter of fiscal 2003, compared to a gross profit of
26.3%, before inventory valuation charges, in the first quarter of fiscal 2002.
This decline in gross profit was primarily due to lower capacity utilization
due to reduction in revenues. Our gross profit percentage in the first quarter
of fiscal 2003 improved to 21.4% including the inventory valuation benefit of
$1.1 million, which represented benefit from sale of some of our excess
inventories which were reserved as inventory valuation charges in the periods
prior to the quarter ending June 30, 2002. Our gross loss as a percentage of
net sales including inventory valuation charges in the first quarter of fiscal
2002 was 5.0%.

Research and Development
In the first quarter of fiscal 2003, research and development expenses
decreased to $3.6 million from $5.9 million in the first quarter of fiscal
2002. This decrease was primarily due to the

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consolidation and relocation of our Seattle, Washington research and
development operations to our San Jose, California facility in June 2001. As a
percentage of net sales, research and development expenses decreased to 7.3% in
first quarter of fiscal 2003 from 7.7% in first quarter of fiscal 2002. We plan
to remain focused on our efforts for next generation products and incremental
improvements to the existing product lines.

Selling, General and Administrative
In the first quarter of fiscal 2003, selling, general and administrative
expenses decreased to $14.6 million from $15.7 million in the first quarter of
fiscal 2002. This decrease was a result of a reduction in workforce and other
cost reduction measures that were taken in fiscal 2002 and additional cost
reduction measures taken in first quarter fiscal 2003. As a percentage of net
sales, selling, general and administrative expenses increased to 29.6% in first
quarter of fiscal 2003, compared to 20.5% in first quarter of fiscal 2002,
primarily because the rate of the decrease in net sales exceeded the rate of
the decrease of selling, general and administrative expenses. We expect our
selling, general and administrative expenses will continue to decrease in
fiscal 2003 as a result of ongoing cost reduction measures in fiscal 2003.

Restructuring Charges

During fiscal 2002, the industry experienced a severe downturn in the global
economy which impacted our revenues significantly. In response to this
downturn, we announced several restructuring programs in fiscal 2002 to focus
on profit contribution by reducing expenses and improving operational
efficiency. These restructuring programs included consolidation of our U.S.
manufacturing operations by relocating our Seattle, Washington operations to
our San Jose, California facility, a worldwide reduction in workforce and a
consolidation of additional excess facilities. In the first quarter of fiscal
2003, we continued to see a slowdown in the economy and tightening in the
capital market. As we do not expect any significant recovery in the economy in
the near future, we took steps in the first quarter of fiscal 2003 to further
improve processes, to reduce costs and to improve asset management. As part of
this improvement program we entered into an agreement for outsourcing our San
Jose manufacturing operations to Microelectronics Technology Inc. (MTI), our
manufacturing partner in Taiwan. We believe this transition of manufacturing
operations will help us lower fixed costs and improve our gross margins and
asset turnover. As a result of changes associated with this agreement, as well
as other reductions in operating expenses and facilities, we recorded
restructuring charges of $14.2 million in the first quarter of fiscal 2003.
This restructuring charge consisted of $2.8 million for employee severance and
benefits, $8.2 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 $1.8 for the write off of
manufacturing equipment. These restructuring costs were reduced by $2.5
million, which represented the amount reimbursable from MTI for the costs
relating to transfer of certain of our manufacturing assets by MTI in
accordance with our agreement with them.

The severance and benefit charges of $2.8 million are for our reduction in
workforce by approximately 153 employees, with reductions affecting primarily
the manufacturing area due to the outsourcing of San Jose, California
manufacturing operations. As of June 30, 2002 almost all affected employees had
been notified and 40 employees had been terminated. The remaining affected
employees will be terminated by December 31, 2002.

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During fiscal 2002, we had recorded restructuring and receivable valuation
charges of $24.6 million. This consisted of $8.4 million for employee severance
and benefits, $11.2 million for facility-related and other costs (including
$8.6 million for vacated building lease obligations, $2.1 million for the loss
on impairment of equipment, $0.1 million for legal costs and $0.4 million for
the write off of goodwill) and $5.0 million for uncollectible accounts
receivable. There were cumulative cash payments and non-cash expenses against
this provision of $7.7 million and $7.5 million, respectively, resulting in an
ending provision balance at March 31, 2002 of $9.4 million. The cash payments
related primarily to workforce reduction payments and the non-cash expenses
related primarily to equipment and receivable valuation charges.

The vacated building lease obligations of $8.2 million and $8.6 million
recorded in first quarter of fiscal 2003 and in fiscal 2002, respectively,
included payments required under lease contracts, less estimated sublease
income after the property was abandoned. To determine the lease loss, certain
assumptions were made related to the (1) time period over which the building
will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate
of brokerage fees. Should operating lease rental rates continue to decline in
the current market or should it take longer than expected to find a suitable
tenant to sublease the Seattle, Washington; San Jose, California and Coventry,
United Kingdom facilities, adjustments to the facilities lease losses reserve
will be made in future periods, if necessary, based upon the future actual
events and circumstances. We have estimated that under certain circumstances
the facilities lease losses could increase by an additional $14.3 million.

The following table summarizes the balance of the restructuring accrual as of
June 30, 2002 and the type and amount of restructuring costs utilized during
the first quarter of fiscal 2003 (in millions):

|                              |  |               |      |                      |  |       |      |   |  |   |      |  
|----------------------------- |  | ------------- | ---- | -------------------- |  | ----- | ---- | - |  | - | ---- | -
|                              |  | Severance and |      |                      |  |       |      |   |  |  
|                              |  | Benefits      |      | Facilities and Other |  | Total
|                              |  |               |      |                      |  |      
|Balance as of April 1, 2002   |  | $             | 2.3  |                      |  | $     | 7.1  |   |  | $ | 9.4  |  
|                             
|                             
|                             
|                             
|Provision                     |  |               | 2.8  |                      |  |       | 11.4 |   |  |   | 14.2 |  
|                             
|                             
|                             
|                             
|Cash payments                 |  |               | (1.2 | )                    |  |       | (0.8 | ) |  |   | (2.0 | )
|                             
|                             
|                             
|                             
|Non-cash expenses             |  |               |     |                      |  |       | (1.8 | ) |  |   | (1.8 | )
|                             
|                             
|                             
|                             
|Reimbursable transition costs |  |               |     |                      |  |       | 2.5  |   |  |   | 2.5  |  
|                              |  |               |      |                      |  |       |      |   |  |   |      |  
|Balance as of June 30, 2002   |  | $             | 3.9  |                      |  | $     | 18.4 |   |  | $ | 22.3 |  
|                              |  |               |      |                      |  |       |      |   |  |   |      |  

The remaining accrual balance as of June 30, 2002 of $22.3 million is expected
to be paid out in cash. We expect all of the remaining cash restructuring
charges of $22.3 million to be paid out in fiscal 2003 with the exception of
severance and benefit costs of approximately $0.3 million, which will be paid
out in fiscal 2004 and vacated building lease obligations of $14.0 million and
$0.6 million, which are expected to be paid out over the next nine years and
sixteen years, respectively.

Other Income (Expense)
Interest income was $0.4 million in first quarter of fiscal 2003 compared to
$0.5 million in first quarter of fiscal 2002. The decrease was primarily due
to lower interest rates in first quarter of Fiscal 2003 as compared to first
quarter of fiscal 2002. Other expense was $0.4 million in first quarter of
fiscal 2003 as compared to $1.2 million in the first quarter of fiscal 2002.
The decrease was primarily due to a decrease in foreign exchange losses.

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During the first quarter of fiscal 2003, we recorded $0.1 million as an
impairment loss on our equity investments in marketable securities. During the
first quarter of fiscal 2002, we recorded an impairment loss of $8.3 million.
This loss consisted of a $3.3 million loss on our equity investments in
marketable securities, a $4.1 million loss on our equity investments in
non-marketable securities and a $0.9 million loss on our short-term investments
in marketable securities. The Company determined that the recorded value for
these certain investments exceeded their fair value and that these losses were
other than temporary in nature.

Provision for Income Taxes
In the first quarter of fiscal 2003 and fiscal 2002, 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 by operating activities in the first quarter of fiscal 2003 was
$3.5 million, compared to net cash provided of $0.5 million in the first
quarter of fiscal 2002. The increase in cash used for operating activities was
primarily due to an increase in accounts receivable by $5.4 million during the
first quarter of fiscal 2003 as compared to a decrease of $27.4 million in the
first quarter of fiscal 2002. Accounts receivable increased in the first
quarter of fiscal 2003 primarily due to a higher concentration of revenues at
the end of the quarter. Other current assets increased by $2.2 million during
the first quarter of fiscal 2003 primarily due to an increase in miscellaneous
receivables. Amounts reimbursable from MTI for the costs related to transfer of
manufacturing operations to them were recorded as a miscellaneous receivable.
Inventories decreased by $5.1 million in the first quarter of fiscal 2003 as
compared to an increase of inventory by $27.4 million in the first quarter of
fiscal 2002, due to improved inventory management practices. Other accrued
liabilities and long term liabilities increased due to restructuring costs
accrued.

Purchases of property and equipment were $1.2 million in the first quarter of
fiscal 2003 compared to $1.9 million in the first quarter of fiscal 2002. The
planned decrease in capital expenditures was made in response to the economic
slowdown.

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

At June 30, 2002, our principal sources of liquidity consisted of $81.1 million
in cash and cash equivalents and short-term investments. Our cash requirements
for fiscal 2003 are primarily to fund operations, research and development,
capital expenditures and restructuring activities.

Commercial commitments
Through several financial institutions, we have issued $1.7 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 $0.7 million
of cash as collateral to meet these specific obligations. These letters of
credit generally expire within a year. We have restricted an additional $0.1
million of cash as collateral to cover the outstanding foreign exchange
contracts made with one of the financial institutions to hedge our foreign
currency risk exposure.

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

|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |             |       |  |  |   |       |  |  |        |        |       |  |   |        | 
|---------------------------------- |  | ---------------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ------ |  | ----------- | ----- |  |  | - | ----- |  |  | ------ | ------ | ----- |  | - | ------ | 
|                                   |  | Payments due (in thousands):
|                                   |  | Years ending March 31,      
|                                   |  |                             
|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |             |       |  |  |   |       |  |  | 2008 & |        | Total
|                                   |  | 2003                         |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | beyond |  | Obligations
|                                   |  |                              |        |      |  |      |       |      |  |      |       |        |  |            
|Operating leases (a)               |  | $                            | 4,203  |      |  | $    | 5,451 |      |  | $    | 5,373 |        |  | $           | 5,494 |  |  | $ | 5,646 |  |  | $      | 24,379 |       |  | $ | 50,546 | 
|                                  
|                                  
|                                  
|                                  
|Unconditional purchase
obligations |  | $                            | 29,338 |      |  |      |      |      |  |      |      |        |  |             |      |  |  |   |      |  |  |        |       |       |  | $ | 29,338 | 



---

|(a) |  | Contractual cash obligations include $14,637 of lease obligations
that have been included in as restructuring charges.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

Restructuring payments
We accrued $17.1 million in restructuring charges during fiscal 2002 and $12.4
million in first quarter of fiscal 2003 for cash outlays. Of this total accrual
of $29.5 million, $7.2 million was paid as of June 30, 2002. We expect the
remaining accrued cash restructuring charges of $22.3 million to be paid out
during fiscal 2003, with the exception of severance and benefits costs of
approximately $0.3 million which will be paid out in fiscal 2004 and vacated
building lease obligations of $14.0 million and $0.6 million which are expected
to be paid out over the next nine years and sixteen years, respectively.

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

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 tenor 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.

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|                                            |  |                      |        |      |  |      |       |      |  |      |   |  |  |  |   |  |  |  |   | 
|------------------------------------------- |  | -------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | - |  |  |  | - |  |  |  | - | 
|                                            |  | Years Ended March 31
|                                            |  |                     
|(In thousands)                              |  | 2003                 |        | 2004 |  | 2005 |       | 2006 |  | 2007
|                                            |  |                      |        |      |  |      |       |      |  |     
|Cash equivalents and
short-term investments |  | $                    | 55,884 |      |  | $    | 7,040 |      |  |      |  |  |  |  |  |  |  |  |  | 
|                                           
|                                           
|                                           
|                                           
|Weighted average
interest rate              |  |                      | 2.23   | %    |  |      | 3.09  | %    |  |      |  |  |  |  |  |  |  |  |  | 

The primary objective of our short-term investment activities is to preserve
principal while at the same time maximize yields, without significantly
increasing risk. Our short-term investments are for fixed interest rates;
therefore, changes in interest rates will not generate a gain or loss on these
investments unless they are sold prior to maturity. Actual gains and losses
due to the sale of our investments prior to maturity have been immaterial. The
average days to maturity for investments held at the end of first quarter of
fiscal 2003 was 91 days and had an average yield of 2.32% per annum.

We are exposed to equity price risks on the marketable portion of equity
securities included in our portfolio of investments, which were purchased for
the promotion of business and strategic objectives. These investments are
generally made in companies within the telecommunications industry sector, many
of which are small capitalization stocks. These investments are classified in
other assets. We typically have not attempted to reduce or eliminate our
market exposure on these securities. A 20% adverse change in equity prices
would result in an approximate $0.1 million decrease in the fair value of our
available-for-sale securities as of June 30, 2002.

As of June 30, 2002, unrealized losses on investments were insignificant. The
investments have been recorded at fair value on our balance sheet. During the
first quarter of fiscal 2003, we recorded a permanent impairment for certain
investments of $0.1 million.

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 June 30, 2002 we held forward
contracts in the aggregate amount of $23.1 million primarily in British pounds
and the euro. The amount of unrealized gain on these contracts at June 30, 2002
was $0.3 million.

Given our foreign exchange position, a change in 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 exchange rate 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 consolidated financial statements.

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Subsequent Events

Under the terms of our agreement with Microelectronics Technology Inc.
(MTI) for transfer of our manufacturing operations to MTI in Taiwan, MTI will
assume assembly, integration and testing of our Altium product family, as well
as assembly and testing of the Outdoor Unit (ODU) portion of its XP4 product.
The agreement also provides for continuing cooperation between the companies
for future products now being developed. Under terms of the agreement, MTI will
acquire certain of our manufacturing assets related to the production of the
Altium and XP4 product lines, and we will provide assistance in the transition
of the operation. In addition, we will consign certain inventory associated
with these products to MTI and MTI will purchase such inventory, as it is
utilized in manufacturing. We will retain product design and R&D functions for
these products. MTI will purchase certain of our manufacturing assets related
to the production of our Altium and XP4 product lines. We expect to transition
the affected manufacturing operations and transfer all of these assets to MTI
in the second quarter of fiscal 2003 and record a note receivable from MTI for
the assets with a net present value of $3.4 million which will be paid by MTI
in equal quarterly installments over a period of three years. The transaction
includes a five-year supply agreement between the two companies. As a result
of the agreement, MTI will be our primary manufacturer of the Outdoor Unit
portion of Altium products and of the XP4 products. Sales of our Altium and XP4
products for the first quarter of fiscal 2003, account for 54% of total
revenues for that quarter.

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Factors That May Affect Future Financial Results

The statements contained in this Quarterly Report on Form 10-Q concerning our
future products, expenses, revenues, gross margins, liquidity and cash needs,
as well as our plans and strategies, contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act of 1934, as amended. All statements, trend analyses and other information
contained herein about the markets for our services and products and trends in
revenue, as well as other statements identified by the use of forward-looking
terminology, including anticipate, believe,
plan, estimate,
expect, goal and intend or the negative of these terms or other
similar expressions constitute forward-looking statements. These
forward-looking statements are based on current expectations, and we assume no
obligation to update this information. 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
these statements, and prospective investors and stockholders should carefully
consider these factors set forth below and elsewhere in evaluating these
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 will increase. Many of our competitors have more
extensive engineering, manufacturing and marketing capabilities and
significantly greater financial, technical, and personnel resources than us. In
addition, some of our competitors may have greater name recognition, broader
product lines, a larger installed base of products and longer-standing customer
relationships. Our existing and potential competitors include established and
emerging companies, such as Alcatel, Ceragon Networks, L.M. Ericsson, Microwave
Communications Division of Harris Corporation, NEC, Nera, Nokia, P-COM, Inc.,
Sagem AS, SIAE and Siemens AG, as well as several private companies currently
in the startup stage. Some of our competitors have product lines that compete
with ours, and are also original equipment manufacturers (OEMs) through which
we market and sell our products. Some of our largest customers could internally
develop the capability to manufacture products similar to those manufactured 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 us. Furthermore,
any acquisition we 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, thereby
creating 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, and the ability of our customers to obtain financing. We cannot
assure you that we will have the financial resources, technical expertise, or
marketing, sales, distribution, and customer service and support capabilities
to compete successfully.

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If we fail to maintain our relationships with original equipment manufacturers,
our distribution channels could be harmed, which could cause our revenues to
decrease.

We have relationships with OEM base station suppliers and in selected
countries we also market our products through independent agents and
distributors. These relationships increase our ability to pursue the limited
number of major contract awards each year. In addition, these relationships 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 these
relationships or, if these 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 revenue shortfalls. If these revenue shortfalls occur,
our business, financial condition and results of operations may 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. In June 2002, we entered into an agreement with
Microelectronics Technology Inc. (MTI) to outsource our San Jose manufacturing
operations to MTI. As a result of changes associated with this agreement, as
well as other reductions in operating expenses and facilities, we reduced our
worldwide headcount by approximately 20% and recorded restructuring charges of
$ 14.2 million in the first quarter of fiscal 2003. Additionally, accounting
estimates with respect to the useful life and ultimate recoverability of our
carrying basis of assets could change as a result of such assessments and
decisions, and could harm our results of operations.

Because of the severe economic downturn in the world economy, and bankruptcies
and financial difficulties in the competitive local exchange carrier business,
the demand for our products and services may decrease.

Due to the rapid and increasingly severe economic downturn in the United
States, as well as the global tightening of the capital markets for
telecommunications and mobile cellular projects during calendar 2001 and the
first half of calendar 2002, our business opportunities have decreased in the
United States, Europe, Asia and other countries and geographic regions where we
conduct business. 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 these countries and geographical regions. In
addition, the terrorist attack of September 11, 2001, the subsequent military
response by the United States and future events occurring in response to, or in
connection with, the attacks have negatively impacted, and may continue to
negatively impact, the economy in general. This could result in our customers
delaying or canceling the purchase of

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our products, which would have a significant negative impact on our
revenues. Due in part to the economic downturn, we undertook a worldwide
reduction in work force of approximately 35% and closed our Seattle, Washington
facility in fiscal 2002. In first quarter of fiscal 2003 we entered into an
agreement with Microelectronics Technology Inc. (MTI) to outsource our
manufacturing operations to MTI. As a result of changes associated with this
agreement, we reduced our headcount by approximately 20% with the reduction
affecting various locations.

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 or be acquired by other operators. 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 decrease
opportunities for us to supply our products to the merged companies. We may
also see similar consolidation among suppliers, which may further decrease our
opportunity to market and sell our products.

Our average sales prices are declining, which is decreasing our gross profit
margins.

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

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

Sales of our products are concentrated in a small number of customers. One
customer accounted for approximately 17% of net sales for the first quarter of
fiscal 2003. Two customers accounted for approximately 19% and 17%,
respectively, of the total accounts receivable balance at the end of 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 global tightening of the capital markets for the
telecommunications and mobile cellular projects in calendar year 2001 and the
first half of calendar 2002, 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

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inability to gain additional customers could result in further declines in
our revenues. If these revenue declines occur, our business, financial
condition, and results of operations would be harmed.

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

We are highly dependent on sales to customers outside the United States.
During Fiscal 2000, 2001, and 2002, sales to international customers accounted
for 79%, 69% and 92% of our net sales, respectively. Sales to international
customers for the first quarter of fiscal 2003 accounted for 98% of our net
sales. A significant portion of these international sales is in lesser
developed countries and 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; and                                                            
|
| |  |  | currency exchange controls.                                                               

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

Our manufacturing operations, which have been substantially subcontracted,
are highly dependent upon the delivery of materials by outside suppliers in a
timely manner. Also, we depend in part upon subcontractors to assemble major
components and subsystems used in our products in a timely and satisfactory
manner. In June 2002, we entered into a five year manufacturing and supply
agreement with Microelectronics Technology Inc. (MTI). Under the terms of our
agreement with MTI, MTI will assume assembly, integration and testing of our
Altium product family, as well as assembly and testing of the Outdoor Unit
(ODU) portion of the XP4 product. Sales of our Altium and XP4 products for the
first quarter of fiscal 2003, account for 54% of total revenues for that
quarter. We do not generally enter into long-term or volume purchase agreements
with any of our suppliers, and we cannot assure you that such materials,
components and subsystems will be available to us at such time and in
quantities we require, if at all. In addition, due to the rapid and
increasingly severe economic downturn, our suppliers have

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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 deliver our products to our
customers in a timely manner. We cannot assure you that we will not experience
material supply problems or component or subsystem delays in the future.
Another risk associated with subcontracting is the subcontractors may not be
able to maintain the quality of our products, which might result into large
number of product returns by customers and could harm our business, financial
conditions and results of operation.

Additional risks associated with the outsourcing of our manufacturing
operations to MTI in Taiwan could include, among other things: (i) political
risks due to political issues between Taiwan and Peoples Republic of China,
(ii) risk of natural disasters in Taiwan which is subject to earthquakes and
typhoons, (iii) economic and regulatory developments and (iv) other events
leading to the disruption of manufacturing operations.

The global tightening of capital markets for the telecommunications and mobile
cellular projects may result in inventory which we cannot sell or be required
to sell at distressed prices.

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 current
tightening of capital markets worldwide, available funding for these projects
has been and may continue to be unavailable to some customers and thereby slow
or halt the purchase of our products and services. This reduction in demand
has resulted in excess inventories on hand, and could result in additional
excess inventories in the future. In fiscal 2002, we recorded inventory
valuation charges of $102.7 million for excess inventory and supplier
commitments resulting from the reduction in our sales volume compared to the
prior fiscal year. In the first quarter of fiscal 2003, we recorded an
inventory valuation benefit of $1.1 million which represented a benefit from
the sale of our excess inventories to some of our customers. However, if
funding continues to be unavailable to our customers or their customers, we may
be forced to take additional reserves for excess inventory. We cannot assure
you 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.

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 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. We are unable to
predict whether and when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed and
successfully integrated. Once integrated, acquired businesses may not achieve
comparable levels of revenues, profitability or productivity as 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 customers of acquired businesses
deferring purchase decisions as they evaluate the impact of the acquisition,
unexpected legal liabilities, and tax and accounting issues.

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Our failure to manage growth effectively could harm our business,
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, and 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;                  
|
| |  |  | ability of our customers to obtain financing to enable their
purchase of our products;                   
|
| |  |  | fluctuations in foreign currency exchange rates;                                                         
|
| |  |  | regulatory developments; and                                                                             
|
| |  |  | general economic conditions in the United States and internationally.                                    

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 to pursue new market opportunities. Accordingly, we
cannot assure you that we will be able to sustain profitability in the future,
particularly on a quarter-to-quarter basis.

Because of intense competition for highly skilled personnel, 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

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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 our business.

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, trademark, 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 assure you 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. Moreover, we have significant operations
in the United Kingdom and New Zealand, and our business is highly dependent on
sales to customers outside the United States. We cannot assure you that the
protection provided to our intellectual property by the laws and courts of
foreign nations will be substantially similar to the remedies available under
United States law. Furthermore, we cannot assure you 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 certain patent or other intellectual property rights of
others. Such litigation or claim 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
assure you that we would be successful in developing such non-infringing
technology or that any license for the infringing technology would be available
to us on commercially reasonable terms, if at all.

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

Radio communications are subject to regulation by United States and
foreign laws and international treaties. Generally, our products must conform
to a variety of United States and international requirements established to
avoid interference among users of transmission

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frequencies and to permit interconnection of telecommunications equipment.
Any delays in compliance with respect to our future products could delay the
introduction of such productions.

In addition, both in the United States and internationally, we are
affected by the allocation and auction of the radio frequency spectrum by
governmental authorities. 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,
and 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.

If we fail to develop products that meet our customers technical
specifications on a timely basis, our business may be harmed.

The existing and potential market for our products and technology are
characterized by ever-increasing performance requirements, evolving industry
standards, rapid technological changes and product obsolescence. These
characteristics lead to frequent new products and technology introductions and
enhancements, shorter product life cycles and changes in customer demands. We
cannot assure you that we will be successful in developing or marketing any of
our products currently being developed. Moreover, we cannot assure you that we
will not experience difficulties that could further delay or prevent the
successful development, introduction and sale of future products, or that these
products will adequately meet the requirements of the marketplace and achieve
market acceptance.

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 page 23, Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosures About Market Risk.

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PART II  OTHER INFORMATION




ITEM 1  LEGAL PROCEEDINGS



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




ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | For a list of exhibits to this Quarterly Report on Form 10-Q, see the
exhibit index located on page 37.                       
|   
|(b) |  | Reports on Form 8-K                                                                                                           
|   
|    |  | On June 13, 2002, we filed a current report on Form 8-K, dated June 6,
2002, reporting a change in our certifying accountants.

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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.

|                      |  |                                                             
|--------------------- |  | ------------------------------------------------------------
|                      |  | DMC STRATEX NETWORKS, INC.                                  
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|Date: August 14, 2002 |  | By /s/ Carl A. Thomsen                                      
|                      |  |                                                             
|                      |  | Carl A. Thomsen                                             
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|                      |  | Senior Vice President, Chief Financial Officer and Secretary
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|                      |  | (Duly Authorized Officer and Principal Financial Officer)   

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EXHIBIT INDEX

|               |  |                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                              
|2.1            |  | Certificate of Ownership and Merger merging DMC Stratex
Networks, Inc. into Digital Microwave Corporation
(incorporated by reference to Exhibit 2.1 to the companys
Quarterly Report of Form 10-Q filed on August 11, 2000).
|              
|              
|              
|              
|3.1            |  | Restated Certificate of Incorporation, amended as of August 9, 2000 (incorporated by reference to Exhibit 3.1 to the
companys Quarterly Report on Form 10-Q filed on August 11,
2000).                                      
|              
|              
|              
|              
|3.2            |  | Amended and Restated Bylaws, dated as of October 17, 2001
(incorporated by reference to Exhibit 3.2 to the companys
Quarterly Report on Form 10-Q filed on November 13, 2001).                                              
|              
|              
|              
|              
|4.1            |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                   
|              
|              
|              
|              
|10.1*          |  | Manufacture and Supply Agreement, dated as of June 30,
2002, by and between DMC Stratex Networks, Inc. and
Microelectronics Technology, Inc. (confidential treatment
of certain portions of this exhibit has been requested).



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|* |  | Confidential treatment requested and the redacted material has been separately
filed with the Securities and Exchange Commission.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------

37