##### 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 endedJune 30, 2006
    
    Commission file number: 0-15895
 Or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 STRATEX NETWORKS, INC.
  Delaware
    
    77-0016028(State or other jurisdiction
    
    (IRS employerof incorporation or organization)
    
    identification number)120 Rose Orchard WaySan Jose, CA
    
    95134(Address of Principal Executive Offices)
    
    (Zip Code)
    Yes þ
    
    No o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
 o þ




---



##### 



INDEX
 PAGECOVER PAGE
    
    
    1INDEX
    
    
    2PART I  FINANCIAL INFORMATIONItem 1 - Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-23Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    24-36Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4  Controls and Procedures
    
    
    37-38PART II  OTHER INFORMATIONItem 1 - Legal Proceedings
    
    
    39Item 1A  Risk Factors
    
    
    39Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3  Defaults Upon Senior Securities
    
    
    40Item 4  Submission of Matters to a Vote of Security Holders
    
    
    40Item 5  Other Information
    
    
    40Item 6  EXHIBITS
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEXEXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



June 30, 2006
    
    
    March 31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    44,087
    
    
    $
    44,414Short-term investments
    
    
    17,187
    
    
    
    13,272Accounts receivable, net of allowance of $2,144
on June 30, 2006 and $2,140 on March 31, 2006
    
    
    40,152
    
    
    
    42,003Inventories
    
    
    46,496
    
    
    
    43,867Other current assets
    
    
    12,327
    
    
    
    12,620Total current assets
    
    
    160,249
    
    
    
    156,176Property and equipment, net
    
    
    23,299
    
    
    
    24,049Other assets
    
    
    804
    
    
    
    605Total assets
    
    $
    184,352
    
    
    $
    180,830LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    41,218
    
    
    $
    38,725Short-term debt
    
    
    11,250
    
    
    
    11,250Accrued liabilities
    
    
    30,393
    
    
    
    31,136Total current liabilities
    
    
    82,861
    
    
    
    81,111Long  term debt
    
    
    19,479
    
    
    
    22,291Restructuring and other long  term liabilities
    
    
    13,919
    
    
    
    15,085Total liabilities
    
    
    116,259
    
    
    
    118,487Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $.01 par value; 5,000
shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 150,000 shares
authorized; 97,587 and 96,931 issued and
outstanding at June 30, 2006 and March 31,
2006, respectively
    
    
    976
    
    
    
    969Additional paid-in-capital
    
    
    493,519
    
    
    
    489,370Accumulated deficit
    
    
    (414,202
    )
    
    
    (416,022
    )Accumulated other comprehensive loss
    
    
    (12,200
    )
    
    
    (11,974
    )Total stockholders equity
    
    
    68,093
    
    
    
    62,343Total liabilities and stockholders equity
    
    $
    184,352
    
    
    $
    180,830
  3




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##### Table of Contents



Three Months EndedJune 30,2006
    
    
    2005Net sales
    
    $
    66,237
    
    
    $
    54,872Cost of sales
    
    
    46,365
    
    
    
    42,271Gross profit
    
    
    19,872
    
    
    
    12,601Operating expenses:Research and development
    
    
    4,584
    
    
    
    3,701Selling, general and administrative
    
    
    12,975
    
    
    
    11,994Total operating expenses
    
    
    17,559
    
    
    
    15,695Operating income (loss)
    
    
    2,313
    
    
    
    (3,094
    )Other income (expense):Interest income
    
    
    657
    
    
    
    220Interest expense
    
    
    (578
    )
    
    
    (501
    )Other expenses, net
    
    
    (335
    )
    
    
    (514
    )Total other income (expense)
    
    
    (256
    )
    
    
    (795
    )Income (loss) before provision
for income taxes
    
    
    2,057
    
    
    
    (3,889
    )Provision for income taxes
    
    
    235
    
    
    
    277Net income (loss)
    
    $
    1,822
    
    
    $
    (4,166
    )Basic net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.04
    )Diluted net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.04
    )Basic weighted average shares outstanding
    
    
    97,168
    
    
    
    94,942Diluted weighted average shares outstanding
    
    
    100,953
    
    
    
    94,942
  4




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##### Table of Contents



Three Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    1,822
    
    
    $
    (4,166
    )Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:Non-cash stock compensation expenses
    
    
    2,960
    
    
    
    228Depreciation and amortization
    
    
    1,630
    
    
    
    1,682Changes in assets and liabilitiesAccounts receivable
    
    
    1,795
    
    
    
    (1,186
    )Inventories
    
    
    (2,547
    )
    
    
    6,198Other assets
    
    
    (645
    )
    
    
    (592
    )Accounts payable
    
    
    2,562
    
    
    
    (5,539
    )Accrued liabilities
    
    
    (387
    )
    
    
    2,744Long-term liabilities
    
    
    (1,165
    )
    
    
    (938
    )Net cash provided by (used for) operating activities
    
    
    6,025
    
    
    
    (1,569
    )Cash flows from investing activities:Purchase of short-term investments
    
    
    (38,494
    )
    
    
    (16,716
    )Proceeds from sale/maturity of short-term investments
    
    
    34,580
    
    
    
    20,953Purchase of property and equipment
    
    
    (973
    )
    
    
    (529
    )Net cash provided by (used for) investing activities
    
    
    (4,887
    )
    
    
    3,708Cash flows from financing activities:Proceeds from sales of common stock
    
    
    1,195
    
    
    
    110Repayment of borrowing from bank
    
    
    (2,813
    )
    
    
    (1,562
    )Net cash used for financing activities
    
    
    (1,618
    )
    
    
    (1,452
    )Effect of exchange rate changes on cash
    
    
    153
    
    
    
    302Net increase (decrease) in cash and cash equivalents
    
    
    (327
    )
    
    
    989Cash and cash equivalents at beginning of period
    
    
    44,414
    
    
    
    32,860Cash and cash equivalents at end of period
    
    $
    44,087
    
    
    $
    33,849SUPPLEMENTAL DATACash paid during the period for:Interest
    
    $
    580
    
    
    $
    314Income taxes
    
    $
    160
    
    
    $
    31
  5




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##### Table of Contents



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
   CASH AND CASH EQUIVALENTS
  SHORT- TERM INVESTMENTS
  6




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##### Table of Contents



INVENTORIES
  June 30, 2006
    
    
    March 31, 2006Raw materials
    
    $
    8,941
    
    
    $
    9,012Finished goods
    
    
    37,555
    
    
    
    34,855$
    46,496
    
    
    $
    43,867
 OTHER CURRENT ASSETS
  June 30, 2006
    
    
    March 31, 2006Receivables from suppliers
    
    $
    2,529
    
    
    $
    3,074Non-trade receivables
    
    
    899
    
    
    
    947Prepaid expenses
    
    
    2,973
    
    
    
    2,987Deferred costs
    
    
    1,641
    
    
    
    1,178Prepaid insurance
    
    
    238
    
    
    
    395Income tax and VAT refund
    
    
    3,869
    
    
    
    3,795Other
    
    
    178
    
    
    
    244$
    12,327
    
    
    $
    12,620
  DEPRECIATION AND AMORTIZATION
  OTHER ASSETS  LONG TERM
   7




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##### Table of Contents



ACCRUED LIABILITIES
  June 30, 2006
    
    
    March 31, 2006Customer deposits
    
    $
    1,753
    
    
    $
    2,103Accrued payroll and benefits
    
    
    2,672
    
    
    
    2,628Accrued commissions
    
    
    4,520
    
    
    
    4,660Accrued warranty
    
    
    4,539
    
    
    
    4,395Accrued restructuring
    
    
    3,729
    
    
    
    3,373Accrual for customer discounts
    
    
    4,483
    
    
    
    4,359Deferred revenue
    
    
    2,592
    
    
    
    3,193Other
    
    
    6,105
    
    
    
    6,425$
    30,393
    
    
    $
    31,136
  CURRENCY TRANSLATION
  DERIVATIVE FINANCIAL INSTRUMENTS
  8
    Table of Contents   
    Three Months Ended
    
    Three Months EndedJune 30, 2006
    
    June 30, 2005Gains/ (Losses)
    
    Gains/ (Losses)Beginning balance on April 1,
    
    $
    (107
    )
    
    $
    90Net changes
    
    
    (269
    )
    
    
    (214
    )Reclassifications to revenue
    
    
    529
    
    
    
    500Reclassifications to cost of sales
    
    
    
    
    
    
    2Ending balance on June 30,
    
    $
    153
    
    
    $
    378
  CONCENTRATION OF CREDIT RISK
   9




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##### Table of Contents



June 30, 2006
    
    June 30, 2005Number of significant customers
    
    
    1
    
    
    
    Percentage of accounts receivable balance
    
    
    19
    %
    
    
    
  Three Months EndedJune 30, 2006
    
    June 30, 2005Number of significant customers
    
    
    3
    
    
    
    1Percentage of net sales
    
    
    14%, 11%, 10%
    
    
    
    14
    %
  REVENUE RECOGNITION
    10
    Table of Contents   
  EARNINGS (LOSS) PER SHARE
  STOCK-BASED COMPENSATION EXPENSE
    11




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##### Table of Contents



COMPREHENSIVE INCOME (LOSS)
  Three Months EndedJune 30,2006
    
    
    2005Net income (loss)
    
    $
    1,822
    
    
    $
    (4,166
    )Other comprehensive income (loss):Unrealized currency translation gain/(loss)
    
    
    (227
    )
    
    
    895Unrealized holding gain (loss) on
investments
    
    
    1
    
    
    
    21Comprehensive income (loss)
    
    $
    1,596
    
    
    $
    (3,250
    )
 RECENT ACCOUNTING PRONOUNCEMENTS
   12
    Table of Contents   
   NOTE 2. LONG TERM DEBT
     Years ending March 31,(in thousands)2007
    
    $
    8,4382008
    
    
    11,2502009
    
    
    6,0412010
    
    
    5,000Total
    
    $
    30,729
 13
    Table of Contents   
  NOTE 3. STOCK BASED COMPENSATION
  Stock Option Plans
     14




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##### Table of Contents



WeightedWeighted
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    contractual
    
    
    Value (in(in thousands)
    
    
    Price
    
    
    term in years
    
    
    thousands)Outstanding at March 31, 2006
    
    
    11,358
    
    
    $
    5.74Granted
    
    
    3,073
    
    
    
    4.33Exercised
    
    
    (288
    )
    
    
    3.37Forfeitures and cancellations
    
    
    (76
    )
    
    
    3.33Expired
    
    
    (75
    )
    
    
    10.22Outstanding at June 30, 2006
    
    
    13,992
    
    
    $
    5.47
    
    
    
    4.59
    
    
    
    6,285Vested and expected to vest at
June 30, 2006
    
    
    13,537
    
    
    $
    5.51
    
    
    
    4.53
    
    
    
    6,254Exercisable at June 30, 2006
    
    
    9,231
    
    
    $
    6.16
    
    
    
    3.70
    
    
    
    5,691
  Employee Stock Purchase Plan
 15




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##### Table of Contents



Restricted Stock Plan
  Weighted AverageGrant Date FairNumber of Shares
    
    ValueNonvested stock at April 1, 2006
    
    
    637
    
    
    
    6.15Granted
    
    
    130
    
    
    
    6.08Vested
    
    
    (307
    )
    
    
    6.14Forfeited
    
    
    Nonvested stock at June 30, 2006
    
    
    460
    
    
    
    6.14
  Determining Fair Value of Stock-based Compensation Awards
 Valuation method
 Amortization method
 Expected Term
 16




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##### Table of Contents



Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
 Estimated Pre-vesting Forfeitures
  Employee Stock Option Plans
    
    Employee Stock PurchasePlanThree Months Ended June 30,
    
    Three Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected stock volatility
    
    
    94.2
    %
    
    
    96.9
    %
    
    
    81.0
    %
    
    
    74.7
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    3.9
    %
    
    
    4.8
    %
    
    
    2.9
    %Expected life in years
    
    
    2.2
    (*)
    
    
    1.6
    (*)
    
    
    0.3
    
    
    
    0.2
 
 (*)
    
    From vest date.  17




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##### Table of Contents



Cost of sales
    
    $
    288Research and development
    
    
    694Selling, general and administrative
    
    
    1,978Income tax effect
    
    
    $
    2,960
    Pro Forma Disclosures.
 Net loss  as reported
    
    $
    (4,166
    )Less: Stock-based compensation expense determined under fair
value method for all awards, net of related tax effects
    
    $
    (1,114
    )Net loss  pro forma
    
    $
    (5,280
    )Basic and diluted loss per share  as reported
    
    $
    (0.04
    )Basic and diluted loss per share  pro forma
    
    $
    (0.06
    )
 18




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##### Table of Contents



NOTE 4. COMMITMENTS AND CONTINGENCIES
  Warranty
  19




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##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005Balance at the beginning of the quarter
    
    $
    4,395
    
    
    $
    5,340Additions related to current period sales
    
    
    1,006
    
    
    
    1,410Warranty costs incurred in the current period
    
    
    (1,055
    )
    
    
    (1,330
    )Adjustments to accruals related to prior period
sales
    
    
    193
    
    
    
    (211
    )Balance at the end of the quarter
    
    $
    4,539
    
    
    $
    5,209
 NOTE 5. RESTRUCTURING CHARGES
    Severance and Benefits
    
    
    Facilities and Other
    
    
    TotalBalance as of March 31, 2005
    
    $
    1.1
    
    
    $
    21.9
    
    
    $
    23.0Cash payments
    
    
    (1.2
    )
    
    
    (3.6
    )
    
    
    (4.8
    )Reclassification
    
    
    0.3
    
    
    
    (0.6
    )
    
    
    (0.3
    )Balance as of March 31, 2006
    
    $
    0.2
    
    
    $
    17.7
    
    
    $
    17.9Cash payments
    
    
    
    
    
    
    (0.8
    )
    
    
    (0.8
    )Balance as of June 30, 2006
    
    $
    0.2
    
    
    $
    16.9
    
    
    $
    17.1Current portion
    
    $
    0.2
    
    
    $
    3.5
    
    
    $
    3.7Long-term portion
    
    $
    
    
    
    $
    13.4
    
    
    $
    13.4
  20




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##### Table of Contents



NOTE 6. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
   ® ®
   21




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##### Table of Contents



Three Months EndedJune 30,2006
    
    2005Products:Net revenues
    
    $
    59,188
    
    
    $
    48,362Operating income (loss)
    
    
    1,154
    
    
    
    (4,000
    )Services:Net revenues
    
    
    7,049
    
    
    
    6,510Operating income
    
    
    1,159
    
    
    
    906Total:Net revenues
    
    $
    66,237
    
    
    $
    54,872Operating income (loss)
    
    
    2,313
    
    
    
    (3,094
    )
  Three Months EndedJune 30,2006
    
    
    2005Eclipse
    
    $
    50,960
    
    
    $
    24,750XP4
    
    
    1,900
    
    
    
    9,512DXR
    
    
    1,707
    
    
    
    6,590Altium
    
    
    2,472
    
    
    
    6,341Other products
    
    
    2,149
    
    
    
    1,169Total products
    
    $
    59,188
    
    
    $
    48,362Total services & repairs
    
    
    7,049
    
    
    
    6,510Total revenue
    
    $
    66,237
    
    
    $
    54,872
 22




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##### Table of Contents



Three Months EndedJune 30,2006
    
    
    2005United States
    
    $
    2,159
    
    
    $
    2,374Other Americas
    
    
    4,626
    
    
    
    6,733Russia
    
    
    2,535
    
    
    
    7,869Other Europe
    
    
    17,403
    
    
    
    14,226Middle East
    
    
    8,851
    
    
    
    3,421Ghana
    
    
    6,455
    
    
    
    1,828Other Africa
    
    
    9,596
    
    
    
    1,701Thailand
    
    
    1,446
    
    
    
    7,671Sri Lanka
    
    
    9,147
    
    
    
    1,299Other Asia/Pacific
    
    
    4,019
    
    
    
    7,750Total revenue
    
    $
    66,237
    
    
    $
    54,872
  June 30, 2006
    
    
    March 31, 2006United States
    
    $
    4,117
    
    
    $
    3,698United Kingdom
    
    
    13,542
    
    
    
    14,193New Zealand
    
    
    3,215
    
    
    
    3,648Other foreign countries
    
    
    2,425
    
    
    
    2,510Total property and equipment, net
    
    $
    23,299
    
    
    $
    24,049
 23




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##### Table of Contents




    
    Our belief that the sales increase was primarily attributable to an increase
in the demand for our newest Eclipse product line due to wireless subscriber growth and
growth in fixed wireless transmission infrastructures in developing countries as well as
increased sales for data applications as a result of the Eclipse product features which
specifically address this market.
    
    Our belief that improved market conditions, though modest, were also one of
the factors contributing to the increase in net sales in the first quarter of fiscal 2007
as compared to the first quarter of fiscal 2006.
    
    Our expectations that cash requirements for the product operating segment to
be primarily for working capital requirements, restructuring payments and research and
development activities.
    
    Our expectations that cash requirements for the service operating segment will
continue to be primarily for labor costs and spare parts.
    
    Our expectation that gross margins will improve further in fiscal 2007 due to
an expected increase in sales of our Eclipse product line which has higher margins as
compared to our legacy product lines;
    
    Our expectation that research and development expenses will increase slightly
over the remainder of fiscal 2007 in part due to salary increases to employees effective
from the second quarter of fiscal 2007;
    
    Our expectation that selling, general and administrative expenses will
increase slightly in the balance of fiscal 2007 in part due to salary increases to
employees effective from the second quarter of fiscal 2007;
    
    Our plan to pay out the $17.1 million of the remaining accrual balance in cash
($0.2 million of severance and benefits, $0.3 million of legal and $3.2 million of vacated
building lease obligations in the next twelve months and vacated building lease obligations
of $13.4 million during fiscal 2008 through fiscal 2012);
    
    Our belief that we have the financial resources needed to meet our business
requirements for at least the next 12 months;
    
    Our belief that our available cash and cash equivalents at June 30, 2006
combined with anticipated receipts of outstanding accounts receivable, the liquidation of
other current assets and our $12.9 million available credit under our revolving credit
facility should be sufficient to meet our anticipated needs for working capital and capital expenditures for
the next twelve months;
 24




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##### Table of Contents




    
    Our belief that the legal proceedings and claims that arise in the normal
course of our business will not have a material adverse effect on our business, financial
position, and results of operations;
  Business Overview
    Q1 FY 2007
    
    Q4 FY 2006
    
    Q3 FY 2006
    
    Q2 FY 2006
    
    Q1 FY 2006Gross Margin
    
    
    30.0
    %
    
    
    30.7
    %
    
    
    29.2
    %
    
    
    26.8
    %
    
    
    23.0
    %
  25




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##### Table of Contents



(in millions)Q1 FY 2007
    
    Q4 FY 2006
    
    Q3 FY 2006
    
    Q2 FY 2006
    
    Q1 FY 2006Revenue
    
    $
    51.0
    
    
    $
    45.7
    
    
    $
    33.3
    
    
    $
    30.9
    
    
    $
    24.8
 Critical Accounting Policies and Estimates
  Results of Operations
 Revenues
  Revenue by geographic regions
 Three Months Ended June 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Total
    
    
    2005
    
    
    TotalUnited States
    
    $
    2,159
    
    
    
    3
    %
    
    $
    2,374
    
    
    
    4
    %Other Americas
    
    
    4,626
    
    
    
    7
    
    
    
    6,733
    
    
    
    13Russia
    
    
    2,535
    
    
    
    4
    
    
    
    7,869
    
    
    
    15Other Europe
    
    
    17,403
    
    
    
    26
    
    
    
    14,226
    
    
    
    26Middle East
    
    
    8,851
    
    
    
    13
    
    
    
    3,421
    
    
    
    6Ghana
    
    
    6,455
    
    
    
    10
    
    
    
    1,828
    
    
    
    3Other Africa
    
    
    9,596
    
    
    
    15
    
    
    
    1,701
    
    
    
    3Thailand
    
    
    1,446
    
    
    
    2
    
    
    
    7,671
    
    
    
    14Sri Lanka
    
    
    9,147
    
    
    
    14
    
    
    
    1,299
    
    
    
    2Other Asia/Pacific
    
    
    4,019
    
    
    
    6
    
    
    
    7,750
    
    
    
    14Total Revenues
    
    $
    66,237
    
    
    
    100
    %
    
    $
    54,872
    
    
    
    100
    %
 26




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Product operating segment .
 Three Months Ended June 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Total
    
    
    2005
    
    
    TotalEclipse
    
    $
    50,960
    
    
    
    86
    %
    
    $
    24,750
    
    
    
    51
    %XP4
    
    
    1,900
    
    
    
    3
    %
    
    
    9,512
    
    
    
    20
    %DXR
    
    
    1,707
    
    
    
    3
    %
    
    
    6,590
    
    
    
    14
    %Altium
    
    
    2,472
    
    
    
    4
    %
    
    
    6,341
    
    
    
    13
    %Other Products
    
    
    2,149
    
    
    
    4
    %
    
    
    1,169
    
    
    
    2
    %Total Revenue
    
    $
    59,188
    
    
    
    100
    %
    
    $
    48,362
    
    
    
    100
    %Operating Income (Loss)
    
    $
    1,154
    
    
    
    2
    %
    
    $
    (4,000
    )
    
    
    (8
    %)
    27




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##### Table of Contents



Service Operating Segment .
 Three Months Ended June 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Revenue
    
    
    2005
    
    
    RevenueField Service revenue
    
    $
    4,170
    
    
    
    
    
    
    $
    3,322Operating income (loss)
    
    
    284
    
    
    
    7
    %
    
    
    (230
    )
    
    
    (7
    %)Repair revenue
    
    
    2,879
    
    
    
    
    
    
    
    3,188Operating income
    
    
    875
    
    
    
    30
    %
    
    
    1,136
    
    
    
    36
    %Total Services Revenue
    
    $
    7,049
    
    
    
    
    
    
    $
    6,510Total Operating income
    
    $
    1,159
    
    
    
    16
    %
    
    $
    906
    
    
    
    14
    %
    Gross Profit
 Three Months Ended June 30,% of Net
    
    
    
    
    
    
    % of Net2006
    
    
    Sales
    
    
    2005
    
    
    Sales(in thousands)Net sales
    
    $
    66,237
    
    
    
    100
    %
    
    $
    54,872
    
    
    
    100
    %Cost of sales
    
    
    46,365
    
    
    
    70
    %
    
    
    42,271
    
    
    
    77
    %Gross profit
    
    $
    19,872
    
    
    
    30
    %
    
    $
    12,601
    
    
    
    23
    %
  28




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Research and Development
 Three Months Ended June 30,2006
    
    
    2005(in thousands)Research and development
    
    $
    4,584
    
    
    $
    3,701% of net sales
    
    
    6.9
    %
    
    
    6.7
    %
  Selling, General and Administrative
 Three Months Ended June 30,2006
    
    
    2005(in thousands)Selling, general and administrative
    
    $
    12,975
    
    
    $
    11,994% of net sales
    
    
    19.6
    %
    
    
    22.0
    %
   29




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##### Table of Contents



Restructuring Charges
   Other Income (Expense)
 Three Months Ended June 30,2006
    
    
    2005(in thousands)Interest income
    
    $
    657
    
    
    $
    220Interest expense
    
    
    (578
    )
    
    
    (501
    )Other expenses, net
    
    
    (335
    )
    
    
    (514
    )
    Provision for Income Taxes
 Three Months Ended June 30,2006
    
    
    2005(in thousands)Provision for income taxes
    
    $
    235
    
    
    $
    277
  30




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Liquidity and Capital Resources
         31




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##### Table of Contents



Cash requirements
  §
    
    Operations§
    
    Research and development§
    
    Restructuring payments§
    
    Capital expenditures§
    
    Repayment of long term debt§
    
    Acquisitions
 Contractual obligations
   2011 &
    
    
    Total2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    beyond
    
    
    ObligationsOperating leases (a)
    
    $
    4,899
    
    
    $
    6,673
    
    
    $
    6,805
    
    
    $
    6,929
    
    
    $
    6,614
    
    
    $
    31,920Unconditional
purchase
obligations (b)
    
    $
    26,899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    26,899Long-term debt (c)
    
    $
    8,438
    
    
    $
    11,250
    
    
    $
    6,041
    
    
    $
    5,000
    
    
    
    
    
    
    $
    30,729
 
 (a)
    
    Contractual cash obligations include $16.6 million of lease obligations that have been
accrued as restructuring charges as of June 30, 2006.(b)
    
    We have firm purchase commitments with various suppliers as of the end of June 2006.
Actual expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these arrangements may be
less in the event that the arrangements are renegotiated or cancelled. Certain agreements
provide for potential cancellation penalties. Our policy with respect to all purchase
commitments is to record losses, if any, when they are probable and reasonably estimable.
We believe we have made adequate provision for potential exposure related to inventory for
orders which may go unused.(c)
    
    See discussion of repayment of long-term debt in the following paragraphs. Restructuring payments
  32




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Customer financing
  Repayment of long-term debt
    Sources of cash:
  Available credit facility
  33




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Employee Stock Options
   34




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##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
  Exposure on Investments
   Years Ending March 31(In thousands)2007
    
    
    2008Cash equivalents and short-term investments (a)
    
    $
    52,391
    
    
    $
    2,404Weighted average interest rate
    
    
    4.9
    %
    
    
    5.3
    %
 
 (a)
    
    Does not include cash of $6.5 million held in bank checking and deposit accounts including
those held by our foreign subsidiaries.   Exposure on Borrowings:
  35




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
   37




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Inherent Limitation on the Effectiveness of Internal Controls
  38




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1- LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  39




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##### Table of Contents



(a)
    
    ExhibitsThe exhibit list called for by this item is incorporated by reference to the Exhibit Index
filed with this report.
 40




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##### Table of Contents



STRATEX NETWORKS, INC.Date: August 9, 2006
    
    
    
    By
    
    /s/ Carl A. ThomsenCarl A. ThomsenSenior Vice President, Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal Financial Officer)
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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.1
    
    Employment Agreement, dated as of May 14, 2002, by and
between Stratex Networks, Inc. and Paul Kennard.10.2
    
    Amendment A to May 14, 2002 Employment agreement between
Stratex Networks, Inc. and Paul Kennard, dated April 1,
2006.10.3
    
    Amendment B to May 14, 2002 Employment agreement between
Stratex Networks, Inc. and Paul Kennard, dated April 1,
2006.10.4
    
    Employment Agreement, dated as of April 1, 2006, by and
between Stratex Networks, Inc. and Larry Brittain.10.5
    
    Amendment A to April 1, 2006 Employment agreement between
Stratex Networks, Inc. and Larry Brittain, dated April 14,
2006.10.6
    
    Amendment B to April 1, 2006 Employment agreement between
Stratex Networks, Inc. and Larry Brittain, dated April 14,
2006.31.1
    
    Certification of Thomas H. Waechter, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of Carl A. Thomsen, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Thomas H. Waechter, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    Certification of Carl A. Thomsen, Chief Financial Officer,
pursuant Section 906 of the Sarbanes-Oxley Act of 2002.