##### 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 September 30, 2006
 Commission file number: 0-15895
 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)
 (408) 943-0777
 .
  þ o
  o þ o
 o þ




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##### 



INDEX
 PAGECOVER PAGE
    
    
    1INDEX
    
    
    2PART I  FINANCIAL INFORMATIONItem 1  Unaudited Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-28Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    29-41Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4  Controls and Procedures
    
    
    44-45PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    46Item 1A  Risk Factors
    
    
    46Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3  Defaults Upon Senior Securities
    
    
    46Item 4  Submission of Matters to a Vote of Security Holders
    
    
    46Item 5  Other Information
    
    
    47Item 6  EXHIBITS
    
    
    47SIGNATURE
    
    
    48EXHIBIT INDEX
    
    
    49EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



September 30, 2006
    
    
    March 31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,167
    
    
    $
    44,414Restricted cash
    
    
    2,608
    
    
    
    Short-term investments
    
    
    20,940
    
    
    
    13,272Accounts receivable, net of allowance of $1,818
on September 30, 2006 and $2,140 on March 31,
2006
    
    
    51,369
    
    
    
    42,003Inventories
    
    
    38,980
    
    
    
    43,867Other current assets
    
    
    13,821
    
    
    
    12,620Total current assets
    
    
    159,885
    
    
    
    156,176Property and equipment, net
    
    
    23,479
    
    
    
    24,049Other assets
    
    
    790
    
    
    
    605Total assets
    
    $
    184,154
    
    
    $
    180,830LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    40,330
    
    
    $
    38,725Short-term debt
    
    
    11,250
    
    
    
    11,250Accrued liabilities
    
    
    29,692
    
    
    
    31,136Total current liabilities
    
    
    81,272
    
    
    
    81,111Long-term debt (Note 3)
    
    
    16,667
    
    
    
    22,291Restructuring and other long-term liabilities
    
    
    13,225
    
    
    
    15,085Total liabilities
    
    
    111,164
    
    
    
    118,487Commitments and contingencies (Note 5)Stockholders equity:Preferred stock, $.01 par value; 5,000 shares
authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 150,000 shares
authorized; 98,049 and 96,931 issued and
outstanding at September 30, 2006 and March 31,
2006, respectively
    
    
    974
    
    
    
    969Additional paid-in-capital
    
    
    496,462
    
    
    
    489,370Accumulated deficit
    
    
    (412,648
    )
    
    
    (416,022
    )Accumulated other comprehensive loss
    
    
    (11,798
    )
    
    
    (11,974
    )Total stockholders equity
    
    
    72,990
    
    
    
    62,343Total liabilities and stockholders equity
    
    $
    184,154
    
    
    $
    180,830
  3




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:Product
    
    $
    57,730
    
    
    $
    47,267
    
    
    $
    116,918
    
    
    $
    95,629Service
    
    
    9,549
    
    
    
    9,287
    
    
    
    16,598
    
    
    
    15,797Total Net Sales
    
    
    67,279
    
    
    
    56,554
    
    
    
    133,516
    
    
    
    111,426Cost of salesProduct
    
    
    38,668
    
    
    
    33,535
    
    
    
    79,143
    
    
    
    70,202Service
    
    
    7,844
    
    
    
    7,851
    
    
    
    13,734
    
    
    
    13,455Total Cost of Sales
    
    
    46,512
    
    
    
    41,386
    
    
    
    92,877
    
    
    
    83,657Gross profit
    
    
    20,767
    
    
    
    15,168
    
    
    
    40,639
    
    
    
    27,769Operating ExpensesResearch and development
    
    
    4,299
    
    
    
    3,703
    
    
    
    8,883
    
    
    
    7,404Selling, general and administrative
    
    
    14,625
    
    
    
    12,182
    
    
    
    27,600
    
    
    
    24,176Total operating expenses
    
    
    18,924
    
    
    
    15,885
    
    
    
    36,483
    
    
    
    31,580Operating income (loss)
    
    
    1,843
    
    
    
    (717
    )
    
    
    4,156
    
    
    
    (3,811
    )Other income (expense):Interest income
    
    
    693
    
    
    
    261
    
    
    
    1,350
    
    
    
    481Interest expense
    
    
    (601
    )
    
    
    (757
    )
    
    
    (1,179
    )
    
    
    (1,257
    )Other expense, net
    
    
    (360
    )
    
    
    (552
    )
    
    
    (695
    )
    
    
    (1,067
    )Total other expense
    
    
    (268
    )
    
    
    (1,048
    )
    
    
    (524
    )
    
    
    (1,843
    )Income (loss) before provision
for income taxes
    
    
    1,575
    
    
    
    (1,765
    )
    
    
    3,632
    
    
    
    (5,654
    )Provision for income taxes
    
    
    23
    
    
    
    496
    
    
    
    257
    
    
    
    773Net income (loss)
    
    $
    1,552
    
    
    $
    (2,261
    )
    
    $
    3,375
    
    
    $
    (6,427
    )Basic income (loss) per share
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.07
    )Diluted income (loss) per share
    
    
    0.02
    
    
    
    (0.02
    )
    
    
    0.03
    
    
    
    (0.07
    )Basic weighted average shares outstanding
    
    
    97,634
    
    
    
    95,175
    
    
    
    97,405
    
    
    
    95,059Diluted weighted average shares
outstanding
    
    
    100,037
    
    
    
    95,175
    
    
    
    100,537
    
    
    
    95,059
  4




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Six Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    3,375
    
    
    $
    (6,427
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Non-cash stock compensation charges
    
    
    5,572
    
    
    
    1,152Depreciation and amortization
    
    
    3,300
    
    
    
    3,326Changes in assets and liabilitiesRestricted Cash
    
    
    (2,608
    )
    
    
    Accounts receivable
    
    
    (9,324
    )
    
    
    2,320Inventories
    
    
    5,103
    
    
    
    2,413Other assets
    
    
    (1,795
    )
    
    
    (1,070
    )Accounts payable
    
    
    1,588
    
    
    
    (890
    )Accrued liabilities
    
    
    (1,393
    )
    
    
    3,997Long term liabilities
    
    
    (1,860
    )
    
    
    (1,727
    )Net cash provided by operating activities
    
    
    1,958
    
    
    
    3,094Cash flows from investing activities:Purchase of short-term investments
    
    
    (67,062
    )
    
    
    (46,189
    )Proceeds from sale of short -term investments
    
    
    59,415
    
    
    
    51,356Purchase of property and equipment
    
    
    (2,668
    )
    
    
    (1,699
    )Net cash provided by (used in) investing activities
    
    
    (10,315
    )
    
    
    3,468Cash flows from financing activities:Repayment of bank borrowings
    
    
    (5,625
    )
    
    
    (3,125
    )Proceeds from sales of common stock
    
    
    1,525
    
    
    
    297Net cash used in financing activities
    
    
    (4,100
    )
    
    
    (2,828
    )Effect of exchange rate changes on cash
    
    
    210
    
    
    
    (800
    )Net increase (decrease) in cash and cash equivalents
    
    
    (12,247
    )
    
    
    2,934Cash and cash equivalents at beginning of period
    
    
    44,414
    
    
    
    32,860Cash and cash equivalents at end of period
    
    $
    32,167
    
    
    $
    35,794SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONInterest paid
    
    $
    535
    
    
    $
    599Income taxes paid
    
    $
    537
    
    
    $
    494
  5




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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
   CASH AND CASH EQUIVALENTS
  6




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SHORT-TERM INVESTMENTS
   INVENTORIES
  September 30, 2006
    
    
    March 31, 2006Raw materials
    
    $
    7,925
    
    
    $
    9,012Finished goods
    
    
    31,055
    
    
    
    34,855$
    38,980
    
    
    $
    43,867
 OTHER CURRENT ASSETS
  September 30, 2006
    
    
    March 31, 2006Receivable from suppliers
    
    $
    2,012
    
    
    $
    3,074Non-trade receivables
    
    
    855
    
    
    
    947Prepaid expenses
    
    
    2,755
    
    
    
    2,987Deferred costs
    
    
    2,304
    
    
    
    1,178Prepaid insurance
    
    
    1,056
    
    
    
    395Income tax and VAT refund
    
    
    4,627
    
    
    
    3,795Other
    
    
    212
    
    
    
    244$
    13,821
    
    
    $
    12,620
 7




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DEPRECIATION AND AMORTIZATION
  OTHER LONG -TERM ASSETS
   ACCRUED LIABILITIES
  September 30, 2006
    
    
    March 31, 2006Customer deposits
    
    $
    1,800
    
    
    $
    2,103Accrued payroll and benefits
    
    
    2,931
    
    
    
    2,628Accrued commissions
    
    
    4,560
    
    
    
    4,660Accrued warranty
    
    
    3,710
    
    
    
    4,395Accrued restructuring
    
    
    3,713
    
    
    
    3,373Customer discounts
    
    
    4,422
    
    
    
    4,359Deferred revenue
    
    
    2,039
    
    
    
    3,193Other
    
    
    6,517
    
    
    
    6,425$
    29,692
    
    
    $
    31,136
  CURRENCY TRANSLATION
  8




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DERIVATIVE FINANCIAL INSTRUMENTS
     Six Months Ended
    
    Six Months EndedSeptember 30, 2006
    
    September 30, 2005Gains/ (Losses)
    
    Gains/ (Losses)Beginning balance on April 1
    
    $
    (107
    )
    
    
    90Net changes
    
    
    (345
    )
    
    
    (1,082
    )Reclassifications to revenue
    
    
    425
    
    
    
    782Reclassifications to cost of sales
    
    
    
    
    
    
    2Ending balance on September 30
    
    $
    (27
    )
    
    
    (208
    )
  9




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CONCENTRATION OF CREDIT RISK
    September 30, 2006
    
    March 31, 2006Number of significant customers
    
    
    2
    
    
    
    2Percentage of accounts receivable
    
    
    18%, 18
    %
    
    
    12%, 10
    %
 10




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Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Number of significant
customers
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2Percentage of net sales
    
    
    16
    %
    
    
    11%, 10
    %
    
    
    13
    %
    
    
    11%, 10
    %
  REVENUE RECOGNITION
    11




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NET INCOME (LOSS) PER SHARE
   Three Months Ended September 30,
    
    Six Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Weighted-average common
shares for
basic net
income per
share
    
    
    97,634
    
    
    
    95,175
    
    
    
    97,405
    
    
    
    95,059Weighted-average
dilutive
stock
options
outstanding
under the
treasury
stock
method
    
    
    2,403
    
    
    
    
    
    
    
    3,132
    
    
    
    Total
    
    
    100,037
    
    
    
    95,175
    
    
    
    100,537
    
    
    
    95,059
 12




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STOCK-BASED COMPENSATION
    COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    1,552
    
    
    $
    (2,261
    )
    
    $
    3,375
    
    
    $
    (6,427
    )Other comprehensive income
(loss):Unrealized currency
translation gain/
(loss)
    
    
    382
    
    
    
    (866
    )
    
    
    155
    
    
    
    29Unrealized holding
gain (loss) on
investments
    
    
    20
    
    
    
    (2
    )
    
    
    21
    
    
    
    19Comprehensive income (loss)
    
    $
    1,954
    
    
    $
    (3,129
    )
    
    $
    3,551
    
    
    $
    (6,379
    )
 13




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RECENT ACCOUNTING PRONOUNCEMENTS
    14




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NOTE 2. PROPOSED BUSINESS COMBINATION
  15




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16




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NOTE 3. LONG-TERM DEBT
     Years ending March 31,(in thousands)2007
    
    $
    5,6252008
    
    
    11,2502009
    
    
    6,0422010
    
    
    5,000Total
    
    $
    27,917
  NOTE 4. STOCK BASED COMPENSATION
  Stock Option Plans
 17




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18




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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
    
    
    3,145
    
    
    
    4.31Exercised
    
    
    (339
    )
    
    
    3.17Forfeitures and cancellations
    
    
    (79
    )
    
    
    3.33Expired
    
    
    (239
    )
    
    
    9.50Outstanding at September 30, 2006
    
    
    13,846
    
    
    $
    5.43
    
    
    
    4.42
    
    
    $
    12,186Vested and expected to vest at
September 30, 2006
    
    
    13,434
    
    
    $
    5.47
    
    
    
    4.35
    
    
    $
    12,186Exercisable at September 30, 2006
    
    
    9,426
    
    
    $
    6.00
    
    
    
    3.57
    
    
    $
    10,389
  Employee Stock Purchase Plan
 19




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Restricted Stock Plan
  Weighted AverageGrant Date FairNumber of Shares
    
    

Value
Per ShareNonvested stock at April 1, 2006
    
    
    637
    
    
    $
    6.15Granted
    
    
    130
    
    
    
    6.08Vested
    
    
    (307
    )
    
    
    6.14Nonvested stock at June 30, 2006
    
    
    460
    
    
    $
    6.14Granted
    
    
    
    
    
    
    Vested
    
    
    (269
    )
    
    
    6.02Nonvested stock at September 30, 2006
    
    
    191
    
    
    $
    6.31
  Determining Fair Value of Stock-based Compensation Awards
 Valuation method
 Amortization method
 Expected Term
 20




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Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
 Estimated Pre-vesting Forfeitures
  21




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Employee Stock Options
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected stock
volatility
    
    
    92.9
    %
    
    
    96.7
    %
    
    
    94.0
    %
    
    
    96.9
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    3.9
    %Expected life in
years(*)
    
    
    2.2
    
    
    
    1.5
    
    
    
    2.2
    
    
    
    1.5
 
 (*)
    
    From vest date.   Employee Stock Purchase Plan
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected stock
volatility
    
    
    61.6
    %
    
    
    48.8
    %
    
    
    71.9
    %
    
    
    50.7
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    3.0
    %
    
    
    5.0
    %
    
    
    2.9
    %Expected life in years
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
  22




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Three Months
    
    
    Six MonthsEnded September
    
    
    Ended September30, 2006
    
    
    30, 2006Total stock-based
compensation expense on
adoption of FAS123R
    
    $
    1,031
    
    
    $
    2,103Tax effect on
stock-based compensation
expense
    
    
    
    
    
    
    Net effect on stock
compensation expense
    
    $
    1,031
    
    
    $
    2,103Effect on loss per share:Basic
    
    $
    0.01
    
    
    $
    0.02Diluted
    
    $
    0.01
    
    
    $
    0.02
  Three Months
    
    
    Six MonthsEnded September
    
    
    Ended September30, 2006
    
    
    30, 2006Cost of sales
    
    $
    175
    
    
    $
    463Research and development
    
    
    667
    
    
    
    1,359Selling, general and administrative
    
    
    1,771
    
    
    
    3,750$
    2,613
    
    
    $
    5,572
    23




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##### Table of Contents



Pro Forma Disclosures.
 Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net loss
 as reported
    
    $
    (2,261
    )
    
    $
    (6,427
    )Add: Stock-based
compensation expense
determined under fair
value method for all
awards, net of
related tax effects
    
    
    (1,409
    )
    
    
    (2,522
    )Net loss  pro forma
    
    $
    (3,670
    )
    
    $
    (8,949
    )Basic and diluted
loss per share  as
reported
    
    $
    (0.02
    )
    
    $
    (0.07
    )Basic and diluted
loss per share  pro
forma
    
    $
    (0.04
    )
    
    $
    (0.09
    )
 NOTE 5. COMMITMENTS AND CONTINGENCIES
  Warranty
  24




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Six Months
    
    Six MonthsEnded
    
    EndedSeptember 30,
    
    September 302006
    
    2005Balance at the beginning of period
    
    $
    4,539
    
    
    $
    5,340Additions related to current period sales
    
    
    1,218
    
    
    
    2,947Warranty costs incurred in the current period
    
    
    (2,173
    )
    
    
    (2,701
    )Adjustments to accruals related to prior
period sales
    
    
    126
    
    
    
    (546
    )Balance at the end
    
    $
    3,710
    
    
    $
    5,040
 NOTE 6. RESTRUCTURING CHARGES
    Severance
    
    
    Facilitiesand Benefits
    
    
    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
    
    
    $
    17.1Provision
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    
    
    
    
    (0.7
    )
    
    
    (0.7
    )Balance as of September 30, 2006
    
    $
    0.2
    
    
    $
    16.2
    
    
    $
    16.4Current portion
    
    $
    0.2
    
    
    $
    3.5
    
    
    $
    3.7Long-term portion
    
    $
    
    
    
    $
    12.7
    
    
    $
    12.7
  25




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NOTE 7. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
     26




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Products:Revenues
    
    $
    57,730
    
    
    $
    47,267
    
    
    $
    116,918
    
    
    $
    95,629Operating income (loss)
    
    
    138
    
    
    
    (2,153
    )
    
    
    1,292
    
    
    
    (6,153
    )Services:Revenues
    
    
    9,549
    
    
    
    9,287
    
    
    
    16,598
    
    
    
    15,797Operating income
    
    
    1,705
    
    
    
    1,436
    
    
    
    2,864
    
    
    
    2,342Total:Revenues
    
    $
    67,279
    
    
    $
    56,554
    
    
    $
    133,516
    
    
    $
    111,426Operating income (loss)
    
    
    1,843
    
    
    
    (717
    )
    
    
    4,156
    
    
    
    (3,811
    )
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Eclipse
    
    $
    49,161
    
    
    $
    30,798
    
    
    $
    100,121
    
    
    $
    55,547Velox
    
    
    1,874
    
    
    
    2,184
    
    
    
    3,404
    
    
    
    3,145DXR
    
    
    1,500
    
    
    
    4,663
    
    
    
    3,207
    
    
    
    11,253XP4
    
    
    3,092
    
    
    
    3,192
    
    
    
    4,992
    
    
    
    12,705Other Products
    
    
    2,103
    
    
    
    6,430
    
    
    
    5,194
    
    
    
    12,979Total Products
    
    
    57,730
    
    
    
    47,267
    
    
    
    116,918
    
    
    
    95,629Total Services
    
    
    9,549
    
    
    
    9,287
    
    
    
    16,598
    
    
    
    15,797Total Revenues
    
    $
    67,279
    
    
    $
    56,554
    
    
    $
    133,516
    
    
    $
    111,426
 27




---



##### Table of Contents



Three Months Ended September 30,
    
    Six Months Ended September 30% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of2006
    
    Total
    
    2005
    
    Total
    
    2006
    
    Total
    
    2005
    
    TotalUnited States
    
    $
    2,000
    
    
    
    3
    %
    
    $
    3,820
    
    
    
    7
    %
    
    $
    4,159
    
    
    
    3
    %
    
    $
    6,194
    
    
    
    6
    %Other Americas
    
    
    4,602
    
    
    
    7
    %
    
    
    6,831
    
    
    
    12
    %
    
    
    9,228
    
    
    
    7
    %
    
    
    13,564
    
    
    
    12
    %Poland
    
    
    4,607
    
    
    
    7
    %
    
    
    6,743
    
    
    
    12
    %
    
    
    5,677
    
    
    
    4
    %
    
    
    11,800
    
    
    
    10
    %Other Europe
    
    
    14,745
    
    
    
    22
    %
    
    
    8,052
    
    
    
    14
    %
    
    
    33,613
    
    
    
    25
    %
    
    
    25,089
    
    
    
    22
    %Middle East
    
    
    1,167
    
    
    
    2
    %
    
    
    5,168
    
    
    
    9
    %
    
    
    10,018
    
    
    
    8
    %
    
    
    8,589
    
    
    
    8
    %Thailand
    
    
    3,324
    
    
    
    5
    %
    
    
    4,053
    
    
    
    7
    %
    
    
    4,770
    
    
    
    4
    %
    
    
    11,724
    
    
    
    11
    %Bangladesh
    
    
    1,823
    
    
    
    3
    %
    
    
    9,123
    
    
    
    16
    %
    
    
    2,896
    
    
    
    2
    %
    
    
    13,258
    
    
    
    12
    %Other Asia/Pacific
    
    
    7,145
    
    
    
    10
    %
    
    
    4,263
    
    
    
    8
    %
    
    
    19,238
    
    
    
    14
    %
    
    
    9,178
    
    
    
    8
    %Ghana
    
    
    10,880
    
    
    
    16
    %
    
    
    1,166
    
    
    
    2
    %
    
    
    17,335
    
    
    
    13
    %
    
    
    2,994
    
    
    
    3
    %Tanzania
    
    
    6,760
    
    
    
    10
    %
    
    
    54
    
    
    
    0
    %
    
    
    9,976
    
    
    
    8
    %
    
    
    65
    
    
    
    0
    %Other Africa
    
    
    10,226
    
    
    
    15
    %
    
    
    7,281
    
    
    
    13
    %
    
    
    16,606
    
    
    
    12
    %
    
    
    8,971
    
    
    
    8
    %Total Revenues
    
    $
    67,279
    
    
    
    100
    %
    
    $
    56,554
    
    
    
    100
    %
    
    $
    133,516
    
    
    
    100
    %
    
    $
    111,426
    
    
    
    100
    %
  September 30, 2006
    
    
    March 31, 2006United States
    
    $
    4,232
    
    
    $
    3,698United Kingdom
    
    
    13,634
    
    
    
    14,193New Zealand
    
    
    3,122
    
    
    
    3,648Other foreign countries
    
    
    2,491
    
    
    
    2,510Total property and
equipment, net
    
    $
    23,479
    
    
    $
    24,049
 28




---



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Business Overview
  29




---



##### Table of Contents



Proposed business combination
    Second quarter financial highlights
    30




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Revenues
 Three
and Six Months ended September 30, 2006 versus Three and Six
Months ended September 30, 2005.
  Revenue by geographic regions
 Three Months Ended September 30,
    
    Six Months Ended September 30% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of2006
    
    Total
    
    2005
    
    Total
    
    2006
    
    Total
    
    2005
    
    TotalUnited States
    
    $
    2,000
    
    
    
    3
    %
    
    $
    3,820
    
    
    
    7
    %
    
    $
    4,159
    
    
    
    3
    %
    
    $
    6,194
    
    
    
    6
    %Other Americas
    
    
    4,602
    
    
    
    7
    %
    
    
    6,831
    
    
    
    12
    %
    
    
    9,228
    
    
    
    7
    %
    
    
    13,564
    
    
    
    12
    %Poland
    
    
    4,607
    
    
    
    7
    %
    
    
    6,743
    
    
    
    12
    %
    
    
    5,677
    
    
    
    4
    %
    
    
    11,800
    
    
    
    10
    %Other Europe
    
    
    14,745
    
    
    
    22
    %
    
    
    8,052
    
    
    
    14
    %
    
    
    33,613
    
    
    
    25
    %
    
    
    25,089
    
    
    
    22
    %Middle East
    
    
    1,167
    
    
    
    2
    %
    
    
    5,168
    
    
    
    9
    %
    
    
    10,018
    
    
    
    8
    %
    
    
    8,589
    
    
    
    8
    %Thailand
    
    
    3,324
    
    
    
    5
    %
    
    
    4,053
    
    
    
    7
    %
    
    
    4,770
    
    
    
    4
    %
    
    
    11,724
    
    
    
    11
    %Bangladesh
    
    
    1,823
    
    
    
    3
    %
    
    
    9,123
    
    
    
    16
    %
    
    
    2,896
    
    
    
    2
    %
    
    
    13,258
    
    
    
    12
    %Other Asia/Pacific
    
    
    7,145
    
    
    
    10
    %
    
    
    4,263
    
    
    
    8
    %
    
    
    19,238
    
    
    
    14
    %
    
    
    9,178
    
    
    
    8
    %Ghana
    
    
    10,880
    
    
    
    16
    %
    
    
    1,166
    
    
    
    2
    %
    
    
    17,335
    
    
    
    13
    %
    
    
    2,994
    
    
    
    3
    %Tanzania
    
    
    6,760
    
    
    
    10
    %
    
    
    54
    
    
    
    0
    %
    
    
    9,976
    
    
    
    8
    %
    
    
    65
    
    
    
    0
    %Other Africa
    
    
    10,226
    
    
    
    15
    %
    
    
    7,281
    
    
    
    13
    %
    
    
    16,606
    
    
    
    12
    %
    
    
    8,971
    
    
    
    8
    %Total Revenues
    
    $
    67,279
    
    
    
    100
    %
    
    $
    56,554
    
    
    
    100
    %
    
    $
    133,516
    
    
    
    100
    %
    
    $
    111,426
    
    
    
    100
    %
  31




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##### Table of Contents



Product operating segment .
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of2006
    
    
    Total
    
    
    2005
    
    
    Total
    
    
    2006
    
    
    Total
    
    
    2005
    
    
    TotalEclipse
    
    $
    49,161
    
    
    
    85
    %
    
    $
    30,798
    
    
    
    65
    %
    
    $
    100,121
    
    
    
    86
    %
    
    $
    55,547
    
    
    
    58
    %Velox
    
    
    1,874
    
    
    
    3
    %
    
    
    2,184
    
    
    
    4
    %
    
    
    3,404
    
    
    
    3
    %
    
    
    3,145
    
    
    
    3
    %DXR
    
    
    1,500
    
    
    
    3
    %
    
    
    4,663
    
    
    
    10
    %
    
    
    3,207
    
    
    
    3
    %
    
    
    11,253
    
    
    
    12
    %XP4
    
    
    3,092
    
    
    
    5
    %
    
    
    3,192
    
    
    
    7
    %
    
    
    4,992
    
    
    
    4
    %
    
    
    12,705
    
    
    
    13
    %Other Products
    
    
    2,103
    
    
    
    4
    %
    
    
    6,430
    
    
    
    14
    %
    
    
    5,194
    
    
    
    4
    %
    
    
    12,979
    
    
    
    14
    %Total Revenue
    
    $
    57,730
    
    
    
    100
    %
    
    $
    47,267
    
    
    
    100
    %
    
    $
    116,918
    
    
    
    100
    %
    
    $
    95,629
    
    
    
    100
    %Operating Income
(Loss)
    
    $
    138
    
    
    
    (0
    %)
    
    $
    (2,153
    )
    
    
    (5
    %)
    
    $
    1,292
    
    
    
    1
    %
    
    $
    (6,153
    )
    
    
    (6
    %)
 32




---



##### Table of Contents



Service Operating Segment .
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of2006
    
    Revenue
    
    2005
    
    Revenue
    
    2006
    
    Revenue
    
    2005
    
    RevenueField Service revenue
    
    $
    6,746
    
    
    
    
    
    
    $
    6,301
    
    
    
    
    
    
    $
    10,916
    
    
    
    
    
    
    $
    9,623Operating income
    
    
    814
    
    
    
    12
    %
    
    
    423
    
    
    
    7
    %
    
    
    1,098
    
    
    
    10
    %
    
    
    193
    
    
    
    2
    %Repair revenue
    
    
    2,803
    
    
    
    
    
    
    
    2,986
    
    
    
    
    
    
    
    5,682
    
    
    
    
    
    
    
    6,174Operating income
    
    
    891
    
    
    
    32
    %
    
    
    1,013
    
    
    
    34
    %
    
    
    1,766
    
    
    
    31
    %
    
    
    2,149
    
    
    
    35
    %Total Service Revenue
    
    $
    9,549
    
    
    
    
    
    
    $
    9,287
    
    
    
    
    
    
    $
    16,598
    
    
    
    
    
    
    $
    15,797Total Operating
income
    
    $
    1,705
    
    
    
    18
    %
    
    $
    1,436
    
    
    
    15
    %
    
    $
    2,864
    
    
    
    17
    %
    
    $
    2,342
    
    
    
    15
    %
   33




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##### Table of Contents



Gross Profit
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofNet
    
    
    
    
    
    Net
    
    
    
    
    
    Net
    
    
    
    
    
    Net2006
    
    Sales
    
    2005
    
    Sales
    
    2006
    
    Sales
    
    2005
    
    Sales(in thousands)Net sales
    
    $
    67,279
    
    
    
    100
    %
    
    $
    56,554
    
    
    
    100
    %
    
    $
    133,516
    
    
    
    100
    %
    
    $
    111,426
    
    
    
    100
    %Cost of sales
    
    
    46,512
    
    
    
    69
    %
    
    
    41,386
    
    
    
    73
    %
    
    
    92,877
    
    
    
    70
    %
    
    
    83,657
    
    
    
    75
    %Gross profit
    
    $
    20,767
    
    
    
    31
    %
    
    $
    15,168
    
    
    
    27
    %
    
    $
    40,639
    
    
    
    30
    %
    
    $
    27,769
    
    
    
    25
    %
    Research and Development
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(in thousands)Research and development
    
    $
    4,299
    
    
    $
    3,703
    
    
    $
    8,883
    
    
    $
    7,404% of net sales
    
    
    6.4
    %
    
    
    6.5
    %
    
    
    6.7
    %
    
    
    6.6
    %
  34




---



##### Table of Contents



Selling, General and Administrative
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(in thousands)Selling, general and administrative
    
    $
    14,625
    
    
    $
    12,182
    
    
    $
    27,600
    
    
    $
    24,176% of net sales
    
    
    22.0
    %
    
    
    21.5
    %
    
    
    21.0
    %
    
    
    21.7
    %
   Interest
Income, Interest Expense and Other Expenses
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(in thousands)Interest income
    
    $
    693
    
    
    $
    261
    
    
    $
    1,350
    
    
    $
    481Interest expense
    
    
    (601
    )
    
    
    (757
    )
    
    
    (1,179
    )
    
    
    (1,257
    )Other expenses, net
    
    
    (360
    )
    
    
    (552
    )
    
    
    (695
    )
    
    
    (1,067
    )
  35




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##### Table of Contents



Provision for Income Taxes
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(in thousands)Provision for income taxes
    
    $
    23
    
    
    $
    496
    
    
    $
    257
    
    
    $
    773
   36




---



##### Table of Contents



Liquidity And Capital Resources
 Summary of Cash Flows
         37




---



##### Table of Contents



Cash requirements
  §
    
    Operations§
    
    Research and development§
    
    Restructuring payments§
    
    Capital expenditures§
    
    Repayment of long-term debt§
    
    Merger related expenses
 Commercial commitments
  38




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##### Table of Contents



Contractual obligations
  Payments due (in thousands):Years ending March 31,2011 &
    
    Total2007
    
    2008
    
    2009
    
    2010
    
    beyond
    
    ObligationsOperating leases (a)
    
    $
    3,273
    (d)
    
    $
    6,673
    
    
    $
    6,805
    
    
    $
    6,929
    
    
    $
    6,614
    
    
    $
    30,294Unconditional
purchase obligation
(b)
    
    $
    28,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,958Long-term debt
including
interest(c)
    
    $
    6,494
    (d)
    
    $
    12,427
    
    
    $
    6,579
    
    
    $
    5,167
    
    
    
    
    
    
    $
    30,667
 
 (a)
    
    Contractual cash obligations include $15.9 million of lease obligations that have been
accrued as restructuring charges as of September 30, 2006.(b)
    
    We have firm purchase commitments with various suppliers as of the end of September 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 provisions for potential exposure related to inventory
purchases for orders that may not be utilized.(c)
    
    See discussion of Repayment of long-term debt below.(d)
    
    Payments due are for six months ending March 31, 2007. Restructuring payments
  39




---



##### Table of Contents



Customer financing
  Repayment of long-term debt
     40




---



##### Table of Contents



Sources of cash
  Available credit facility
    41




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Exposure on Investments
   Years Ended March 31(In thousands)2007
    
    2008Cash equivalents and short-term investments (a)
    
    $
    45,244
    
    
    $
    2,319Weighted average interest rate
    
    
    5.21
    %
    
    
    5.42
    %
 
 (a)
    
    Does not include cash of $8.2 million held in bank checking and deposit accounts including
those held by our foreign subsidiaries.   Exposure on Borrowings
  42




---



##### Table of Contents



43




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
       44




---



##### Table of Contents



Inherent Limitation on the Effectiveness of Internal Controls
  45




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1  LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Nominee
    
    In favor
    
    WithheldRichard C. Alberding
    
    
    83,810,763
    
    
    
    8,744,040Charles D. Kissner
    
    
    89,947,135
    
    
    
    2,607,668Edward F. Thompson
    
    
    90,087,024
    
    
    
    2,467,779James D. Meindl
    
    
    77,505,416
    
    
    
    15,049,387William A. Hasler
    
    
    66,314,651
    
    
    
    26,240,152V. Frank Mendicino
    
    
    77,609,510
    
    
    
    14,945,293Thomas H. Waechter
    
    
    89,961,726
    
    
    
    2,593,077Clifford H. Higgerson
    
    
    90,091,509
    
    
    
    2,463,294
   46




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##### Table of Contents



For
    
    Against
    
    Abstain
    
    Broker Non-Vote47,352,821
    
    
    17,999,960
    
    
    
    150,143
    
    
    
    27,051,879
  For
    
    Against
    
    Abstain
    
    Broker Non-Vote90,618,995
    
    
    231,942
    
    
    
    1,703,866
    
    
    
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6  EXHIBITS
 (a)
    
    ExhibitsFor a list of exhibits to this Quarterly Report on Form 10-Q, see the exhibit index located
on page 49.
 47




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##### Table of Contents



STRATEX NETWORKS, INC.Date:   November 8, 2006
    By
    /s/ Carl A. ThomsenCarl A. ThomsenSenior Vice President, Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal Financial Officer) 48




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    First Amendment to May 18, 2006 Employment agreement
between Stratex Networks, Inc. and Thomas H. Waechter,
dated September 1, 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 to Section 906 of the Sarbanes-Oxley Act of 2002.
 49