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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2004



Commission file number: 0-15895



STRATEX NETWORKS, INC.

(Exact name of registrant specified in its charter)



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



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



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



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



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



Yes  x    No ̈



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



The number of outstanding shares of the Registrants common
stock, par value $.01 per share, was 84,273,131 on July 30, 2004.



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##### Table of Contents

I
NDEX



|                                                                                               |  |      
|---------------------------------------------------------------------------------------------- |  | -----
|                                                                                               |  | PAGE 
|COVER PAGE                                                                                     |  | 1    
|                                                                                               | 
|INDEX                                                                                          |  | 2    
|                                                                                               | 
|PART I - FINANCIAL INFORMATION                                                                 |  |      
|                                                                                               | 
|Item 1 - Financial Statements                                                                  |  |      
|                                                                                               | 
|Condensed Consolidated Balance Sheets                                                          |  | 3    
|                                                                                               | 
|Condensed Consolidated Statements of Operations                                                |  | 4    
|                                                                                               | 
|Condensed Consolidated Statements of Cash Flows                                                |  | 5    
|                                                                                               | 
|Notes to Condensed Consolidated Financial Statements                                           |  | 6-19 
|                                                                                               | 
|Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20-33
|                                                                                               | 
|Factors That May Affect Future Financial Results                                               |  | 34-45
|                                                                                               | 
|Item 3 -
Quantitative and Qualitative Disclosures About Market Risk                            |  | 46   
|                                                                                               | 
|Item 4 -
Controls and Procedures                                                               |  | 46   
|                                                                                               | 
|PART II - OTHER INFORMATION                                                                    |  |      
|                                                                                               | 
|Item 1 -
Legal Proceedings                                                                     |  | 47   
|                                                                                               | 
|Item 6 -
Exhibits and Reports on Form 8-K                                                      |  | 47   
|                                                                                               | 
|SIGNATURE                                                                                      |  | 48   
|                                                                                               | 
|EXHIBIT INDEX                                                                                  |  | 49   



2



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PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS



STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                              |  |              |          |   |               |   |          |  
|--------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ------------- | - | -------- | -
|                                                                                              |  | June 30,2004 |          |   | March 31,2004 |  
|ASSETS                                                                                        |  |              |          |   |               |  
|Current assets:                                                                               |  |              |          |   |               |   |          |  
|Cash and cash equivalents                                                                     |  | $            | 26,129   |   |               | $ | 21,626   |  
|Short-term investments                                                                        |  |              | 37,662   |   |               |   | 28,337   |  
|Accounts receivable, net of allowance of $2,156 on June 30, 2004 and $2,373 on March 31, 2004 |  |              | 34,038   |   |               |   | 34,295   |  
|Inventories                                                                                   |  |              | 30,983   |   |               |   | 33,101   |  
|Other current assets                                                                          |  |              | 11,995   |   |               |   | 10,932   |  
|                                                                                              |  |              |          |   |               |   |          |  
|Total current assets                                                                          |  |              | 140,807  |   |               |   | 128,291  |  
|                                                                                              |  |             
|Property and equipment, net                                                                   |  |              | 32,626   |   |               |   | 31,175   |  
|Intangible assets, net                                                                        |  |              | 1,186    |   |               |   | 1,581    |  
|Other assets                                                                                  |  |              | 1,411    |   |               |   | 2,197    |  
|                                                                                              |  |              |          |   |               |   |          |  
|Total assets                                                                                  |  | $            | 176,030  |   |               | $ | 163,244  |  
|                                                                                              |  |              |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                          |  |              |          |   |               |  
|Current liabilities:                                                                          |  |              |          |   |               |   |          |  
|Accounts payable                                                                              |  | $            | 37,812   |   |               | $ | 40,033   |  
|Short-term debt                                                                               |  |              | 6,250    |   |               |   |         |  
|Accrued liabilities                                                                           |  |              | 21,744   |   |               |   | 21,718   |  
|                                                                                              |  |              |          |   |               |   |          |  
|Total current liabilities                                                                     |  |              | 65,806   |   |               |   | 61,751   |  
|Long  term debt                                                                              |  |              | 18,229   |   |               |   |         |  
|Long  term liabilities                                                                       |  |              | 19,116   |   |               |   | 20,311   |  
|                                                                                              |  |              |          |   |               |   |          |  
|Total liabilities                                                                             |  |              | 103,151  |   |               |   | 82,062   |  
|                                                                                              |  |             
|Commitments and contingencies (Note 4)                                                        |  |              |         |   |               |   |         |  
|                                                                                              |  |             
|Stockholders equity:                                                                         |  |              |          |   |               |   |          |  
|Common stock                                                                                  |  |              | 842      |   |               |   | 840      |  
|Common stock additional paid-in capital                                                       |  |              | 461,806  |   |               |   | 461,483  |  
|Accumulated deficit                                                                           |  |              | (375,763 | ) |               |   | (367,779 | )
|Accumulated other comprehensive loss                                                          |  |              | (14,006  | ) |               |   | (13,362  | )
|                                                                                              |  |              |          |   |               |   |          |  
|Total stockholders equity                                                                    |  |              | 72,879   |   |               |   | 81,182   |  
|                                                                                              |  |              |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                    |  | $            | 176,030  |   |               | $ | 163,244  |  
|                                                                                              |  |              |          |   |               |   |          |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



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STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                      |  |                            |        |   |      |   |        |  
|----------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedJune 30, |       
|                                                      |  | 2004                       |        |   | 2003 |  
|Net sales                                             |  | $                          | 46,041 |   |      | $ | 35,967 |  
|Cost of sales                                         |  |                            | 39,115 |   |      |   | 28,621 |  
|                                                      |  |                            |        |   |      |   |        |  
|Gross profit                                          |  |                            | 6,926  |   |      |   | 7,346  |  
|                                                      |  |                            |        |   |      |   |        |  
|Operating expenses:                                   |  |                            |        |   |      |   |        |  
|Selling, general and administrative                   |  |                            | 9,630  |   |      |   | 6,956  |  
|Research and development                              |  |                            | 4,364  |   |      |   | 3,886  |  
|Amortization of intangible assets                     |  |                            | 395    |   |      |   |       |  
|                                                      |  |                            |        |   |      |   |        |  
|Total operating expenses                              |  |                            | 14,389 |   |      |   | 10,842 |  
|                                                      |  |                            |        |   |      |   |        |  
|Operating loss                                        |  |                            | (7,463 | ) |      |   | (3,496 | )
|                                                      |  |                           
|Other income (expense):                               |  |                            |        |   |      |   |        |  
|Interest income                                       |  |                            | 150    |   |      |   | 262    |  
|Other expenses, net                                   |  |                            | (520   | ) |      |   | (210   | )
|                                                      |  |                            |        |   |      |   |        |  
|Loss before provision for income taxes                |  |                            | (7,833 | ) |      |   | (3,444 | )
|                                                      |  |                           
|Provision (benefit) for income taxes                  |  |                            | 151    |   |      |   | (69    | )
|                                                      |  |                            |        |   |      |   |        |  
|Net loss                                              |  | $                          | (7,984 | ) |      | $ | (3,375 | )
|                                                      |  |                            |        |   |      |   |        |  
|Basic and diluted loss per share                      |  | $                          | (0.09  | ) |      | $ | (0.04  | )
|                                                      |  |                            |        |   |      |   |        |  
|Basic and diluted weighted average shares outstanding |  |                            | 84,127 |   |      |   | 82,810 |  
|                                                      |  |                            |        |   |      |   |        |  



See accompanying Notes
to Condensed Consolidated Financial Statements.



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STRATEX NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  |                            |         |   |      |   |         |  
|---------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                             |  | Three Months EndedJune 30, |        
|                                                                             |  | 2004                       |         |   | 2003 |  
|Cash flows from operating activities:                                        |  |                            |         |   |      |   |         |  
|Net loss                                                                     |  | $                          | (7,984  | ) |      | $ | (3,375  | )
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                            |         |   |      |   |         |  
|Depreciation and amortization                                                |  |                            | 2,392   |   |      |   | 2,038   |  
|Loss on disposal of property and equipment                                   |  |                            |        |   |      |   | 38      |  
|Changes in assets and liabilities                                            |  |                            |         |   |      |   |         |  
|Accounts receivable                                                          |  |                            | 367     |   |      |   | 5,805   |  
|Inventories                                                                  |  |                            | 2,214   |   |      |   | (831    | )
|Other assets                                                                 |  |                            | (762    | ) |      |   | 1,477   |  
|Accounts payable                                                             |  |                            | (2,632  | ) |      |   | (2,538  | )
|Income taxes payable                                                         |  |                            | 274     |   |      |   | (588    | )
|Accrued liabilities                                                          |  |                            | (17     | ) |      |   | (5,268  | )
|Long-term liabilities                                                        |  |                            | (1,147  | ) |      |   | (972    | )
|                                                                             |  |                            |         |   |      |   |         |  
|Net cash used for operating activities                                       |  |                            | (7,295  | ) |      |   | (4,214  | )
|                                                                             |  |                            |         |   |      |   |         |  
|Cash flows from investing activities:                                        |  |                            |         |   |      |   |         |  
|Purchase of short-term investments                                           |  |                            | (31,481 | ) |      |   | (89,458 | )
|Proceeds from sale/maturity of short-term investments                        |  |                            | 22,075  |   |      |   | 91,768  |  
|Purchase of property and equipment                                           |  |                            | (3,733  | ) |      |   | (1,542  | )
|                                                                             |  |                            |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                         |  |                            | (13,139 | ) |      |   | 768     |  
|                                                                             |  |                            |         |   |      |   |         |  
|Cash flows from financing activities:                                        |  |                            |         |   |      |   |         |  
|Proceeds from sales of common stock                                          |  |                            | 325     |   |      |   | 195     |  
|Borrowings from banks                                                        |  |                            | 25,000  |   |      |   |        |  
|Repayment of borrowing from bank                                             |  |                            | (521    | ) |      |   |        |  
|                                                                             |  |                            |         |   |      |   |         |  
|Net cash provided by financing activities                                    |  |                            | 24,804  |   |      |   | 195     |  
|Effect of exchange rate changes on cash                                      |  |                            | 133     |   |      |   | 199     |  
|                                                                             |  |                            |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                         |  |                            | 4,503   |   |      |   | (3,052  | )
|Cash and cash equivalents at beginning of period                             |  |                            | 21,626  |   |      |   | 34,036  |  
|                                                                             |  |                            |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                   |  | $                          | 26,129  |   |      | $ | 30,984  |  
|                                                                             |  |                            |         |   |      |   |         |  
|SUPPLEMENTAL DATA                                                            |  |                            |         |   |      |   |         |  
|Interest paid                                                                |  | $                          | 140     |   |      | $ | 48      |  
|Income taxes paid                                                            |  | $                          | 8       |   |      | $ | 2       |  



See accompanying Notes
to Condensed Consolidated Financial Statements



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



BASIS OF PRESENTATION



The condensed
consolidated financial statements include the accounts of Stratex Networks, Inc. and its wholly-owned subsidiaries (the Company). Intercompany accounts and transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to current year presentation.



While the financial
information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations
for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated
financial statements should be read in connection with the Companys financial statements included in its annual report and Form 10-K for the fiscal year ended March 31, 2004, filed with the Securities and Exchange Commission on May 27, 2004.



CASH AND CASH EQUIVALENTS



The Company generally considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less at the time of purchase, to be cash equivalents. Auction rate preferred securities are considered as short-term investments based on historical practice of rolling over such investments at the interest rate
reset dates. Cash and cash equivalents consisted of cash, money market funds, and short-term securities as of June 30, 2004 and March 31, 2004.



SHORT- TERM INVESTMENTS



The Company invests its excess cash in high-quality marketable instruments to ensure that cash is readily available for use in its current operations. Accordingly, all of the marketable securities are classified as
available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115. All investments are reported at fair market value with the related unrealized holding gains and losses
reported as a component of accumulated other comprehensive loss. Unrealized holding losses on the portfolio as of June 30, 2004 were $0.1 million. This loss of $0.1 million resulting from market fluctuations was considered to be temporary in nature
by the Company because all of the investments held by the Company are debt securities which are redeemable at face value and will not generate a gain or loss unless they are sold prior to maturity. Losses due to sale of investments prior to maturity
have been immaterial. At June 30, 2004, the available-for-sale securities had contractual maturities ranging from 1 month to 11 months, with a weighted average maturity of 3 months.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



INVENTORIES



Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands):



|                |  |               |        |                |   |       
|--------------- |  | ------------- | ------ | -------------- | - | ------
|                |  | June 30, 2004 |        | March 31, 2004
|Raw materials   |  | $             | 18,477 |                | $ | 20,594
|Work in process |  |               | 2,879  |                |   | 1,719 
|Finished goods  |  |               | 9,627  |                |   | 10,788
|                |  |               |        |                |   |       
|                |  | $             | 30,983 |                | $ | 33,101
|                |  |               |        |                |   |       



OTHER CURRENT ASSETS



Other current assets included the following (in thousands):



|                           |  |               |        |                |   |       
|-------------------------- |  | ------------- | ------ | -------------- | - | ------
|                           |  | June 30, 2004 |        | March 31, 2004
|Receivables from suppliers |  | $             | 4,693  |                | $ | 3,886 
|Non-trade receivables      |  |               | 1,732  |                |   | 1,037 
|Prepaid expenses           |  |               | 4,696  |                |   | 4,730 
|Prepaid insurance          |  |               | 269    |                |   | 569   
|Tax refund                 |  |               | 334    |                |   | 423   
|Other                      |  |               | 271    |                |   | 287   
|                           |  |               |        |                |   |       
|                           |  | $             | 11,995 |                | $ | 10,932
|                           |  |               |        |                |   |       



OTHER ASSETS



Included in other assets as of June 30, 2004 and March 31, 2004 are long-term deposits for
premises leased by the Company. Other assets also included long-term accounts receivable of $1.0 million and $1.8 million as of June 30, 2004 and March 31, 2004, respectively. The long-term accounts receivable is due to the extended terms of credit
granted by the Company in fiscal 2004 to some of its customers in order to position itself favorably in certain markets.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



ACCRUED LIABILITIES



Accrued liabilities included the following (in thousands):



|                                   |  |               |        |                |   |       
|---------------------------------- |  | ------------- | ------ | -------------- | - | ------
|                                   |  | June 30, 2004 |        | March 31, 2004
|Customer deposits                  |  | $             | 1,865  |                | $ | 1,175 
|Accrued payroll and benefits       |  |               | 2,586  |                |   | 2,891 
|Accrued commissions                |  |               | 1,636  |                |   | 2,041 
|Accrued warranty                   |  |               | 4,662  |                |   | 4,277 
|Accrued restructuring              |  |               | 3,945  |                |   | 4,255 
|Accrual for contingent liabilities |  |               | 1,866  |                |   | 1,866 
|Other                              |  |               | 5,184  |                |   | 5,213 
|                                   |  |               |        |                |   |       
|                                   |  | $             | 21,744 |                | $ | 21,718
|                                   |  |               |        |                |   |       



Accrual for contingent liability of
$1.9 million at June 30, 2004 was for claims made by trustees for unsecured creditors in the bankruptcy proceedings of the Companys prior customers. See Note 7 for further details regarding settlement of this claim.



Accrued restructuring was $3.9 million as of June 30, 2004 compared to $4.3 million as of
March 31, 2004. See Note 5.



CURRENCY TRANSLATION



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



DERIVATIVE FINANCIAL INSTRUMENTS



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



We manufacture and sell products internationally subjecting us to currency risk. Derivatives are employed to eliminate, reduce, or transfer selected foreign currency risks that can be identified and quantified. The
Companys policy is to hedge forecasted and actual foreign currency risk



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



with forward contracts that expire within twelve months. Specifically, the Company hedges
foreign currency risks relating to firmly committed backlog, open purchase orders and non-functional currency monetary assets and liabilities. Derivatives hedging non-functional currency monetary assets and liabilities are recorded on the balance
sheet at fair value and changes in fair value are recognized currently in earnings.



Additionally, the Company hedges forecasted non-U.S. dollar sales and non-U.S. dollar purchases. In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as cash flow hedges and
are evaluated for effectiveness, excluding time value, at least quarterly. The Company records effective changes in the fair value of these cash flow hedges in accumulated other comprehensive income (OCI) until the revenue is recognized
or the related purchases are recognized in cost of sales, at which time the changes are reclassified to revenue and cost of sales, respectively. All amounts accumulated in OCI at the end of the quarter will be reclassified to earnings within the
next 12 months.



The following table summarizes the activity in OCI, with
regard to the changes in fair value of derivative instruments, for the first quarter of fiscal 2005 (in thousands):



|                                   |  |                                                 |     |   |                                                 |     |  
|---------------------------------- |  | ----------------------------------------------- | --- | - | ----------------------------------------------- | --- | -
|                                   |  | Three Months Ended June 30, 2004 Gains/(Losses) |     |   | Three Months Ended June 30, 2003 Gains/(Losses) |    
|Beginning balance on April 1, 2004 |  | $                                               | 23  |   |                                                 | 56  |  
|Net changes                        |  |                                                 | (93 | ) |                                                 | (23 | )
|Reclassifications to revenue       |  |                                                 | 73  |   |                                                 | (43 | )
|                                   |  |                                                 |     |   |                                                 |     |  
|Ending balance on June 30, 2004    |  | $                                               | 3   |   |                                                 | (10 | )
|                                   |  |                                                 |     |   |                                                 |     |  



An insignificant amount of loss was
recognized in other income and expense in the first quarter of fiscal 2005 and fiscal 2004 related to the exclusion of time value from effectiveness testing and ineffectiveness resulting from forecasted transactions that did not occur.



CONCENTRATION OF CREDIT RISK



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



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Accounts receivable concentrated with certain customers primarily in the telecommunications
industry and in certain geographic locations may subject the Company to concentration of credit risk. The following table summarizes the number of our significant customers as a percentage of our accounts receivable balance at June 30, 2004 and
March 31, 2004, along with the percentage of accounts receivable balance they individually represent. No other customer accounted for more than 10% of the accounts receivable balance at the dates indicated.



|                                          |  |               |   |  |                |  
|----------------------------------------- |  | ------------- | - |  | -------------- | -
|                                          |  | June 30, 2004 |   |  | March 31, 2004 |  
|Number of significant customers           |  | 3             |   |  | 3              |  
|Percentage of accounts receivable balance |  | 25%,14%,13    | % |  | 30%, 22%, 11   | %



The following table
summarizes the number of our significant customers, each of whom accounted for more than 10% of our revenues, along with the percentage of revenues they individually represent.



|                                |  |                    |   |  |               |  
|------------------------------- |  | ------------------ | - |  | ------------- | -
|                                |  | Three Months Ended |  
|                                |  | June 30, 2004      |   |  | June 30, 2003 |  
|Number of significant customers |  | 2                  |   |  | 2             |  
|Percentage of net sales         |  | 19%, 18            | % |  | 12%, 10       | %



The Company actively markets and sells
products in Africa, Asia, Europe, the Middle East and the Americas. The Company performs on-going credit evaluations of its customers financial conditions and generally requires no collateral, although sales to Asia, Africa and the Middle East
are primarily paid through letters of credit.



REVENUE RECOGNITION



The Company recognizes revenue pursuant to Staff Accounting Bulletin No.
101 (SAB 101) Revenue Recognition in Financial Statements as amended by Staff Accounting Bulletin No. 104 (SAB 104) Revenue Recognition. 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 104, 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. Installation service revenue is
recognized when the related services are performed.



At the time revenue is
recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales, recorded as a component of cost of revenue. The Companys standard warranty is generally for a period of 27 months from the date of sale
if the customer uses the Company or its approved installers to install the products, otherwise it is 15 months from the date of sale. The Companys warranty accrual represents the best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



LOSS PER SHARE



Basic earnings (loss) per share are computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding
during the period. Net loss per share is computed using only the weighted average number of shares of common stock outstanding during the period, as the inclusion of potentially dilutive securities would be anti-dilutive.



STOCK-BASED COMPENSATION



The Company accounts for its employee stock option plans in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation is recognized for employee stock options granted with exercise prices greater than or equal to the
fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the
options.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                                                                                                                     |  |                                          |         |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                     |  | Three Months Ended June 30,              |        
|                                                                                                                     |  | 2004                                     |         |   | 2003 |  
|                                                                                                                     |  | (in thousands, except per share amounts) |        
|Net loss  as reported                                                                                               |  | $                                        | (7,984  | ) |      | $ | (3,375 | )
|Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |                                          | (3,499  | ) |      |   | (2,781 | )
|                                                                                                                     |  |                                          |         |   |      |   |        |  
|Net loss  pro forma                                                                                                 |  | $                                        | (11,483 | ) |      | $ | (6,156 | )
|                                                                                                                     |  |                                          |         |   |      |   |        |  
|Basic and diluted loss per share  as reported                                                                       |  | $                                        | (0.09   | ) |      | $ | (0.04  | )
|Basic and diluted loss per share  pro forma                                                                         |  | $                                        | (0.14   | ) |      | $ | (0.07  | )



For purposes of pro forma disclosure
under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to expense over the options vesting period, using the multiple option method. The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:



|                                        |  |                            |   |  |                               |   |  |           |   |  |           |  
|--------------------------------------- |  | -------------------------- | - |  | ----------------------------- | - |  | --------- | - |  | --------- | -
|                                        |  | Employee Stock Option Plan |   |  | Employee Stock Purchase Plans |  
|                                        |  | Three Months EndedJune 30, |   |  | Three Months EndedJune 30,    |  
|                                        |  | 2004                       |   |  | 2003                          |   |  | 2004      |   |  | 2003      |  
|Expected dividend yield                 |  | 0.0                        | % |  | 0.0                           | % |  | 0.0       | % |  | 0.0       | %
|Expected stock volatility               |  | 96.5                       | % |  | 96.0                          | % |  | 96.5      | % |  | 96.0      | %
|Risk-free interest rate                 |  | 3.7                        | % |  | 2.7                           | % |  | 1.1       | % |  | 1.1       | %
|Expected life of options from vest date |  | 1.5 years                  |   |  | 1.7 years                     |   |  | 0.2 years |   |  | 0.2 years |  
|Forfeiture rate                         |  | Actual                     |   |  | Actual                        |   |  |          |   |  |          |  



The weighted average fair value of
stock options granted during the period was $2.18 and $1.79 for the quarters ended June 30, 2004 and June 30, 2003, respectively.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



COMPREHENSIVE INCOME



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



|                                              |  |                            |        |   |      |   |        |  
|--------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                              |  | Three Months EndedJune 30, |       
|                                              |  | 2004                       |        |   | 2003 |  
|Net loss                                      |  | $                          | (7,984 | ) |      | $ | (3,375 | )
|Other comprehensive income (loss):            |  |                            |        |   |      |   |        |  
|Unrealized currency translation gain/(loss)   |  |                            | (563   | ) |      |   | 1,311  |  
|Unrealized holding gain (loss) on investments |  |                            | (81    | ) |      |   | (48    | )
|                                              |  |                            |        |   |      |   |        |  
|Comprehensive loss                            |  | $                          | (8,628 | ) |      | $ | (2,112 | )
|                                              |  |                            |        |   |      |   |        |  



NEW ACCOUNTING PRONOUNCEMENTS



In March 2004, the Emerging Issues Task Force (EITF) reached
a consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF No. 03-01). EITF No. 03-01 provides guidance on recording other-than-temporary impairments of
cost method investments and disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under the Financial Accounting Standards Board (FASB) Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15,
2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. For investments accounted for under FAS 115, the disclosures are effective in annual financial statements for fiscal years ending
after December 15, 2003. The adoption of this standard did not have a material impact on the Companys consolidated balance sheet or statement of operations.



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



The Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, in January 2003, and a revised interpretation of FIN



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



46 (FIN 46-R) in December 2003. On February 12, 2004, FASB issued FASB staff
positions FIN 46 (R)-1, FIN 46 (R)-2 and FIN 46 (R)-3 which are applicable to all entities to which FIN 46 (R) is applied. FIN 46 requires certain variable interest entities (VIEs) to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities for which the
Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company was required to continue to apply FIN 46 through March 15, 2004. The Company was required to adopt the provisions of FIN 46-R after March 15,
2004. The adoption of FIN 46-R did not have an impact on the financial position, results of operations or cash flows of the Company.



NOTE 2. ACQUIRED INTANGIBLE ASSETS



In fiscal 2004, the Company acquired the net assets of Plessey Broadband Wireless, a division of Tellumat (Pty) Ltd. (Tellumat) located in Cape Town, South
Africa. As part of the purchase agreement the Company acquired $2.4 million of intangible assets. This $2.4 million of intangible assets has been assigned to intellectual property and is estimated to have a useful life of 18 months.



The following table summarizes the gross and net balance of the intangible assets as of June
30, 2004 (in thousands):



|                                                   |  |                      |       |                         |   |                    |  |   |      
|-------------------------------------------------- |  | -------------------- | ----- | ----------------------- | - | ------------------ |  | - | -----
|                                                   |  | As of June 30, 2004 
|                                                   |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Net CarryingAmount
|Intellectual Property                              |  | $                    | 2,371 |                         | $ | 1,185              |  | $ | 1,186
|                                                   |  |                      |      
|Aggregate Amortization Expense (in thousands):     |  |                      |       |                         |   |                    |  |   |      
|                                                   |  |                      |      
|For the three months ended June 30, 2004           |  |                      |       |                         |   |                    |  | $ | 395  
|                                                   |  |                      |      
|Estimated Amortization Expense (in thousands):     |  |                      |       |                         |   |                    |  |   |      
|                                                   |  |                      |      
|For the remainder of the year ended March 31, 2005 |  |                      |       |                         |   |                    |  | $ | 1,186



NOTE 3. BANK LINE OF CREDIT



On May 27, 2004 the Company borrowed $25 million on a long-term basis
against its $35 million revolving credit facility with a commercial bank. This $25 million loan is payable in equal monthly installments of principal plus interest over a period of four years. This loan bears interest at a fixed interest rate of
6.38%. Short- term borrowings under the remaining $8.5 million of available credit under the $10 million revolving credit portion of the initial $35 million credit facility will be at banks prime rate, which was 4% at June 30, 2004, or LIBOR
plus 2% at June 30, 2004. This facility is secured by the Companys assets.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE 4. COMMITMENTS AND CONTINGENCIES



The Company is subject to legal proceedings and claims that arise in the normal course of
its business. In the opinion of management, these proceedings should not have a material adverse effect on the business, financial position, and results of operations of the Company. See Note 1 Accrued liabilities for the accruals made
by the Company for a contingent liability.



Warranty



At the time revenue is recognized, the Company establishes an accrual for estimated warranty
expenses associated with its sales, recorded as a component of cost of sales. The Companys standard warranty is generally for a period of 27 months from the date of sale if the customer uses the Companys or their approved installers to
install the products, otherwise it is 15 months from the date of sale. The warranty accrual represents the best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.



The changes in the warranty reserve balances during the periods indicated are as follows:



|                                                      |  |                            |        |   |      |   |        |  
|----------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedJune 30, |       
|                                                      |  | 2004                       |        |   | 2003 |  
|Balance at the beginning of the quarter               |  | $                          | 4,277  |   |      | $ | 4,219  |  
|Additions related to current period sales             |  |                            | 1,700  |   |      |   | 1,820  |  
|Warranty costs incurred in the current period         |  |                            | (1,315 | ) |      |   | (1,900 | )
|Adjustments to accruals related to prior period sales |  |                            |       |   |      |   |       |  
|                                                      |  |                            |        |   |      |   |        |  
|Balance at the end of the quarter                     |  | $                          | 4,662  |   |      | $ | 4,139  |  
|                                                      |  |                            |        |   |      |   |        |  



NOTE 5. RESTRUCTURING CHARGES



The Company did not record any restructuring charges in the first quarter
of fiscal 2005 and the first quarter of fiscal 2004.



In the fourth quarter of
fiscal 2004, the Company recorded $5.5 million of restructuring charges. In order to reduce expenses and increase operational efficiency, the Company reduced the workforce by 34 employees and recorded restructuring charges for employee severance and
benefits of $0.9 million. As of June 30, 2004,17 employees had been terminated. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003 as explained in the following
paragraphs. The vacated building lease obligations recorded as restructuring charges in fiscal 2003 and in fiscal 2002 included payments required under lease contracts, less estimated sublease income after the property has been abandoned. To
determine the lease loss, certain assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents
managements estimate of time to sublease and actual sublease rates. In fiscal 2004, the Company recorded the additional $4.6 million charges primarily due to a decrease in estimated future sublease income.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



During fiscal 2003 and 2002, the Company announced several restructuring programs to reduce
expenses and improve operational efficiency. These restructuring programs included consolidation of additional excess facilities. Due to these actions, the Company recorded restructuring charges of $19.0 million in fiscal 2003 and $8.6 million in
fiscal 2002 for vacated building lease obligations.



The following table
summarizes the activities of the restructuring accrual during the first quarter of fiscal 2005 and during the fiscal year ended March 31, 2004 (in millions):



|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|---------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                             |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of March 31, 2003 |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision if fiscal 2004     |  |                       | 0.9  |   |                     |   | 4.6  |       |  |   | 5.5  |  
|Cash payments                |  |                       | (1.3 | ) |                     |   | (5.6 | )     |  |   | (6.9 | )
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of March 31, 2004 |  | $                     | 1.1  |   |                     | $ | 21.7 |       |  | $ | 22.8 |  
|Provision                    |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                |  |                       | (0.2 | ) |                     |   | (1.2 | )     |  |   | (1.4 | )
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of June 30, 2004  |  | $                     | 0.9  |   |                     | $ | 20.5 |       |  | $ | 21.4 |  
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion              |  | $                     | 0.9  |   |                     | $ | 3.0  |       |  | $ | 3.9  |  
|Long-term portion            |  | $                     |     |   |                     | $ | 17.5 |       |  | $ | 17.5 |  



The remaining accrual balance of $21.4
as of June 30, 2004 is expected to be paid out in cash. The Company expects $3.3 million of the remaining accrual balance ($0.9 million of severance and benefits, $0.2 million of legal costs and $2.2 million of vacated building lease obligations) to
be paid out in the remainder of fiscal 2005 and vacated building lease obligations of $18.1 million to be paid out during fiscal 2006 through fiscal 2012.



NOTE 6. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION



SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131) establishes annual and interim reporting standards for
an enterprises operating segments and related disclosures about products, geographic information, and major customers. Operating segment information for the first quarter of fiscal 2005 and 2004 is presented in accordance with SFAS 131.



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



The Products operating segment includes the Eclipse XP4, Altium®, DXR® and Velox digital microwave systems for digital transmission
markets. The Company announced a new



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



wireless platform consisting of an Intelligent Node Unit called Eclipse (Eclipse) in July 2003 and in the
4thquarter of fiscal 2004. The Company designs and develops the above products in Wellington, New Zealand and San
Jose, California. Prior to June 30, 2002, the Company manufactured the XP4 and Altium family of digital microwave radio products in San Jose, California. In June 2002, the Company entered into an agreement with Microelectronics Technology Inc.
(MTI), a Taiwanese company for outsourcing of the Companys XP4 and Altium products manufacturing operations. The Company manages the manufacturing of the DXR product family from Wellington, New Zealand, where most manufacturing for the product
takes place, except for a portion of the DXR product family that is outsourced. The Services operating segment includes, but is not limited to, installation, repair, spare parts, network design, path surveys, integration, and other revenues. The
Company maintains regional service centers in Lanarkshire, Scotland and Clark Field, Pampanga, Philippines.



Operating segments generally do not sell products to each other, and accordingly, there are no significant inter-segment revenues to be reported. The Company does not allocate interest and taxes to operating segments.
The accounting policies for each reporting segment are the same.



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|                      |  |                            |        |   |      |   |        |  
|--------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                      |  | Three Months EndedJune 30, |       
|                      |  | 2004                       |        |   | 2003 |  
|Products:             |  |                            |        |   |      |   |        |  
|Net revenues          |  | $                          | 38,493 |   |      | $ | 28,577 |  
|Operating loss        |  |                            | (8,372 | ) |      |   | (4,994 | )
|Services and repairs: |  |                            |        |   |      |   |        |  
|Net revenues          |  |                            | 7,548  |   |      |   | 7,390  |  
|Operating income      |  |                            | 909    |   |      |   | 1,498  |  
|Total:                |  |                            |        |   |      |   |        |  
|Net revenues          |  | $                          | 46,041 |   |      | $ | 35,967 |  
|Operating loss        |  |                            | (7,463 | ) |      |   | (3,496 | )



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



|                         |  |                            |        |      |   |       
|------------------------ |  | -------------------------- | ------ | ---- | - | ------
|                         |  | Three Months EndedJune 30,
|                         |  | 2004                       |        | 2003
|XP4                      |  | $                          | 20,984 |      | $ | 12,130
|DXR                      |  |                            | 4,504  |      |   | 6,118 
|Eclipse                  |  |                            | 4,680  |      |   |      
|Altium                   |  |                            | 6,357  |      |   | 9,893 
|Other products           |  |                            | 1,968  |      |   | 436   
|                         |  |                            |        |      |   |       
|Total products           |  |                            | 38,493 |      |   | 28,577
|Total services & repairs |  |                            | 7,548  |      |   | 7,390 
|                         |  |                            |        |      |   |       
|Total revenue            |  | $                          | 46,041 |      | $ | 35,967
|                         |  |                            |        |      |   |       



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STRATEX NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



|              |  |                            |        |      |   |       
|------------- |  | -------------------------- | ------ | ---- | - | ------
|              |  | Three Months EndedJune 30,
|              |  | 2004                       |        | 2003
|Russia        |  | $                          | 6,430  |      | $ | 3,717 
|Other Europe  |  |                            | 6,142  |      |   | 8,605 
|Middle East   |  |                            | 5,865  |      |   | 2,700 
|Americas      |  |                            | 9,576  |      |   | 5,852 
|Asia/Pacific  |  |                            | 5,910  |      |   | 8,370 
|Nigeria       |  |                            | 7,305  |      |   | 3,930 
|Other Africa  |  |                            | 4,813  |      |   | 2,793 
|              |  |                            |        |      |   |       
|Total revenue |  | $                          | 46,041 |      | $ | 35,967
|              |  |                            |        |      |   |       



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



|                                  |  |              |        |                |   |       
|--------------------------------- |  | ------------ | ------ | -------------- | - | ------
|                                  |  | June 30,2004 |        | March 31, 2004
|United Kingdom                    |  |              | 17,132 |                |   | 15,388
|United States                     |  | $            | 6,801  |                | $ | 6,912 
|New Zealand                       |  |              | 4,833  |                |   | 4,655 
|Other foreign countries           |  |              | 3,860  |                |   | 4,220 
|                                  |  |              |        |                |   |       
|Total property and equipment, net |  | $            | 32,626 |                | $ | 31,175
|                                  |  |              |        |                |   |       



|NOTE | 7: SUSEQUENT EVENT
|---- | ------------------



In July 2004, the Company reached a settlement on the claims made by the trustees for unsecured creditors in the bankruptcy proceedings of the Companys prior customers for approximately the amount accrued. The
settlement is awaiting final bankruptcy court approval. These claims were accrued by the Company in fiscal 2003. See note 1 Accrued liabilities for details regarding the amount accrued.



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



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



| |  | Our expectation that gross margins will improve by the end of fiscal year 2005 due to increase in sales of our new product Eclipse which has higher margins as compared to our other
products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that cash usage will decline by the end of fiscal year;
| | - | -----------------------------------------------------------------------



| |  | Our expectation that net losses will decline by the end of fiscal year;
| | - | -----------------------------------------------------------------------



| |  | Our expectation that cash requirements for the product operating segment will continue to be primarily for working capital requirements, restructuring payments and research and
development activities;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that the cash requirements for our service operating segment will continue to be primarily for labor costs and spare parts;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that research and development expenses will remain relatively flat in the remainder of fiscal 2005 as compared to the first quarter of fiscal 2005;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to remain focused on our efforts for next generation products and incremental improvements to the existing product lines;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that there will be no significant change in selling, general and administrative expenses in the remainder of fiscal 2005;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to pay out in cash the $3.3 million of the remaining accrual balance ($0.9 million of severance and benefits, $0.2 million of legal costs and $2.2 million of vacated
building lease obligations) in fiscal 2005 and vacated building lease obligations of $18.1 million during fiscal 2006 through fiscal 2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our plan to minimize our overall customer financing exposures by discounting receivables when possible, raising third party financing and arranging letters of credit;.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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, 2004 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current
assets and our $8.5 million available credit on our revolving credit facility should be sufficient to meet our anticipated needs for working capital and capital expenditures through March 31, 2005;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that the legal proceedings and claims that arise in the normal course of our business will not have a material adverse effect on our business, financial position, and
results of operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  | Our expectation that the redevelopment of the Middle East regions will continue to provide sales opportunities in future periods;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new
product, and are reluctant to switch thereafter;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our statements relating to improvements in the overall business outlook and global economic conditions;
| | - | -------------------------------------------------------------------------------------------------------



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



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



All forward looking statements included in this document are made as of the date hereof,
based on information available to us as of the date hereof, and we assume no obligation to update any forward looking statement or statements. The reader should also consult the cautionary statements and risk factors listed in this Quarterly Report
and those listed from time to time in our Reports on Forms 10-Q, 8-K, and our most recent Annual Report on Form 10-K for the year ended March 31, 2004, including those contained in the section, Factors That May Affect Future Financial
Results, beginning on page 34 in this Quarterly Report, in evaluating these forward-looking statements.



Business Overview



Stratex Networks,
Inc. was founded in 1984. We design, manufacture, market and sell advanced wireless solutions for worldwide mobile and fixed telephone network interconnection and access. We market our products primarily to mobile wireless carriers around the world.
Our solutions also address the requirements of fixed wireless carriers, enterprises and government institutions that operate broadband wireless networks. We also sell our products to base station suppliers, who provide and install integrated systems
to service providers, and to distributors, including value-added resellers (VARs) and agents.



We provide our customers with a broad product line, which contains products that operate using a variety of transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a variety of transmission
capacities, typically ranging from 64 Kilobits to 2XOC-3 or 311 Megabits per second (Mbps). Our broad product line allows us to market and sell our products to service providers worldwide with varying interconnection and access requirements. We
design our products to meet the requirements of mobile communications networks and fixed wireless broadband access networks worldwide. Our products typically enable our customers to deploy and expand their wireless infrastructure and market their
services rapidly to subscribers, so that service providers can realize a return on their investments in frequency allocation licenses and network equipment. We recently announced a new wireless platform consisting of an Intelligent Node Unit (INU)
and a radio element, which combined are called Eclipse (Eclipse). The Eclipse wireless network transmission system enables wireless network node configurations



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supporting up to six independent radio traffic paths from a compact and highly modular
Intelligent Node Unit. An integral high speed, Time Division Multiplexing (TDM) bus architecture enables traffic routing between traffic paths by software, without local cabling.



In the first quarter of fiscal 2005, we remained focused on our near term strategy of successfully rolling out our new product Eclipse and
rolling out advanced features for this product. We released a new software for Eclipse in May 2004, which supports a number of network functions. We are seeing some improvement in the overall business outlook. New order bookings for Eclipse
continued to be strong. We received $6.0 million for Eclipse orders in the first quarter of fiscal 2005. Our gross margins in the first quarter of fiscal 2005 were 15%. We expect gross margins to improve by the end of fiscal year 2005 due to the
increase in sales of our new product Eclipse which has higher margins as compared to our other products. During the quarter we also borrowed $25 million against the $35 million line of credit facility we have from a commercial bank in order to meet
our working capital requirements. We expect cash usage to decline later in the fiscal year as the net losses decline.



We have equipment installed in over 150 countries, and a significant percentage of our revenue is derived from sales outside the United States. Since inception, we have
shipped over 274,000 microwave radios worldwide. Our revenues from sales of equipment and services outside the United States were 94% in the first quarter of fiscal 2005, 98% in fiscal 2004 and 95% in fiscal 2003.



Critical Accounting Policies and Estimates



There have been no changes to our critical accounting policies since March 31, 2004. For a
description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2004.



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Results of Operations



Revenues



Net sales for the first quarter of fiscal 2005 increased to $46.0 million, compared to $36.0 million reported in the first quarter of fiscal 2004. We believe that this
increase was primarily attributable to an increase in the demand for our products due to improvement in global economic conditions. Our net sales from the last four quarters have shown a gradual improvement as indicated in the following table.



|          |  |                                   |      |               |   |                  |  |                   |      |  |   |     
|--------- |  | --------------------------------- | ---- | ------------- | - | ---------------- |  | ----------------- | ---- |  | - | ----
|          |  | Three Months Ended, (in millions)
|          |  | June 30,2004                      |      | March 31,2004 |   | December 31,2003 |  | September 30,2003
|Net sales |  | $                                 | 46.0 |               | $ | 44.2             |  | $                 | 40.3 |  | $ | 36.9



Revenue by geographic regions.
The following table sets forth information on our sales to geographic regions for the periods indicated (in thousands):



|               |  |                             |        |           |     |   |      |   |           |  |     |  
|-------------- |  | --------------------------- | ------ | --------- | --- | - | ---- | - | --------- |  | --- | -
|               |  | Three Months Ended June 30, |       
|               |  | 2004                        |        | % ofTotal |     |   | 2003 |   | % ofTotal | 
|Russia         |  | $                           | 6,430  |           | 14  | % |      | $ | 3,717     |  | 10  | %
|Other Europe   |  |                             | 6,142  |           | 13  | % |      |   | 8,605     |  | 24  | %
|Middle East    |  |                             | 5,865  |           | 13  | % |      |   | 2,700     |  | 8   | %
|Americas       |  |                             | 9,576  |           | 21  | % |      |   | 5,852     |  | 16  | %
|Asia/Pacific   |  |                             | 5,910  |           | 13  | % |      |   | 8,370     |  | 23  | %
|Nigeria        |  |                             | 7,305  |           | 16  | % |      |   | 3,930     |  | 11  | %
|Other Africa   |  |                             | 4,813  |           | 10  | % |      |   | 2,793     |  | 8   | %
|               |  |                             |        |           |     |   |      |   |           |  |     |  
|Total Revenues |  | $                           | 46,041 |           | 100 | % |      | $ | 35,967    |  | 100 | %
|               |  |                             |        |           |     |   |      |   |           |  |     |  



Revenues in the first quarter of
fiscal 2005 as compared to the first quarter of fiscal 2004 increased in Russia, Nigeria and Middle East regions. Revenue in the Americas region also experienced slight improvement. Net sales to Russia increased to $6.4 million in the first quarter
of fiscal 2005, from $3.7 million in the first quarter of fiscal 2004. Net sales to Nigeria increased to $7.3 million in the first quarter of fiscal 2004 from $3.9 million in the first quarter of fiscal 2004 primarily due to increased sales to one
customer in that region. Net sales to Asia/Pacific decreased to $5.9 million in the first quarter of fiscal 2005 from $8.4 million in the first quarter of fiscal 2004 primarily due to completion of certain large projects in India in the first
quarter of fiscal 2004 which did not repeat in the first quarter of fiscal 2005.



Orders and backlog.During the first quarter of fiscal 2005, we received $45.5 million in new orders shippable over the next 12 months, compared to $41.8 million in the first quarter of fiscal 2004. The backlog at June 30, 2004 was
$58.0 million, compared to $41.3 million at June 30, 2003 and $59.1 million at March 31, 2004. We review our backlog on an ongoing basis and



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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.



The following table summarizes the number of our customers, each of whom
accounted for more than 10% of our backlog as at the end of the period indicated, along with the percentage of backlog they individually represent.



|                      |  |                    |   |  |               |  
|--------------------- |  | ------------------ | - |  | ------------- | -
|                      |  | Three Months Ended |  
|                      |  | June 30, 2004      |   |  | June 30, 2003 |  
|Number of customers   |  | 2                  |   |  | 1             |  
|Percentage of backlog |  | 20%, 11            | % |  | 16            | %



Product operating segment. The
revenue and operating income for the product operating segment for the periods indicated were as follows (in thousands):



|               |  |                             |        |   |           |     |    |      |   |        |           |  |     |  
|-------------- |  | --------------------------- | ------ | - | --------- | --- | -- | ---- | - | ------ | --------- |  | --- | -
|               |  | Three Months Ended June 30, |       
|               |  | 2004                        |        |   | % ofTotal |     |    | 2003 |   |        | % ofTotal | 
|XP4            |  | $                           | 20,984 |   |           | 55  | %  |      | $ | 12,130 |           |  | 43  | %
|DXR            |  |                             | 4,504  |   |           | 12  | %  |      |   | 6,118  |           |  | 21  | %
|Eclipse        |  |                             | 4,680  |   |           | 12  | %  |      |   |       |           |  |    |  
|Altium         |  |                             | 6,357  |   |           | 16  | %  |      |   | 9,893  |           |  | 35  | %
|Other Products |  |                             | 1,968  |   |           | 5   | %  |      |   | 436    |           |  | 1   | %
|               |  |                             |        |   |           |     |    |      |   |        |           |  |     |  
|Total Revenue  |  | $                           | 38,493 |   |           | 100 | %  |      | $ | 28,577 |           |  | 100 | %
|Operating Loss |  | $                           | (8,372 | ) |           | (22 | )% |      | $ | (4,994 | )         |  | 17  | %



Our XP4 product line net sales
increased significantly to $21 million in the first quarter of fiscal 2005 from $12.1 million in the first quarter of fiscal 2004 primarily because of increase in sales to our existing customers in Russia and Nigeria who are adding more access
points to their existing networks. Net sales of our Altium and DXR product lines decreased in the first quarter of fiscal 2005 as compared to fiscal 2004 because some of the demand for those products was replaced by our new product Eclipse.
Operating loss of the product operating segment in the first quarter of fiscal 2005, as a percentage of total revenue, was higher than the first quarter of fiscal 2004. This was primarily because in the first quarter of fiscal 2004 we reduced our
accrual for contingent liability made in fiscal 2003 by $3.5 million on settlement of a claim made by the trustees for unsecured creditors in the bankruptcy proceedings of the Companys prior customers.



The cash used for the product operating segment was primarily due to operating losses
incurred by that segment. The cash needs of this segment were also to fund research and development activities, capital expenses and restructuring payments. We also increased the inventory levels of our new product Eclipse in order to support its
rollout in the market. We expect cash requirements for this segment to continue to be primarily for working capital requirements, restructuring payments and research and development activities, although we expect the cash usage to decline in the
next couple of quarters as the net losses decline.



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Service Operating Segment. The revenue and operating income for the service
operating segment for the three months ended June 30 were as follows: (in thousands)



|                         |  |                             |       |   |             |    |    |      |   |             |  |    |  
|------------------------ |  | --------------------------- | ----- | - | ----------- | -- | -- | ---- | - | ----------- |  | -- | -
|                         |  | Three Months Ended June 30, |      
|                         |  | 2004                        |       |   | % ofRevenue |    |    | 2003 |   | % ofRevenue | 
|Service revenue          |  | $                           | 4,595 |   |             |    |    |      | $ | 3,705       |  |    |  
|Operating income/ (loss) |  |                             | (39   | ) |             | (1 | )% |      | $ | 48          |  | 1  | %
|                         |  |                             |       |  
|Repair revenue           |  |                             | 2,953 |   |             |    |    |      |   | 3,685       |  |    |  
|Operating income         |  |                             | 948   |   |             | 32 | %  |      |   | 1,450       |  | 39 | %
|                         |  |                             |       |   |             |    |    |      |   |             |  |    |  
|Total Revenue            |  | $                           | 7,548 |   |             |    |    |      | $ | 7,390       |  |    |  
|Total Operating income   |  | $                           | 909   |   |             | 12 | %  |      | $ | 1,498       |  | 20 | %



Services revenue includes, but is not
limited to, installation, network design, path surveys, integration, and other revenues derived from the services we provide to our customers. In the first quarter of fiscal 2005, service revenue increased to $4.6 million as compared to $3.7 million
in the first quarter of fiscal 2004, primarily because of the increase in product revenues in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004. The operating loss for service revenue, as a percentage of service
revenue, was 1% in the first quarter of fiscal 2005 as compared to operating income of 1% in the first quarter of fiscal 2004. This decline was primarily due to aggressive pricing on the installation of our new product Eclipse for one of our major
projects in South Asia in order to successfully rollout our product in that market.



Repair revenue decreased in the first quarter of fiscal 2005 to $3.0 million from $3.7 million in the first quarter of fiscal 2004. Repair operating income, as a percentage of repair revenue, in the first quarter of fiscal 2005 decreased to
32% as compared to 39% in the first quarter of fiscal 2004. This was primarily due to lower revenues resulting in lower absorption of fixed costs.



The cash requirements in the service operating segment were primarily to purchase spare parts to provide repair services to our customers and for payment of labor
expenses. We also paid cash to several third party vendors for helping us in the installation of our products. In the first quarter of fiscal 2005, we purchased approximately $1.8 million of spare parts for our discontinued Spectrum product line. We
incurred this bulk purchase of parts for our Spectrum product line because our suppliers notified us that they would not continue manufacturing this equipment. We expect the cash requirements for this segment to continue to be primarily for labor
costs and spare parts.



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Gross Profit



|              |  |                             |        |               |     |   |      |   |               |  |     |  
|------------- |  | --------------------------- | ------ | ------------- | --- | - | ---- | - | ------------- |  | --- | -
|              |  | Three Months Ended June 30, |       
|              |  | 2004                        |        | % of NetSales |     |   | 2003 |   | % of NetSales | 
|Net sales     |  | $                           | 46,041 |               | 100 | % |      | $ | 35,967        |  | 100 | %
|Cost of sales |  |                             | 39,115 |               | 85  |   |      |   | 28,621        |  | 80  |  
|              |  |                             |        |               |     |   |      |   |               |  |     |  
|Gross profit  |  | $                           | 6,926  |               | 15  | % |      | $ | 7,346         |  | 20  | %



Gross profit as a percentage of net
sales was 15% in the first quarter of fiscal 2005 as compared to 20% in the first quarter of fiscal 2004. This decrease in gross profit of 5% was primarily due to unfavorable product mix impact of approximately 2% and negative pricing impact of
approximately 3%. We expect the gross profit percentage to increase in the remaining quarters of fiscal 2005 due to an increase in sales of our new product Eclipse which will have higher margins as compared to our other product lines.



Research and Development



|                         |  |                             |       |   |      |   |       |  
|------------------------ |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                         |  | Three Months Ended June 30, |      
|                         |  | 2004                        |       |   | 2003 |  
|Research and development |  | $                           | 4,364 |   |      | $ | 3,886 |  
|% of net sales           |  |                             | 9.5   | % |      |   | 10.8  | %



In the first quarter of fiscal 2005,
research and development expenses increased slightly to $4.4 million from $3.9 million in the first quarter of fiscal 2004. This increase was primarily due to inclusion of expenses of Plessey Broadband Wireless which we acquired at the beginning of
the third quarter of fiscal 2004 and an increase in material purchases for prototype builds of our new product, Eclipse. As a percentage of net sales, research and development expenses decreased to 9.5% in the first quarter of fiscal 2005 from 10.8%
in the first quarter of fiscal 2004 primarily due to the increase in sales. We plan to remain focused on our efforts for next generation products and new features for our Eclipse product line. We expect research and development expenses to remain
relatively flat in the remainder of fiscal 2005 as compared to the first quarter of fiscal 2005.



Selling, General and Administrative



|                                    |  |                             |       |   |      |   |       |  
|----------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                    |  | Three Months Ended June 30, |      
|                                    |  | 2004                        |       |   | 2003 |  
|Selling, general and administrative |  | $                           | 9,630 |   |      | $ | 6,956 |  
|% of net sales                      |  |                             | 20.9  | % |      |   | 19.3  | %



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Selling, general and administrative expenses in the first quarter of fiscal 2004 were $7.0
million which included a $3.5 million of reduction in reserves due to a favorable settlement of a legal claim that was reserved in the periods prior to the quarter ending June 30, 2003. In the first quarter of fiscal 2005, selling, general and
administrative expenses decreased to $0.8 million as compared to the first quarter of fiscal 2004, after accounting for the reversal in reserve mentioned above, primarily due to the cost reduction measures taken in fiscal 2004.



We do not expect our selling, general and administrative expenses to change significantly in
the remainder of fiscal 2005.



Restructuring Charges



We did not record any restructuring charges in the first quarter of fiscal 2005 and the
first quarter of fiscal 2004.



In the fourth quarter of fiscal 2004, we
recorded $5.5 million of restructuring charges. In order to reduce expenses and increase operational efficiency, we reduced the workforce by 34 employees and recorded restructuring charges for employee severance and benefits of $0.9 million. As of
June 30, 2004, 17 employees had been terminated. The remaining $4.6 million of restructuring charges was for building lease obligations, which were vacated in fiscal 2002 and fiscal 2003 as explained in the following paragraphs. The vacated building
lease obligations recorded as restructuring charges in fiscal 2003 and in fiscal 2002 included payments required under lease contracts, less estimated sublease income after the property has been abandoned. To determine the lease loss, certain
assumptions were made related to (1) the time period over which the building will remain vacant, (2) sublease terms, (3) sublease rates and (4) an estimate of brokerage fees. The lease loss represents our estimate of time to sublease and actual
sublease rates. In fiscal 2004, we recorded the additional $4.6 million charges primarily due to a decrease in estimated future sublease income.



During fiscal 2003 and 2002, we announced several restructuring programs to reduce expenses and improve operational efficiency. These restructuring programs included
consolidation of additional excess facilities. Due to these actions, we recorded restructuring charges of $19.0 million in fiscal 2003 and $8.6 million in fiscal 2002 for vacated building lease obligations.



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The following table summarizes the activities of the restructuring accrual during the first
quarter of fiscal 2005 and during the fiscal year ended March 31, 2004 (in millions):



|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|---------------------------- |  | --------------------- | ---- | - | ------------------- | - | ---- | ----- |  | - | ---- | -
|                             |  | Severanceand Benefits |      |   | Facilitiesand Other |   |      | Total | 
|Balance as of March 31, 2003 |  | $                     | 1.5  |   |                     | $ | 22.7 |       |  | $ | 24.2 |  
|Provision if fiscal 2004     |  |                       | 0.9  |   |                     |   | 4.6  |       |  |   | 5.5  |  
|Cash payments                |  |                       | (1.3 | ) |                     |   | (5.6 | )     |  |   | (6.9 | )
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of March 31, 2004 |  | $                     | 1.1  |   |                     | $ | 21.7 |       |  | $ | 22.8 |  
|Provision                    |  |                       |     |   |                     |   |     |       |  |   |     |  
|Cash payments                |  |                       | (0.2 | ) |                     |   | (1.2 | )     |  |   | (1.4 | )
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Balance as of June 30, 2004  |  | $                     | 0.9  |   |                     | $ | 20.5 |       |  | $ | 21.4 |  
|                             |  |                       |      |   |                     |   |      |       |  |   |      |  
|Current portion              |  | $                     | 0.9  |   |                     | $ | 3.0  |       |  | $ | 3.9  |  
|Long-term portion            |  | $                     |     |   |                     | $ | 17.5 |       |  | $ | 17.5 |  



The remaining accrual balance of $21.4
as of June 30, 2004 is expected to be paid out in cash. We expect $3.3 million of the remaining accrual balance ($0.9 million of severance and benefits, $0.2 million of legal costs and $2.2 million of vacated building lease obligations) to be paid
out in the remainder of fiscal 2005 and vacated building lease obligations of $18.1 million to be paid out during fiscal 2006 through fiscal 2012.



Other Income (Expense)



|                                     |  |                            |      |   |      |   |      |  
|------------------------------------ |  | -------------------------- | ---- | - | ---- | - | ---- | -
|                                     |  | Three Months EndedJune 30, |     
|                                     |  | 2004                       |      |   | 2003 |  
|Interest income                      |  | $                          | 150  |   |      | $ | 262  |  
|Other Expenses, net                  |  |                            | (520 | ) |      |   | (210 | )
|Provision (benefit) for income taxes |  |                            | 151  |   |      |   | (69  | )



Interest income was $0.2 million in
the first quarter of fiscal 2005 compared to $0.3 million in the first quarter of fiscal 2004. The decrease was primarily due to lower cash balances in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004. Other expense
was $0.5 million in first quarter of fiscal 2005 as compared to $0.2 million in the first quarter of fiscal 2004. The increase was primarily due to interest expense incurred on our long term debt partially offset by a decrease in letter of credit
discounting fees.



In the first quarter of fiscal 2005, 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.



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Liquidity And Capital Resources



Net cash used for operating activities in the first quarter of fiscal 2005 was $7.3 million,
compared to net cash used for operating activities of $4.2 million in the first quarter of fiscal 2004. The amount used in operating activities was due to net losses, as adjusted to exclude non-cash charges. Working capital uses of cash included
significant decreases in accounts payable and long-term liabilities.



Accounts
payable decreased by $2.6 million in the first quarter of fiscal 2005 primarily because of payments made to some of our major suppliers.



Long-term liabilities decreased by $1.1 million primarily due to payment of restructuring costs, which were accrued in periods prior to fiscal 2004.



Inventories decreased in the first quarter of fiscal 2005 by $2.2 million as compared to an
increase of $0.8 million in the first quarter of fiscal 2004. This was primarily because of lower inventory purchases as we increased the outsourcing of our manufacturing.



Net cash used by investing activities in the first quarter of fiscal 2005 was $13.1 million, compared to net cash provided by investing
activities of $0.8 million in the first quarter of fiscal 2004. Purchases of property and equipment were $3.7 million in the first quarter of fiscal 2005 compared to $1.5 million in the first quarter of fiscal 2004. The increase in capital
expenditures was primarily due to the purchase of service parts to provide support to the existing customers of our discontinued Spectrum product line. We incurred this one time bulk purchase of parts costing approximately $1.8 million for our
Spectrum product line because our suppliers notified us that they would not continue manufacturing this equipment.



Net cash provided by financing activities in the first quarter of fiscal 2005 was $24.8 million as compared to $0.2 million in the first quarter of fiscal 2004. In the
first quarter of fiscal 2005, we borrowed $25 million against our line of credit of $35 million with a commercial bank. Proceeds from the sale of common stock were derived from the exercise of employee stock options and the employee stock purchase
plan.



Cash requirements



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



| |  | Operations
| | - | ----------



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



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



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



| |  | Potential acquisitions
| | - | ----------------------



Commercial commitments



As of June 30, 2004, we had $2.0 million in standby letters of credit outstanding with several financial institutions to support bid and performance bonds issued to
various customers. The majority of these letters of credit expire in fiscal 2005. Also, as of June 30, 2004, we had outstanding forward foreign exchange contracts in the aggregate amount of $30.5 million to support our foreign exchange rate risk
exposure management program.



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Contractual obligations



The following table provides information related to our contractual obligations:



Payments due (in thousands):

Years ending March 31,



|                                   |  |      |        |      |   |       |  |      |       |      |   |               |  |                   |       |  |   |        |  |   |       
|---------------------------------- |  | ---- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ------------- |  | ----------------- | ----- |  | - | ------ |  | - | ------
|                                   |  | 2005 |        | 2006 |   | 2007  |  | 2008 |       | 2009 |   | 2010 & beyond |  | Total Obligations
|Operating leases(a)                |  | $    | 4,521  |      | $ | 5,722 |  | $    | 5,576 |      | $ | 5,784         |  | $                 | 5,945 |  | $ | 11,247 |  | $ | 38,795
|Unconditional purchase obligations |  | $    | 41,705 |      |   |      |  |      |      |      |   |              |  |                   |      |  |   |       |  |   |       



|(a) | Contractual cash obligations include $20.3 million of lease obligations that have been accrued as restructuring charges as of June 30, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



Restructuring payments



The accrued liability of $21.5 million for restructuring payments as of June 30, 2004 is
expected to be paid out in cash. We expect $3.3 million of the remaining accrual balance ($0.9 million of severance and benefits, $0.2 million of legal costs and $2.2 million of vacated building lease obligations) to be paid out in the remainder of
fiscal 2005 and vacated building lease obligations of $18.1 million to be paid out during fiscal 2006 through fiscal 2012.



Customer financing



In fiscal 2004, we granted extended terms of credit to some of our customers in order to position ourselves in certain markets and to promote opportunities for our new
Eclipse product line. As of June 30, 2004 we have $1.0 million recorded as long-term accounts receivable due to these extended terms of credit granted to our customers. Although we may commit to provide financing to customers in order to position
ourselves in certain markets, we remain focused on minimizing our overall customer financing exposures by discounting receivables when possible, raising third party financing and arranging letters of credit.



Long-term Debt



In the first quarter of fiscal 2005, we borrowed $25 million, on a long-term basis, against
our $35 million revolving credit facility with a commercial bank. This loan is payable in equal monthly installments of principal plus interest over a period of four years. This loan is at a fixed interest rate of 6.38%. As part of the loan
agreement, we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth of at least $60 million plus 25% of net income, as determined in accordance with GAAP, for such quarter and all preceding quarters since December
31, 2003 (exclusive of losses). We also have to maintain, as measured at the last day of each calendar month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term, marketable securities minus certain outstanding bank services
divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00. As of June 30, 2004 we were in compliance with these financial covenants of the loan.



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Sources of cash:



At June 30, 2004, our principal sources of liquidity consisted of:



| |  | $63.8 million in cash and cash equivalents and short-term investments and
| | - | -------------------------------------------------------------------------



| |  | the $8.5 million of available credit under the remaining $10 million revolving credit portion of the initial $35 million credit facility with a major bank against which we borrowed
$25 million in the first quarter of fiscal 2005 (as explained above). Short-term borrowings under the revolving facility will be at the banks prime rate, which was 4% at June 30, 2004, or LIBOR plus 2%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash usage in the first quarter of fiscal 2005 was quite significant. We expect the cash
usage to decline later in the fiscal year as the net losses are expected to decline once our new product Eclipse has rolled out successfully in the market. We believe that our available cash and cash equivalents at June 30, 2004 combined with
anticipated receipts of outstanding accounts receivable, the liquidation of other current assets and our $8.5 million available credit on our revolving credit facility should be sufficient to meet our anticipated needs for working capital and
capital expenditures through June 30, 2005.



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.



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Quantitative and Qualitative Disclosures about Market Risk



Interest Rate Risk:



Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality issues and, by policy, limit the amount of credit exposure to any one issuer and country. The portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs. This policy minimizes the requirement to sell securities in order to meet
liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.



The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio.



|                                               |  |                                    |        |   |      |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                               |  | Years Ended March 31(In thousands) |       
|                                               |  | 2005                               |        |   | 2006 |  
|Cash equivalents and short-term investments(a) |  | $                                  | 49,381 |   |      | $ | 10,676 |  
|Weighted average interest rate                 |  |                                    | 1.24   | % |      |   | 1.55   | %



|(a) | Does not include cash of $3.7 million held by foreign subsidiaries in bank checking and
deposit accounts.
|--- | ---------------------------------------------------------------------------------------------------------



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 2005 was 3 months and had an average yield of 1.31% per annum.



As of
June 30, 2004, unrealized losses on investments were insignificant. The investments have been recorded at fair value on our balance sheet.



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, 2004 we held forward contracts in the aggregate amount of $30.5 million primarily in Thai Baht and the Euro. The amount of unrealized loss on these contracts at June 30, 2004 was insignificant.
Forward contracts are not



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available in certain currencies and are not purchased by the Company for certain currencies
due to the cost. The exchange rate changes in these currencies, such as the Nigerian Naira, could result in significant gains and losses in future periods.



Given our exposure to various transactions in foreign currencies, a change in foreign exchange rates would result in exchange gains and losses. As these exposures are
generally covered by forward contracts where such contracts are available, these exchange gains and losses would be offset by exchange gains and losses on the contracts designated as hedges against such exposures.



We do not enter into foreign currency transactions for trading or speculative purposes. We
attempt to limit our exposure to credit risk by executing foreign contracts with high-quality financial institutions. A discussion of our accounting policies for derivative financial instruments is included in the notes to the condensed consolidated
financial statements.



Subsequent Event



On July 29, 2004 we reached a settlement on the claims made by the trustees for unsecured
creditors in the bankruptcy proceedings of our prior customers for approximately the amount accrued. The settlement is awaiting final approval from bankruptcy court. These claims were accrued for in fiscal 2003. See Note 1 Accrued
liabilities to the financial statements for details regarding the amount accrued.



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Factors That May Affect Future Financial Results



Numerous factors, including the risk factors discussed below, economic and competitive conditions, timing and volume of incoming orders, shipment volumes, product margins and foreign exchange rates, could have a
material adverse affect on our business and results of operations, as well as cause actual results to differ materially from those described in forward looking statements contained herein.



We have a history of losses, and we may not acheive or sustain profitability on a
quarterly or annual basis.



We have incurred losses in
many of our fiscal years since inception. From the last four fiscal years we have continuously incurred losses. In the first quarter of fiscal 2005, we incurred a loss of $8.0 million. As of June 30, 2004 we have an accumulated deficit of $376
million. We may not achieve or sustain profitability on a quarterly or annual basis.



Competition could harm our ability to maintain or improve our position in the market and could decrease our revenues.



The wireless interconnection and access business is a specialized segment of the wireless telecommunications industry and is extremely competitive. We
expect competition in this segment to increase. Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and significantly greater financial, technical, and personnel resources than we have. In addition, some
of our competitors have greater name recognition, broader product lines, a larger installed base of products and longer-standing customer relationships. Our competitors include established companies, such as Alcatel, L.M. Ericsson, the Microwave
Communications Division of Harris Corporation, NEC, Nera Telecommunications, Nokia, and Siemens AG, as well as a number of smaller companies and private companies in selected markets. Some of our competitors are also base station suppliers through
whom we market and sell our products. One or more of our largest customers could internally develop the capability to manufacture products similar to those manufactured or outsourced by us and, as a result, their demand for our products and services
may decrease.



In addition, we compete for acquisition and
expansion opportunities with many entities that have substantially greater resources than we have. Furthermore, any acquisition we contemplate and subsequently complete may encourage certain of our competitors to enter into additional business
combinations, to accelerate product development, or to engage in aggressive price reductions or other competitive practices, resulting in even more powerful or aggressive competitors.



We believe that our ability to compete successfully will depend on a number of factors both within and outside our control,
including price, quality, availability, customer service and support, breadth of product line, product performance and features, rapid time-to-market delivery capabilities, reliability, timing of new product introductions by us, our customers and
our competitors, the ability of our customers to obtain financing, uncertainty of regional socio- and geopolitical factors. We cannot give assurances that we will have the financial resources, technical expertise, or marketing, sales, distribution,
customer service and support capabilities to compete successfully.



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Our average sales prices are declining.



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



If we do not successfully market our new product, Eclipse, our business would be harmed.



In July 2003, we introduced our latest product, Eclipse. Eclipse is a wireless platform consisting of an Intelligent Node
Unit and an Outdoor Unit. The platform utilizes a nodal architecture and combines multiplexing, routing and cross-connection functions with low to high capacity wireless transmission into a single system. To a large extent, our future profitability
depends on the successful commercialization of Eclipse. We began to market the Eclipse product in 2003 and recorded our first sales in January 2004. Because Eclipse represents a new innovative solution for wireless carriers, we cannot give
assurances that we will be able to successfully market this product. If Eclipse does not achieve broad market acceptance, we may not be able to recoup the significant amount of research and development expenses associated with the development and
introduction of this product and our business could be negatively impacted. Should the introduction of Eclipse be unsuccessful, there would be a material adverse effect on our business, financial condition and results of operations.



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



Sales of
our products are concentrated in a small number of customers. The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of our revenues for the period indicated, along with the percentage of
revenues they individually represent.



|                                |  |                    |   |  |              |  
|------------------------------- |  | ------------------ | - |  | ------------ | -
|                                |  | Three Months Ended |  
|                                |  | June 30,2004       |   |  | June 30,2003 |  
|Number of significant customers |  | 2                  |   |  | 2            |  
|Percentage of net sales         |  | 19%, 18            | % |  | 12%, 10      | %



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The worldwide telecommunications industry is dominated by a small number of large
corporations, and we expect that a significant portion of our future product sales will continue to be concentrated in a limited number of customers. In addition, our customers typically are not contractually obligated to purchase any quantity of
products in any particular period, and product sales to major customers have varied widely from period to period. In addition, as a result of the ongoing global tightening of the capital markets for telecommunications and mobile cellular projects,
the demand for our products and services has decreased and may continue to decrease. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or our inability to gain additional customers could
result in further declines in our revenues. If these revenue declines occur, our business, financial condition, and results of operations would be harmed.



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



We are highly dependent on sales to customers outside the
United States. During first quarter of fiscal 2005 sales to international customers accounted for 94% of the total net sales. During fiscal 2003 and 2004, sales to international customers accounted for 95% and 98% of our net sales, respectively. In
the first quarter of fiscal 2005, sales to the Middle East/Africa region accounted for approximately 39% of our sales. In fiscal 2004 and 2003, sales to the Middle East/Africa region accounted for approximately 33% and 24% of our net sales,
respectively. Also, significant portions of our international sales are in lesser developed countries. We expect that international sales will continue to account for the majority of our net product sales for the foreseeable future. As a result, the
occurrence of any international, political, economic or geographic event that adversely affects our business could result in significant revenue shortfalls. These revenue shortfalls could cause our business, financial condition and results of
operations to be harmed. Some of the risks and challenges of doing business internationally include:



| |  | unexpected changes in regulatory requirements;
| | - | ----------------------------------------------



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



| |  | imposition of tariffs and other barriers and restrictions;
| | - | ----------------------------------------------------------



| |  | management and operation of an enterprise spread over various countries;
| | - | ------------------------------------------------------------------------



| |  | burden of complying with a variety of foreign laws;
| | - | ---------------------------------------------------



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



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



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



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



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



Although a majority of sales are through our direct sales
force, we also market our products through independent agents and distributors. In addition, we generate sales through base station suppliers. These relationships enhance our ability to pursue the limited number of major contract awards each year
and, in some cases, are intended to provide our customers with easier access to financing and to integrated systems providers with a variety of equipment and service capabilities. We may not be able to continue to maintain and develop additional
relationships or, if additional relationships are developed, they may not be successful. Our inability to establish or maintain these distribution relationships could restrict our ability to market our products and thereby result in significant
reductions in revenue. If these revenue reductions occur, our business, financial condition and results of operations would be harmed.



Our industry is volatile and subject to frequent changes, and we may not be able to respond effectively or in a timely manner to these changes.



We participate in a highly volatile industry that is characterized by
vigorous competition for market share and rapid technological development. These factors could result in aggressive pricing practices and growing competition both from start-up companies and from well-capitalized telecommunication systems providers,
which, in turn, could decrease our revenues. In response to changes in our industry and market conditions, we may restructure our activities to more strategically realign our resources. This includes assessing whether we should consider disposing
of, or otherwise exiting, businesses and reviewing the recoverability of our tangible and intangible assets. Any decision to limit investment in our tangible and intangible assets or to dispose of or otherwise exit businesses may result in the
recording of accrued liabilities for special charges, such as workforce reduction costs. Additionally, accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets could change as a result of such
assessments and decisions, and could harm our results of operations.



Because of the severe economic downturn in the world economy and the telecommunications industry, the demand for our products and services may continue to decrease.



Due to the downturn in the world economy, as well as the global tightening of the capital markets for telecommunications and
mobile cellular projects, our business opportunities have decreased globally over the past two years. To the extent that the economic downturn and the global tightening of the capital markets continue, the demand for our products and services may
decrease further in certain countries and geographic regions.



In addition, the terrorist attack of September 11, 2001, the subsequent military response by the United States, the aftermath of the U.S. war against Iraq, and the general socio and geopolitical conditions in the Middle East, have
negatively impacted, and may continue to negatively impact, the economy in general. This could impact our current and future business in the Middle East and could result in our customers delaying or canceling the purchase of our products, which
would have a significant negative impact on our revenues. However, the redevelopment of these regions has provided us with sales opportunities recently and may continue to provide sales opportunities in future periods.



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



The telecommunications industry has
experienced significant consolidation among its participants, and we expect this trend to continue. Some operators in this industry have experienced financial difficulty and have filed, or may file, for bankruptcy protection. Other operators may
merge and one or more of our competitors may supply products to such companies that have merged or will merge. This consolidation could result in purchasing decision delays by the merged companies and decreased opportunities for us to supply our
products to the merged companies. We may also see consolidation among suppliers, which may further decrease our opportunity to market and sell our products.



Our success depends on new product introductions and acceptance.



The market for our products is characterized by rapid technological change, evolving industry standards and frequent new product introductions. Our future
success will depend, in part, on continuous, timely development and introduction of new products and enhancements that address evolving market requirements and are attractive to customers. We believe successful new product introductions provide a
significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and are reluctant to switch thereafter. We spend significant resources on internal research and development to support our
effort to develop and introduce new products and enhancements. To the extent that we fail to introduce new and innovative products, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which
would be difficult or impossible to regain. An inability, for technological or other reasons, to develop successfully and introduce new products quickly or on a cost-effective basis could reduce our growth rate or otherwise materially damage our
business, financial condition and results of operations.



In the past we have
experienced, and we are likely to experience in the future, delays in the development and introduction of products and enhancements. We cannot provide assurances that we will keep pace with the rapid rate of technological advances, or that our new
products will adequately meet the requirements of the marketplace or achieve market acceptance before our competitors offer products with performance, features and quality similar to or better than our products. Our revenues and earnings may suffer
if we invest in developing and marketing technologies and technology standards that do not function as expected, are not adopted in the industry or are not accepted in the market within the time frame we expect or at all.



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



Our business requires extensive credit risk management that may
not be adequate to protect against customer nonpayment. Risks of nonpayment and nonperformance by customers are a major consideration in our business. Our accounts receivable balance is also concentrated among a few customers, increasing our credit
risk. The following table summarizes the number of our significant customers, each of whom accounted for more than 10% of accounts receivable at the end of the period indicated, along with the percentage of accounts receivable they individually
represent. No other customer accounted for more than 10% of the accounts receivable balance at the end of the periods indicated.



|                                          |  |                     |   |  |                |  
|----------------------------------------- |  | ------------------- | - |  | -------------- | -
|                                          |  | Three Months Ended, |  
|                                          |  | June 30, 2004       |   |  | March 31, 2004 |  
|Number of significant customers           |  | 3                   |   |  | 3              |  
|Percentage of accounts receivable balance |  | 25%,14%,13          | % |  | 30%, 22%, 11   | %



We generally require no collateral,
although sales to Asia, Africa and the Middle East are often paid through letters of credit. Our credit procedures and policies may not adequately mitigate customer credit risk.



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We will need additional capital in the future. If additional capital is not available, we
may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations.



During fiscal 2004 and the first quarter of fiscal 2005, we used a significant amount of cash. This use of cash was primarily because of higher inventory levels to
support the rollout of our new product Eclipse, net losses from operations, our acquisition of Plessey Broadband Wireless and our extension of terms of credit to some of our customers in order to establish and favorably position ourselves in certain
key markets. If we continue to use cash at this rate we may need significant additional financing, which we may seek to raise through, among other things, public and private equity offerings and debt financing. We currently anticipate that our
available cash and cash equivalents at June 30, 2004 combined with anticipated receipts of outstanding accounts receivable, the liquidation of other current assets and the $8.5 million available credit on our $ 35 million revolving credit facility
should be sufficient to meet our anticipated needs for working capital and capital expenditures through March 31, 2005. However, if changes occur that would consume available capital resources significantly sooner than we expect, if there is any
significant negative impact resulting from poor collection performance, if we are unable to raise sufficient funds in the required time frame on commercially reasonable terms, or we are unable to liquidate other current assets, our working capital
may not be sufficient to support our anticipated needs for working capital and capital expenditures through March 31, 2005 and we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our
operations.



We may breach our covenants relating to our outstanding debt
against our $35 million revolving credit facility with a commercial bank resulting in a secured creditor claim action against us by the bank.



During the first quarter of fiscal 2005, we borrowed $25 million on a long term basis against our $35 million credit facility with a commercial bank. As
part of the loan agreement, we have to maintain, as measured at the last day of each fiscal quarter, tangible net worth of at least $60 million plus 25% of net income, as determined in accordance with GAAP, for such quarter and all preceding
quarters since December 31, 2003 (exclusive of losses). We also have to maintain, as measured at the last day of each calendar month, a ratio of (1) total unrestricted cash and cash equivalents plus short-term, marketable securities minus certain
outstanding bank services divided by (2) the aggregate amount of outstanding borrowings and other obligations to the bank, of not less than 1.00 to 1.00. As of June 30, 2004 we were in compliance with these financial covenants of the loan. We may be
in breach of these covenants in future quarters which will make the long-term outstanding debt due to the bank immediately. We may not have the cash to pay off the outstanding debt immediately resulting in a secured creditor legal action against us.



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



Our manufacturing operations, which have been substantially subcontracted, are highly dependent upon the delivery of materials by outside suppliers in a
timely manner. We have significant operations in San Jose, California, the United Kingdom, New Zealand and South Africa and outsourcing arrangements in Asia. Also, we depend in part upon subcontractors to assemble major components and subsystems
used in our products in a timely and satisfactory manner. We do not generally enter into long-term or volume purchase agreements with any of our suppliers, and we cannot provide assurances that such materials, components and subsystems will be
available to us at such time and in such quantities as we require, if at all. In addition, due to the rapid and increasingly severe economic downturn, our suppliers have experienced and are continuing to experience various financial difficulties,
which may impact their ability to supply the materials, components and subsystems that we require. Our inability to develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and
timely deliver our products to our customers. We cannot give assurances that we will not experience material supply problems or component or subsystem delays in the future. Also, our subcontractors may not be able to maintain the quality of our
products, which might result in a large number of product returns by customers and could harm our business, financial condition and results of operations.



Additional risks associated with the outsourcing of our manufacturing operations to Microelectronics Technology, Inc. in Taiwan could include, among other things: (i)
political risks due to political issues between Taiwan and The Peoples Republic of China, (ii) risk of natural disasters in Taiwan, such as earthquakes and typhoons, (iii) economic and regulatory developments, (iv) an outbreak of SARS and (v)
other events leading to the disruption of manufacturing operations.



The
global tightening of capital markets for telecommunications and mobile cellular projects may result in excess inventory, which we cannot sell or be required to sell at distressed prices, and may result in longer credit terms to our customers.



Many of our current and potential customers require
significant capital funding to finance their telecommunications and mobile cellular projects, which include the purchase of our products and services. Due to the ongoing restrictions in capital markets worldwide, available funding for these projects
has been and may continue to be unavailable to some customers and the purchase of our products and services may be slowed or halted. Reduction in demand for our products has resulted in excess inventories on hand, and could result in additional
excess inventories in the future. If funding continues to be unavailable to our customers or their customers, we may be forced to write down excess inventory. In addition, we may have to extend more and longer credit terms to our customers, which
could negatively impact our cash and possibly result in higher bad debt expense. We cannot give assurances that we will be successful in matching our inventory purchases with anticipated shipment volumes. As a result, we may fail to control the
amount of inventory on hand and may be forced to write-off additional amounts. Such additional inventory write-offs, if required, would decrease our profits.



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In addition, in order to maintain competitiveness in an environment of
restrictive third party financing, we may have to offer customer financing that is recorded on our balance sheet. This may result in deferred revenue recognition, additional credit risk and substantial cash usage.



If we fail to manage our internal development or successfully integrate acquired
businesses, we may not effectively manage our growth and our business may be harmed.



Future growth of our operations depends, in part, on our ability to introduce new products and develop enhancements to existing products to meet the emerging trends in our industry. We have pursued, and will continue
to pursue, growth opportunities through internal development, minority investments and acquisitions of complementary businesses and technologies. For example, on October 3, 2003, we completed the acquisition of the net assets of Plessey Broadband
Wireless, a division of Tellumat (Pty) Ltd. Through this acquisition, we obtained a license-exempt telecommunications product line. We cannot provide assurances that we will be able to successfully integrate this product line or this division into
our operations and sales programs. We are unable to predict whether and when any other prospective acquisition candidate will become available or the likelihood that any other acquisition will be completed and successfully integrated. Once
integrated, acquired businesses may not achieve comparable levels of revenues, profitability or productivity to our existing business or otherwise perform as expected. Also, acquisitions may involve difficulties in the retention of personnel,
diversion of managements attention, risks of our customers and the customers of acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition, unexpected legal liabilities and, tax and accounting issues. Our
failure to manage growth effectively could harm our business, financial condition and results of operations.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  | general economic conditions worldwide.
| | - | --------------------------------------



Our quarterly results are difficult to predict and delays in product delivery or closing of a sale can cause revenues and net income to fluctuate
significantly from anticipated levels. In addition, we may increase spending in response to competition or in pursuit of new market opportunities. Accordingly, we cannot provide assurances that we will be able to achieve profitability in the future
or that if profitability is attained, that we will be able to sustain profitability, particularly on a quarter-to-quarter basis.



Because of intense competition for highly skilled candidates, we may not be able to recruit and retain qualified personnel.



Due to the specialized nature of our business, our future performance is
highly dependent upon the continued services of our key personnel and executive officers, including Charles D. Kissner, who currently serves as our Chairman of the Board and Chief Executive Officer. The loss of any key personnel could harm our
business. Our prospects depend upon our ability to



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attract and retain qualified engineering, manufacturing, marketing, sales and management
personnel for our operations. Competition for personnel is intense and we may not be successful in attracting or retaining qualified personnel. The failure of any key employee to perform in his or her current position or our inability to attract and
retain qualified personnel could harm our business and deter our ability to expand.



If we are unable to protect our intellectual property rights adequately, we may be deprived of legal recourse against those who misappropriate our intellectual property.



Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our
technology in the United States and internationally. We currently rely upon a combination of trade secrets, trademarks, patents and contractual rights to protect our intellectual property. In addition, we enter into confidentiality and invention
assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. We cannot give assurances that any steps taken by
us will be adequate to deter misappropriation or impede independent third party development of similar technologies. In the event that such intellectual property arrangements are insufficient, our business, financial condition and results of
operations could be harmed. We have significant operations in the United Kingdom and New Zealand, and outsourcing arrangements in Asia. We cannot provide assurances that the protection provided to our intellectual property by the laws and courts of
foreign nations will be substantially similar to the protection and remedies available under United States law. Furthermore, we cannot provide assurances that third parties will not assert infringement claims against us based on foreign intellectual
property rights and laws that are different from those established in the United States.



Defending against intellectual property infringement claims could be expensive and could disrupt our business.



The wireless telecommunications industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often
protracted and expensive litigation. We may in the future be notified that we are infringing upon certain patent or other intellectual property rights of others. Such litigation or claims could result in substantial costs and diversion of resources.
In the event of an adverse result of any such litigation, we could be required to pay substantial damages, cease the licensing of allegedly infringing technology or the sale of allegedly infringing products and expend significant resources to
develop non-infringing technology or to obtain licenses for the infringing technology. We cannot give assurances that we would be successful in developing such non-infringing technology or that any license for the infringing technology would be
available to us on commercially reasonable terms, if at all.



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



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



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



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



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



Our stock price may be volatile, which may lead to losses by investors.



Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general
conditions in the telecommunications industry in which we compete, or the economies of the countries in which we do business and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could lower the market price of our common stock and cause our
stock to be delisted from Nasdaq National Market..



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For a description of our market risks, see page 28, Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations  Quantitative and Qualitative Disclosures About
Market Risk.



ITEM 4. CONTROLS AND PROCEDURES



(a)
Evaluation and disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer
and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) or 15d-15(b). Based on this evaluation, our Principal Executive Officer and
Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report.



(b) Changes in internal controls. There has been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.



(c) Limitations on the Effectiveness of Controls. Our management, including the Principal Executive Officer and Principal Financial Officer, do not expect that
our disclosure controls or our internal controls for financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.



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PART II - OTHER INFORMATION



ITEM 1  LEGAL PROCEEDINGS



We are subject
to legal proceedings and claims that arise in the normal course of our business. As of June 30, 2004 we were a named defendant in a preference claim matter pursuant to the U.S. Bankruptcy Code. This matter was settled subsequently in July 2004 for
approximately the amount accrued by us. The settlement is awaiting final approval from bankruptcy court. This amount was reserved in fiscal 2003.



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 48.



(b) Reports on Form 8-K



On April 28, 2004, we filed a current report on Form 8-K regarding a press release
announcing our financial results for the fourth quarter of fiscal year 2004, which ended on March 31, 2004.



On June 01, 2004, we filed a current report on Form 8-K furnishing information regarding our borrowing of $25 million on a long-term basis against our $35 million line of credit with Silicon Valley Bank.



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SIGNATURE



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



|                     |  |                        |  |                                                             
|-------------------- |  | ---------------------- |  | ------------------------------------------------------------
|                     |  | STRATEX NETWORKS, INC.
|                     |  |                       
|Date: August 9, 2004 |  | By                     |  | /s/ Carl A. Thomsen                                         
|                     |  |                        |  | Carl A. Thomsen                                             
|                     |  |                        |  | Senior Vice President, Chief Financial Officer and Secretary
|                     |  |                        |  | (Duly Authorized Officer and Principal Financial Officer)   



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EXHIBIT INDEX



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



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