**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| x                                            | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| **For  the fiscal year ended June 30, 2006** |
| **or**                                       |
| o                                            | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**       |

**Forthe transition period from                to                **

**Commission file number 0-02287**

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**SYMMETRICOM, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **No. 95-1906306**               |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
| **2300 Orchard Parkway,  San Jose, California**                  |   | **95131-1017**                        |
| (Address of  Principal Executive Offices)                        |   | (Zip Code)                            |

**Registrant’s telephonenumber, including area code: (408) 433-0910**

| **Securities registered pursuant  to Section 12(b) of the Act:** |   | **Name of  each exchange on which registered:** |
|----------------------------------------------------------------------------|--------|-------------------------------------------------|
| **Common  Stock, $0.0001 Par Value**                                       |   | **The  NASDAQ Stock Market LLC**                |

**Securitiesregistered pursuant to Section 12(g) of the Act:None**

**Series AParticipating Preferred Stock Purchase Rights**

(Title of Class)

**Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes**o  Nox

**Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes**o  No x

**Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.**   Yes x   No o

**Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§29.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.**   o

**Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):**

| **Large accelerated filer    ****o** | **Accelerated  filer    ****x** | **Non-accelerated  filer    ****o** |
|----------------------------------------------------------|-----------------------------------------------------|---------------------------------------------------------|

**Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).**   Yes o No x

The aggregate market valueof the voting and non-voting common stock held by non-affiliates of theRegistrant, computed by reference to the closing price at which the CommonStock was sold on December 31, 2005, as reported on the NASDAQ StockMarket LLC (formerly the NASDAQ National Market) was approximately$391,397,548. This calculation does not reflect a determination that suchpersons are affiliates of the Registrant for any other purpose.

As of August 31, 2006,there were approximately 45,818,616 shares of Registrant’s Common Stockoutstanding.

Portions of the ProxyStatement for the Registrant’s 2006 Annual Meeting of Stockholders areincorporated by reference in Part III of this Form 10-K.

 

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**SYMMETRICOM, INC.FORM 10-KFor the Fiscal Year Ended June 30, 2006INDEX**

|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
| **Item 1.**  |       | Business                                                                                                           |       | 3        |
| **Item 1A.**      |       | Factors  That May Affect Results                                                                              |       | 11       |
| **Item  1B.**     |       | Unresolved  Staff Comments                                                                                         |       | 22       |
| **Item 2.**  |       | Properties                                                                                                         |       | 23       |
| **Item 3.**  |       | Legal  Proceedings                                                                                                 |       | 23       |
| **Item 4.**  |       | Submission  of Matters to a Vote of Security Holders                                                               |       | 24       |
| **PART II**  |
| **Item 5.**  |       | Market  for Registrant’s Common Stock, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 25       |
| **Item 6.**  |       | Selected  Financial Data                                                                                           |       | 26       |
| **Item 7.**  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 27       |
| **Item 7A.** |       | Quantitative  and Qualitative Disclosures about Market Risk                                                        |       | 47       |
| **Item 8.**  |       | Consolidated  Financial Statements and Supplementary Data                                                          |       | 48       |
| **Item 9.**  |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                              |       | 85       |
| **Item 9A.** |       | Controls  and Procedures                                                                                           |       | 85       |
| **Item 9B.** |       | Other  Information                                                                                                 |       | 85       |
| **PART III** |
| **Item 10.** |       | Directors  and Executive Officers of the Registrant                                                                |       | 87       |
| **Item 11.** |       | Executive  Compensation                                                                                            |       | 87       |
| **Item 12.** |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   |       | 87       |
| **Item 13.** |       | Certain  Relationships and Related Transactions                                                                    |       | 87       |
| **Item 14.** |       | Principal Accounting Fees and Services                                                                             |       | 87       |
| **PART IV**  |
| **Item 15.** |       | Exhibits  and Financial Statement Schedules                                                                        |       | 88       |
|              |       | Signatures                                                                                                         |       | 95       |

 

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**PART I**

**FORWARD-LOOKINGINFORMATION**

*When used in thisdiscussion, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,”“will,” “intend,” “can” and similar expressions are intended to identifyforward-looking statements. These statements are subject to risks anduncertainties that could cause actual results to differ materially from thoseprojected.*

*These risks anduncertainties include, but are not limited to risks relating to generaleconomic conditions in the markets we address and the telecommunications marketin general, risks related to the development of our new products and services,the effects of competition and competitive pricing pressure, uncertaintiesassociated with changing intellectual property laws, developments in and expensesrelated to litigation, increased competition in our markets, inability toobtain sufficient amounts of key components, the rescheduling or cancellationsof key customer orders, the loss of a key customer, the effects of new andemerging technologies, the risk that excess inventory may result in write-offs,price erosion and decreased demand, fluctuations in the rate of exchange offoreign currency, changes in our effective tax rate, market acceptance of ournew products and services, technological advancements, undetected errors ordefects in our products, the risks associated with our international sales,geopolitical risks and risk of terrorist activities, the risks associated withattempting to integrate other companies we acquire, and the risks set forthbelow under Item 1A, “Factors that may affect results.”*

*Theseforward-looking statements speak only as of the date hereof. We expresslydisclaim any obligation or undertaking to release publicly any updates orrevisions to any forward-looking statements contained herein to reflect anychange in our expectations with regard thereto or any change in events,conditions or circumstances or on which any such statement is based.*

*In the sections ofthis report entitled “Business” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Factors That May AffectResults,” all references to “Symmetricom,” “we,” “us,” and “our” meanSymmetricom, Inc. and its subsidiaries, except where it is made clear thatthe term means only the parent company.*

*TimeSource, SMARTCLOCK, BesTime, GoLong, GoWide,TimeHub, TimePictra, TimeCesium, TimeProvider, TimeCreator and TimeScan are ourtrademarks. We also refer to trademarks of other corporations and organizationsin this document.*

**Item 1.**                        *Business*

**Overview**

Symmetricom is a leading supplier of timing andsynchronization hardware, software and services. Our technology plays acritical role in network reliability and quality of service. We sell oursolutions to communication service providers, government agencies, enterprises,and research facilities. Symmetricom products have been shipped to more than 90 countries. Our products include atomicfrequency references, including rubidium and cesium oscillators; hydrogenmasers; GPS time and frequency receivers, as well as time and frequencydistribution systems; network management software; and professional services.

We manufacture precisiontime products that allow our customers to keep accurate time within 40 billionthsof a second over a 24-hour period. Our clocks tell us the time of day andallow us to measure the time interval between when an event starts and when itstops. The difference between conventional time measuring devices and ourprecise time products lies in the accuracy of the measurements. To place theaccuracy of our clocks in perspective, if a clock accumulates a 40 billionth ofa second time error over a 24-hour period, it will require more than500,000 years to accumulate an error of one second.

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***General Information***

Symmetricom was incorporated in California in 1956 andreincorporated in Delaware in 2002. The principal executive offices are locatedat 2300 Orchard Parkway, San Jose, California 95131-1017, and thetelephone number is (408) 433-0910.

Our website is located at *www.symmetricom.com*. We make available,free of charge on or through our website, our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as practical after we electronicallyfile such material, or furnish it, to the SEC. Information contained orreferenced on our website is not incorporated by reference into and does notform a part of this Form 10-K.

**Industry Background**

The time andfrequency markets served by Symmetricom include:

·       Telecommunicationsand cable markets;

·       Wireless/OEMtelecommunications equipment manufacturers; and

·       Aerospace, defense,metrology and enterprise.

***Integration of Agilent Technologies’ Frequency andTiming Standards Product Line***

On August 1, 2005, weacquired Agilent Technologies’ Frequency and Timing Standards product line.This acquisition has significantly enhanced Symmetricom’s market position incesium clocks used by official time-keeping authorities and metrologyinstitutes throughout the world. The total purchase price of approximately $8.0million was paid in cash. The purchase price was allocated to the assetsacquired, including goodwill and the liabilities assumed based on management’spreliminary estimate of the fair value for purchase accounting purposes at thedate of acquisition. This acquisition is included in the Timing, Test, andMeasurement division. Management does not expect significant revisions to thepurchase price allocations for the acquired businesses.

***Reportable Segments***

The Company structureconsists of five reportable segments. The Telecom Solutions Division consistsof four reportable segments: Wireline Products; Wireless/OEM (originalequipment manufacturer) Products; Global Services; and SpecialtyManufacturing/Other. The fifth reportable segment is the Timing, Test andMeasurement Division. Information as to net revenue and gross profit marginattributable to each of these reportable segments for each year in thethree-year period ended June 30, 2006, is contained in Note O of the notesto the consolidated financial statements.

***Telecom Solutions Division***

Our Telecom Solutions Division offers a full suite oftiming and synchronization products that meet global standards requirements.Products include primary reference sources; edge clocks and distributors forsynchronization outside the network core; BITS/SSU for the central office;network management and monitoring software; and synchronization subsystems forOEM integration. Symmetricom holds patents in advanced control algorithms andimplementations using the Global Positioning System (GPS), DOCSISTM Timing Interface (DTI) and Code DivisionMultiple Access (CDMA).

In fiscal 2006, we actively participated in themodernization of several synchronization networks with certain serviceproviders and helped others develop future plans for such efforts. The carriersand operators are driven by network economics and competitive forces to evolvetheir network infrastructures 

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toward integratedtransmission and switching functions and packet-based technologies. We believethis evolutionary trend demands a more intelligent and reliable synchronizationinfrastructure.

Symmetricom played a role in the specification processat CableLabsTM where the next generation of cable servicesand infrastructure are defined. In this effort Symmetricom contributedtechnology and expertise to specify the first time and frequencysynchronization standard for the cable market.

We continue to build a strong portfolio of precisetime and frequency solutions to address the growing synchronizationrequirements of all layers of existing circuit switched network andnext-generation packet networks.

Our Global Servicessegment provides services for all of Symmetricom’s product lines.

***Timing, Test and Measurement Division***

Our Timing, Test and Measurement Division providesprecision time and frequency instruments and reference standards for theaerospace, defense, metrology and enterprise markets. Products includesynchronized clocks, network time servers, network displays, time codegenerators, computer plug-in cards, and primary reference standards such asrubidium and cesium oscillator standards and ruggized crystal oscillators.Customer applications include synchronization of communication networks,synchronization of computer networks, calibration of lab equipment andsubsystem master timing. To support both a diverse customer and product base,the division has built strong application engineering capabilities that allowfor the tailoring of standard product platforms to meet a customer’s uniquesystem requirements.

During fiscal 2006, thedivision continued its emphasis on government program business in securemobile, satellite, and wireline communications, as well as other defenseplatform upgrades on destroyers and submarines. Key customers of the divisionincluded Boeing, DISA, Lockheed Martin, Northrop Grumman, Raytheon, and variousmilitary procurement and service agencies. New products introduced during theyear included a line of high performance cesium frequency standards purchasedfrom Agilent Technologies; a new product family of state-of- the-art networktime servers; an industry-first IEEE-1588 GrandMaster clock used forprecision time transfer over an IP network; and several new ruggedized rubidiumand OCXO oscillator platforms for space and avionics applications.

***Wireline and Cable Infrastructure Markets and Products***

***Wireline and Cable Infrastructure Markets:***

The wireline and cableinfrastructure markets include local, long distance and internationaltelecommunications service providers and carriers and cable service providers.Customers in the wireline market include worldwide public network providers,incumbent local exchange carriers (ILECs), public telephone and telegraphcompanies (PTTs), competitive local exchange carriers (CLECs), other telephonecompanies as well as cable companies. We believe that these telco providerswill have to replace their legacy synchronization equipment in the future. Somecompanies have begun the upgrade process. Based on the size of the installedbase of legacy equipment, we anticipate that this cycle could take at leastseveral years to complete. The cable infrastructure market has an emergingrequirement for synchronization within cable vendors’ equipment for which wehave developed a line of synchronization products.

***Wireline and Cable Products:***

The telecommunications network consists of a series ofinterconnected switching equipment and other components that route information(i.e., voice, video, data, etc.) through the network. For these networks tofunction efficiently it is essential that each network be synchronized and theindividual nodes within the network operate within precise tolerances. Precisionsynchronization equipment throughout these networks provides a frequencyreference which enables digital switching, routing and transmission systems 

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to operate at a common,synchronized clock rate, thereby aligning time slots, which increases bandwidthutilization while minimizing signal degradation and reducing errors throughouta network.

Our core systemproducts are built on atomic clock (such as cesium and rubidium) and GPStechnologies. The products belong to one of four classes:

·       *Primary Reference Sources (PRS)*—consistsof the GPS-based TimeSource family, and the cesium-based TimeCesium.

·       *Building Integrated Timing Supplies (BITS) orSynchronization Supply Units (SSUs)*—consists of the versatile SSU2000 and the carrier-class TimeHub, both intelligent sync distribution systems.

·       *Next Generation Timing Sources*—consists ofTime Provider, the industry’s first node clock (hybrid SSU & PRS), andother products currently under development to address emerging needs in thewireline and cable markets.

·       *Element Management Systems*—consists of TimePictra, thecarrier class HP-UX based system, and TimeScan, the PC-based system.

***Wireless/OEM Market and Products***

***Wireless/OEM Market:***

Symmetricom’s Wireless/OEM products are sold into thewireless and broadband access market. Wireless telecommunications networksconsist of numerous cells located throughout a service area. In a wirelessnetwork, calls are segmented, transmitted over the air, and reassembled by areceiver within the network. Certain engineering requirements demand a highlevel of synchronization at the base station. Our products are primarily soldinto CDMA- based implementations throughout the world.

Broadband access isanother part of the Wireless/OEM products market. Currently, our G.shdslproducts serve a niche market primarily deployed in Europe.

***Wireless/OEM Products:***

The primary use of our wireless products is inwireless base stations. Base stations are the infrastructure equipment used inall cellular and personal communication services worldwide. Many of thewireless technologies used today require high precision frequency and timinginformation to operate their services.

Our component and sub-system (module) products deliverstable timing to wireless base stations using a combination of GPS receiversfor timing distribution, high precision quartz oscillators and rubidium atomicoscillators. Their use depends on the specific cellular technology such asCDMA2000 or UMTS, and the governing standards that apply. For example, in CDMA,most manufacturers require GPS for every base station with either a highperformance quartz or rubidium oscillator. These solutions are also availableto other communication applications requiring high precision frequency andtiming information, such as digital television transmission, high definitiontelevision, and instrumentation.

Specific productswe provide are:

·       *Rubidium atomic oscillators* with variousperformance levels.

·       *GPS accessory components*, which includereceiving antennas, timing antennas, splitters, amplifiers, and lightningprotectors.

·       *Sub-system cards or modules* used withinanother manufacturer’s equipment such as wireless base stations or broadbandwireless solutions. These are customized for each manufacturer, using a 

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combination of GPS, quartzoscillators, rubidium atomic oscillators, input/output signals and controlalgorithms. Some of the control algorithms are contained in our BesTimetechnology.

·       *SHDSL modems,*which offer higher data rates, greater reachand enhanced spectral compatibility when compared to legacy transporttechnologies. These products deliver high speeds by bundling multiple DSLlinks, and focus on circuit emulation applications.

***Specialty Manufacturing Markets and Products***

Our production facility in Puerto Rico providesspecialty (contract) manufacturing to select clients. Customers in this marketare mainly from the semiconductor and medical industries.

On April 27, 2006,management announced plans to discontinue the contract manufacturing work beingconducted at the Puerto Rico facility. We anticipate exiting this non-corebusiness during fiscal 2007 and reallocating or downsizing manufacturingresources accordingly.

***Global Services Market and Products***

***Global Services Market:***

We market our servicesexclusively to customers who purchase our products.

***Global Services Products:***

Our Global Services organization provides lifecycleservices for all Symmetricom product lines. Services products fall into fivemain categories:

·       *Engineering and installation*—Our engineering and installationservices help customers implement new Symmetricom product purchases.

·       *Operations and support programs*—Our operations and supportprograms, such as Sync Office Audits assist, customers in maintenance of theirsync networks, help ensure power and alarm diversity to avoid service outagesand identify system capacity.

·       *Maintenance*—Our maintenance offerings are designed to helpcustomers minimize staff and expenses necessary for ongoing support of theirSymmetricom products. These include 24 x 7 technical support, traditionalreturn-to-factory repair services, and on-site repair labor.

·       *Training, certification programs and professional development courses*—Ourtraining courses enable customer personnel to successfully utilize and maintainour products. These programs are also available under license for customers whomaintain their own training centers.

·       *Consulting and other professional services*—Our consultingservices assist customers in planning new sync communications networks anddeveloping growth or disaster recovery plans for existing sync networks.

***Timing, Test and Measurement Markets and Products***

***Timing, Test and Measurement Markets:***

Precision time andfrequency instruments and reference standards are required by the aerospace,defense, metrology and enterprise markets. Time and frequency solutions includeGPS and time code instrumentation products, bus level timing cards, andprecision frequency references (atomic standards). IP network timing productsinclude dedicated network time servers and management and monitoring softwarethat synchronizes the timing on enterprise networks. Space, defense andavionics 

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applicationsinclude highly reliable and ruggedized components and systems designed toaddress specific customer requirements.

***Timing, Test and Measurement Products:***

We offer a widevariety of precision time and frequency products sold primarily to theaerospace, defense, metrology and enterprise sectors. These products cangenerally be divided into the following broad categories:

·       *Precision Frequency References*—Precision Frequency References form the basis of absolute timeand frequency in many systems and applications. Our products include activehydrogen masers, cesium frequency standards, rubidium frequency standards andquartz frequency standards. Our primary reference source instruments providestand-alone dependability, ease of use, and ease of installation that make themsuitable for the critical time or frequency systems found in telecommunicationstiming, calibration and metrology laboratories, satellite tracking stations andspace-based master time standards.

·       *Bus LevelTiming—**W**e* manufacture a broad line of precision timing products inthe form of plug-in cards for computers. These cards provide precise timingcapabilities to computers equipped with common bus components. We also offersoftware development tools to speed the integration of these cards intosoftware applications.

·       *Enterprise Network Time Servers*—We manufacture several products forenterprise network time distribution. These bring entire networks of computersinto precise time synchronization.

·       *GPS* & *TimeCode Instrumentation Products*—We manufacture a wide varietyof general purpose GPS receivers, time code generation, translation anddistribution products. A time code is a data format for recording andprocessing time measurements.

·       *Space, Defense and Avionics*—We provide ruggedized and militarized quartz and atomic clockplatforms for the most demanding military applications such as FA-22Raptor and F-35 Joint Strike Fighter aircraft. Our designs are vibrationisolated with low-acceleration sensitivity. For space applications such as GPS,where there is a high degree of exposure to radiation, our products areprotected by radiation-hardened designs.

**Sales Operations**

We sell our products directly to customers and throughdomestic and international distributors, as well as systems integrators andmanufacturer sales representatives. In the United States, our wireline andcable products are primarily sold through our own sales force to ILECs, PTTs,CLECs, other telephone companies, wireless service providers, cable operators,Internet Service Providers (ISPs) and OEMs. Our instrumentation productsare primarily sold through manufacturer sales representatives, and ourenterprise products are primarily sold through telesales and the internet.

Internationally, we marketand sell our products through our internal sales force, independent salesrepresentatives, distributors and system integrators. As of June 30, 2006,we employed a sales, sales service, and marketing force of 125 people,including 95 employees in domestic sales and service, 8 employees ininternational sales and service and 22 employees in marketing.

**Licenses, Patents,Trademarks and Copyrights**

We use a combination of trademark rights, copyrightsand patent rights, as well as associated registrations, contractualrestrictions and internal security to establish and protect our proprietaryrights. As of June 30, 2006, we had 46 active United States patents.The active patents issued will expire between 

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August 2009 and September 2024.We believe that our patents have value, but we rely primarily on innovation,technological expertise and marketing competence to maintain our competitiveadvantage. The telecommunications industry is characterized by the existence ofa large number of patents and frequent litigation based on allegations ofpatent infringement. We intend to continue our efforts to obtain patentswhenever possible, but there can be no assurance that patents will be issued orthat any existing patents or patents that are obtained will not be challenged,invalidated or circumvented, or that the rights granted will provide anycommercial benefit to us. Additionally, if any of our processes or designs areidentified as infringing upon patents held by others, there can be noassurances that a license will be available or that the terms of obtaining anysuch license will be acceptable to us. In addition, the laws of certaincountries in which our products may be developed, manufactured or sold may notprotect our products and intellectual property rights to the same extent as thelaws of the United States. In addition, we use technology licensed from others.

We generally enter into confidentiality agreementswith our employees, consultants, and third parties in connection with ourtechnology. These confidentiality agreements generally seek to control accessto, and distribution of, our technology, documentation and other proprietaryinformation. Despite these precautions, it may be possible for a third party toobtain and use our proprietary information without authorization or to developsimilar technology independently.

In addition, we use trademarks to help identify andmarket our products and services. We have a number of trademark registrationsand pending applications both in the United States and around the world. Werely on these trademark registrations and applications as one of the tools toprotect our rights in our trademarks and brands. We also rely on our common lawtrademark rights in those countries that recognize such rights, such as theUnited States. We can provide no assurance, however, that any of our trademarkapplications will be successful, or that our existing registrations will not bechallenged or invalidated. Likewise, we can provide no assurance that ourregistrations, applications or common law rights will enable us to stop othersfrom infringing upon our trademarks, or enable us to successfully defendagainst claims of trademark infringement. Furthermore, effective trademarkprotection may not be available in every country in which our products andservices are distributed.

We also have copyrights onour software products, product documentation, marketing materials, and otherdocumentation and materials. We rely on these copyrights to protect our rightsin our copyrighted materials. We can provide no assurances, however, that ourcopyrighted materials will not be infringed. In addition, effective copyrightprotection may not be available in every country in which our products aredistributed.

**Manufacturing**

Our manufacturing processfor standard products consists primarily of in-house electrical assembly andtest performed by our manufacturing sites in Aguadilla, Puerto Rico; Beverly,Massachusetts; Tuscaloosa, Alabama; San Jose, California and Hofolding,Germany. In addition, custom and semi-custom instrumentation products aredeveloped, assembled, and tested in Santa Rosa, California. All of ourmanufacturing facilities are certified and registered to the ISO 9001:2000quality system standard. During fiscal 2005 our Beverly, Massachusetts andPuerto Rico facilities were upgraded to meet the TL 9000 quality systemstandard (a standard for manufacturing and engineering). Our San Jose,California facility was also upgraded to meet the TL 9000 quality systemstandard for its engineering process. We currently do not plan to upgrade ourSanta Rosa, California, Tuscaloosa, Alabama and Hofolding, Germany facilities.

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**Backlog**

Our backlog consists of firm orders that have yet tobe shipped to the customer. Our total backlog was $51.7 million as of June 30,2006, compared with $31.0 million as of June 30, 2005. Of the $51.7million backlog at June 30, 2006, $37.9 million, $8.6 million and $5.2million is estimated to be shippable within six months, from six to 12 monthsand after 12 months, respectively. Most orders included in backlog can berescheduled or cancelled by customers without significant penalty.Historically, a substantial portion of net revenue in any fiscal period hasbeen derived from orders received during that fiscal period. Our backlog mayalso be affected by the cancellation or delay of customer orders, the overallcondition of the telecommunications industry, overall worldwide economicconditions and the cyclical nature of customer demand in each of our markets.See “Risk Factors.”

**Key Customers andExport Sales**

Nosingle customer accounted for more than 10% of our net revenue during fiscal2006, 2005 and 2004. Our export sales to Western Europe, Latin America, Asiaand Canada, accounted for 29.5%, 35.0% and 32.0% of our net revenue in fiscal2006, 2005 and 2004, respectively. For additional information regarding ourexport sales, see Note O to our consolidated financial statements. We haveshipped products over 90 countries.

Gains and losses on the conversion to United Statesdollars of accounts receivable and accounts payable arising from internationaloperations may, in the future, contribute to fluctuations in our business andoperating results. Sales and purchase obligations denominated in foreigncurrencies have not been significant. We do not currently engage in currencyhedging activities or derivative arrangements but may do so in the future tothe extent that foreign currency transactions become more significant.

**Competition**

Competition in thetelecommunications industry is intense. Some of our competitors or potentialcompetitors are well established and have significant financial, manufacturing,technical and marketing resources. Competitors of our synchronization productsinclude Emrise Corp., Frequency Electronics, Inc., Huawei Technologies Co.Ltd., and Oscilloquartz SA. Competitors for our Wireless/OEM Products includeFrequency Electronics, Inc. and Trimble Navigation, Ltd. Competitors ofour timing, test and measurement products include Brandywine Communications,EndRun Technologies, Frequency Electronics, Inc., Meinberg, Temex and TrakSystems, Inc. (a Veritas Corporation subsidiary).

**Research andDevelopment**

As of June 30, 2006, we had 92 engineers andtechnicians directly involved in the research, design and development of ourproducts. Our development efforts include providing enhanced functionality toour existing products including the development of additional software-basedfeatures and functionality. We also utilize domestic and internationalcontractors (primarily in India) to assist us in our research and developmentactivities. We focused our development efforts in fiscal 2006 on thedevelopment of both hardware and software products. Our product developmentprograms include wireline and wireless synchronization, network managementsoftware, government communication and infrastructure, network time server,integrated access devices and updates and maintenance on existing products. Infiscal 2006, 2005 and 2004, overall research and development expenditures were$18.8 million, $16.3 million and $16.8 million, respectively. Weexpensed all research and development expenditures as they were incurred. Weexpect to continue to support research and development efforts in order toenhance existing products and to design and develop new technologies andproducts.

Our primary product development centers are in SanJose, California; Santa Rosa, California; Beverly, Massachusetts and Austin,Texas.

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**GovernmentRegulation**

The telecommunicationsindustry is subject to government regulatory policies regarding pricing,taxation and tariffs, which may adversely impact the demand for our products.These policies are continuously reviewed and subject to change by the variousgovernmental agencies. We are also subject to government regulations andstandards for our products.

**EnvironmentalRegulation**

Our operations are subjectto numerous foreign, federal, state and local environmental regulations relatedto the storage, use, discharge and disposal of toxic, volatile or otherwisehazardous chemicals and materials used in our manufacturing process andproducts. Failure to comply with such regulations could result in a suspensionor cessation of our operations, or could subject us to significant futureliabilities. See “Item 3. Legal Proceedings” And “Factor That May Affect Results- Our operating results may be adversely affected as a result of our requiredcompliance with the adopted European Union Directives on Waste Electrical andElectronic Equipment and their Restriction of the Use of Hazardous Substancesin electrical and electronic equipment.”

**Sources andAvailability of Raw Materials**

We endeavor to usestandard parts and components, which are generally available from multiplesources. We make significant purchases of parts and components from third-partysuppliers. Certain parts used in our manufacturing process are single sourced.

**Employees**

At June 30, 2006, wehad 865 employees, including 575 in manufacturing, 92 in engineering and 198 insales, marketing, service and general and administration. Our employee turnoverrate for fiscal 2006 was 8.8%. None of our employees are represented by a laborunion, and we have experienced no work stoppages. We believe that our employeerelations are good.

**Item 1A.**                *Factors That May Affect Results*

***We have relied and may continueto rely on a limited number of customers for a significant portion of our net revenue, and our revenuecould decline due to the delay of customer orders or cancellation of existingorders***

Although a relatively small number of customers havehistorically accounted for a significant portion of our net revenue, no singlecustomer accounted for 10% or more of our net revenue during fiscal 2006, 2005or 2004. However, we expect that we will continue to depend on a relativelysmall number of customers for a substantial portion of our net revenue for theforeseeable future. The timing and level of sales to our largest customers havefluctuated significantly in the past and are expected to continue to fluctuatesignificantly in the future. The loss of one or more of our significantcustomers, or a significant reduction or delay in sales to any customer, may harmour business and operating results. For instance, our Wireline revenue in 2006decreased by $2.5 million in part because one large customer ordered lessproduct in fiscal 2006 than 2005 as it completed a major project. Majorcustomers also have significant leverage and may attempt to change the terms,including pricing, upon which we do business, which could also harm ourbusiness and operating results.

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***We have direct orindirect sales pursuant to contracts with United States government agencies,which can be terminated at the convenience of the government, and our revenuewould decline if the government terminated these contracts***

Historically, approximately10% to 17% of our net revenue has been generated from sales to United Statesgovernment agencies either directly or indirectly through subcontracts.Government-related contracts and subcontracts are subject to standardprovisions for termination at the convenience of the government. In such event,however, we are generally entitled to reimbursement of costs incurred on thebasis of work completed plus other amounts specified in each individualcontract. These contracts and subcontracts are either fixed-price or costreimbursable contracts. Fixed-price contracts provide fixed compensation forspecified work. Under cost reimbursable contracts, we agree to performspecified work in return for reimbursement of costs (to the extent allowableunder government regulations) and a specified fee. In general, while the riskof loss is greater under fixed-price contracts than under cost reimbursablecontracts, the potential for profit under fixed-price contracts is greater thanunder cost reimbursable contracts.

***If we are unable to develop new products, or we aredelayed in production startup, our sales could decline***

The markets for ourproducts are characterized by:

·       rapidlychanging technology;

·       evolvingindustry standards;

·       changesin end-user requirements; and

·       customersmay perceive new products as deficient if there is miscommunication aboutproduct specifications.

Technological advancements could render our productsobsolete and unmarketable. Our success will depend on our ability to respond tochanging technologies and customer requirements, and our ability to develop andintroduce new and enhanced products in a cost-effective and timely manner. Thedevelopment of new or enhanced products is a complex and uncertain processrequiring the accurate anticipation of technological and market trends. We mayexperience design, manufacturing, marketing, and other difficulties that coulddelay or prevent the development, introduction or marketing of our new productsand enhancements.

The introduction of new orenhanced products also requires that we manage a smooth transition from olderproducts to new products. Delays in new product development or delays inproduction startup could reduce our sales.

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***Thetelecommunications market is highly competitive, and if we are unable tocompete successfully in our markets, our revenue could decline***

Competition in the telecommunications industry, ingeneral, and in the markets we serve, is intense and likely to increasesubstantially. We face competition in all of our markets. Competitors in oursynchronization products segment include Frequency Electronics, Inc.,Huawei Technologies Co. Ltd., Emrise Corp., and Oscilloquartz SA. Competitorsin our wireless segment include Frequency Electronics, Inc. and TrimbleNavigation, Ltd. Competitors in our timing and frequency, test and measurementsegment include Brandywine Communications, EndRun Technologies, FrequencyElectronics, Inc., Meinberg, Temex and Trak Systems, Inc. (a VeritasCorporation subsidiary). In addition, the Telecommunications Act of 1996permits ILECs to manufacture telecommunications equipment, which may result inincreased competition. Our ability to compete successfully in the future willdepend on many factors including:

·       thecost-effectiveness, quality, price, service and market acceptance of ourproducts;

·       ourresponse to the entry of new competitors into our markets or the introductionof new products by our competitors;

·       theaverage selling prices for our products;

·       increasedindustry consolidation among our customers, which may lead to decreased demandfor, and downward pricing pressure on the prices of, our products;

·       ourability to keep pace with changing technology and customer requirements;

·       ourcontinued improvement of existing products;

·       thetimely development or acquisition of new or enhanced products;

·       thetiming of new product introductions by our competitors or us; and

·       changesin worldwide market and economic conditions.

Some of our competitors orpotential competitors are well established and have significant financial,manufacturing, technical and marketing resources. These competitors may be ableto respond more quickly to new and emerging technologies and changes incustomer requirements, to devote greater resources to the development, promotionand sale of products, or to deliver competitive products at lower prices. Weexpect to continue to experience pricing pressures from our competitors in allof our markets. If we are unable to compete by delivering new products or bydelivering competitive products at lower prices, we could lose market share andour revenue could decline.

***Our quarterly andannual operating results have fluctuated in the past and may continue tofluctuate in the future, which could cause our stock price to decline and resultin losses to our investors***

We believe thatperiod-to-period comparisons of our operating results may not be a goodindication of our future performance. Our quarterly and annual operatingresults have fluctuated in the past and may continue to fluctuate in thefuture. Some of the factors that could cause our operating results to fluctuate include:

·       theresumption of recent adverse economic conditions, particularly within thetelecommunications equipment industry, which may result in revenue declines;

·       restructuringand integration-related charges;

·       goodwillimpairment charges related to acquisitions;

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·       ourability to obtain sufficient supplies of sole or limited source components atcommercially reasonable prices;

·       changesin our products or mix of sales to customers;

·       althoughwe have been approved as a supplier in requests for proposals from severalmajor wireline customers, this does not guarantee any purchases;

·       ourability to manage fluctuations in manufacturing yields of rubidium oscillatorsand cesium tubes;

·       ourability to manage the level and value of our inventories in relation to salesvolume;

·       ourability to accurately anticipate the volume and timing of customer orders orcustomer cancellations;

·       ourability to collect receivables from our customers, including those in thetelecommunications industry;

·       thegain or loss of significant customers;

·       ourability to introduce new products on a timely and cost-effective basis;

·       customerdelays in qualification of new products;

·       marketacceptance of new or enhanced versions of our products and our competitors’products;

·       ourability to manage increased competition and competitive pricing pressures;

·       increasedindustry consolidation among our customers, which may lead to decreased demandfor, and downward pricing pressure on the prices of, our products;

·       ourability to timely implement changes developed as a result of our processimprovement projects without negatively impacting operations;

·       ourability to manage fluctuations in the average selling prices of our products;

·       ourability to manage the long sales cycle associated with our products;

·       ourability to manage cyclical conditions in the telecommunications industry;

·       ourability to retain key employees, which could affect our ability to sell,develop and deliver our products;

·       reducedrates of growth of telecommunications services;

·       customersmay delay upgrading their old equipment with our new products;

·       ourability to establish in a timely fashion subsidiaries in new geographic regions,which our customers or potential customers may require to do business with usin those regions;

·       internationalcustomers may delay purchasing products;

·       customersin the wireless market may delay adding new base stations which require ourproducts;

·       customersmay experience labor strikes which could result in reduced sales volume;

·       customersin the wireless market may switch from buying Rubidium based products which isinternally manufactured to Quartz based products which is purchased and sold ata lower price point, which may result in lower revenue and gross margins; and

·       aglobal pandemic, if not contained.

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A significant portion of our operating andmanufacturing expenses are relatively fixed in nature and planned expendituresare based in part on anticipated orders. If we are unable to adjust spending ina timely manner to compensate for any unexpected future sales shortfall, ouroperating results will be negatively impacted. Our operations entail a highlevel of fixed costs and require an adequate volume of production and sales toachieve and maintain reasonable gross profit margins and net earnings. If weincrease the volume of product manufacturing by outside sources and decreaseour internal production, we could incur higher fixed costs (per unit) andintegration and restructuring charges. Significant decreases in demand for ourproducts or reduction in our average selling prices, or any material delay incustomer orders may negatively harm our business, financial condition andresults of operations. Our future results depend in large part on growth in themarkets for our products.

The growth in each ofthese markets may depend on changes in general economic and regulatoryconditions, conditions related to the markets in which we compete, changes inregulatory conditions, legislation, export rules or conditions, interestrates and fluctuations in the business cycle for any particular market segment.If our quarterly or annual operating results do not meet the expectations ofsecurities analysts and investors, the trading price of our common stock coulddecline significantly.

***If we incur netlosses in the future, we may have to record a valuation allowance against mostor all of our deferred tax assets, which would significantly increase our taxexpense and hurt our net earnings***

Although we had netearnings of $0.8 million and $17.9 million for fiscal 2006 and 2005respectively, we had net losses for the preceding three fiscal years. Futurelosses may create uncertainty about the realizability of our $50.4 million netdeferred tax assets. If we record a valuation allowance against our deferredtax assets, we would record an additional tax expense, which would reduce netearnings. In addition, uncertainties about the realizability of our deferredtax assets would limit our ability to recognize future deferred tax assets onour balance sheet and correspondingly reduce net earnings. At the end of eachfiscal quarter, our management reviews the results of operations for thatquarter and forecasts for the remainder of the fiscal year and future years todetermine if it is more likely than not that a valuation allowance for thedeferred tax assets is needed.

***Increases in our effective tax rate will negativelyimpact our net earnings***

Our effective tax rate was affected by the percentageof qualified Puerto Rican earnings compared to our total earnings. Most of ourPuerto Rico earnings were taxed under Section 936 of the UnitedStates Internal Revenue Code, which exempted qualified Puerto Rican earnings fromregular federal income taxes. The Section 936 exemption was subject to avariety of limitations before it expired at the end of fiscal 2006.Historically, we reduced our effective tax rate using the Section 936exemption.

In July 2006, the Puerto Rico subsidiary,formerly electing Section 936, moved its place of legal organization fromDelaware to Bermuda in a tax-free reorganization. Consistent with a resolutionby the Symmetricom, Inc. board of directors, this subsidiary has electedto indefinitely reinvest its future earnings outside the United States and notrepatriate future earnings back to Symmetricom, Inc. Based on this change,we estimate that the fiscal 2007 effective tax rate will be approximately32.0%.

Our effective tax ratedecreased in fiscal 2006 because of the high percentage of Puerto Ricanearnings to total earnings.

***We purchase certainkey components of our synchronization and timing and frequency equipment fromsingle or limited sources and could lose sales if these sources fail to fulfillour needs***

We have limited suppliers for a number of ourcomponents, which are key components of our synchronization and timing andfrequency equipment. If single source components were to become unavailable onsatisfactory terms, we would be required to purchase comparable components fromother 

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sources. If for any reasonwe could not obtain comparable replacement components from other sources in atimely manner, our business, results of operations and financial conditioncould be harmed. In addition, some of our suppliers require long lead-times todeliver requested quantities of components. If we are unable to obtainsufficient quantities of components, we could experience delays or reductionsin product shipments, which could also have a material adverse effect on ourbusiness, results of operations and financial condition. Due to rapid changesin technology, on occasion, one or more of the components used in our productshave become unavailable, resulting in unanticipated redesign and related delaysin shipments.

We cannot assure you thatsimilar delays will not occur in the future. Our suppliers of components may beimpacted by compliance with environmental regulations including RoHS &WEEE, which could affect our continued supply of components or cause additionalcosts for us to implement new components into our manufacturing process.

***Our products are complex and may contain errors ordesign flaws, which could be costly to correct***

Our products are complexand often use state-of-the-art components, processes and techniques. When werelease new products, or new versions of existing products, they may containundetected or unresolved errors or defects. Despite testing, errors or defectsmay be found in new products or upgrades after the commencement of commercialshipments. Undetected errors and design flaws have occurred in the past andcould occur in the future. These errors could result in delays, loss of marketacceptance and sales, diversion of development resources, damage to ourreputation, legal action by our customers, failure to attract new customers,and increased service and warranty costs. The occurrence of any of thesefactors could cause our net revenue to decline.

***Our criticalbusiness and manufacturing facilities in Puerto Rico, Beverly, Massachusettsand San Jose, California, as well as many our customers and suppliers arelocated near known hurricane zones and earthquake fault zones and theoccurrence of an earthquake, hurricanes or other catastrophic disaster, couldcause damage to our facilities and equipment, which could require us, as wellas our customers and suppliers to cease, curtail or disrupt operations***

***Capacityconstraints, systems failures or security breaches could prevent access to ourcomputer systems, which could interrupt our business and harm our dailyoperation.***

Our business goals ofperformance, reliability and availability require that we have adequatecapacity in our computer systems to support our operations. As our operationsgrow in size and scope, we will need to improve and upgrade our systems andinfrastructure to offer internal personnel enhanced services, capacity,features and functionality. Our ability to provide high-quality service dependson the efficient and uninterrupted operation of our computer and communicationssystems. Our computer system has experienced system interruptions from time totime and could experience periodic system interruptions in the future. Oursystems and operations are also vulnerable to damage or interruption from humanerror, natural disasters, power loss, telecommunication failures, break-ins,sabotage, computer viruses, design defects, vandalism, denial-of-serviceattacks and similar events. Even though we have a formal disaster recoveryplan, it may not completely prevent any system failure or security breach thatcauses an interruption in our business and daily operation.

***If we fail toprotect our intellectual property, our competitive position could be weakenedand our revenues may decline***

We believe our successwill depend in a large part on our ability to protect trade secrets, obtain orlicense patents, and operate without infringing on the rights of others. Werely on a combination of trademark, copyright and patent registration,contractual restrictions and internal security to establish and 

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protectour proprietary rights. These measures may not provide sufficient protectionfor our trade secrets or other proprietary information. We have United Statesand international patents and patent applications pending that cover certaintechnology used by our operations. However, while we believe that our patentshave value, we rely primarily on innovation, technological expertise andmarketing competence to maintain our competitive position. While we intend tocontinue our efforts to obtain patents whenever possible, there can be noassurance that patents will be issued, or that new, or existing patents willnot be challenged, invalidated or circumvented, or that the rights granted willprovide us with any commercial benefit.

***Third parties mayassert intellectual property infringement claims, which would be difficult todefend, costly and may result in our loss of significant rights***

The telecommunicationsindustry is characterized by the existence of a large number of patents andfrequent litigation based on allegations of patent infringement. We are subjectto the risk of adverse claims and litigation alleging infringement of theintellectual property rights of others. Although we are currently not a partyto any intellectual property litigation, from time to time we have receivedclaims asserting that we have infringed the proprietary rights of others. Wecannot assure you that third parties will not assert infringement claimsagainst us in the future, or that any such claims will not result in costlylitigation or require us to obtain a license for such intellectual propertyrights regardless of the merit of such claims. No assurance can be given thatany necessary licenses will be available or that, if available, such licensescan be obtained on commercially reasonable terms. In the event any necessarylicenses are not available, we may not be able to sell or distribute ourproducts, which may have a material adverse effect on our business.

***If we acquire othercompanies and are unable to smoothly integrate the businesses we acquire, ouroperations and financial results could be harmed***

As part of ourbusiness strategy we have engaged in acquisitions in the past, including theacquisitions of TrueTime and Datum, and certain assets from AgilentTechnologies, and continue to evaluate other acquisition opportunities thatcould provide additional product or service offerings, technologies oradditional industry expertise. Acquisitions involve risks, which include thefollowing:

·       wemay be exposed to unknown liabilities of the acquired business;

·       wemay incur significant write-offs;

·       wemay experience problems in combining the acquired operations, technologies orproducts;

·       wemay not realize the revenue and profits that we expect the acquired businessesto generate;

·       wemay not achieve the cost savings we hope to obtain from combining the acquiredoperations with ours;

·       wemay experience regulatory difficulties and unbudgeted expenses in attempting tocomplete an acquisition;

·       wemay encounter unanticipated acquisition or integration costs that could causeour quarterly or annual operating results to fluctuate;

·       wemay incur substantial penalties if we do not relocate manufacturing operationsas scheduled;

·       ourmanagement’s attention may be diverted from our core business;

·       ourexisting business relationships with suppliers and customers may be impaired;

·       wemay not be successful in entering new markets in which we have no or limitedexperience;

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·       keyemployees of the acquired businesses may have expertise and know-how, and wemay not be able to retain some of these key employees, and some of them mayjoin or start competing businesses;

·       ourearnings per share may be diluted if we pay for an acquisition with equitysecurities; and

·       we may not be able to repayour debt used to make acquisitions.

We cannot assure you thatwe will be able to successfully integrate any business, products, technologiesor personnel from any recent or future acquisitions. If we fail to successfullyintegrate acquisitions or to achieve any anticipated benefits of anacquisition, our operations and business could be harmed. Additionally, we mayexperience difficulty integrating and managing the acquired businessoperations. For these reasons, we cannot be certain what effect acquisitionsmay have on our business, financial condition and results of operations.

***Existing commonstockholders may experience dilution in connection with our sale of convertiblenotes in June 2005 and will experience immediate dilution if we sellshares of our common stock or other equity securities in future financings,and, as a result, our stock price may go down***

Our common stockholders may experience dilution inconnection with the sale in June 2005 of $120 million worth ofconvertible notes if our stock price reaches $12.49 or more per share.

In addition, asopportunities present themselves, we may enter into financing or similararrangements in the future, including the issuance of debt securities,preferred stock or common stock. If we issue common stock or securitiesconvertible into common stock, our common stockholders will experience dilution.

***We are subject to environmental regulations that couldresult in costly environmental liability***

Our operations are subject to numerous international,federal, state and local environmental regulations related to the storage, use,labeling, discharge, disposal and human exposure to toxic, volatile orotherwise hazardous chemicals used in our manufacturing process. While we havenot experienced any significant effects on our operations from environmentalregulations, changes in these regulations may require additional capitalexpenditures or restrict our ability to expand our operations. Failure tocomply with such regulations could result in suspension or cessation of ouroperations or could subject us to significant liabilities. We could also besubject to fines and civil or criminal sanctions, third-party propertydamage or personal injury claims, or could be required to incur substantialinvestigation or remediation costs, if we were to violate or become liableunder environmental laws. Liability under environmental laws can be joint andseveral and without regard to comparative fault. Although we periodicallyreview our facilities and internal operations for compliance with applicableenvironmental regulations, these reviews are necessarily limited in scope andfrequency and may not reveal all potential instances of noncompliance, possibleinjury or possible contamination. There can be no assurance that violations ofenvironmental laws or regulations will not occur in the future as a result ofthe inability to obtain permits, human error, equipment failure or othercauses. The liabilities arising from any noncompliance with environmental regulations,or liability resulting from accidental contamination or injury from toxic orhazardous chemicals could result in liability that exceeds our resources. Therisk of liabilities increases as we acquire other companies, such as Datum,which use, or have used, hazardous substances at various current or formerfacilities.

A manufacturing facility previously operated by Datumin Austin, Texas is undergoing remediation for known subsurface contaminationat that facility and adjoining properties. We believe that we will incurmonitoring costs for years to come in connection with this subsurfacecontamination. Further, we have received a demand from adjoining landowner andmay be subject to claims from other adjoining 

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landowners, in addition toclaims for remediation, and the amount of these costs and the extent of ourexposure to these demands and claims cannot be determined at this time.

The determination of theexistence and cost of any additional contamination could involve costly andtime-consuming negotiations and litigation. Remediation activities andsubsurface contamination may require us to incur additional unreimbursed costsand could harm on-site operations and the future use and value of the property.The remediation efforts, the property owner’s claims and any relatedgovernmental action may expose us to material liability and could significantlyharm our business.

***Our operatingresults may be adversely affected as a result of our required compliance withthe adopted European Union Directives on Waste Electrical and ElectronicEquipment and the Restriction of the Use of Hazardous Substances in electricaland electronic equipment***

In January 2003, the European Union enactedDirective 2002/96/EC on Waste Electrical and Electronic Equipment Directive,known as the WEEE Directive. The WEEE Directive requires producers of certainelectrical and electronic equipment to be financially responsible for thefuture disposal costs of this equipment. Some of our products fall within thescope of this Directive, and, as such, we will incur some financialresponsibility for the collection, recycling, treatment and disposal of bothnew product sold, and product already sold prior to the WEEE Directive’senforcement date, to customers within the European Union.

At the same time, the European Union also enactedDirective 2002/95/EC on the Restriction of the use of Hazardous Substances inelectrical and electronic equipment, known as the RoHS Directive. ThisDirective restricts the use of certain hazardous substances, including mercury,lead, cadmium, hexavalent chromium and certain flame retardants, used in theconstruction of component parts of electrical and electronic equipment. We mayneed to change our manufacturing processes, redesign or reformulate some of ourproducts, and change some components to eliminate these hazardous substances inour products, in order to be able to continue to offer them for sale within theEuropean Union.

Individual European Unionmember states are required to transpose the Directives into nationallegislation. Although not all European Union member states have enactedlegislation to implement these two directives, we continue to review theapplicability and impact of both directives on the sale of our products withinthe European Union. If we fail to comply with these laws, we may be forced torecall products and cease their manufacture and distribution, and we could besubject to civil or criminal penalties. We may incur increased manufacturingcosts, and some products may be subject to production delays to comply withfuture legislation which implements these directives, but we cannot currentlyestimate the extent of such increased costs or production delays, if any.However, to the extent that any such cost increases or delays are substantial,our operating results could be materially adversely affected. Also, we areaware that lead times for new, compliant components are taking longer to getand that older, non-compliant components are being discontinued at a fast pace.In addition, we are aware of similar legislation which may be enacted in othercountries, such as Japan and China, and possible new federal and statelegislation in the United States, the cumulative impact of which couldsignificantly increase our operating costs and adversely affect our operatingresults.

***We are subject toother significant governmental regulations relating to health and safety,packaging, product content and labor regulations***

Our business is subject tovarious other significant international, federal, state and local, health andsafety, packaging, product content and labor regulations. These regulations arecomplex, change frequently and have become more stringent over time. We may berequired to incur significant expenses to comply with these regulations or toremedy past violations of these regulations. Any failure by us to comply withapplicable government regulations could also result in cessation of ouroperations or portions of our 

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operations,product recalls or impositions of fines and restrictions on our ability tocarry on or expand our operations. In addition, because many of our productsare regulated or sold into regulated industries, we must comply with additionalregulations in marketing our products. Our products and operations are alsooften subject to the rules of industrial standards bodies, like theInternational Standards Organization, as well as regulation of other agenciessuch as the United States Federal Communications Commission. If we fail toadequately address any of these regulations, our business may suffer.

***Our customers maybe subject to governmental regulations, which, if changed, could negativelyimpact our business results***

Federal and stateregulatory agencies, including the Federal Communications Commission and thevarious state public utility commissions and public service commissions,regulate most of our domestic telecommunications customers. Similar governmentoversight also exists in the international market. While we are not directlyaffected by this legislation, such regulation of our customers may negativelyimpact our business. For instance, the sale of our products may be affected bythe imposition upon certain of our customers of common carrier tariffs and thetaxation of telecommunications services. These regulations are continuouslyreviewed and changed by the various governmental agencies. Changes in currentor future laws or regulations, in the United States or elsewhere, couldnegatively impact our business results.

***Sales of asignificant portion of our products to customers outside of the United Statessubjects us to business, economic and political risks***

Our export sales toWestern Europe, Latin America, Asia and Canada accounted for 29.5% of netrevenue during fiscal 2006, compared to 35.0% of net revenue during fiscal2005. We anticipate that sales to customers located outside of the UnitedStates will continue to be a significant part of our net revenue for theforeseeable future. Because significant portions of our sales are to customersoutside of the United States we are subject to risks, including:

·       foreigncurrency fluctuations;

·       theeffects of terrorist activity and armed conflict which may disrupt generaleconomic activity and result in revenue shortfalls;

·       exportrestrictions;

·       aglobal pandemic if it does not continue to be contained;

·       longerpayment cycles;

·       unexpectedchanges in regulatory requirements or tariffs;

·       protectionistlaws and business practices that favor local competition;

·       dependenceon local vendors;

·       reducedor limited protection of intellectual property rights and political andeconomic instability; and

·       politicaland economic instability.

To date, very few of ourinternational revenue and cost obligations have been denominated in foreigncurrencies. As a result, an increase in the value of the United States dollarrelative to foreign currencies could make our products more expensive, andthus, less competitive in foreign markets. A portion of our internationalrevenues may be denominated in foreign currencies in the future, including theEuro, which will subject us to risks associated with fluctuations in theseforeign currencies. We do not currently engage 

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inforeign currency hedging activities or derivative arrangements, but may do soin the future to the extent that such obligations become more significant.

***If we havesignificant inventories that become obsolete or cannot be sold at acceptableprices, our results may be negatively impacted***

Although we believe thatwe currently have made adequate adjustments for inventory that has declined invalue, become obsolete, or is in excess of anticipated demand, there can be noassurance that such adjustments will be adequate. If significant inventories ofour products become obsolete, or are otherwise not able to be sold at favorableprices, our results of operations could be materially affected.

***We may be requiredto record additional goodwill and intangibles impairment charges in futurequarters***

As of June 30, 2006,we had recorded goodwill with a net book value of $45.9 million related toacquisitions of Datum and TrueTime and Agilent Technologies’ Frequency andTiming Standards product line. We test for impairment at least annually, andmore frequently whenever evidence of impairment exists. We performed a goodwillimpairment test on our Wireless/OEM business segment as of March 31, 2006and determined that goodwill was impaired by approximately $7.0 million. If ourfuture financial performance or other events indicate that the value of ourrecorded goodwill is impaired, we may record additional impairment charges thatcould have a material adverse effect on our reported results.

***We may be subject to additional taxes from tax reviewsby foreign authorities***

Although we believe thatwe have made adequate reserves for foreign tax provisions, there can be noassurance that such reserves will be adequate until the foreign authoritieshave reviewed the foreign tax filings.

***Our sales and ourcost may be affected by the ongoing movement towards environmentally friendlymanufacturing (“green” manufacturing)***

Various countries in theinternational marketplace are moving towards more environmentally friendlymanufacturing requirements, and some companies or countries may require us tomeet new standards, which could affect the sales of our products. Thesestandards could possibly be based on the production methods of ourmanufacturing process, and materials used in this process. If we have to changeour methods or processes to comply, our manufacturing costs may increase.

***Investor confidenceand share value may be adversely impacted if we are unable to conclude that ourinternal controls over financial reporting are adequate, as required by Section 404of the Sarbanes-Oxley Act of 2002***

Section 404 of the Sarbanes-Oxley Act of 2002requires us to evaluate the effectiveness of our internal controls overfinancial reporting as of the end of each year beginning June 30, 2005,and to include a management report assessing the effectiveness of our internalcontrols over financial reporting in all annual reports beginning with thisReport. Section 404 also requires our independent registered publicaccounting firm to attest to, and report on, management’s assessment of ourinternal controls over financial reporting.

Our management, including our CEO and CFO, does notexpect that our internal controls over financial reporting will prevent allerror and all fraud. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met.

Although our managementhas determined, and our independent registered public accounting firm hasattested, that our internal control over financial reporting was effective asof June 30, 2006, we cannot 

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assureyou that we or our independent registered public accounting firm will notidentify a material weakness in our internal controls in the future. A materialweakness in our internal controls over financial reporting would requiremanagement and our independent registered public accounting firm to evaluateour internal controls as ineffective. If our internal controls over financialreporting are not considered adequate, we may experience a loss of publicconfidence, which could have an adverse effect on our business and our stockprice.

Item1B.               *Unresolved Staff Comments*

None.

 

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**Item 2.**                        *Properties*

Thefollowing are our principal facilities as of June 30, 2006:

| ** **              | ** ** | ** **                                     | ** ** | **Approximate**               | ** ** | ** **         | ** ** |
|-------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **              | ** ** | ** **                                     | ** ** | **Floor Area**           | ** ** | **Owned/Lease**    | ** ** |
| **Location**            | ** ** | ** **                                     | ** ** | **Principal Operations** | ** ** | **(Sq. Ft.)** | ** ** | **Expiration Date** | ** ** |
| San Jose,  California   |       | Corporate  Headquarters (partial sublease)     |       |                          | 118,000    |               |       | April 2016 |   |
| Santa Rosa,  California |       | Manufacturing/Administrative  (partial vacant) |       |                          | 70,000     |               |       | December 2015 |   |
| Santa Rosa,  California |       | Manufacturing  (partial sublease)              |       |                          | 25,000     |               |       | December 2008 |   |
| Irvine,  California     |       | Administrative  Office                         |       |                          | 2,500      |               |       | December 2006* |   |
| Beverly,  Massachusetts |       | Manufacturing                                  |       |                          | 54,000     |               |       | Owned |   |
| Austin, Texas           |       | Administrative  Office                         |       |                          | 21,000     |               |       | December 2009 |   |
| Tuscaloosa,  Alabama    |       | Manufacturing                                  |       |                          | 5,000      |               |       | March 2007 |   |
| Hofolding,  Germany     |       | Manufacturing/Administrative                   |       |                          | 7,000      |               |       | January 2009 |   |
| Crowthorne, UK          |       | Administrative                                 |       |                          | 1,200      |               |       | October 2008 |   |
| Subang Java,  Malaysia  |       | Administrative                                 |       |                          | 700        |               |       | May 2008 |   |
| Aguadilla, Puerto  Rico |       | Manufacturing                                  |       |                          | 87,000     |               |       | February 2016 |   |
| Beijing, China          |       | Administrative                                 |       |                          | 200        |               |       | February 2008 |   |
| Beijing, China          |       | Administrative                                 |       |                          | 807        |               |       | February 2007 |   |
| Guangzhou, China        |       | Administrative                                 |       |                          | 600        |               |       | February 2007 |   |
|                         |            |                                                |            |                               |            |                    |            |  |  |  |  |

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*       Monthly

We have subletapproximately 34,000 square feet of our San Jose facility through March 2007and approximately 16,025 square feet and 18,810 square feet of our Santa Rosafacility through November 2008 and 2011, respectively. We believe that ourcurrent facilities are suitable and adequate to meet our anticipated needs forthe foreseeable future.

**Item 3.**                        *Legal Proceedings*

We formerly leased a tract of land for our operationsin Texas. Those operations involved the use of solvents and, at the end of thelease, we remediated an area where the solvents had been deposited on theground and obtained regulatory approval for that remedial activity. In 1996, anenvironmental investigation of the property detected those same contaminants ingroundwater in excess of then current regulatory standards. The groundwatercontamination has migrated to some adjacent properties. We have entered intothe Texas Natural Resource Conservation Commission’s Voluntary CleanupProgram (the “Voluntary Cleanup Program”) to obtain regulatory approval forclosure of this site and a release from liability to the State of Texas forsubsequent landowners and lenders. We have notified adjacent property ownersaffected by the contamination of our participation in the Voluntary CleanupProgram. On May 20, 2004, we received a demand from the owner of severaladjacent lots for damages in the amount of $1.3 million, as well asseeking an indemnity for the contamination and a promise to remediate thecontamination. On March 14, 2006, the adjacent property ownerfiled suit in Probate Court No. 1, Travis County, Texas (*Anna B. Miller, Individually and as Executrix of the Estate of RobertL. Miller, et al. vs. Austron, Inc., et al.)*, seeking damages. Wehave not yet been served in this matter. We are continuing to work onthe remediation of the formerly leased site as well as the adjacentproperties and intend to defend this lawsuit vigorously. As of June 30, 2006, we had an accrualof $0.6 million for remediation costs, appraisal fees and other ongoingmonitoring costs.

We are also a party tocertain other claims in the normal course of our operations. While the resultsof these claims cannot be predicted with any certainty, we believe that thefinal outcome of these matters will not have a material adverse effect on ourfinancial position and results of operations.

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**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

Not applicable.

**Executive Officersof Symmetricom**

Followingis a list of our executive officers as of June 30, 2006 and briefsummaries of their business experience. All officers, including executiveofficers, are appointed annually by the Board of Directors at its meetingfollowing the annual meeting of stockholders. We are not aware of any officerwho was appointed to the office pursuant to any arrangement or understandingwith another person.

| **Name**         | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                                                                 | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|---------|------------|----------------------------------------------------------------------------------------------|------------|------------|------------|
| Thomas W. Steipp |       |       | 56         |    |       | Chief  Executive Officer                                                                     |       |
| William Slater   |       |       | 54         |    |       | Executive  Vice President Finance and Administration, Chief  Financial Officer and Secretary |       |
| Bruce Bromage    |       |       | 52         |    |       | Executive  Vice President and General Manager TT&M Division                              |       |
| Nancy Shemwell   |       |       | 50         |    |       | Executive Vice President  Global Sales & Support                                    |       |

 

*Mr. Steipp*has served as Chief Executive Officer of Symmetricom since December 1998. Mr. Steippserved as Chief Executive Officer and Chief Financial Officer of Symmetricomfrom December 1998 to October 1999. Mr. Steipp served asPresident and Chief Operating Officer, Telecom Solutions, a division ofSymmetricom, from March 1998 to December 1998. Prior to joiningSymmetricom, from February 1996 to February 1998, Mr. Steippserved as Vice President and General Manager of Broadband Data Networks, adivision of Scientific-Atlanta.

*Mr. Slater*has served as Executive Vice President Finance and Administration, ChiefFinancial Officer and Secretary of Symmetricom since July 2006. Mr. Slaterserved as Chief Financial Officer and Secretary of Symmetricom from August 2000to June 2006. From September 1991 to December 1999, Mr. Slaterserved as Executive Vice President and Chief Financial Officer of ComputerCurriculum Corporation, an educational software company that was a division ofViacom. Mr. Slater was V.P of Financial Planning at Simon &Schuster from December 1985 though September 1991. Prior to that Mr. Slaterwas Controller of Revlon’s Professional Products Group. Mr. Slater workedfor the public accounting firm of Touche Ross (predecessor to Deloitte &Touche) prior to joining Revlon.

*Dr. Bromage*has served as Executive Vice President and General Manager of the Timing, Testand Measurement Division since April 2004. Dr. Bromage joinedSymmetricom in April 2002 and served as Vice President, Strategic Planningand Alliances from April 2002 to April 2004. Prior to joiningSymmetricom, from February 2000 to April 2002, Dr. Bromage heldsenior management positions with two startup companies. From August 1993to February 2000, Dr. Bromage held senior marketing and generalmanagement positions with Hewlett Packard.

*Ms. Shemwell*joined Symmetricom in October 2004 as Sr. VP Global Sales &Support and in July 2006 became Executive Vice President Global Sales &Support. Ms. Shemwell has held a variety of senior positions with globalbusiness responsibilities including assignments in Europe and North America.Her experience covers a broad spectrum of general management, sales, andmarketing roles in rapidly developing markets. Previous positions include thatof President and CEO of Jovial Test Equipment, a sixteen year career withNortel Networks where she held titles of President, Micom CommunicationsCorporation (a Nortel subsidiary), Vice President Business Segments, VicePresident Sales and Marketing Wiltel (Nortel’s largest enterprisedistributor) and Director Marketing for Europe, Middle East and Africa.

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**PART II**

**Item 5.**                        *Market for the Registrant’s Common Stock, Related Stockholder Mattersand Issuer Purchases ofEquity Securities*

Our common stock is traded on the Nasdaq Stock MarketLLC, under the symbol “SYMM”. We had approximately 1,108 stockholders of recordas of August 31, 2006.

Thefollowing table sets forth the high and low per share sale prices reported onthe Nasdaq Stock Market LLC for our common stock for the periods indicated.

| ** **                     | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| Year ended June 30,  2005 |       |     |       |    |       |
| First Quarter                  |       | $        | 9.69       |    | $          | 6.39 |   |
| Second Quarter                 |       | 11.34    |       | 8.35    |       |
| Third Quarter                  |       | 11.33    |       | 8.22    |       |
| Fourth Quarter                 |       | 11.70    |       | 9.19    |       |
| Year ended  June 30, 2006 |       |     |       |    |       |
| First Quarter                  |       | 11.04    |       | 7.29    |       |
| Second Quarter                 |       | 8.98     |       | 6.56    |       |
| Third Quarter                  |       | 10.11    |       | 8.04    |       |
| Fourth Quarter                 |       | 8.45     |       | 6.99    |       |
|                                |            |          |            |         |            |  |  |

 

Symmetricom has never declared nor paid cash dividendson its capital stock and does not anticipate paying any cash dividends in theforeseeable future.

The information requiredby this item regarding equity compensation plans is incorporated by referenceto the information in Item 12 of this Form 10-K.

*Stock RepurchaseProgram*

On August 11, 2005, the Board of Directorsauthorized management to repurchase up to approximately 2.6 million sharespursuant to a repurchase program established in fiscal 2002, adding 2.0 millionshares to the program previously authorized, of which approximately 0.6 millionshares remained available for repurchase as of June 30, 2005. As of June 30,2006, approximately 1.4 million shares remained eligible for repurchase. Therewere approximately 45.7 million shares of Symmetricom common stock outstandingas of June 30, 2006.

During fiscal 2006, we repurchased 1,172,349 sharesfor an aggregate price of approximately $9.7 million. Upon termination ofsome employees, 35,500 shares of restricted stock were forfeited pursuant toexisting agreements.

Thefollowing table provides monthly detail of our share repurchases and forfeituresduring the fourth quarter of fiscal 2006:

| ** **                                    | ** ** | **Total**          | ** ** | ** **          | ** ** | **Total**          | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** | **Number of** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Shares**         | ** ** |
| **Period**                                    | ** ** | ** **         | ** ** | **Purchased**       | ** ** | **per Share** | ** ** | **Forfeited** | ** ** |
| May 1, 2006  through May 31, 2006   |       |               | 173,276    |                |       |               | 7.50       |   |   |   |   |   |   |
| June 1, 2006  through June 30, 2006 |       |               | 88,500     |                |       |               | 7.45       |   |   |   | 17,500 |   |   |
|                                          |       |               | 261,776    |                |       |               | $          | 7.48 |   |   |   | 17,500 |   |   |
|                                               |            |                    |            |                     |            |                    |            |  |  |  |  |  |  |  |  |  |

 

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During fiscal 2005, werepurchased 186,400 shares for an aggregate price of approximately $1.8 million.Upon termination of employees, 19,009 shares of restricted stock were forfeitedpursuant to existing agreements. The Company did not repurchase any sharesduring fiscal 2004.

**Item 6.**                        *Selected Financial Data*

Thefollowing selected consolidated financial data should be read together with theconsolidated financial statements and related notes and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”appearing elsewhere in this Form 10-K.

| ** **                                                      | ** ** | **Year ended June 30,**                                | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net revenue                                                     |       | $                                                                     | 188,211    |   | $ | 189,147 |   | $ | 172,847 |   | $ | 132,049 |   | $ | 72,643 |   |
| Operating income  (loss)                                        |       | (1,526                                                                | )          | 19,190 |   | (4,096 | ) | (46,047 | ) | (11,141 | ) |
| Income (loss)  before income taxes                              |       | 969                                                                   |       | 20,298 |   | (4,373 | ) | (46,500 | ) | (8,973 | ) |
| Income (loss)  from continuing operations                       |       | 819                                                                   |       | 17,754 |   | (2,250 | ) | (34,347 | ) | (5,695 | ) |
| Gain (loss) from  discontinued operations(1)                    |       | —                                                                |       | 162 |   | 13 |   | (14,970 | ) | 410 |   |
| Net earnings  (loss)                                            |       | 819                                                                   |       | 17,916 |   | (2,237 | ) | (49,317 | ) | (5,285 | ) |
| Basic earnings  (loss) per share from continuing operations     |       | 0.02                                                                  |       | 0.39 |   | (0.05 | ) | (0.96 | ) | (0.25 | ) |
| Basic earnings  (loss) per share from discontinued operations   |       | —                                                                |       | — |   | — |   | (0.42 | ) | 0.02 |   |
| Basic net  earnings (loss) per share                            |       | 0.02                                                                  |       | 0.39 |   | (0.05 | ) | (1.38 | ) | (0.23 | ) |
| Diluted earnings  (loss) per share from continuing operations   |       | 0.02                                                                  |       | 0.38 |   | (0.05 | ) | (0.96 | ) | (0.25 | ) |
| Diluted earnings  (loss) per share from discontinued operations |       | —                                                                |       | — |   | — |   | (0.42 | ) | 0.02 |   |
| Diluted net earnings  (loss) per share                          |       | 0.02                                                                  |       | 0.38 |   | (0.05 | ) | (1.38 | ) | (0.23 | ) |
|                                                                 |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                | ** ** | **June 30,**       | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Total assets              |       | $                       | 392,418    |   | $ | 392,171 |   | $ | 247,590 |   | $ | 233,890 |   | $ | 130,310 |   |
| Long-term  obligations    |       | 125,620                 |       | 126,967 |   | 8,827 |   | 10,057 |   | 6,574 |   |
| Stockholders’ equity |       | $                       | 224,561    |   | $ | 226,175 |   | $ | 196,484 |   | $ | 183,432 |   | $ | 104,189 |   |

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(1)   Reflectsamounts related to gains (losses) on discontinued operations. The Trusted TimeDivision was discontinued in fiscal 2003 and the Linfinity business was sold infiscal 1999. The gain in fiscal 2005, 2004 and the loss in fiscal 2003 are fromthe discontinued Trusted Time Division. The gain in fiscal 2002 represents arelease of funds from an escrow account that was established in connection withthe sale of the Linfinity business.

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**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussionand analysis of our financial condition and results of operations should beread together with the consolidated financial statements and related notesincluded elsewhere in this report.

**Overview**

Symmetricom is a leading supplier of synchronizationand timing products to industry, government, research centers and aerospacemarkets. We supply solutions for customers who demand reliable products andengineering expertise in a variety of applications, including networksynchronization, timing, testing, verification and/or the measurement of a timeand frequency-based signals. We design and/or manufacture rubidium clocks,crystal oscillators, cesium clocks and hydrogen maser clocks. Our productsinclude synchronization network elements, timing elements and businessbroadband access devices for wireline and wireless networks as well as theprovision of professional services. Our products play an essential role innetwork operations, bandwidth optimization, and quality of service of wireline,wireless and broadband communications networks, enabling our customers toincrease performance and efficiency in their communications infrastructures.

Symmetricom’s customers include worldwide publicnetwork providers, incumbent local exchange carriers (ILECs), public telephoneand telegraph companies (PTTs), competitive local exchange carriers (CLECs),other telephone companies, wireless service providers, cable televisionoperators, distributors and systems integrators and communications originalequipment manufacturers (OEMs). With the fiscal 2003 acquisition of TrueTimeand Datum, we broadened our customer base to include aerospace contractors,governments and research facilities.

On April 27, 2006, we announced plans for theclosure of the contract manufacturing work conducted at our Puerto Ricofacility. Symmetricom’s Telecom Solution Division revenues contain a SpecialtyManufacturing/Other segment that is related to this contract manufacturing work.We anticipate exiting this non-core business during fiscal 2007 andreallocating the majority of the related manufacturing resources to otheractivities. Revenues for this segment were $12.1 million, $9.8 million and $9.5million for fiscal 2006, 2005 and 2004, respectively. Gross profit was $2.4million, $1.6 million and $1.4 million for fiscal 2006, 2005 and 2004,respectively.

On August 1, 2005, we acquired AgilentTechnologies’ Frequency and Timing Standards product line. including the 5071Acesium primary frequency standard. This acquisition has enhanced Symmetricom’sposition in the area of cesium standards and Symmetricom’s leadership ingenerating high-precision frequency and timing references including rubidium,cesium and hydrogen masers. We acquired certain assets of Agilent Technologiesfor a cost of approximately $8.0 million which was accounted for as a purchase.In June 2003, we discontinued the operation of the Trusted Time Divisionand integrated the Broadband Network Division into the Telecom SolutionsDivision. The Trusted Time Division was acquired as part of the acquisition ofDatum in October 2002. The division has been accounted for as adiscontinued operation and, accordingly, the results of operations have beenexcluded from continuing operations in the consolidated statements ofoperations. Certain charges related to the discontinuance of this operation,including a non-cash impairment charge for goodwill and intangibles associatedwith this business, were taken in fiscal 2003.

On October 29, 2002,we completed our acquisition of Datum. Each share of Datum common stockoutstanding was converted into the right to receive 2.7609 shares ofSymmetricom common stock. The aggregate consideration was approximately 17.4million shares of our common stock. The acquisition of Datum qualified as atax-free reorganization within the meaning of Section 368(a) ofInternal Revenue code and was accounted for as a purchase.

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**Critical AccountingPolicies, Significant Judgments and Estimates**

Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States, which requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenueand expenses, and related disclosure at the date of our financial statements.On an on-going basis, management evaluates its estimates and judgments,including those related to allowances for doubtful accounts receivable,inventories, valuation of goodwill and intangible assets, excess and obsoleteinventory, future warranty costs, stock options, and valuation of deferred taxassets, income taxes, and stock options. Management bases its estimates andjudgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. TheCompany considers certain accounting policies related to revenue recognitionand allowance for doubtful accounts, reserve for warranty, inventory valuation,accounting for income taxes, valuation of investments and valuation of intangibleassets and goodwill to be critical policies due to the estimates and judgmentsinvolved in each.

*BusinessCombinations*

We allocate the purchase price of acquired companiesto the tangible and intangible assets acquired, liabilities assumed, as well asin-process research and development based on their estimated fair values. Weengage an independent third-party appraisal firm to assist us in determiningthe fair values of the assets acquired and the liabilities assumed. Suchvaluations require management to make significant estimations and assumptions,especially with respect to intangible assets.

Critical estimates invaluing certain intangible assets include but are not limited to: futureexpected cash flows from customer contracts, customer lists, distributionagreements, acquired developed technologies and patents; expected costs todevelop the in-process research and development into commercially viableproducts and estimating cash flows from the projects when completed; also thebrand awareness and the market position of the acquired products andassumptions about the period of time the brand will continue to be used in thecombined company’s product portfolio. Management’s estimates of fair value arebased upon assumptions believed to be reasonable, but which are inherentlyuncertain and unpredictable.

*Revenue Recognition*

Our standard arrangement for our domestic andinternational customers includes a signed purchase order or contract and noright of return of delivered products. Revenue from sales of product andsoftware licenses is recognized when: (1) we enter into a legally bindingarrangement with a customer; (2) we deliver the products; (3) customerpayment is deemed fixed or determinable and free of contingencies orsignificant uncertainties; and (4) collection is probable. Revenue frompost-sale customer support is deferred and recognized ratably over the term ofthe support contract. Revenue from consulting and training services isrecognized as the services are performed.

We assess collectibility based on the creditworthiness of the customer and past transaction history. We perform on-goingcredit evaluations of our customers and do not require collateral from ourcustomers. For some of our international customers, we require an irrevocableletter of credit to be issued by the customer before the purchase order isaccepted. If we determine that collection of the invoice is not reasonablyassured, we recognize the revenue at the time that collection becomesreasonably assured, which is generally upon the receipt of cash. We commonlyhave transactions that involve sales of both product and services to ourcustomers. Product revenue is generated from the sale of synchronization andtiming equipment with embedded software that is essential to productfunctionality. We account for these 

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transactions in accordancewith the rules applicable to software revenue recognition. Service revenueis recognized as the services are performed, provided collection of the relatedreceivable is probable. Our sales to distributors are made under agreementsallowing for returns or credits under certain circumstances. Accordingly, wedefer an amount of revenue equal to our estimate of returns from distributorsbased on a historical average of distributor returns. We record commissionexpense when orders are shipped, at which time the commission is both earnedand payable.

Revenue from contractsthat require development and manufacture in accordance with customerspecifications and have a lengthy development period may be categorized intotwo types: firm fixed price and cost-plus reimbursement. Revenue is recognizedunder the fixed price contracts using the percentage of completion method,(cost-to-cost basis) principally based upon the costs incurred relative to thetotal estimated costs atcompletion on the individual contracts. Any anticipated losses oncontracts are charged to operations as soon as they are determinable. Revenuerecognized under cost-plus contracts is recognized on the basis of direct andindirect costs incurred plus a negotiated profit calculated as a percentage ofcosts or as performance based award fee. Revenue from long-term contracts isreviewed periodically, with adjustments recorded in the period in which therevisions are made.

*Warranty*

Our standard warranty agreement is one year fromshipment. However, our warranty agreements are contract and component specificand can range to twenty years for selected components. We offer extendedwarranty contracts on products that are less than eight years old. The extendedwarranty contract is applicable for a maximum of nine years after theexpiration of the standard one-year warranty. The income from extended warrantycontracts is recognized ratably over the period of contract.

We accrue for anticipatedwarranty costs upon shipment. Our warranty reserve is based on the number ofinstalled units, historical analysis of the volume of product returned to usunder the warranty program, management’s judgment regarding anticipated ratesof warranty claims and associated repair costs. We use the historical data toforecast our anticipated future warranty obligations. This analysis is updatedon a quarterly basis.

*Allowance forDoubtful Accounts*

We maintain an allowancefor doubtful accounts based on a continuous review of customer accounts,payment patterns and specific collection issues. Where specific collectionissues are identified, we record a specific allowance based on the amount thatwe believe will be uncollected. For accounts where specific collection issuesare not identified, we record a reserve based on the age of the receivable andhistorical collection patterns.

*Inventory Valuation*

Inventories are valued atthe lower of cost or market, cost being determined on a first-in, first-outbasis. We assess the valuation of all inventories, including raw materials,work-in-process, finished goods and spare parts on a periodic basis. Obsoleteinventory or inventory in excess of management’s estimated usage iswritten-down to its estimated market value less costs to sell, if less than itscost. Inherent in the estimates of market value are management’s estimatesrelated to current economic trends, future demand, and technologicalobsolescence. If actual market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required. Ifthe inventory value is written down to its net realizable value, andsubsequently there is an increased demand for the inventory at a higher value,the increased value of the inventory is not realized until the inventory issold. During fiscal 2006, 2005 and 2004, we charged $1.7 million, $0.9 millionand $0.9 million, respectively to cost of goods sold to write down excess andobsolete inventory.

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*Accounting forIncome Taxes*

We provide for income taxes using the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to realized. The effect on deferredtax assets and liabilities from a change in tax rates is recognized in thefinancial statements in the period that includes the enactment date.

We operate a subsidiary in Puerto Rico under a grantproviding for partial exemption from Puerto Rico taxes through fiscal 2016. Inaddition, this subsidiary was taxed under Section 936 of the U.S. InternalRevenue Code, which exempted qualified Puerto Rico source earnings, subject tovarious limitations, from regular federal income taxes through fiscal 2006.Taxes have been calculated on this subsidiary’s earnings, all of which weintend to remit to the U.S. Section 936 expired as of the end of fiscal2006.

In July 2006, the Puerto Rico subsidiary,formerly enjoying the benefits of Section 936, moved its place of legalorganization from Delaware to Bermuda in a tax-free reorganization. Consistentwith a resolution by the Symmetricom, Inc. board of directors, thissubsidiary has elected to indefinitely reinvest its future earnings outside theUnited States. Under the applicable accounting rules, future earnings of thissubsidiary will not be subject to U.S. taxes, as its future earnings will notbe repatriated back to Symmetricom, Inc. We estimate that the fiscal 2007effective tax rate will be approximately 32%, based on management’s estimate ofpretax income and the split of income between U.S. and foreign jurisdictions.

The carrying value of ournet deferred tax assets, which are made up of tax deductions, net operatingloss carryforwards and tax credits, assumes that we will be able to generatesufficient future income to fully realize these assets. We evaluate the weightof all available evidence in determining whether it is more likely than notthat some portion of the deferred tax assets will not be realized. If we do notgenerate sufficient future income, the realization of these deferred tax assetsmay be impaired, resulting in an additional income tax expense. A portion ofour tax credits is related to stock options and has a valuation allowancebecause of uncertainty regarding their realization. If these tax credits arerealized, the benefit will be credited to common stock.

*Valuation ofInvestments*

We did not carry any investments in public or privatecompanies during fiscal 2005 and 2006.

During fiscal 2003, weconcluded that the decline in value of our investment in the common stock ofSarantel Ltd., a privately held company, was other than temporary.We recorded $0.2 million as a loss on equity investment. On March 3,2005, Sarantel went public in the United Kingdom and began trading on the AIMmarket of the London Stock Exchange under the symbol SLG. Subsequently, theCompany sold the stock of Sarantel Ltd. and recorded a gain of $0.4 million onthe investment in June 2005.

*Valuation ofGoodwill*

In the third quarter of the fiscal year 2006, werecorded a non-cash impairment charge of $7.0 million for the write-down of thegoodwill entirely related to our Wireless/OEM business segment purchased inconnection with the Datum acquisition in October 2002.

We perform goodwillimpairment tests in accordance with Statement of Financial Accounting Standard(SFAS) No. 142,*Goodwill and Other Intangible Assets*, on an annual basis,and between annual tests in certain circumstances for each reporting unit. Duringthe third quarter of fiscal 2006, we decided to perform a goodwill impairmenttest on the Wireless/OEM business segment since the product pricing pressuresand gross margin pressures discussed in prior quarters continued to decline inthe third quarter 

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offiscal 2006 and we did not anticipate any improvement. Potential goodwillimpairment is measured based upon a two-step process. In the first step, wecompare the fair value of a reporting unit with its carrying amount usingdiscounted cash flow valuation method, including goodwill. If the fair value ofa reporting unit exceeds its carrying amount, goodwill of the reporting unit isconsidered not impaired, thus the second step of the impairment test isunnecessary. If the carrying amount of a reporting unit exceeds its fair value,the second step of the goodwill impairment test is performed to measure theamount of impairment loss, if any. In fiscal 2005 and 2004, no impairmentlosses were recorded based on these evaluations.

*Valuation of Long-LivedAssets Including Intangible Assets Subject to Amortization*

Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of such assets may not be recoverable. Intangibleassets primarily include purchased technology and trademarks. We review ourintangible assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” Factors we consider importantthat could trigger an impairment review include significant under-performancerelative to historical or projected future operating results, significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business, or significant negative industry or economic trends. If thesecriteria indicate that the value of the intangible asset may be impaired, anevaluation of the recoverability of the net carrying value of the asset overits remaining useful life is made. If this evaluation indicates that theintangible asset is not recoverable, the net carrying value of the relatedintangible asset will be reduced to fair value. Any such impairment chargecould be significant and could have a material adverse effect on our financialstatements if and when an impairment charge is recorded. If an impairmentcharge were recognized, the amortization related to intangible assets woulddecrease during the remainder of the life of the asset. In the third quarter ofthe fiscal 2006, we recorded a non-cash impairment charge of $1.2 million forthe write-down of the other intangibles entirely related to our wirelessbusiness segment purchase in connection with the Datum acquisition in October 2002.In fiscal 2005 and 2004, no impairment losses were recorded based on thisevaluation.

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**Results of Operations**

Thefollowing table presents the percentage of total revenue for the respectiveline items in our consolidated statement of operations:

| ** **                                     | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenue                                    |       |                                   |       |   |   |   |   |
| Telecom Solutions  Division:                   |       |                                   |       |   |   |   |   |
| Wireline Products                              |       | 42.8                                   | %          | 43.9 | % | 41.3 | % |
| Wireless/OEM Products                          |       | 12.7                                   | %          | 14.7 | % | 20.0 | % |
| Global Services                                |       | 6.7                                    | %          | 5.1 | % | 4.8 | % |
| Specialty Manufacturing/Other                  |       | 6.4                                    | %          | 5.2 | % | 5.5 | % |
| Timing, Test and Measurement Division          |       | 31.4                                   | %          | 31.1 | % | 28.4 | % |
| Total net revenue                              |       | 100.0                                  | %          | 100.0 | % | 100.0 | % |
| Cost of products and services                  |       | 53.2                                   | %          | 51.1 | % | 58.7 | % |
| Amortization of  purchased technology          |       | 1.9                                    | %          | 2.1 | % | 2.3 | % |
| Impairment of  intangibles                     |       | 0.6                                    | %          | — | % | — | % |
| Integration and  restructuring charges         |       | 0.6                                    | %          | — | % | 3.4 | % |
| Gross profit                                   |       | 43.6                                   | %          | 46.8 | % | 35.7 | % |
| Operating  expenses:                           |       |                                   |       |   |   |   |   |
| Research and development                       |       | 10.0                                   | %          | 8.6 | % | 9.7 | % |
| Selling, general and administrative            |       | 30.4                                   | %          | 27.7 | % | 26.5 | % |
| Amortization of intangibles                    |       | 0.3                                    | %          | 0.3 | % | 0.5 | % |
| Integration and restructuring charges          |       | —                                 | %          | — | % | 1.3 | % |
| Impairment of goodwill                         |       | 3.7                                    | %          | — | % | — | % |
| Operating income (loss)                        |       | (0.8                                   | )%         | 10.1 | % | (2.4 | )% |
| Gain on equity  investments, net               |       | —                                 | %          | 0.2 | % | — | % |
| Interest income                                |       | 4.0                                    | %          | 0.8 | % | 0.2 | % |
| Interest expense                               |       | (2.6                                   | )%         | (0.4 | )% | (0.3 | )% |
| Income (loss) before income taxes              |       | 0.5                                    | %          | 10.7 | % | (2.5 | )% |
| Income tax  provision (benefit)                |       | 0.1                                    | %          | 1.3 | % | (1.2 | )% |
| Income (loss) from continuing operations       |       | 0.4                                    | %          | 9.4 | % | (1.3 | )% |
| Gain from  discontinued operations, net of tax |       | —                                 | %          | 0.1 | % | — | % |
| Net Income (loss)                              |       | 0.4                                    | %          | 9.5 | % | (1.3 | )% |

 

**Fiscal Years EndedJune 30, 2006 and 2005**

*Net revenue*

| ** **                            | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Net Revenue *(in thousands)*:         |       |                |       |           |       |   |   |   |   |
| Wireline Products                     |       | $                   | 80,635     |           | $          | 83,129 |   |   | (3.0 | )% |   |
| Wireless/OEM Products                 |       | 23,893              |       | 27,723         |       |   | (13.8 | ) |   |
| Global Services                       |       | 12,539              |       | 9,712          |       |   | 29.1 |   |   |
| Specialty Manufacturing/Other         |       | 12,100              |       | 9,759          |       |   | 24.0 |   |   |
| Timing, Test and Measurement Division |       | 59,044              |       | 58,824         |       |   | 0.4 |   |   |
| Total Net Revenue                     |       | $                   | 188,211    |           | $          | 189,147 |   |   | (0.5 | )% |   |
| Percentage of  Revenue                |       | 100.0               | %          | 100.0          | %          |   |   |   |   |

 

32

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Net revenue consists ofsales of products, software licenses and services sales. Net revenue decreasedby $0.9 million or 0.5% to $188.2 million in fiscal 2006 from $189.1 million infiscal 2005. The decrease in net revenue was attributable to the Wirelineproducts decrease of $2.5 million or 3.0% (primarily due to large initialorders from a customer in fiscal 2005 not repeated in fiscal 2006) and theWireless/OEM products decrease of $3.8 million or 13.8% (due to a product shifttoward lower priced, lower performance quartz-based products from higherperformance, lower maintenance rubidium-based solutions, continued overallpricing pressure and implementation of non-CDMA base stations that derivetiming from a central office). These revenue decreases were partially offset bya $2.8 million or 29.1% increase in the Global Services segment (primarily dueto an increase in total solution sales to customers), the SpecialtyManufacturing/Other segment increase of $2.3 million or 24.0% (due to anincrease for a major customer to transition future production to anothermanufacturer in fiscal 2007), and a $0.2 million or 0.4% increase in theTiming, Test and Measurement segment (due primarily to the acquisition of theAgilent’s cesium products partially offset by decline in other products).

*Cost of products and services*

| ** **                                       | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                       | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Cost of Products and  Services*(in  thousands)*: | ** ** | ** **          | ** ** | ** **     |       |   |   | ** ** |   |
| Wireline Products                                |       | $                   | 35,427     |           | $          | 35,848 |   |   | (1.2 | )% |   |
| Wireless/OEM Products                            |       | 18,441              |       | 19,621         |       |   | (6.0 | ) |   |
| Global Services                                  |       | 6,205               |       | 5,547          |       |   | 11.9 |   |   |
| Specialty Manufacturing/Other                    |       | 9,726               |       | 8,115          |       |   | 19.9 |   |   |
| Timing, Test and Measurement Division            |       | 30,354              |       | 27,589         |       |   | 10.0 |   |   |
| Other cost of sales                              |       | 5,975               |       | 3,899          |       |   | 53.2 |   |   |
| Total Cost                                       |       | $                   | 106,128    |           | $          | 100,619 |   |   | 5.5 | % |   |
| Percentage of  Revenue                           |       | 56.4                | %          | 53.2           | %          |   |   |   |   |

 

The cost of products and services, including othercost of sales, increased by $5.5 million or 5.5% during fiscal 2006 comparedwith fiscal 2005. The cost of products and services for Wireline productsdecreased by $0.4 million or 1.2%, which was fairly consistent with the revenuedecrease of 3.0%. The cost of products and services for Wireless/OEM productsdecreased by $1.2 million or 6.0%, which was lower than the revenue decrease of13.8% due to increased costs and lower selling prices. The cost of products andservices for Global Services products increased by $0.7 million or 11.9%, whichwas lower than the revenue increase of 29.1%, due to favorable sales mix ofhigher revenue in the lower cost services. The cost of products and servicesfor Specialty Manufacturing/Other products increased by $1.6 million or 19.9%,due to higher sales volume and was consistent with the revenue increase of24.0%. The cost of products and services for Timing, Test and Measurementproducts increased by $2.8 million or 10.0% due to increased sales volume, butwas higher than the revenue increase of 0.4% due to higher period cost.

Other cost of sales increased by $2.1 million or53.2%, due to that in fiscal 2006, we recorded a non-cash impairment charge of$1.2 million for the write-down of the other intangibles principally related toour Wireless/OEM business segment purchased in connection with the Datumacquisition in October 2002. For fiscal 2005, there were no correspondingcharges for this non-cash item. In addition, during fiscal 2006, there were$1.2 million in integration charges related to the acquisition of AgilentTechnologies’ Frequency and Timing Standards product line. There were nointegration expenses in fiscal 2005.

Per the adoption of SFAS No. 123(R),the cost of products and services included $0.6 million for stock-basedcompensation expense in fiscal 2006.

33

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*Gross Profit*

| ** **                            | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Gross Profit*(in thousands)*:         |       |                |       |           |       |   |   |   |   |
| Wireline Products                     |       | $                   | 45,208     |           | $          | 47,281 |   |   | (4.4 | )% |   |
| Wireless/OEM Products                 |       | 5,452               |       | 8,102          |       |   | (32.7 | ) |   |
| Global Services                       |       | 6,334               |       | 4,165          |       |   | 52.1 |   |   |
| Specialty Manufacturing/Other         |       | 2,374               |       | 1,644          |       |   | 44.4 |   |   |
| Timing, Test and Measurement Division |       | 28,690              |       | 31,235         |       |   | (8.1 | ) |   |
| Other cost of sales                   |       | (5,975              | )          | (3,899         | )          |   | 53.2 |   |   |
| Total Gross Profit                    |       | $                   | 82,083     |           | $          | 88,528 |   |   | (7.3 | )% |   |
| Percentage of  Revenue                |       | 43.6                | %          | 46.8           | %          |   |   |   |   |

 

In fiscal 2006, gross profit, excluding other cost ofsales, decreased $4.4 million, or 4.7%, compared to fiscal 2005. This decreasein total gross profit was greater than the revenue decrease of 0.5%. Grossprofit for the Wireline products decreased by $2.1 million or 4.4%, which wasfairly consistent with the 3.0% revenue decrease for the same period. Grossprofit for the Wireless/OEM products decreased by $2.7 million or 32.7%,which was higher than the revenue decrease of 13.8% due to lower selling pricesand increased sales of lower margin products. Gross profit for Global Servicesincreased by $2.2 million or 52.1%, which was higher than the 29.1% revenueincrease for the same period due to increased sales of lower cost services.Gross profit for the Specialty Manufacturing/Other products increased by $0.7million or 44.4%, which was higher than the revenue increase of 24.0% for thesame period due to lower manufacturing costs as a result of higher volume.Gross profit for the Timing, Test and Measurement products decreased by $2.5million or 8.1%, which was lower than the revenue increase of 0.4% for the sameperiod due primarily to the addition of the higher cost cesium product acquiredfrom Agilent Technologies in August 2005.

Other cost of sales forthe fiscal 2006 increased $2.1 million in comparison to fiscal 2005 primarilydue to the $1.2 million impairment charge for the write down of otherintangibles principally related to our Wireless/OEM business segment and theacquisition of Agilent Technologies’ Frequency and Timing Standards productline, which includes costs associated with integration and restructuring andadditional intangibles. In addition, during fiscal 2006, there were $1.2million in integration and restructuring charges related to the acquisition ofAgilent Technologies’ Frequency and Timing Standards product line. There wereno integration expenses in fiscal 2005.

*Operating Expense*

*Research and development*

| ** **                                        | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                        | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                        | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Research and  development expense*(in thousands)* |       | $                   | 18,836     |           | $          | 16,286 |   |   | 15.7 | % |   |
| Percentage of  Revenue                            |       | 10.0                | %          | 8.6            | %          |   |   |   |   |
|                                                   |            |                     |            |                |            |  |  |  |  |  |  |

 

Research and developmentexpenses consist primarily of salaries and benefits, prototype expenses andfees paid to outside consultants. Research and development expenses were $18.8million during fiscal 2006 compared to $16.3 million for fiscal 2005. Theoverall increase in the research and development expense was primarilyattributable to $0.5 million in stock-based compensation, salary increases, andincreased spending in new R&D projects to comply with new EU regulation,RoHS (restriction of the use of certain hazardous substances in electrical andelectronic equipment). This regulation bans the placing in the EU 

34

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marketof new electrical and electronic equipment containing more than certain levelsof lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB)and polybrominated diphenyl ether (PBDE) flame retardants beginning on July 1,2006.

*Selling, general and administrative includingamortization of intangibles*

| ** **                                                                                 | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                                                 | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                                                 | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Selling, general  and administrative including amortization of intangibles*(in thousands)* |       | $                   | 57,810     |           | $          | 53,052 |   |   | 9.0 | % |   |
| Percentage of  Revenue                                                                     |       | 30.7                | %          | 28.0           | %          |   |   |   |   |
|                                                                                            |            |                     |            |                |            |  |  |  |  |  |  |

 

Selling, general andadministrative expense, including the amortization of intangibles, consistsprimarily of salaries, benefits, sales commissions and travel-related expensesfor our sales and services, finance, human resources, information technologyand related facility costs and part of the amortization expenses of ourintangible assets. These expenses increased by 9.0% to $57.8 million for fiscal2006 compared to $53.1 million for the corresponding period of fiscal 2005.This $4.8 million increase in selling, general and administrative expenses wasattributable primarily to an increase in stock-based compensation of $3.6million and annual merit increases.

*Integration andrestructuring charges*

During fiscal 2006 and2005, we did not incur any integration and restructuring charges for theoperating expenses.

*Impairment of goodwill*

| ** **                               | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                               | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                               | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Impairment of  goodwill*(in  thousands)* |       | 6,963               |       |           | $          | — |   |   |   | 100.0 | % |   |
| Percentage of  Revenue                   |       | 3.7                 | %          |           | —     | % |   |   |   |   |   |

 

In the third quarter ofthe fiscal 2006, we recorded a non-cash impairment charge of $7.0 million forthe write-down of goodwill principally related to our wireless business segmentpurchased in connection with the Datum acquisition in October 2002. Forthe fiscal year ended June 30, 2005, there were no charges associated withgoodwill.

*Gain on sale of equity investments*

| ** **                                  | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                  | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                  | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Gain on equity  investments*(in thousands)* |       |                | $          | —         |       |   | $ | 389 |   |   | (100.0 | )% |   |
| Percentage of  Revenue                      |       |                | —     | %              |       | 0.2 | % |   |   |   |   |
|                                             |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

In fiscal 2006, we did notrealize any gains or losses on equity investments. During fiscal 2005, werecorded a gain of $0.4 million from the sale of our investment in SarantelLtd., which was expensed in fiscal 2003 as fully impaired.

35

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*Interest income*

| ** **                      | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|---------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                      | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Interest income*(in thousands)* |       | $                   | 7,478      |           | $          | 1,533 |   |   | 387.8 | % |   |
| Percentage of  Revenue          |       | 4.0                 | %          | 0.8            | %          |   |   |   |   |
|                                 |            |                     |            |                |            |  |  |  |  |  |  |

 

Interest income increasedto $7.5 million in fiscal 2006 compared to $1.5 million in fiscal 2005 due tohigher cash investments balance attributable to the proceeds received from theconvertible notes issued in June 2005 and higher average interest rates.

*Interest expense*

| ** **                       | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|----------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                       | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Interest expense*(in thousands)* |       | $                   | (4,983     | )              | $          | (814 | ) |   | 512.2 | % |   |
| Percentage of  Revenue           |       | (2.6                | )%         | (0.4           | )%         |   |   |   |   |
|                                  |            |                     |            |                |            |  |  |  |  |  |  |

 

Interest expense consistsprimarily of interest on our capital lease for our headquarters building inSan Jose, California and interest for our convertible note. Interestexpense increased 512.2% to $5.0 million in fiscal 2006 from $0.8 millionin fiscal 2005 due primarily to interest expense on the convertible notes,which started accruing at 3.25% on June 15, 2005.

*Income tax provision (benefit)*

| ** **                             | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Income tax  provision*(in  thousands)* |       | $                   | 150        |           | $          | 2,544 |   |   | (94.1 | )% |   |
| Percentage of Revenue                  |       | 0.1                 | %          | 1.3            | %          |   |   |   |   |
|                                        |            |                     |            |                |            |  |  |  |  |  |  |

 

Our income tax provisionwas $150,000 (effective tax provision rate of 15.5%) in fiscal 2006 compared toan income tax provision $2.5 million (effective tax provision rate of 12.5%) infiscal 2005. The effective tax rate fluctuated significantly in fiscal2006 as a result of the write-off of goodwill for $7.0 million, sincea substantial portion of the goodwill write-off was not deductible for taxreporting purposes. The increase in tax rate from the write-off of goodwill wasoffset by our Puerto Rico earnings, since a substantial percentage of ourPuerto Rico earnings were taxed under Section 936 of the U.S. InternalRevenue Code, which exempts qualified Puerto Rico earnings from regular federalincome taxes. Section 936 expired at the end of fiscal 2006.

*Gain from discontinued operations, net of tax*

| ** **                                                     | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                                     | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                                                     | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Gain from  discontinued operations, net of tax*(in thousands)* |       |                | $          | —         |       |   | $ | 162 |   |   | (100.0 | )% |   |
| Percentage of  Revenue                                         |       |                | —     | %              |       | 0.1 | % |   |   |   |   |
|                                                                |            |                     |            |                |            |  |  |  |  |  |  |  |  |

 

During fiscal 2006 therewas no gain or loss recorded for discontinued operations. During fiscal 2005,we recorded a gain of $162,000 from our discontinued operations, which wasattributable to the final payment arising from the sale of software. In June 2003,we discontinued the operation of the Trusted 

36

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TimeDivision as part of our post-acquisition consolidation process. The divisionwas acquired as part of the acquisition of Datum in October 2002. Thedivision has been accounted for as a discontinued operation and, accordingly,the results of operations have been excluded from continuing operations in theconsolidated statements of operations.

*Net Income*

| ** **                 | ** ** | **Year ended** | ** ** | ** **     | ** ** |
|----------------------------|------------|---------------------|------------|----------------|------------|
| ** **                 | ** ** | **June 30,**   | ** ** | **Percentage** | ** ** |
| ** **                 | ** ** | **2006**            | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Net income*(in thousands)* |       | $                   | 819        |           | $          | 17,916 |   |   | (95.4 | )% |   |
| Percentage of  Revenue     |       | 0.4                 | %          | 9.5            | %          |   |   |   |   |
|                            |            |                     |            |                |            |  |  |  |  |  |  |

 

As a result of the factorsabove, net income was $0.8 million, or $0.02 per basic and diluted share, infiscal 2006 compared to a net income of $17.9 million, or $0.39 per basic and$0.38 diluted share, in fiscal 2005.

**Fiscal Years EndedJune 30, 2005 and 2004**

*Net revenue*

| ** **                            | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                            | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Net Revenue *(in thousands):*         | ** ** | ** **                         | ** ** | ** **     |       |   |   |   |   |
| Wireline Products                     |       | $                                  | 83,129     |           | $          | 71,467 |   |   | 16.3 | % |   |
| Wireless/OEM Products                 |       | 27,723                             |       | 34,617         |       |   | (19.9 | ) |   |
| Global Services                       |       | 9,712                              |       | 8,315          |       |   | 16.8 |   |   |
| Specialty Manufacturing/Other         |       | 9,759                              |       | 9,537          |       |   | 2.3 |   |   |
| Timing, Test and Measurement Division |       | 58,824                             |       | 48,911         |       |   | 20.3 |   |   |
| Total Net Revenue                     |       | $                                  | 189,147    |           | $          | 172,847 |   |   | 9.4 | % |   |
| Percentage of  Revenue                |       | 100.0                              | %          | 100.0          | %          |   |   |   |   |

 

Net revenue increased 9.4%to $189.1 million in fiscal 2005 from $172.8 million in fiscal 2004. The increasein net revenue was attributable to the Wireline Products segment increase of$11.7 million, or 16.3%, which was due primarily to major customers upgradingtheir networks and growth in international business including a $2.3 millionproject in Costa Rica. The Timing, Test and Measurement segment increased $9.9million, or 20.3%, as military-related purchases of our timing and frequencysolutions for mobile communication applications drove a significant portion ofthe sales growth. The Global Services segment revenue increased$1.4 million, or 16.8%, primarily due to product sales volume increase.The Specialty Manufacturing/Other segment increased of $0.2 million, or 2.3%,due to overall increases in the electronics industry. These revenue increaseswere partially offset by a $6.9 million, or 19.9%, reduction in Wireless/OEMsegment revenue due to reported softness in the wireless industry and a productshift toward lower priced, lower performance quartz-based products from higherperformance, lower maintenance rubidium-based solutions.

37

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*Cost of product and services*

| ** **                                         | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                         | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Cost of Products and  Services *(in thousands)**:* | ** ** | ** **                         | ** ** | ** **     |       |   |   |   |   |
| Wireline Products                                  |       | $                                  | 35,848     |           | $          | 37,084 |   |   | (3.3 | )% |   |
| Wireless/OEM Products                              |       | 19,621                             |       | 25,781         |       |   | (23.9 | ) |   |
| Global Services                                    |       | 5,547                              |       | 4,832          |       |   | 14.8 |   |   |
| Specialty Manufacturing/Other                      |       | 8,115                              |       | 8,168          |       |   | (0.6 | ) |   |
| Timing, Test and Measurement Division              |       | 27,589                             |       | 25,545         |       |   | 8.0 |   |   |
| Other cost of sales                                |       | 3,899                              |       | 9,773          |       |   | (60.1 | ) |   |
| Total Cost                                         |       | $                                  | 100,619    |           | $          | 111,183 |   |   | (9.5 | )% |   |
| Percentage of  Revenue                             |       | 53.2                               | %          | 64.3           | %          |   |   |   |   |

 

Cost of products and services, including other cost ofsales, decreased $10.6 million, or 9.5%, during the fiscal 2005 compared withfiscal 2004. Cost of products and services for Wireline products decreased $1.2million, or 3.3%, while Wireline products revenue increased 16.3%. Theimprovement in Wireline products cost was due to overhead volume savings,material cost reductions and favorable mix due to increased revenue on highermargin products. Cost of products and services for Wireless/OEM productsdecreased $6.2 million, or 23.9%, which is in line with the revenue decrease of19.9%. Cost of products and services for Global Services products increased$0.7 million, or 14.8%, which was lower than the revenue increase of 16.8%since the revenue increase was primarily higher margin services. Cost ofproducts and services for Specialty Manufacturing/Other products decreased$53,000, or 0.6%, which was in line with flat revenue increase of 2.3%. Cost ofproducts and services for Timing, Test and Measurement products increased $2.0million, or 8.0%, which was much lower than the revenue increase of 20.3%.

This improvement was due to overhead volume savings,material cost savings, and savings due to the elimination of higher startupmanufacturing costs at Beverly, Massachusetts after the shutdown of our Irvine,California facility.

Other cost of salesincludes amortization of purchased technology, which remained constant duringfiscal 2005 and 2004 at $3.9 million. In fiscal 2005, we had no charges forintegration and restructuring as compared to the $5.9 million charge in fiscal2004, which was primarily attributable to the closure of the Irvine, Californiamanufacturing facility and the move of production to Beverly, Massachusetts.

*Gross profit*

| ** **                            | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                            | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Gross Profit *(in thousands)**:*      | ** ** | ** **                         | ** ** | ** **     |       |   |   |   |   |
| Wireline Products                     |       | $                                  | 47,281     |           | $          | 34,383 |   |   | 37.5 | % |   |
| Wireless/OEM Products                 |       | 8,102                              |       | 8,836          |       |   | (8.3 | ) |   |
| Global Services                       |       | 4,165                              |       | 3,483          |       |   | 19.6 |   |   |
| Specialty Manufacturing/Other         |       | 1,644                              |       | 1,369          |       |   | 20.1 |   |   |
| Timing, Test and Measurement Division |       | 31,235                             |       | 23,366         |       |   | 33.7 |   |   |
| Other cost of sales                   |       | (3,899                             | )          | (9,773         | )          |   | (60.1 | ) |   |
| Total Gross Profit                    |       | $                                  | 88,528     |           | $          | 61,664 |   |   | 43.6 | % |   |
| Percentage of  Revenue                |       | 46.8                               | %          | 35.7           | %          |   |   |   |   |

 

38

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In fiscal 2005, grossprofit, excluding other cost of sales, increased $26.9 million, or 43.6%,compared to fiscal 2004. This increase was greater than the revenue increase of9.4%. Gross profit for the Wireline products increased $12.9 million, or 37.5%,which was higher than the 16.3% revenue increase for the same period due to theimprovements mentioned in the cost of product and services commentary. Grossprofit for the Wireless/OEM products decreased $0.7 million, or 8.3%, which waslower than the 19.9% revenue decline for the same period due primarily tothe 2004 shutdown of the Irvine, California manufacturing facility. Grossprofit for Global Services increased $0.7 million, or 19.6%, which was higherthan the 16.8% revenue increase for the same period due to an increase in salesof higher margin services. Gross profit for the Specialty Manufacturing/Otherproducts increased $0.3 million, or 20.1%, which was lower than the 2.3%revenue increase for the same period. Gross profit for the Timing, Test andMeasurement products increased $7.9 million, or 33.7%, which was higher thanthe 20.3% revenue increase for the same period due to the savings mentioned inthe cost of product and services commentary. In fiscal 2005, gross marginimproved $5.9 million for the other cost of sales due to the absence ofintegration and restructuring charges when compared to the same period of theprior year.

*Operating Expense*

*Research and development*

| ** **                                         | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                         | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Research and  development expense *(in thousands)* |       | $                                  | 16,286     |           | $          | 16,772 |   |   | (2.9 | )% |   |
| Percentage of  Revenue                             |       | 8.6                                | %          | 9.7            | %          |   |   |   |   |
|                                                    |            |                                    |            |                |            |  |  |  |  |  |  |

 

For fiscal 2005, researchand development expenses were $16.3 million compared to $16.8 million in fiscal2004. The decrease in the research and development expenses was primarily dueto the reduction in force of the research and development employees at theIrvine, California site that closed in December 2003.

*Selling, general and administrative includingamortization of intangibles*

| ** **                                                                                       | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                                                                       | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Selling, general  and administrative including amortization of intangibles *(in thousands)* |       | $                                  | 53,052     |           | $          | 46,663 |   |   | 13.7 | % |   |
| Percentage of  Revenue                                                                           |       | 28.0                               | %          | 27.0           | %          |   |   |   |   |
|                                                                                                  |            |                                    |            |                |            |  |  |  |  |  |  |

 

Selling, general andadministrative expense, including the amortization of intangibles, consistsprimarily of salaries, benefits, sales commissions and travel related expensesfor our sales and services, finance, human resources, information technologyand facilities departments and part of the amortization expenses of ourintangible assets. These expenses increased 13.7% to $53.1 million for fiscal2005 compared to $46.7 million for the fiscal 2004. This $6.4 million increasein selling, general and administrative expenses was attributable primarily tosalary increases for employees that become effective in July 2004, thehiring of three new senior sales and marketing executives, stock basedcompensation and external audit and internal testing costs associated withSarbanes-Oxley section 404 compliance.

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*Integration and restructuring charges*

| ** **                                              | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                              | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Integration and  restructuring charges *(in thousands)* |       |                               | $          | —         |       |   | $ | 2,325 |   |   | (100.0 | )% |   |
| Percentage of  Revenue                                  |       |                               | —     | %              |       | 1.3 | % |   |   |   |   |
|                                                         |            |                                    |            |                |            |  |  |  |  |  |  |  |  |

 

During fiscal 2005, we did not incur any integrationand restructuring charges.

In fiscal 2004, werecorded integration and restructuring charges of $2.3 million inacquisition-related costs and other restructuring expenses. Of these costs,$1.6 million is related to our facility restructuring in Irvine, California and$0.7 million is for land remediation accruals related to a former Datumfacility in Austin, Texas. See Note O of our notes to the consolidatedfinancial statements for further discussion of integration and restructuring charges.

*Impairment ofgoodwill*

We performed an annualgoodwill impairment test as of June 30, 2005 and June 30, 2004 anddetermined that goodwill was not impaired.

*Gain on sale of equity investments*

| ** **                                   | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                   | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Gain on equity  investments *(in thousands)* |       | $                                  | 389        |           |       | $ | — |   |   |   | 100.0 | % |   |
| Percentage of  Revenue                       |       | 0.2                                | %          |           | —     | % |   |   |   |   |   |
|                                              |            |                                    |            |                |            |  |  |  |  |  |  |  |  |

 

During fiscal 2005, werecorded a gain of $0.4 million from the sale of our investment in SarantelLtd., which was expensed in fiscal 2003 as fully impaired. In fiscal 2004, wedid not realize any gains or losses on equity investments.

*Interest income*

| ** **                       | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                       | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Interest income *(in thousands)* |       | $                                  | 1,533      |           | $          | 308 |   |   | 397.7 | % |   |
| Percentage of  Revenue           |       | 0.8                                | %          | 0.2            | %          |   |   |   |   |
|                                  |            |                                    |            |                |            |  |  |  |  |  |  |

 

Interest income increasedto $1.5 million in fiscal 2005 compared to $0.3 million in fiscal 2004 dueprimarily to higher interest rates and cash levels in fiscal 2005. It wasprimarily resulted from interest on the proceeds from sale of our $120 millionconvertible notes, which started accruing on June 15, 2005.

*Interest expense*

| ** **                        | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Interest expense *(in thousands)* |       | $                                  | (814       | )              | $          | (585 | ) |   | 39.1 | % |   |
| Percentage of  Revenue            |       | (0.4                               | )%         | (0.3           | )%         |   |   |   |   |
|                                   |            |                                    |            |                |            |  |  |  |  |  |  |

 

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Interest expense consistsprimarily of interest on our capital lease for our headquarters building inSan Jose, California. Interest expense increased 39.1% to $0.8 million infiscal 2005 from $0.6 million in fiscal 2004 due primarily to interest expense onour convertible notes, which started accruing at 3.25% on June 15, 2005.

*Income tax provision (benefit)*

| ** **                                       | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                       | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Income tax  provision (benefit) *(in thousands)* |       | $                                  | 2,544      |           | $          | (2,123 | ) |   | (219.8 | )% |   |
| Percentage of  Revenue                           |       | 1.3                                | %          | (1.2           | )%         |   |   |   |   |
|                                                  |            |                                    |            |                |            |  |  |  |  |  |  |

 

Our income tax provisionwas $2.5 million (effective tax provision rate of 12.5%) in fiscal 2005compared to an income tax benefit of $2.1 million (effective tax benefit rateof 48.5%) in fiscal 2004. The effective tax rate fluctuated significantly as aresult of recognition of deferred tax assets related to Puerto Ricooperations and a return to full year profitability in fiscal 2005. Oureffective tax rate has also been affected by the percentage of qualifiedPuerto Rico earnings compared to total earnings, as most of our PuertoRico earnings are taxed under Section 936 of the U.S. Internal RevenueCode, which exempts qualified Puerto Rico earnings from federal income taxes.This exemption is subject to wage-based and other limitations and expired atthe end of fiscal 2006.

*Gain from discontinued operations, net of tax*

| ** **                                                      | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                                                      | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Gain from  discontinued operations, net of tax *(in thousands)* |       | $                                  | 162        |           | $          | 13 |   |   | 1,146.2 | % |   |
| Percentage of  Revenue                                          |       | 0.1                                | %          | 0.0            | %          |   |   |   |   |
|                                                                 |            |                                    |            |                |            |  |  |  |  |  |  |

 

In June 2003, wediscontinued the operation of the Trusted Time Division as part of our post-acquisitionconsolidation process. The division was acquired as part of the acquisition ofDatum in October 2002. The division has been accounted for as adiscontinued operation and, accordingly, the results of operations have beenexcluded from continuing operations in the consolidated statements ofoperations. During fiscal 2005, we recorded a gain of $162,000 from ourdiscontinued operations, which was attributable to the final payment arisingfrom the sale of software. During fiscal 2004, we recorded a gain of $13,000from our discontinued operation.

*Net Income (loss)*

| ** **                           | ** ** | **Year ended  June 30,** | ** ** | **Percentage** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|----------------|------------|
| ** **                           | ** ** | **2005**                           | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Net income (loss)  *(in  thousands)* |       | $                                  | 17,916     |           | $          | (2,237 | ) |   | (900.9 | )% |   |
| Percentage of  Revenue               |       | 9.5                                | %          | (1.3           | )%         |   |   |   |   |
|                                      |            |                                    |            |                |            |  |  |  |  |  |  |

 

As a result of the factorsabove, net income was $17.9 million, or $0.39 per basic and $0.38 per dilutedshare, in fiscal 2005 compared to a net loss of $2.2 million, or $0.05 perbasic and diluted share, in fiscal 2004.

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**Key OperatingMetrics**

Key operating metrics formeasuring our performance include sales backlog, contract revenue, headcountand deferred revenue. These metrics, which compare fiscal 2006 with fiscal2005, are listed below.

*Sales backlog:*

Our backlog consists offirm orders that have yet to be shipped to the customer, or may not beshippable to a customer until a future period. Most orders included in backlogcan be rescheduled or cancelled by customers without significant penalty.Historically, a substantial portion of net revenue in any fiscal period hasbeen derived from orders received during that fiscal period. Our total backlogamounted to $51.7 million as of June 30, 2006, compared to $31.0 millionas of June 30, 2005. Our backlog, which is shippable within the next sixmonths, was $37.9 million as of June 30, 2006, compared to $20.5 millionas of June 30, 2005.

*Contract revenue:*

Revenue from contractsthat require development and manufacture in accordance with customerspecifications and have a lengthy development period may be categorized intotwo types: firm fixed price and cost-plus reimbursement. Revenue is recognizedunder the fixed price contracts using the percentage of completion method,(cost-to-cost basis) principally based upon the costs incurred relative to thetotal estimated costs at completion on the individual contracts. Anyanticipated losses on contracts are charged to operations as soon as they are determinable.Revenue recognized under cost-plus contracts is recognized on the basis ofdirect and indirect costs incurred plus a negotiated profit calculated as apercentage of costs or as performance based award fee. Revenue from long-termcontracts is reviewed periodically, with adjustments recorded in the period inwhich the revisions are made. As of June 30, 2006, we have approximately$4.4 million in contract revenue to be performed and recognized within the next36 months, compared to approximately $4.7 million in contract revenue thatwas to be performed and recognized within the following 36 months as of June 30,2005. These amounts have been accounted for as part of our sales backlogdiscussed above.

*Headcount:*

Our consolidated headcountas of June 30, 2006 was comprised of 802 regular employees and 63 temporaryemployees, compared to 779 regular employees and 51 temporary employees as of June 30, 2005.

*Deferred revenue:*

Deferred revenue is comprised of deferred revenue onsales of goods with special terms, which are recognized when the special termsare satisfied; maintenance contracts, which are recognized ratably over themaintenance period; and distributor return allowances, which are based onhistorical return averages with certain distributors. Deferred revenue forsales of goods with special terms was $0.4 million as of June 30,2006, compared to $0.2 million as of June 30, 2005. Deferred revenue formaintenance contracts was $2.2 million as of June 30, 2006, compared to$1.4 million as of June 30, 2005. Deferred revenue for distributor returnallowances was $0.3 million as of June 30, 2006, compared to $0.6 millionas of June 30, 2005.

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**Liquidity and CapitalResources**

As of June 30, 2006, working capital was $221.2million compared to $223.1 million as of June 30, 2005. Cash and cashequivalents as of June 30, 2006 decreased $23.4 million to $82.2 millionfrom $105.6 million as of June 30, 2005. This decrease was primarilythe result of $34.6 million in cash used for investing activities, and $8.3million in cash used for financing activities, offset by $19.3 million in cashprovided by operating activities. Short-term investments increased from $89.5million as of June 30, 2005 to $106.7 million as of June 30, 2006.This increase resulted primarily from the fact that we invested more inshort-term investments during fiscal 2006.

The $19.3 million net cash provided by operatingactivities in fiscal 2006 was primarily attributable to a net profit of $0.8million and non-cash expenses related to depreciation and amortization of $10.0 million,impairment of goodwill and intangibles of $8.2 million, and stock-basedcompensation of $4.6 million, which was partially offset by a $4.0 millionincrease in accounts receivable and $2.7 million increase in inventory. Theincrease in accounts receivable was the result of higher sales during thefourth quarter of fiscal 2006 compared to fiscal 2005 and the increase ininventory was the result of discontinuing the contract manufacturing works forour Telecom Solution Division in Puerto Rico manufacturing. The $34.6 millionnet cash used for investing activities in fiscal 2006 was primarilyattributable to $77.7 million in purchases of short-term investments, $9.4million in purchases of plant and equipment, and $8.0 million cash payment forthe acquisition of the Agilent product line, which was partially offset by$60.7 million in maturities of short-term investments. The $8.3 million netcash provided by financing activities was primarily attributable to $1.9million in proceeds from the issuance of common stock, which was offset by $9.7million repurchase of common stock and $1.1 million for repayment of long-termobligation.

Our total capital spending commitments outstanding asof June 30, 2006 were $1.3 million. Days sales outstanding in accountsreceivable was 59 days as of June 30, 2006, an increase from 58 days as ofJune 30, 2005, which is attributable to a larger amount of shipments madein the last month of the prior quarter, resulting in lower collections in thelast quarter of fiscal 2006.

We believe that our existing cash resources will besufficient to meet our anticipated operating and working capital expenditureneeds in the ordinary course of business for at least the next 12 months andthe foreseeable future. We base our expense levels in part on our expectationof future revenue levels. If our revenue for a particular period is lower than weexpect, we may take steps to reduce our operating expenses accordingly. If cashgenerated from operations is insufficient to satisfy our liquidity requirementsor if we require additional capital resources to grow our business or toacquire complementary technologies and businesses in the future, we may seek toissue additional equity securities or obtain additional debt financing.Additional financing may not be available at all or on terms favorable to us.Additional financing may also be dilutive to our existing stockholders. We donot have any arrangements or relationships with entities that are notconsolidated into our financial statements that are reasonably likely tomaterially affect our liquidity or the availability of our capital resources.

On June 8,2005, the Company sold $120 million of contingent convertible subordinatednotes (the “Notes”), which mature on June 15, 2025 and bear interest atthe rate of 3.25 % per annum. Interest on the Notes is payable semi-annually inJune and December of each year beginning on December 15, 2005.The Notes are unsecured obligations and are subordinated in right of payment toall of our existing and future senior debt, including our indebtedness underour senior credit facilities. The Notes are structurally subordinated to allindebtedness and liabilities of our subsidiaries.

The Notes are convertible, at the holder’s option,prior to the maturity date into cash and, if applicable, shares of our commonstock in the following circumstances:

·       Prior to June 15,2023, if the common stock price for a least 20 trading days in the period of 30 consecutivedays ending on the last trading day of the calendar quarter preceding thequarter in which the conversion occurs is more than 125% of the conversionprice of the notes in effect on that 30th trading day;

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·       Onor after June 15, 2023, at all times on or after any date on which thecommon stock price is more than 125% of the then current conversion price;

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the trading price for the notes for each suchtrading-day was less than 95% of the average of the sale price of our commonstock during such five trading-day period multiplied by the then currentconversion rate;

·       Ifwe have called the particular notes for redemption and the redemption has notyet occurred; or

·       Uponthe occurrence of specified corporate transactions.

Holders may convert any outstanding Notes into cashand, if applicable, shares of our common stock at an initial conversion priceper share of $12.49. On June 30, 2006, the reported closing bid price ofour common stock was $7.07 per share.

Also, on or after June 20, 2012, we may redeemsome or all of the Notes at any time or from time to time at a redemption priceof 100% of the principal amount of the Notes, plus accrued and unpaid interest,(including liquidated damages, if any) up to but not including the date ofredemption, payable in cash. Holders may require us to repurchase all or aportion of their Notes on June 15, 2012, 2015 and 2020 for a repurchaseprice equal to 100% of the principal amount of the Notes, plus accrued andunpaid interest (including liquidated damages, if any) up to but not includingthe date of repurchase, payable in cash, plus, in the event of certain changeof control events related to us.

We may from time to time repurchase or redeem all or aportion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D).We may undertake such repurchase from time to time through privately negotiatedor open-market transactions or other available means.

In connection with the issuance of these Notes,Symmetricom recorded bond fees of approximately $3.8 million, which will beamortized over a period of seven years until fiscal 2012.

On May 1, 2004, we entered into a creditagreement with Wells Fargo Bank, National Association to obtain a revolvingline of credit up to $5.0 million to be used as working capital. On June 1,2005 this agreement was amended to allow the Company to obtain a revolving lineof credit up to $10.0 million to be used as working capital. At the beginningof July 2006, we decided to reduce the credit note from $10 millionto $3 million. On July 3, 2006, the note was amended accordingly. The lineof credit contains certain financial covenants and restrictions. The new lineof credit expires on November 1, 2006. No borrowings were outstanding asof June 30, 2006.

On June 1, 2001, theMassachusetts Development Finance Agency issued a $2.7 million industrialdevelopment bond on Datum’s behalf to finance the expansion of Datum’smanufacturing facility in Beverly, Massachusetts. The bond matures on May 1,2021. Interest on the bond is payable monthly at an adjustable rate ofinterest. The remarketing agent establishes the interest rate for each rateperiod at the lowest rate that in its judgment would permit the sale of thebonds at par value. The bond is collateralized by the line of credit with WellsFargo Bank described above. As of June 30, 2006, the bond balance was $2.4million.

**ContractualObligations**

On March 1, 2006 we entered into an Office LeaseAgreement, effective as of March 1, 2006, between the Company and ChinaScientific Equipment Trading Company, for approximately 200 square feet of spacein an office building located in Beijing, P.R. China. The lease period will endon February 28, 2008. The leased space serves as an administrative andsales office.

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On November 18, 2005, we entered into a FirstAmendment to Lease, effective as of October 27, 2005, which amends ourexisting lease for approximately 117,739 square feet of space in an officebuilding located in San Jose, California. The leased space serves as ourcorporate office. The amendment extends the termination date of the lease from April 15,2009 to April 15, 2016. In addition, it provides that, commencing December 1,2005, basic annual rent (as defined in the lease) will be reduced to $1.7million, subject to 4% annual increases commencing on April 15, 2006. Thebuilding element of the original lease, which was accounted for from the outsetas a capital lease for a property with a cost of $9.0 million,continues to be amortized over the initial lease period ending in April 2009,in accordance with SFAS No. 13, Accounting for Leases.

In connection with the Datum acquisition, we assumedDatum’s liability relating to the $2.7 million industrial development bond thatwas issued by the Massachusetts Development Finance Agency on June 1,2001, to finance the expansion by Datum of its manufacturing facility inBeverly, Massachusetts. The bond matures on May 1, 2021. Interest on thebond is payable monthly at an adjustable rate of interest as determined by theremarketing agent for each rate period to be the lowest rate that in itsjudgment would permit the sale of the bonds at par. The bond is collateralizedby a $2.7 million letter of credit issued under our credit facility with WellsFargo Bank. As of June 30, 2006, the bond balance was $2.4 million.

We operate in multiple locations domestically andinternationally. As such, certain facilities and equipment are leased undercapital lease agreements or operating lease agreements. Due to excess capacityon several non-cancelable leases as a result of the economic downturn, wesubleased certain facilities and recognized lease loss liability for theremainder.

We incur purchase commitments during our normal courseof business. As of June 30, 2006, our principal commitments totaled $16.5million and related primarily to commitments to purchase inventory.

In connection with the Datum acquisition, we assumedDatum’s post-retirement health care benefits plan. Post-retirement benefits arerecognized over the employee’s service period based on a 6.23% discounted rateto the employee and the employee’s beneficiaries after retirement. The healthcare plan was curtailed as of December 31, 2002, and only existing retiredparticipants and former Datum employees, now employed by Symmetricom and whomeet the retirement eligibility requirements by December 31, 2004, areeligible for participation. The health care plan is a contributory plan.

Thefollowing table summarizes our contractual cash obligations as of June 30,2006, and the effect such obligations are expected to have on liquidity andcash flow in future periods.

| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| **Contractual Obligations**      | ** ** | ** **                                | ** ** | **Total** | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| ** **                            | ** ** | **(In thousands)**                   | ** ** |
| Bond payable                          |       | $                                         | 2,405      |   |   | $ | 70 |   |   | $ | 140 |   |   | $ | 140 |   |   | $ | 2,055 |   |
| Convertible subordinate  notes        |       | 120,000                                   |       |   | — |   |   | — |   |   | — |   |   | 120,000 |   |
| Capital lease  obligations            |       | 4,393                                     |       |   | 1,492 |   |   | 2,901 |   |   | — |   |   | — |   |
| Operating leases  obligations(1)      |       | 35,200                                    |       |   | 2,255 |   |   | 5,326 |   |   | 8,258 |   |   | 19,361 |   |
| Purchase obligations                  |       | 16,525                                    |       |   | 12,652 |   |   | 3,873 |   |   | — |   |   | — |   |
| Post-retirement benefits  liabilities |       | 334                                       |       |   | 42 |   |   | 110 |   |   | 63 |   |   | 119 |   |
| Lease loss accrual                    |       | 254                                       |       |   | 109 |   |   | 103 |   |   | 40 |   |   | 2 |   |
| Total contractual cash  obligations   |       | 179,111                                   |       |   | 16,620 |   |   | 12,453 |   |   | 8,501 |   |   | 141,537 |   |
| Sublessor agreements                  |       | (2,322                                    | )          |   | (678 | ) |   | (968 | ) |   | (676 | ) |   | — |   |
| Net                                   |       | $                                         | 176,789    |   |   | $ | 15,942 |   |   | $ | 11,485 |   |   | $ | 7,825 |   |   | $ | 141,537 |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Operatinglease obligation is already net against the lease loss accrual

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**Recent AccountingPronouncements**

In June 2006, the FASB issued InterpretationNumber, or FIN, No. 48, *Accounting forUncertainty in Income Taxes*. FIN No. 48 applies to all taxpositions within the scope of FASB Statement No. 109, applies a “morelikely than not” threshold for tax benefit recognition, identifies a definedmethodology for measuring benefits and increases the disclosure requirements forcompanies. FIN No. 48 is mandatory for years beginning after December 15,2006. We are currently in the process of evaluating the effects of this newaccounting standard.

In March 2006, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156,*Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140*. SFAS No. 156 amendsFASB Statement No. 140, *Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,with respect to the accounting for separately recognized servicing assets andservicing liabilities.*An entity should adopt this Statement as ofthe beginning of its first fiscal year that begins after September 15,2006. Earlier adoption is permitted as of the beginning of an entity’s fiscalyear, provided the entity has not yet issued financial statements, includinginterim financial statements, for any period of that fiscal year. The effectivedate of this Statement is the date an entity adopts the requirements of thisStatement. Adoption of SFAS No. 156 is not expected to have a materialimpact on our consolidated financial position, results of operations or cashflows.

In February 2006, the FASB issued SFAS No. 155,*Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140*. SFAS No. 155amends FASB Statements No. 133, *Accounting for DerivativeInstruments and Hedging Activities, and No. 140, Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities.*This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1,“*Application of Statement 133 to BeneficialInterests in Securitized Financial Assets.*” SFAS No. 155 iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006. Adoptionof SFAS No. 155 is not expected to have a material impact on ourconsolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections. SFAS No. 154 establishes newstandards on accounting for changes in accounting principles. Pursuant to thenew rules, all such changes must be accounted for by retrospective applicationto the financial statements of prior periods unless it is impracticable to doso. SFAS No. 154 is effective for accounting changes and error correctionsmade in fiscal years beginning after December 15, 2005, with earlyadoption permitted for changes and corrections made in years beginning after May 2005.Adoption of SFAS No. 154 is not expected to have a material impact on ourconsolidated financial position, results of operations or cash flows.

As of July 4, 2005,we adopted Statement of Financial Accounting Standard (SFAS) No. 123(R) usingthe modified prospective method, which requires measurement of compensationcost for all stock-based awards at fair value on date of grant and recognitionof compensation over the service period for awards expected to vest. The fairvalue of restricted stock is determined based on the number of shares grantedand the quoted price of our common stock, and the fair value of stock optionsis determined using the Black-Scholes valuation model, which is consistent withour valuation techniques previously utilized for options in footnotedisclosures required under SFAS No. 123, *Accountingfor Stock Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation Transitionand Disclosure.* Such value is recognized as expense over the serviceperiod, net of estimated forfeitures, using the accelerated method under SFAS No. 123(R).Because we adopted SFAS No. 123(R), we no longer have employee stockawards subject to variable accounting treatment.

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**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

**Interest RateExposure**

As of June 30, 2006, we had short-terminvestments of $106.7 million. These investments in corporate debt securitieshave maturity dates of greater than three months. Our corporate debt securitiesare subject to interest rate risk in as much as their fair value will fall ifmarket interest rates increase. If market interest rates were to increaseimmediately and uniformly by 10% from the levels prevailing at June 30,2006, the fair value of the portfolio would not decline by a material amount.Additionally, a 10% decrease in the market interest rates would not materiallyimpact the fair value of the portfolio. We do not use derivative financialinstruments to mitigate the risks inherent in these securities. However, we doattempt to reduce these risks by typically limiting the maturity date of suchsecurities to no more than nine months, placing our investments with highcredit quality issuers and limiting the amount of credit exposure with any oneissuer. In addition, we believe that we currently have the ability to holdthese investments until maturity, and therefore, believe that reductions in thevalue of these securities attributable to short-term fluctuations in interestrates would not materially harm our business.

On June 8, 2005, weissued convertible subordinate notes with a fixed rate of 3.25%, which wouldhave no interest rate risk impact to our business.

**Foreign CurrencyExchange Rate Exposure**

Our exposure to market risk due to fluctuations incurrency exchange rates relates primarily to the intercompany balances with oursubsidiaries in the United Kingdom and Germany. Although we transact businesswith various countries, settlement amounts are usually based on United Statescurrency. Transaction gains or losses have not been significant in the past andwe do not presently engage in hedging activity. Based on the intercompanybalances of $0.2 million with the United Kingdom and $0.6 million with Germanyat June 30, 2006, a hypothetical 10% adverse change in sterling or Euroagainst United States dollars would not result in a material foreign exchangeloss. Consequently, we do not expect that reductions in the value of suchintercompany balances, or of other accounts denominated in foreign currenciesresulting from even a sudden or significant fluctuation in foreign exchangerates, would have a direct material impact on our business.

Notwithstanding the foregoing analysis of the directeffects of interest rate and currency exchange rate fluctuations on the valueof certain of our investments and accounts, the indirect effects of suchfluctuations could have a materially harmful effect on our business. Forexample, international demand for our products is affected by foreign currencyexchange rates. In addition, interest rate fluctuations may affect the buyingpatterns of our customers. Furthermore, interest rate and currency exchangerate fluctuations have broad influence on the general condition of the UnitedStates, foreign and global economies which could materially harm our business.

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**Item 8.**                        *Consolidated Financial Statements and Supplementary Data*

Supplementaryquarterly financial data (unaudited):

| ** **                                               | ** ** | **First**                                                             | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                               | ** ** | **Quarter**                                                           | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Year**   | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Fiscal Year 2006**                                     | ** ** | ** **                                                            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net revenue                                              |       | $                                                                     | 44,267     |        | $          | 47,909      |       | $           | 45,538     |       | $          | 50,497 |   | $ | 188,211 |   |
| Gross profit                                             |       | 20,391                                                                |       | 21,713      |       | 17,972      |       | 22,007      |       | 82,083     |       |
| Operating income (loss)                                  |       | 1,491                                                                 |       | 3,134       |       | (7,733      | )          | 1,582       |       | (1,526     | )          |
| Income (loss) from operations before income taxes        |       | 1,808                                                                 |       | 3,637       |       | (7,002      | )          | 2,526       |       | 969        |       |
| Net income (loss)                                        |       | 1,373                                                                 |       | 2,655       |       | (5,187      | )          | 1,978       |       | 819        |       |
| Basic net earnings (loss) per share                      |       | 0.03                                                                  |       | 0.06        |       | (0.11       | )          | 0.04        |       | 0.02       |       |
| Diluted earnings per share from continuing  operations   |       | 0.03                                                                  |       | 0.06        |       | (0.11       | )          | 0.04        |       | 0.02       |       |
| Diluted net earnings (loss) per share                    |       | 0.03                                                                  |       | 0.06        |       | (0.11       | )          | 0.04        |       | 0.02       |       |
| **Fiscal Year 2005**                                     | ** ** | ** **                                                            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net revenue                                              |       | $                                                                     | 51,958     |        | $          | 47,964      |       | $           | 43,815     |       | $          | 45,410 |   | $ | 189,147 |   |
| Gross profit                                             |       | 23,318                                                                |       | 22,879      |       | 20,759      |       | 21,572      |       | 88,528     |       |
| Operating income                                         |       | 5,843                                                                 |       | 6,374       |       | 3,441       |       | 3,532       |       | 19,190     |       |
| Income from continuing operations before income  taxes   |       | 5,854                                                                 |       | 6,465       |       | 3,702       |       | 4,277       |       | 20,298     |       |
| Income from continuing operations                        |       | 4,485                                                                 |       | 4,583       |       | 2,819       |       | 5,867       |       | 17,754     |       |
| Gain on discontinued operations                          |       | —                                                                |       | 162         |       | —      |       | —      |       | 162        |       |
| Net income                                               |       | 4,485                                                                 |       | 4,745       |       | 2,819       |       | 5,867       |       | 17,916     |       |
| Basic earnings per share from continuing operations      |       | 0.10                                                                  |       | 0.10        |       | 0.06        |       | 0.13        |       | 0.39       |       |
| Basic earnings per share from discontinued  operations   |       | —                                                                |       | —      |       | —      |       | —      |       | —     |       |
| Basic net earnings per share                             |       | 0.10                                                                  |       | 0.10        |       | 0.06        |       | 0.13        |       | 0.39       |       |
| Diluted earnings per share from continuing  operations   |       | 0.10                                                                  |       | 0.10        |       | 0.06        |       | 0.12        |       | 0.38       |       |
| Diluted earnings per share from discontinued  operations |       | —                                                                |       | —      |       | —      |       | —      |       | —     |       |
| Diluted net  earnings per share                          |       | 0.10                                                                  |       | 0.10        |       | 0.06        |       | 0.12        |       | 0.38       |       |

 

48

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**SYMMETRICOM, INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                   | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm                                                                                          |       | 50       |
| Consolidated  Balance Sheets at June 30, 2006 and 2005                                                                                       |       | 51       |
| Consolidated  Statements of Operations for the years ended June 30, 2006, 2005 and  2004                                                     |       | 52       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  years ended June 30, 2006, 2005 and 2004 |       | 53       |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2006, 2005 and  2004                                                     |       | 54       |
| Notes  to the Consolidated Financial Statements                                                                                                   |       | 55       |

 

49

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofSymmetricom, Inc.San Jose, California

We have audited the accompanying consolidated balancesheets of Symmetricom, Inc. and its subsidiaries (the “Company”) as of June 30,2006 and 2005, and the related consolidated statements of operations,stockholders’ equity and comprehensive income (loss), and cash flows for eachof the three years in the period ended June 30, 2006. Our audits alsoincluded the financial statement schedule included in Item 15 Schedule II.These financial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the consolidated financial statements and the financial statementschedule based on our audits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of June 30, 2006 and 2005, and the results of its operations and itscash flows for each of the three years in the period ended June 30, 2006in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly in all material respects the information setforth therein.

As described in Note A to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No. 123(R),“*Share Based Payment*,” effective July 1,2005, based on the modified prospective application transition method.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2006, based on the criteria establishedin *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated September 12, 2006 expressed an unqualified opinionon management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting and an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

San Jose, CaliforniaSeptember 12, 2006

50

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**SYMMETRICOM, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share amounts)**

| ** **                                                                                                                                                            | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**          | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                            | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                       |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                 | 82,193     |   | $ | 105,635 |   |
| Short-term investments                                                                                                                                                |       | 106,696           |       | 89,514 |   |
| Total cash and investments                                                                                                                                            |       | 188,889           |       | 195,149 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $888 and $874                                                                                         |       | 33,015            |       | 29,049 |   |
| Inventories                                                                                                                                                           |       | 30,717            |       | 26,698 |   |
| Prepaids and other current assets                                                                                                                                     |       | 10,240            |       | 10,827 |   |
| Total current assets                                                                                                                                                  |       | 262,861           |       | 261,723 |   |
| Property, plant  and equipment, net                                                                                                                                   |       | 26,553            |       | 23,063 |   |
| Goodwill                                                                                                                                                              |       | 45,899            |       | 49,248 |   |
| Other intangible  assets, net                                                                                                                                         |       | 8,200             |       | 10,272 |   |
| Deferred taxes  and other assets                                                                                                                                      |       | 48,405            |       | 47,365 |   |
| Note receivable  from employee                                                                                                                                        |       | 500               |       | 500 |   |
| Total assets                                                                                                                                                          |       | $                 | 392,418    |   | $ | 392,171 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                  |       |              |       |   |   |
| Accounts payable                                                                                                                                                      |       | $                 | 13,359     |   | $ | 12,684 |   |
| Accrued compensation                                                                                                                                                  |       | 10,352            |       | 9,062 |   |
| Accrued warranty                                                                                                                                                      |       | 3,547             |       | 3,338 |   |
| Other accrued liabilities                                                                                                                                             |       | 13,074            |       | 12,416 |   |
| Current maturities of long-term obligations                                                                                                                           |       | 1,286             |       | 1,110 |   |
| Total current liabilities                                                                                                                                             |       | 41,618            |       | 38,610 |   |
| Long-term  obligations                                                                                                                                                |       | 125,620           |       | 126,967 |   |
| Deferred income  taxes                                                                                                                                                |       | 619               |       | 419 |   |
| Total liabilities                                                                                                                                                     |       | 167,857           |       | 165,996 |   |
| Stockholders’ equity:                                                                                                                                            |       |              |       |   |   |
| Preferred stock, $0.0001 par value; 500 shares  authorized, none issued                                                                                               |       | —            |       | — |   |
| Common stock, $0.0001 par value; 70,000 shares  authorized, 47,662 shares issued and 45,743 outstanding in 2006; 47,076  shares issued and 46,329 outstanding in 2005 |       | 181,696           |       | 184,292 |   |
| Accumulated other comprehensive income                                                                                                                                |       | 263               |       | 100 |   |
| Retained earnings                                                                                                                                                     |       | 42,602            |       | 41,783 |   |
| Total stockholders’ equity                                                                                                                                       |       | 224,561           |       | 226,175 |   |
| Total liabilities  and stockholders’ equity                                                                                                                      |       | $                 | 392,418    |   | $ | 392,171 |   |

 

See notes to the consolidated financial statements.

51

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

| ** **                                                     | ** ** | **Year ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenue                                                    |       | $                                      | 188,211    |   | $ | 189,147 |   | $ | 172,847 |   |
| Cost of products  and services                                 |       | 100,154                                |       | 96,720 |   | 101,410 |   |
| Amortization of  purchased technology                          |       | 3,622                                  |       | 3,899 |   | 3,911 |   |
| Impairment of  intangibles                                     |       | 1,198                                  |       | — |   | — |   |
| Integration and  restructuring charges                         |       | 1,154                                  |       | — |   | 5,862 |   |
| Gross profit                                                   |       | 82,083                                 |       | 88,528 |   | 61,664 |   |
| Operating expenses:                                            |       |                                   |       |   |   |   |   |
| Research and development                                       |       | 18,836                                 |       | 16,286 |   | 16,772 |   |
| Selling, general and administrative                            |       | 57,288                                 |       | 52,439 |   | 45,825 |   |
| Amortization of intangibles                                    |       | 522                                    |       | 613 |   | 838 |   |
| Integration and restructuring charges                          |       | —                                 |       | — |   | 2,325 |   |
| Impairment of goodwill                                         |       | 6,963                                  |       | — |   | — |   |
| Operating income (loss)                                        |       | (1,526                                 | )          | 19,190 |   | (4,096 | ) |
| Gain on equity  investments, net                               |       | —                                 |       | 389 |   | — |   |
| Interest income                                                |       | 7,478                                  |       | 1,533 |   | 308 |   |
| Interest expense                                               |       | (4,983                                 | )          | (814 | ) | (585 | ) |
| Income (loss) before income taxes and discontinued  operations |       | 969                                    |       | 20,298 |   | (4,373 | ) |
| Income tax  provision (benefit)                                |       | 150                                    |       | 2,544 |   | (2,123 | ) |
| Income (loss) from continuing operations                       |       | 819                                    |       | 17,754 |   | (2,250 | ) |
| Gain from  discontinued operations, net of tax.                |       | —                                 |       | 162 |   | 13 |   |
| Net income (loss)                                              |       | $                                      | 819        |   | $ | 17,916 |   | $ | (2,237 | ) |
| Earnings (loss) per  share—basic:                         |       |                                   |       |   |   |   |   |
| Earnings (loss) from continuing operations                     |       | $                                      | 0.02       |   | $ | 0.39 |   | $ | (0.05 | ) |
| Earnings from discontinued operations                          |       | —                                 |       | — |   | — |   |
| Net earnings (loss)                                            |       | $                                      | 0.02       |   | $ | 0.39 |   | $ | (0.05 | ) |
| Weighted average  shares outstanding—basic                |       | 45,913                                 |       | 45,532 |   | 43,691 |   |
| Earnings (loss)  per share—diluted:                       |       |                                   |       |   |   |   |   |
| Earnings (loss) from continuing operations                     |       | $                                      | 0.02       |   | $ | 0.38 |   | $ | (0.05 | ) |
| Earnings from discontinued operations                          |       | —                                 |       | — |   | — |   |
| Net earnings (loss)                                            |       | $                                      | 0.02       |   | $ | 0.38 |   | $ | (0.05 | ) |
| Weighted average shares  outstanding—diluted              |       | 46,791                                 |       | 46,936 |   | 43,691 |   |

 

See notes to the consolidated financial statements.

52

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands)**

| ** **                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | **(1)**          | ** ** | ** **        | ** ** | **Total**         | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** | **Stockholder**   | ** ** | **Other**              | ** ** | **Deferred**     | ** ** | ** **        | ** ** | **Stock-**        | ** ** | **Total**              | ** ** |
| ** **                                                                  | ** ** | **Common Stock** | ** ** | **Note**   | ** ** | **Comprehensive** | ** ** | **Stock-based**        | ** ** | **Retained**     | ** ** | **holders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Receivable**    | ** ** | **Income (loss)** | ** ** | **Compensation** | ** ** | **Earnings**      | ** ** | **Equity**        | ** ** | **Income (loss)** | ** ** |
| Balance at  June 30, 2003                                              |       |                  | 42,491     |       |       | $                 | 159,194    |                   |       | $                | (555       | )                 |       |              | $          | (178                   | )          |   |   | $ | (1,133 | ) |   |   | $ | 26,104 |   |   | $ | 183,432 |   |   | $ | (49,377 | ) |   |
| Issuance of common stock:                                                   |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock option  exercises, net of shares tendered upon exercise               |       |                  | 1,805      |       |       | 7,568             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 7,568 |   |   | — |   |   |
| Employee stock  purchase plan                                               |       |                  | 98         |       |       | 321               |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 321 |   |   | — |   |   |
| Warrants exercised                                                          |       |                  | 487        |       |       | 2,013             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 2,013 |   |   | — |   |   |
| Restricted stock  issued                                                    |       |                  | 34         |       |       | 237               |       |                   | —     |             |       |              | —     |              |       |                   | (237       | ) |   |   | — |   |   | — |   |   | — |   |   |
| Stock option  income tax benefit                                            |       |                  | —     |       |       | 4,960             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 4,960 |   |   | — |   |   |
| Amortization of  deferred compensation                                      |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | 250        |   |   |   | — |   |   | 250 |   |   | — |   |   |
| Comprehensive income:                                                       |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss from  continuing operations                                            |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | (2,250 | ) |   | (2,250 | ) |   | (2,250 | ) |   |
| Gain from  discontinued operations, net of tax of $7                   |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | 13 |   |   | 13 |   |   | 13 |   |   |
| Unrealized gain on  short-term investments, net of taxes                    |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 265        |              |       |                   | —     |   |   |   | — |   |   | 265 |   |   | 265 |   |   |
| Cumulative  adjustments to foreign currency translation, net  of taxes |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | (88        | )                 |       |                   | —     |   |   |   | — |   |   | (88 | ) |   | (88 | ) |   |
| Balance at  June 30, 2004                                              |       |                  | 44,915     |       |       | 174,293           |       |                   | (555       | )                |       |              | (1         | )                 |       |                   | (1,120     | ) |   |   | 23,867 |   |   | 196,484 |   |   | (2,060 | ) |   |
| Issuance of common stock:                                                   |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock option  exercises, net of shares tendered upon exercise               |       |                  | 1,619      |       |       | 8,012             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 8,012 |   |   | — |   |   |
| Reinstated stock  option                                                    |       |                  | —     |       |       | 919               |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 919 |   |   | — |   |   |
| Repurchase of  common stock                                                 |       |                  | (186       | )          |       | (1,833            | )          |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | (1,833 | ) |   | — |   |   |
| Restricted stock  canceled                                                  |       |                  | (19        | )          |       | (120              | )          |                   | —     |             |       |              | —     |              |       |                   | 84         |   |   |   | — |   |   | (36 | ) |   | — |   |   |
| Stock option  income tax benefit                                            |       |                  | —     |       |       | 3,021             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 3,021 |   |   | — |   |   |
| Amortization of  deferred compensation                                      |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | 1,036      |   |   |   | — |   |   | 1,036 |   |   | — |   |   |
| Loan payment                                                                |       |                  | —     |       |       |              |       |                   | 555        |             |       |              |       |              |       |                   |       |   |   |   |   |   |   | 555 |   |   | — |   |   |
| Comprehensive income:                                                       |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from  continuing  operations                                         |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | 17,754 |   |   | 17,754 |   |   | 17,754 |   |   |
| Gain from  discontinued operations, net of tax of $93                  |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | 162 |   |   | 162 |   |   | 162 |   |   |
| Unrealized gain on  short-term investments, net of taxes                    |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 84         |              |       |                   | —     |   |   |   | — |   |   | 84 |   |   | 84 |   |   |
| Cumulative adjustments  to foreign currency translation,  net of taxes |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 17         |              |       |                   | —     |   |   |   | — |   |   | 17 |   |   | 17 |   |   |
| Balance at  June 30, 2005                                              |       |                  | 46,329     |       |       | 184,292           |       |                   | —     |             |       |              | 100        |              |       |                   | —     |   |   |   | 41,783 |   |   | 226,175 |   |   | 18,017 |   |   |
| Issuance of common stock:                                                   |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock option  exercises, net of shares tendered upon exercise               |       |                  | 402        |       |       | 1,904             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 1,904 |   |   | — |   |   |
| Restricted stock  issued                                                    |       |                  | 220        |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | — |   |   | — |   |   |
| Repurchase of  common stock                                                 |       |                  | (1,172     | )          |       | (9,712            | )          |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | (9,712 | ) |   | — |   |   |
| Restricted stock  canceled                                                  |       |                  | (36        | )          |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | — |   |   | — |   |   |
| Stock option  income tax benefit                                            |       |                  | —     |       |       | 592               |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 592 |   |   | — |   |   |
| Stock-based  compensation                                                   |       |                  | —     |       |       | 4,620             |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | — |   |   | 4,620 |   |   | — |   |   |
| Comprehensive income:                                                       |       |                  |       |       |       |              |       |                   |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income.                                                                 |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | —     |              |       |                   | —     |   |   |   | 819 |   |   | 819 |   |   | 819 |   |   |
| Unrealized gain on  short-term investments, net of taxes                    |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 67         |              |       |                   | —     |   |   |   | — |   |   | 67 |   |   | 67 |   |   |
| Cumulative  adjustments to foreign currency translation,  net of taxes |       |                  | —     |       |       | —            |       |                   | —     |             |       |              | 96         |              |       |                   | —     |   |   |   | — |   |   | 96 |   |   | 96 |   |   |
| Balance at  June 30, 2006                                              |       |                  | 45,743     |       |       | $                 | 181,696    |                   |       | $                | —     |              |       |              | $          | 263                    |       |   |   | $ | — |   |   |   | $ | 42,602 |   |   | $ | 224,561 |   |   | $ | 982 |   |   |

----

(1)          Following the adoptionof SFAS 123R in fiscal 2006, amounts that would previously have beenrecorded in this column are now included within Common Stock.

See notes to the consolidated financial statements.

53

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**SYMMETRICOM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                 | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                      |       |                                   |       |   |   |   |   |
| Net income (loss)                                                                          |       | $                                      | 819        |   | $ | 17,916 |   | $ | (2,237 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating  activities: |       |                                   |       |   |   |   |   |
| Impairment of  goodwill and intangibles                                                    |       | 8,161                                  |       | — |   | — |   |
| Gain from disposal  of discontinued operations                                             |       | —                                 |       | (162 | ) | — |   |
| Depreciation and  amortization                                                             |       | 9,966                                  |       | 11,303 |   | 11,646 |   |
| Deferred income  taxes                                                                     |       | (1,693                                 | )          | (3,368 | ) | (6,540 | ) |
| Gain on sale of  equity investments                                                        |       | —                                 |       | (389 | ) | — |   |
| Loss on disposal  of fixed assets                                                          |       | 211                                    |       | 202 |   | — |   |
| Gain on post-retirement  benefit obligation                                                |       | (65                                    | )          | (118 | ) | — |   |
| Stock-based  compensation                                                                  |       | 4,620                                  |       | 1,001 |   | 250 |   |
| Non-cash  compensation                                                                     |       | —                                 |       | 919 |   | — |   |
| Stock option  income tax benefit                                                           |       | —                                 |       | 3,021 |   | 4,960 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                        |       |                                   |       |   |   |   |   |
| Accounts  receivable                                                                       |       | (3,966                                 | )          | (108 | ) | (5,165 | ) |
| Inventories                                                                                |       | (2,662                                 | )          | 1,179 |   | 1,165 |   |
| Prepaids and other  assets                                                                 |       | 1,579                                  |       | (378 | ) | 590 |   |
| Accounts payable                                                                           |       | 675                                    |       | (2,688 | ) | 3,126 |   |
| Accrued  compensation                                                                      |       | 1,265                                  |       | (599 | ) | (2,530 | ) |
| Other accrued  liabilities                                                                 |       | 429                                    |       | (555 | ) | 1,409 |   |
| Net cash provided  by operating activities                                                 |       | 19,339                                 |       | 27,176 |   | 6,674 |   |
| Cash flows from investing activities:                                                      |       |                                   |       |   |   |   |   |
| Change in  restricted cash                                                                 |       | —                                 |       | — |   | 3,396 |   |
| Acquisition and  related costs, net of cash acquired                                       |       | (8,032                                 | )          | — |   | — |   |
| Purchases of  short-term investments                                                       |       | (77,726                                | )          | (83,478 | ) | (19,565 | ) |
| Maturities of  short-term investments                                                      |       | 60,650                                 |       | 7,460 |   | 7,167 |   |
| Purchases of plant  and equipment                                                          |       | (9,443                                 | )          | (3,074 | ) | (3,897 | ) |
| Proceeds from sale  of assets                                                              |       | —                                 |       | 1,585 |   | — |   |
| Net cash used for  investing activities                                                    |       | (34,551                                | )          | (77,507 | ) | (12,899 | ) |
| Cash flows from financing activities:                                                      |       |                                   |       |   |   |   |   |
| Repayment of  long-term obligations                                                        |       | (1,110                                 | )          | (1,148 | ) | (1,660 | ) |
| Proceeds from  issuance of common stock                                                    |       | 1,904                                  |       | 8,011 |   | 9,902 |   |
| Proceeds from  repayment of employee note                                                  |       | —                                 |       | 555 |   | — |   |
| Proceeds from  convertible notes                                                           |       | —                                 |       | 116,151 |   | — |   |
| Stock option income tax benefit                                                            |       | 592                                    |       | — |   | — |   |
| Repurchase of  common stock                                                                |       | (9,712                                 | )          | (1,833 | ) | — |   |
| Net cash provided  by (used for) financing activities                                      |       | (8,326                                 | )          | 121,736 |   | 8,242 |   |
| Effect of exchange  rate changes in cash                                                   |       | 96                                     |       | 17 |   | (88 | ) |
| Net increase  (decrease) in cash and cash equivalents                                      |       | (23,442                                | )          | 71,422 |   | 1,929 |   |
| Cash and cash  equivalents at beginning of year                                            |       | 105,635                                |       | 34,213 |   | 32,284 |   |
| Cash and cash  equivalents at end of year                                                  |       | $                                      | 82,193     |   | $ | 105,635 |   | $ | 34,213 |   |
| Non-cash investing and financing activities:                                               |       |                                   |       |   |   |   |   |
| Unrealized loss on  securities, net                                                        |       | $                                      | 67         |   | $ | 84 |   | $ | 265 |   |
| Cash payments for:                                                                         |       |                                   |       |   |   |   |   |
| Interest                                                                                   |       | $                                      | 5,073      |   | $ | 544 |   | $ | 585 |   |
| Income taxes                                                                               |       | 1,173                                  |       | 1,427 |   | 367 |   |

 

See notes to the consolidated financial statements.

54

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note A—Summary ofSignificant Accounting Policies**

*Business*

Symmetricom, Inc.,incorporated in the state of Delaware, is a leading supplier of precise timingstandards to industry, government, utilities, research centers, and aerospacemarkets. Products and services include network synchronization systems andtiming elements used by network operators and users, broadband access devicesfor business and residential applications, and professional services. Suchproducts play an important role in the operation, bandwidth utilization, andquality of service of wireline, wireless and broadband communications networksenabling our customers to increase the efficiency of their networks in today’sevolving communications environment.

*Principles ofConsolidation*

The consolidated financialstatements include the accounts of Symmetricom, Inc., and its wholly ownedsubsidiaries (“Symmetricom”, “we”, “our” or the “Company”). All significantintercompany accounts and transactions are eliminated.

*Fiscal Year*

Symmetricom, forpresentation purposes, presents each fiscal year as if it ended on June 30.However, our fiscal year ends on the Sunday closest to June 30. Fiscalyear 2006 ended on July 2, 2006. All references to years refer to ourfiscal years. Fiscal 2006, 2005 and 2004 consisted of 52, 53 and 52 weeks,respectively.

*Use of Estimates*

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. These estimates include allowances fordoubtful accounts receivable, valuation of goodwill and intangible assets,excess and obsolete inventory, future warranty costs, stock options, andvaluation of deferred tax assets. Actual results could differ from thoseestimates.

*Cash and CashEquivalents*

We consider all highlyliquid debt investments with a remaining maturity of three months or less whenpurchased to be cash and cash equivalents.

*Short-termInvestments*

Short-term investments consist of corporate debt andequity securities. Corporate debt securities mature between three and twelvemonths. All of our debt and marketable equity securities are classified asavailable-for-sale. These securities are carried at fair value with theunrealized gains and losses, net of taxes, reported as a component ofstockholders’ equity.

55

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table summarizes Symmetricom’s available-for-sale securities recordedas cash and cash equivalents or short-term investments:

| ** **                                   | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** **          | ** ** |
|----------------------------------------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **Amortized Cost** | ** ** | **Gains (losses)**   | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | **(In thousands)**   | ** ** | ** **          | ** ** |
| **June 30,  2006**                      | ** ** |                    | ** ** | ** **                |       |                | ** ** | ** ** |   | ** ** | ** ** |
| Commercial paper                             |       |                    | $          | 170,718                   |       |                |       | $ | 107 |   |   | $ | 170,825 |   |
| Less amounts  classified as cash equivalents |       |                    | (66,859    | )                         |       |                | —     |   |   | (66,859 | ) |
| Deferred  compensation plan assets           |       |                    | 2,770      |                      |       |                | (40        | ) |   | 2,730 |   |
| Total short term investments                 |       |                    | $          | 106,629                   |       |                |       | $ | 67 |   |   | $ | 106,696 |   |
| **June 30, 2005**                       | ** ** |                    | ** ** | ** **                |       |                | ** ** | ** ** |   | ** ** | ** ** |
| Commercial paper                             |       |                    | $          | 177,313                   |       |                |       | $ | (27 | ) |   | $ | 177,286 |   |
| Less amounts  classified as cash equivalents |       |                    | (89,726    | )                         |       |                | —     |   |   | (89,726 | ) |
| Deferred  compensation plan assets           |       |                    | 1,843      |                      |       |                | 111        |   |   | 1,954 |   |
| Total short term  investments                |       |                    | $          | 89,430                    |       |                |       | $ | 84 |   |   | $ | 89,514 |   |

 

*Fair Values ofFinancial Instruments*

The estimated fair valueof our financial instruments, which include cash and cash equivalents, short-terminvestments, accounts receivable, capital lease obligations, accounts payable,notes payable, and bonds payable, approximate their carrying amount. Theshort-term investments in equity instruments are carried at market value. Therecorded amount of our capital lease obligation approximates the estimated fairvalue based on an analysis of the present value of future lease payments.

*Concentrations ofCredit Risk*

Financial instruments,which potentially subject us to concentrations of credit risk, consistprincipally of cash and cash equivalents, short-term investments, and accountsreceivable. We place our investments with high-credit-quality corporations andfinancial institutions. Accounts receivable are derived primarily from sales totelecommunications service providers, original equipment manufacturers,government agencies, defense contractors, and distributors. Management believesthat its credit evaluation, approval, and monitoring processes mitigatepotential credit risks. However, we still have significant credit risks as ourcustomers currently tend to consolidate by mergers or acquisitions, which wouldimpact their ability to pay.

56

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Inventories*

Inventoriesare stated at the lower-of-cost (first-in, first-out) or market. We assess thevaluation of all inventories, including raw materials, work-in-process,finished goods and spare parts on a periodic basis. Obsolete inventory orinventory in excess of management’s estimated usage is written-down to itsestimated market value less costs to sell, if less than its cost. Inherent inthe estimates of market value are management’s estimates related to currenteconomic trends, future demand and technological obsolescence. Inventoriesconsist of:

| ** **      | ** ** | **June 30,**       | ** ** |
|-----------------|------------|-------------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
| Raw materials   |       | $                       | 15,354     |   | $ | 12,207 |   |
| Work-in-process |       | 9,043                   |       | 9,089 |   |
| Finished goods  |       | 6,320                   |       | 5,402 |   |
| Inventories     |       | $                       | 30,717     |   | $ | 26,698 |   |

 

*Property, Plant andEquipment, Net*

Property,plant and equipment are stated at cost. Depreciation and amortization arecomputed using the straight-line method based on the estimated useful lives ofthe assets except for land as follows:

| Buildings and  improvements                 |   | 15 -  39 years                             |   |
|---------------------------------------------|--------|--------------------------------------------|--------|
| Leasehold  improvements                     |   | 5 - 15  years, or life of lease if shorter |   |
| Machinery, equipment and  computer software |   | 3 - 7 years                                |   |

 

Property,plant and equipment consists of the following:

| ** **                                | ** ** | **June 30,**       | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** ** |
| Property, plant and  equipment:           |       |                    |       |   |   |
| Land                                      |       | $                       | 200        |   | $ | 200 |   |
| Buildings and improvements                |       | 14,672                  |       | 14,551 |   |
| Machinery and equipment                   |       | 28,913                  |       | 34,713 |   |
| Computer software                         |       | 8,486                   |       | 7,441 |   |
| Leasehold improvements                    |       | 15,777                  |       | 10,025 |   |
|                                      |       | 68,048                  |       | 66,930 |   |
| Accumulated depreciation and amortization |       | (41,495                 | )          | (43,867 | ) |
|                                      |       | $                       | 26,553     |   | $ | 23,063 |   |

 

Building and improvementsincludes $9,007,000 of costs capitalized under a capital lease for our facilityin San Jose, California, which was completed in June 1997. As of June 30,2006 and 2005 accumulated amortization for this facility totaled $6,854,000 and$6,089,000, respectively.

57

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Goodwill and OtherIntangible Assets*

We allocate the purchase price of acquired companiesto the tangible and intangible assets acquired and liabilities assumed, as wellas in-process research and development based on their estimated fair values.Such allocations require management to make significant estimations andassumptions, especially with respect to intangible assets.

Critical estimates invaluing certain intangible assets include, but are not limited to: futureexpected cash flows from customer contracts, customer lists, distributionagreements, acquired developed technologies and patents; expected costs todevelop the in-process research and development into commercially viableproducts and estimating cash flows from the projects when completed; and thebrand awareness and the market position of the acquired products andassumptions about the period of time the brand will continue to be used in thecombined company’s product portfolio. Management’s estimates of fair value arebased upon assumptions believed to be reasonable, but which are inherentlyuncertain and unpredictable.

*Long-lived AssetsIncluding Other Intangible Assets Subject to Amortization*

The carrying value oflong-lived assets is evaluated whenever events or changes in circumstancesindicate that the carrying value of the asset may be impaired. An impairmentloss is recognized when estimated undiscounted future cash flows expected toresult from the use of the asset, including disposition, is less than the carryingvalue of the asset. Impairment is measured as the amount by which the carryingamount exceeds the fair value.

*ComprehensiveIncome (Loss)*

SFAS No. 130, “Reporting Comprehensive Income,”establishes standards for reporting and display of comprehensive income and itscomponent. SFAS No.130 requires companies to report “comprehensive income” thatincludes unrealized holding gains and losses and other items that havepreviously been excluded from net income and reflected instead in stockholders’equity.

Accumulatedother comprehensive income (loss), consists of the following:

| ** **                                              | ** ** | **June 30,**       | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Foreign currency  translation adjustments, net of taxes |       | $                       | 246        |   | $ | 150 |   | $ | 133 |   |
| Unrealized loss  on investments, net of taxes           |       | 17                      |       | (50 | ) | (134 | ) |
| Total accumulated other  comprehensive income (loss)    |       | $                       | 263        |   | $ | 100 |   | $ | (1 | ) |

 

*Warranty*

Our standard warranty agreement is one year fromshipment. However, our warranty agreements are contract and component specificand can range to twenty years for selected components. We offer extendedwarranty contracts to our customers. The extended warranty is offered onproducts that are less than eight years old. The extended warranty contract isapplicable for a maximum of nine years after the expiration of the standardone-year warranty. The income from extended warranty contracts is recognizedratably over the period of contract.

58

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

We accrue for anticipatedwarranty costs upon shipment. Our warranty reserve is based on the number ofinstalled units, historical analysis of the volume of product returned to usunder the warranty program, management’s judgment regarding anticipated ratesof warranty claims and associated repair costs. We use the historical data toforecast our anticipated future warranty obligations.

*Acquired in-processresearch and development expenses*

During fiscal 2003, $1.6 million of the purchase priceof the Datum and TrueTime acquisitions was allocated to purchased in-processresearch and development expense based upon the values assigned to theacquisitions. Projects that qualify as in-process research and developmentrepresent those that have not yet reached technological feasibility and have noalternative future use. Technological feasibility is defined as beingequivalent to a beta-phase working prototype in which there is no remainingrisk relating to the development. The $1.6 million represented $1.2 millionfrom Datum and $0.4 million from TrueTime. The value of these projects wasdetermined by estimating the discounted net cash flows from the sale of theproducts resulting from the completion of the projects, reduced by the portionof the revenue attributable to developed technology and the percentage ofcompletion of the project.

The nature of the effortsto develop the purchased in-process research and development into commerciallyviable products principally relates to the completion of all prototyping andtesting activities that are necessary to establish that the product can meetits design specification including function, features and technical performancerequirements. Therefore, the amount allocated to in-process research anddevelopment has been charged to operations.

*SoftwareDevelopment Costs*

Costs for the developmentof new software and substantial enhancements to existing software are expensedas incurred until technological feasibility has been established, at which timeany additional development costs would be capitalized in accordance with SFAS No. 86,“Computer Software to Be Sold, Leased, or Otherwise Marketed.” We believe thecurrent process for developing software is essentially completed concurrentlywith the establishment of technological feasibility; accordingly, no costs havebeen capitalized to date.

*Foreign CurrencyTranslation*

The functional currency of each of our internationalsubsidiaries in the United Kingdom, China, and Hong Kong is the U.S. dollar,while in Germany, it is the Euro.

For our subsidiaries in which the U.S. Dollar is thefunctional currency, foreign currency denominated assets and liabilities aretranslated at the year-end exchange rates, except for inventories, prepaidexpenses, and property and equipment, which are translated at historicalexchange rates. Statements of operations are translated at the average exchangerates during the year except for those expenses related to the balance sheetamounts, which are translated using historical exchange rates. Net gains(losses) from these foreign exchange transactions have not been material to ouroperating results for any of the periods presented.

For our subsidiary inGermany, foreign currency denominated assets and liabilities are translated atthe year-end exchange rates, while revenue and expenses are translated ataverage rates prevailing during the year. Translation adjustments are reportedin other comprehensive income.

59

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Revenue Recognition*

We recognize revenue when persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, ourprice is fixed or determinable and collectibility is reasonably assured. Ourstandard arrangement for our domestic and international customers includes asigned purchase order or contract and no right of return of delivered products.

We assess collectibility based on the creditworthiness of the customer and past transaction history. We perform on-goingcredit evaluations of our customers and do not require collateral from ourcustomers. For many of our international customers, we require an irrevocableletter of credit to be issued by the customer before the purchase order isaccepted. If we determine that collection of the invoice is not reasonablyassured, we recognize the revenue at the time that collection becomesreasonably assured, which is generally upon the receipt of cash. We commonlyhave transactions that involve sales of both product and services to ourcustomers. Product revenue is generated from the sale of synchronization andtiming equipment with embedded software that is essential to productfunctionality. We account for these transactions in accordance with the rules applicableto software revenue recognition. Service revenue is recognized as the servicesare performed provided collection of the related receivable is reasonablyassured. Our sales to distributors are made under agreements allowing forreturns or credits under certain circumstances. Accordingly, we defer anestimate of returns from distributors based on a historical average ofdistributor returns. We record commission expense when orders are shipped, atwhich time the commission is both earned and payable.

Revenue from contractsthat require development and manufacture in accordance with customerspecifications and have a lengthy development period may be categorized intotwo types: firm fixed price and cost-plus reimbursement. Revenue is recognizedunder the fixed price contracts using the percentage of completion method,(cost-to-cost basis) principally based upon the costs incurred relative to thetotal estimated costs at completion on the individual contracts. Anyanticipated losses on contracts are charged to operations as soon as they aredeterminable. Revenue recognized under cost plus contracts is recognized on thebasis of direct and indirect costs incurred plus a negotiated profit calculatedas a percentage of costs or as performance based award fee. Revenue fromlong-term contracts is reviewed periodically, with adjustments recorded in theperiod in which the revisions are made. A contract is determined to besubstantially complete when the physical deliverables are completed, shipped andaccepted. Unbilled receivables totaled $1.6 million as of June 30, 2006and 2005. All of unbilled receivables as of June 30, 2006 are expected tobe collected in fiscal 2007. Any anticipated losses on contracts are charged tooperations as soon as they are determinable.

*Stock-BasedCompensation*

Prior to fiscal 2006, we accounted for stock-basedawards under the intrinsic value method, which followed the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations. The intrinsic value method of accounting resulted incompensation expense for restricted stock at fair value on date of grant basedon the number of shares granted and the quoted price of our common stock, andfor stock options to the extent option exercise prices were set below marketprices on the date of grant. Also, to the extent we granted stock options orstock awards that were subject to an exchange offer, other modifications orperformance criteria, such awards were subject to variable accountingtreatment. To the extent stock awards were forfeited prior to vesting, thecorresponding previously recognized expense related to the unvested portion ofthe awards was reversed as an offset to operating expenses.

60

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

As of fiscal 2006, we adopted SFAS No. 123(R), *Share-Based**Payment,* using the modified prospective method, whichrequires measurement of compensation cost for all stock-based awards at fairvalue on date of grant and recognition of compensation over the service periodfor awards expected to vest. The fair value of restricted stock is determinedbased on the number of shares granted and the quoted price of our common stock,and the fair value of stock options is determined using the Black-Scholesvaluation model, which is consistent with our valuation techniques previouslyutilized for options in footnote disclosures required under SFAS No. 123, *Accounting for Stock Based Compensation*,as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation Transition and Disclosure.* Such valueis recognized as expense over the service period, net of estimated forfeitures,using the accelerated method under SFAS No. 123(R). Because we adoptedSFAS No. 123(R), we no longer have employee stock awards subject tovariable accounting treatment.

SFAS No. 123(R) resulted in stock-basedcompensation expense of $4.6 million for the fiscal year ended June 30,2006, which includes the net cumulative impact of 5.94% estimated futureforfeitures in the determination of the period expense, rather than recordingforfeitures when they occur as previously permitted.

At June 30, 2006, the total compensation costrelated to unvested stock-based awards granted to employees, directors andconsultants under the Company’s stock option plans but not yet recognized wasapproximately $4.3 million, net of estimated forfeitures of $0.6 million. Thiscost will be amortized on an accelerated method basis over a period ofapproximately 1.1 years and will be adjusted for subsequent changes inestimated forfeitures.

Prior to the adoption ofSFAS No. 123(R), cash retained as a result of tax deductions relating tostock-based compensation was presented in operating cash flows, along withother tax cash flows, in accordance with the provisions of the Emerging IssuesTask Force (EITF) Issue No. 00-15,*Classification in the Statement of Cash Flows of the Income Tax BenefitReceived by a Company upon Exercise of a Nonqualified Employee Stock Option.*SFAS No. 123(R) supersedes EITF Issue No. 00-15, amendsSFAS No. 95, *Statement of CashFlows,* and requires tax benefits relating to excess stock-basedcompensation deductions to be prospectively presented in the statement of cashflows as financing cash inflows. There were no excess tax benefits resultingfrom the exercise of stock-based compensation deductions reported for financialreporting purposes for the fiscal period ended June 30, 2006.

61

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Effect of Adoptionof SFAS No. 123(R)*

Theapplication of SFAS No. 123(R) had the following effect on thereported amounts for the fiscal period ended June 30, 2006 relative toamounts that would have been reported using the intrinsic value method underprevious accounting:

| ** **                         | ** ** | **Year ended**                                                     | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **June 30, 2006**                                             | ** ** |
| ** **                         | ** ** | **As**                                                                  | ** ** | **SFAS 123R** | ** ** |
| ** **                         | ** ** | **Reported**                                                            | ** ** | **Adjustments** | ** ** |
| ** **                         | ** ** | **(In thousands, except   per share amounts)** | ** ** |
| Income (loss)  from operations     |       |                                                                    | $          | (1,526 | ) |   |   | $ | (4,620 | ) |   |
| Income (loss)  before income taxes |       |                                                                    | $          | 969 |   |   |   | (4,620 | ) |   |
| Net Income (loss)                  |       |                                                                    | 819        |   |   |   | $ | (2,911 | ) |   |
| Basic earnings  per share          |       |                                                                    |       |   |   |   |   |   |   |
| Earnings (loss)                    |       |                                                                    | $          | 0.02 |   |   |   | $ | (0.06 | ) |   |
| Diluted earnings  per share        |       |                                                                    |       |   |   |   |   |   |   |
| Earnings (loss)                    |       |                                                                    | $          | 0.02 |   |   |   | $ | (0.06 | ) |   |

 

| ** **                           | ** ** | **Year ended**         | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **June 30, 2006** | ** ** |
| ** **                           | ** ** | **(In thousands)**     | ** ** |
| SFAS  123(R) adjustments:       |       |                        |       |   |   |
| Cost of products  and services       |       |                        | $          | 564 |   |   |
| Research and  development            |       |                        | 481        |   |   |
| Selling, general  and administrative |       |                        | 3,575      |   |   |
|                                 |       |                        | $          | 4,620 |   |   |

 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Duringfiscal 2004 and fiscal 2005, prior to the adoption of SFAS 123(R), the Companyhad adopted the disclosure only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation.*The Company accounted for employee stock-based compensation using theintrinsic-value-based method of accounting as defined under AccountingPrinciples Board Opinion No. 25 (APB 25), “Accounting for Stock Issue toEmployees,” and its related interpretation. Accordingly, we recognized nocompensation expense in our consolidated statements of operations with respectto options awarded to our employees with exercise prices greater than or equalto the fair value of the underlying common stock at the date of grant. However,we recognized compensation expense in our consolidated statements of operationswith respect to restricted stock awarded to our employees. Had compensationcost for the Company’s stock-based compensation plans been determined using thefair-value method at the grant date for awards under those plans calculatedusing the Black-Scholes pricing model and recognized using the acceleratedmethod over the option vesting periods, the Company’s net income (loss) for theyears ended June 30, 2005 and 2004, would have been decreased (increased)to the pro forma amounts indicated below (in thousands, except per share data):

| ** **                                                                                                                                                             | ** ** | **Year ended June 30,**                                  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2005**                                                                | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                             | ** ** | **(In thousands, except   per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                                                                        |       | $                                                                       | 17,916     |   | $ | (2,237 | ) |
| Add: Stock-based employee compensation expense with  respect to restricted stock awards included in reported net income (loss),  net of related tax effects            |       | 620                                                                     |       | 154 |   |
| Less: Stock-based employee compensation expense  determined under fair value based method for all awards (including the  restricted stock), net of related tax effects |       | (6,131                                                                  | )          | (2,130 | ) |
| Pro forma net  income (loss)                                                                                                                                           |       | $                                                                       | 12,405     |   | $ | (4,213 | ) |
| Earnings (loss) per  share—basic:                                                                                                                                 |       |                                                                    |       |   |   |
| As reported                                                                                                                                                            |       | $                                                                       | 0.39       |   | $ | (0.05 | ) |
| Pro forma                                                                                                                                                              |       | $                                                                       | 0.27       |   | $ | (0.10 | ) |
| Earnings (loss) per  share—diluted:                                                                                                                               |       |                                                                    |       |   |   |
| As reported                                                                                                                                                            |       | $                                                                       | 0.38       |   | $ | (0.05 | ) |
| Pro forma                                                                                                                                                              |       | $                                                                       | 0.26       |   | $ | (0.10 | ) |

 

*Net Income (Loss)Per Share*

Basic income (loss) per share is computed by dividingnet income (loss) by the weighted average number of common shares outstandingduring the period. Diluted income (loss) per share is calculated by dividingnet income (loss) by the weighted average number of common shares outstandingand common equivalent shares from dilutive stock options, warrants, andrestricted stock using the treasury method, except when antidilutive.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Areconciliation of the denominator used in the calculation of basic and dilutednet income (loss) per share is as follows (in thousands):

| ** **                                                                   | ** ** | **Year ended June 30,**                                  | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(In thousands, except   per share amounts)** | ** ** |
| Numerator:                                                                   |       |                                                                    |       |   |   |   |   |
| Net income (loss) from continuing operations                                 |       | $                                                                       | 819        |   | $ | 17,754 |   | $ | (2,250 | ) |
| Gain from discontinued operations                                            |       | —                                                                  |       | 162 |   | 13 |   |
| Net income (loss)                                                            |       | $                                                                       | 819        |   | $ | 17,916 |   | $ | (2,237 | ) |
| Shares (Denominator):                                                        |       |                                                                    |       |   |   |   |   |
| Weighted average common shares outstanding                                   |       | 46,080                                                                  |       | 45,654 |   | 43,691 |   |
| Weighted average common shares outstanding subject  to repurchase            |       | (167                                                                    | )          | (122 | ) | — |   |
| Weighted average shares outstanding—basic                               |       | 45,913                                                                  |       | 45,532 |   | 43,691 |   |
| Weighted average dilutive share equivalents from  stock options and warrants |       | 824                                                                     |       | 1,282 |   | — |   |
| Weighted average common shares dilutive subject to  repurchase               |       | 54                                                                      |       | 122 |   | — |   |
| Weighted average shares outstanding—diluted                             |       | 46,791                                                                  |       | 46,936 |   | 43,691 |   |
| Net earnings (loss) per share—basic                                     |       | $                                                                       | 0.02       |   | $ | 0.39 |   | $ | (0.05 | ) |
| Net earnings  (loss) per share—diluted                                  |       | $                                                                       | 0.02       |   | $ | 0.38 |   | $ | (0.05 | ) |

 

Unvested restricted stock is subject to repurchase bythe Company and therefore is not included in the calculation of theweighted-average shares outstanding for basic earnings (loss) per share.

Thefollowing common stock equivalents were excluded from the net earnings (loss)per share calculation, as their effect would have been antidilutive:

| ** **                                                                                    | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **(In thousands)**                | ** ** |
| Stock options and  warrants                                                                   |       | 2,231                                  |       | 1,861 |   | 5,789 |   |
| Common shares  subject to repurchase                                                          |       | 1                                      |       | — |   | 267 |   |
| Total shares of common  stock excluded from diluted net earnings (loss) per share calculation |       | 2,232                                  |       | 1,861 |   | 6,056 |   |

 

We account for ourcontingent convertible notes in accordance with EITF 04-08, “The Effectof Contingently Convertible Debt on Diluted Earnings Per Share,” which requiresus to include the dilutive effect of the shares of our common stock issuableupon conversion of the outstanding convertible notes in our diluted earningsper share calculation regardless of whether the market price trigger or othercontingent conversion feature has been met. Because our Notes include amandatory cash settlement feature for the principal payment, we apply thetreasury stock method. This method results in incremental dilutive shares whenthe average fair value of our common stock for a reporting period exceeds theinitial conversion price per share of $12.49. However, because our share pricedid not exceed $12.49, no shares 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

associatedwith the contingent convertible notes were included in our diluted earnings pershare as of June 30, 2006.

**Note B—Acquisitions**

*Acquisition ofAgilent’s cesium product line assets*

On August 1, 2005, the Company completed theacquisition of Agilent Technologies’ Frequency and Timing Standards productline. This acquisition is expected to enhance the Company’s position in thearea of cesium clocks used primarily by official time authorities and metrologyinstitutes throughout the world and to further the Company’s leadership ingenerating high-precision frequency and timing references including rubidiumoscillators, cesium clocks and hydrogen masers. The total purchase price ofapproximately $8.0 million was paid in cash. The purchase price was allocatedto the assets acquired, including goodwill and the liabilities assumed, basedon management’s preliminary estimate of the fair value for purchase accountingpurposes at the date of acquisition. Management does not expect significantrevisions to the purchase price allocations for the acquired businesses.

The purchaseprice was allocated to Agilent’s assets and liabilities as follows (inthousands):

| Inventory                         |   | $     | 1,357  |   |
|-----------------------------------|--------|-------|--------|--------|
| Prepaid and other  current assets |   | 92    |   |
| Property, plant  and equipment    |   | 82    |   |
| Intangible assets                 |   | 3,354 |   |
| Goodwill                          |   | 3,614 |   |
| Liabilities  assumed              |   | (467  | )      |
| Total purchase  price             |   | $     | 8,032  |   |

 

*Acquisition ofDatum*

On October 29, 2002, we completed our acquisitionof Datum. The acquisition was accomplished pursuant to an Agreement and Plan ofMerger, dated as of May 22, 2002 and was accounted for as a purchase. As aresult of the merger, Datum became a wholly owned subsidiary of Symmetricom. Weissued approximately 17.4 million shares of our common stock with a fair valueof $97.5 million, converted Datum stock options into options to purchaseapproximately 2.3 million shares of our common stock with a fair value of $13.1million and converted Datum warrants into warrants to purchase 486,754 sharesof our common stock with an exercise price of $4.135 per share and a fair valueof $1.8 million. In addition, we incurred direct acquisition costs ofapproximately $6.6 million.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thepurchase price was allocated to Datum’s assets and liabilities as follows (inthousands):

| Cash and cash  equivalents           |   | $       | 3,034   |   |
|--------------------------------------|--------|---------|---------|--------|
| Property, plant,  and equipment      |   | 12,120  |    |
| Other tangible  assets               |   | 42,834  |    |
| Existing  technology                 |   | 13,856  |    |
| In-process  research and development |   | 1,156   |    |
| Other intangible  assets             |   | 293     |    |
| Goodwill                             |   | 68,549  |    |
| Assumed  liabilities                 |   | (22,904 | )       |
| Total purchase  price                |   | $       | 118,938 |   |

 

In fiscal 2004, theamounts contained in the purchase price allocation were adjusted when finaldata on some of the preliminary estimates was received. The changes arereflected in the table above and include a $1.3 million increase in deferredtax assets identified when final tax returns were prepared, a $304,000 increasein the accrued warranty after confirming with the customers the amount of totalliabilities for the rework and a $28,000 net increase in the inventorywrite-off after negotiating with the vendor to finalize the liabilities.

**Note C—DiscontinuedOperations**

During fiscal 2006 there was no gain or loss recordedfor discontinued operations. During fiscal 2005 and 2004, we recognized gainsof $162,000 and $13,000, respectively, for final payment for sale of softwarerelated to the Trusted Time Division, which was discontinued during fiscal2003.

In June 2003, wediscontinued the operation of the Trusted Time Division as part of ourpost-acquisition consolidation process. The division was acquired as part ofthe acquisition of Datum in October 2002. The division has been accountedfor as a discontinued operation and, accordingly, the results of operationshave been excluded from continuing operations in the consolidated statements of operations.

**Note D—OtherAccrued Liabilities**

Other accruedliabilities consists of the following:

| ** **                  | ** ** | **June 30,**       | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Other accrued  liabilities: |       |                    |       |   |   |
| Income taxes payable        |       | $                       | 4,529      |   | $ | 4,408 |   |
| Deferred revenue            |       | 3,198                   |       | 2,847 |   |
| Accrued expenses            |       | 5,238                   |       | 4,494 |   |
| Accrued lease loss          |       | 109                     |       | 667 |   |
| Total                       |       | $                       | 13,074     |   | $ | 12,416 |   |

 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note E—Post-RetirementBenefit Obligations**

In connection with the Datum acquisition, we assumedDatum’s post-retirement health care benefits plan. Post-retirement benefits arerecognized over the employee’s service period based on 6.23% discount rate tothe employee and the employee’s beneficiaries after retirement. The health careplan was curtailed as of December 31, 2002, and only existing retiredparticipants and former Datum employees, now employed by Symmetricom andmeeting the retirement eligibility requirements by December 31, 2004, areeligible for participation. The health care plan is a contributory plan.

Thefollowing sets forth the Company’s post-retirement program’s status reconciledwith amounts reported in the consolidated balance sheet (in thousands):

| ** **                                                         | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**                | ** ** |
| Beginning balance  accumulated post-retirement benefit obligations |       | $                                      | 415        |   | $ | 555 |   | $ | 559 |   |
| Service cost                                                       |       | —                                 |       | — |   | — |   |
| Interest cost                                                      |       | 26                                     |       | 28 |   | 34 |   |
| Actuarial gain                                                     |       | (65                                    | )          | (123 | ) | 25 |   |
| Benefit payments                                                   |       | (42                                    | )          | (45 | ) | (63 | ) |
| Ending balance  accumulated postretirement benefit obligations     |       | $                                      | 334        |   | $ | 415 |   | $ | 555 |   |

 

Netperiodic post-retirement benefit cost includes the following components:

| ** **                            | ** ** | **Year ended June 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(In thousands)**                | ** ** |
| Service cost                          |       |                                   | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Interest cost                         |       |                                   | 26         |   |   |   | 28 |   |   |   | 34 |   |   |
| Net periodic  post-retirement expense |       |                                   | $          | 26 |   |   |   | $ | 28 |   |   |   | $ | 34 |   |   |

 

The Company’s contributionto the plan is fixed for each eligible retiree. Therefore, fluctuations inhealth care costs have no effect on the Company’s liability. Upon the demise ofthe eligible retiree, the coverage for the spouse of the retiree is terminated.

**Note F—Warranties**

Changesin our accrued warranty liability during fiscal 2006, 2005 and 2004 are asfollows:

| ** **                              | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                | ** ** |
| Beginning balance                       |       | $                                      | 3,338      |   | $ | 3,194 |   | $ | 4,021 |   |
| Provision for  warranty for the year    |       | 2,886                                  |       | 2,546 |   | 2,059 |   |
| Adjustment for  expired warranties year |       | —                                 |       | — |   | (23 | ) |
| Less: Actual  warranty costs            |       | (2,677                                 | )          | (2,402 | ) | (2,863 | ) |
| Ending balance                          |       | $                                      | 3,547      |   | $ | 3,338 |   | $ | 3,194 |   |

 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note G—LeaseCommitments**

In March 2006, we entered into an office leaseagreement, effective April 15, 2006 to December 31, 2009, for approximately21,065 square feet of space in an office building located in Austin, Texas. Theleased space is for offices.

***In November 2005, we entered into aFirst Amendment to Lease, effective as of October 27, 2005, which amendsour existing lease for approximately 117,739 square feet of space in an officebuilding located in San Jose, California. The leased space serves as ourcorporate office. The amendment extends the termination date of the lease from April 15,2009 to April 15, 2016. In addition, it provides that, commencing December 1,2005, basic annual rent (as defined in the lease) will be reduced to $1.7million, subject to 4% annual increases commencing on April 15, 2006. Thebuilding element of the original lease, which was accounted for from the outsetas a capital lease for a property with a cost of $9.0 million,continues to be amortized over the initial lease period ending in April 2009,in accordance with SFAS No. 13,***Accounting for Leases.

Lease loss liabilities were created as a result ofdiscontinuing operations and consolidations. As of June 30, 2006, and 2005the accrued lease loss liabilities were approximately $300,000 and $946,000, respectively.

Inaddition, we lease certain other facilities and equipment under operating leaseagreements. Rental expense charged to operations was $1.7 million in 2006, $1.4million in 2005 and $1.9 million in 2004. Future minimum lease payments, net ofsublease income at June 30, 2006 are as follows: 

| ** **                                                         | ** ** | **Capital Lease**  | ** ** | **Operating Lease** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | **(In thousands)** | ** ** |
| **For the fiscal year:**                                           | ** ** |                    | ** ** | ** **               |       |   | ** ** | ** ** |   |
| 2007                                                               |       |                    | $          | 1,492                    |       |   |   | $ | 1,796 | ** ** |   |
| 2008                                                               |       |                    | 1,576      |                     |       |   | 2,300 | ** ** |   |
| 2009                                                               |       |                    | 1,325      |                     |       |   | 2,264 | ** ** |   |
| 2010                                                               |       |                    | —     |                     |       |   | 3,435 | ** ** |   |
| 2011                                                               |       |                    | —     |                     |       |   | 4,228 | ** ** |   |
| Thereafter                                                         |       |                    | —     |                     |       |   | 19,365 | ** ** |   |
| Total minimum lease payments                                       |       |                    | 4,393      |                     |       |   | $ | 33,388 | ** ** |   |
| Amount representing  interest (weighted average rate of 8.5%) |       |                    | (480       | )                        |       |   |   | ** ** |   |
| Present value of  total minimum lease payments                     |       |                    | 3,913      |                     |       |   |   | ** ** |   |
| Current portion                                                    |       |                    | (1,216     | )                        |       |   |   | ** ** |   |
| Capital lease  obligation, net of current portion                  |       |                    | $          | 2,697                    |       |   |   |   | ** ** |   |

 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note H—Goodwill andIntangible Assets**

Thechanges in the carrying value of goodwill for the years ended June 30,2006 and 2005 are as follows for the different segments of Symmetricom (seeNote B):

| ** **                         | ** ** | ** **              | ** ** | ** **       | ** ** | **Timing, Test** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-------------------------|------------|------------------|------------|-----------------------|------------|------------|------------|
| ** **                         | ** ** | ** **              | ** ** | ** **       | ** ** | **and**               | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Wireline**            | ** ** | **Wireless/OEM** | ** ** | **Measurement**       | ** ** | **Total**  | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Balances as of  June 30, 2004 |       | $                       | 27,917     |             |       | $                     | 6,963      |       |       |   | $ | 14,368 |   |   | $ | 49,248 |   |
| Adjustments                        |       | —                  |       |             | —     |                  |       |       | —     |   |   | — |   |
| Balances as of  June 30, 2005 |       | $                       | 27,917     |             |       | $                     | 6,963      |       |       |   | $ | 14,368 |   |   | $ | 49,248 |   |
| Addition (see  Note B)             |       | —                  |       |             | —     |                  |       |       | 3,614      |   |   | 3,614 |   |
| Impairment of  goodwill            |       | —                  |       |             | (6,963     | )                     |       |       | —     |   |   | (6,963 | ) |
| Balances as of  June 30, 2006 |       | $                       | 27,917     |             |       | $                     | —     |       |       |   | $ | 17,982 |   |   | $ | 45,899 |   |

 

In the third quarter of the fiscal 2006, we recorded anon-cash impairment charge of approximately $7.0 million for the write-down ofthe goodwill related to our Wireless/OEM business segment purchased inconnection with the Datum acquisition in October 2002. The impairmentcharge reflects changing business conditions in the wireless segmentsurrounding product pricing, gross margins, new product acceptance and theincreasingly prevalent use of wireless technologies that do not require afrequency reference at the cell site, but receive the required synchronizationreferences from central office. Our accounting policy is to perform impairmenttests in accordance with the SFAS No.142,*Goodwill and OtherIntangible Assets*, on an annual basis, and between annual tests incertain circumstances, for each reporting unit using a discounted cash flowvaluation method. During the third quarter of fiscal 2006, there was animpairment indicator and we performed a goodwill impairment test on theWireless/OEM business segment since the product pricing pressures and grossmargin pressures discussed in prior quarters continued to decline in the thirdquarter of fiscal 2006 and we did not anticipate any improvement.

Critical estimates in valuing certain intangibleassets include, but are not limited to: future expected cash flows fromcustomer contracts, customer lists, distribution agreements, acquired developedtechnologies and patents; expected costs to develop the in-process research anddevelopment into commercially viable products and estimating cash flows fromthe projects when completed; and the brand awareness and the market position ofthe acquired products and assumptions about the period of time the brand willcontinue to be used in the combined company’s product portfolio. Management’sestimates of fair value are based upon assumptions believed to be reasonable,but which are inherently uncertain and unpredictable.

The provisions of SFAS No. 142 also require anannual goodwill impairment test, and more frequently if impairment indicatorsarise. In testing for a potential impairment of goodwill, the provisions ofSFAS No. 142 require the application of a fair value based test atthe reporting unit level. The first step of the impairment test prescribed bySFAS No. 142 requires an estimate of the fair value of each unit. If theestimated fair value of any unit is less than the book value, SFAS No. 142requires an estimate of the fair value of all identifiable assets andliabilities of the unit in a manner similar to a purchase price allocation foran acquired business. This estimate requires valuations of certain internallygenerated and unrecognized intangible assets such as in-process research anddevelopment and developed technology. Potential goodwill impairment is measuredbased upon this two-step process. An internal evaluation identified the need torecord an impairment loss for the Wireless/OEM segment in the third quarter of 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

fiscal 2006 using adiscounted cash flow valuation method. We performed our most recent annualgoodwill impairment test as of June 2006 and no impairment losses wererecorded based on these evaluations.

In the third quarter of fiscal 2006, we recorded anon-cash impairment charge of approximately $1.2 million for thewrite-down of the other intangibles related to our Wireless/OEM businesssegment purchased in connection with the Datum acquisition in October 2002.During the third quarter of fiscal 2006, there was an impairment indicator andwe performed an intangible impairment test on the Wireless/OEM business segmentsince the product pricing pressures and gross margin pressures discussed inprior quarters continued to decline in the third quarter of fiscal 2006 and wedid not anticipate any improvement. There were no charges associated with theintangible assets in fiscal 2005 and 2004.

The carrying value of long-lived assets is evaluatedwhenever events or changes in circumstances indicate that the carrying value ofthe asset may be impaired. An impairment loss is recognized when estimatedundiscounted future cash flows expected to result from the use of the asset,including disposition, is less than the carrying value of the asset. Impairmentis measured as the amount by which the carrying amount exceeds the fair value.

Otherintangible assets are recorded at cost, less accumulated amortization. Otherintangible assets as of June 30, 2006 and 2005 consist of:

| ** **                         | ** ** | **Gross**                | ** ** | **Accumulated**  | ** ** | **Net**                    | ** ** |
|------------------------------------|------------|--------------------------|------------|------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Carrying Amount** | ** ** | **Amortization** | ** ** | **Intangible Assets** | ** ** |
| ** **                         | ** ** | **(in thousands)**  | ** ** |
| Purchased  technology              |       |                     | $          | 23,768           |       |                       |       | $ | 14,557 |   |   |   | $ | 9,211 |   |   |
| Customer lists,  trademarks, other |       |                     | 3,730      |             |       |                       | 2,669      |   |   |   | 1,061 |   |   |
| Total as of June 30, 2005     |       |                     | $          | 27,498           |       |                       |       | $ | 17,226 |   |   |   | $ | 10,272 |   |   |
| Purchased technology               |       |                     | $          | 22,671           |       |                       |       | $ | 15,515 |   |   |   | $ | 7,156 |   |   |
| Customer lists,  trademarks, other |       |                     | 3,973      |             |       |                       | 2,929      |   |   |   | 1,044 |   |   |
| Total as of  June 30, 2006    |       |                     | $          | 26,644           |       |                       |       | $ | 18,444 |   |   |   | $ | 8,200 |   |   |

 

| **Fiscal year:** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|-----------------------|------------|------------|------------|-------------------------|------------|
| 2007                  |       |       | $          | 2,322                   |       |   |
| 2008                  |       |       | 1,427      |                    |       |
| 2009                  |       |       | 1,294      |                    |       |
| 2010                  |       |       | 1,011      |                    |       |
| 2011                  |       |       | 796        |                    |       |
| Thereafter            |       |       | 1,350      |                    |       |
| Total  amortization   |       |       | $          | 8,200                   |       |   |

 

The estimated future amortization expense is asfollows:

Intangible asset amortization expense for fiscal 2006,2005 and 2004 was approximately $4.1 million, $4.5 million and $4.7 million,respectively.

Increases in the other intangible assets during fiscal2006 primarily resulted from the acquisition of Agilent Technologies’ Frequencyand Timing Standards product line, which included $2.6 million in purchasedtechnology, $0.2 million in backlog and $0.5 million in customer relationships.The $0.2 million in backlog was fully amortized in the first quarter of fiscal2006.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note I—Income Taxes**

Theprovision of federal, state and foreign income tax expense on income fromcontinuing operations consists of the following:

| ** **                 | ** ** | **Year ended June 30,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** |
| Current:                   |       |                                   |       |   |   |   |   |
| Federal                    |       | $                                      | 767        |   | $ | 1,375 |   | $ | (1,178 | ) |
| State                      |       | (45                                    | )          | 267 |   | 283 |   |
| Puerto Rico                |       | 445                                    |       | 847 |   | 288 |   |
| Foreign                    |       | 47                                     |       | 635 |   | 65 |   |
|                       |       | 1,214                                  |       | 3,124 |   | (542 | ) |
| Deferred:                  |       |                                   |       |   |   |   |   |
| Federal                    |       | (881                                   | )          | (447 | ) | (1,445 | ) |
| State                      |       | (383                                   | )          | 196 |   | (147 | ) |
| Puerto Rico                |       | 200                                    |       | (345 | ) | — |   |
| Foreign                    |       | —                                 |       | 16 |   | 11 |   |
|                       |       | (1,064                                 | )          | (580 | ) | (1,581 | ) |
| Total provision  (benefit) |       | $                                      | 150        |   | $ | 2,544 |   | $ | (2,123 | ) |

 

Theeffective income tax rate differs from the federal statutory income tax rate asfollows:

| ** **                                           | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal statutory  income tax (benefit) expense rate |       | 35.0                                   | %          | 35.0 | % | (35.0 | )% |
| Federal tax  benefit of Puerto Rico operations       |       | (198.0                                 | )          | (26.5 | ) | (28.0 | ) |
| Puerto Rico taxes                                    |       | 67.0                                   |       | 2.5 |   | 6.6 |   |
| State income  taxes, net of federal benefit          |       | (50.0                                  | )          | 2.1 |   | 2.9 |   |
| Goodwill                                             |       | 167.0                                  |       | — |   | 2.2 |   |
| Other                                                |       | (5.5                                   | )          | (0.6 | ) | 2.8 |   |
| Effective income tax  rate                           |       | 15.5                                   | %          | 12.5 | % | (48.5 | )% |

 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theprincipal components of deferred tax assets and liabilities are as follows:

| ** **                       | ** ** | **June 30,**       | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| Deferred tax  assets:            |       |                    |       |   |   |
| Net operating loss carryforwards |       | $                       | 23,292     |   | $ | 23,458 |   |
| Tax credit carryforwards         |       | 11,621                  |       | 11,202 |   |
| Reserves and accruals            |       | 6,759                   |       | 6,312 |   |
| Depreciation and amortization    |       | 12,719                  |       | 11,517 |   |
|                             |       | 54,391                  |       | 52,489 |   |
| Valuation  allowance             |       | (2,822                  | )          | (2,822 | ) |
| Total deferred  tax assets       |       | 51,569                  |       | 49,667 |   |
| Deferred tax  liabilities:       |       |                    |       |   |   |
| Unremitted Puerto Rico earnings  |       | 1,177                   |       | 929 |   |
|                             |       | 1,177                   |       | 929 |   |
| Net deferred tax  assets         |       | $                       | 50,392     |   | $ | 48,738 |   |

 

The increase of net deferred tax assets of $1.7million during fiscal 2006 includes the deferred tax provision on continuingoperations shown above of $1.1 million plus $0.6 million of deferred tax assetsrelated to the recognition of stock option benefits.

Netdeferred tax assets are comprised of the following:

| ** **               | ** ** | **June 30,**       | ** ** |
|--------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| Current assets           |       | $                       | 6,759      |   | $ | 6,312 |   |
| Non-current  assets      |       | 44,252                  |       | 42,845 |   |
| Non-current  liabilities |       | (619                    | )          | (419 | ) |
| Net deferred tax assets  |       | $                       | 50,392     |   | $ | 48,738 |   |

 

As of June 30, 2006, for federal income taxpurposes, we had regular net operating loss carryforwards of approximately$66.0 million, which will expire in years 2021 through 2025. We had Californiaregular net operating loss carryforwards of approximately $15.9 million, whichwill expire in years 2013 through 2015.

Also, we had federal research and development taxcredit carryforwards of approximately $5.8 million that will expire in theyears 2008 through 2025, and alternative minimum tax credit carryforwards ofapproximately $3.5 million that have no expiration date. Additionally, forstate income tax purposes, we had research and development tax creditcarryforwards of approximately $2.1 million, which have no expiration date.

During fiscal 2006, we reviewed the realizability ofdeferred tax assets and determined that $0.6 million of the deferred taxassets related to stock option exercises were more likely than not to berealized. Accordingly, we recognized these deferred tax assets with acorresponding increase to common stock. We have provided a valuation allowancefor certain deferred tax assets because we have determined that it is morelikely than not that we will not have sufficient taxable income to realizethese tax assets. At June 30, 2006, the valuation allowance of $2.8million was attributable to the tax benefit of potentially 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

expiring tax creditsstemming from stock option transactions, which will be credited to common stockif realized rather than as a reduction of the tax provision.

We operate a subsidiary in Puerto Rico under a grantproviding for a partial exemption from Puerto Rico taxes through fiscal2016. In addition, this subsidiary was taxed under Section 936 of the U.S.Internal Revenue Code, which exempted qualified Puerto Rico source earnings,subject to wage-based and other limitations, from federal income taxes throughfiscal 2006. Taxes have been calculated on this subsidiary’s earnings, all ofwhich we intend to remit to the U.S. As of June 30, 2006, the totalunremitted earnings of the Puerto Rico subsidiary and the related tax liabilitywere approximately $46.0 million and $1.1 million, respectively.

On July 10,2006, ourPuerto Rico subsidiary, formerly electing the benefits of section 936,distributed $41.0 million as a dividend to its parent Symmetricom, Inc. OnJuly 11, 2006, this Puerto Rico subsidiary moved its place ofincorporation from Delaware to Bermuda in a tax-free reorganization. Consistentwith a resolution approved by the Symmetricom board of directors, thissubsidiary has elected to indefinitely reinvest its future profits outside theUnited States and not repatriate future earnings to its parent Symmetricom, Inc.

**Note J—Contingencies**

We formerly leased a tract of land for our operationsin Texas. Those operations involved the use of solvents and, at the end of thelease, we remediate an area where the solvents had been deposited on the groundand obtained regulatory approval for that remedial activity. In 1996, anenvironmental investigation of the property detected those same contaminants ingroundwater in excess of current regulatory standards. The groundwatercontamination has migrated to some adjacent properties. We have entered intothe Texas Natural Resource Conservation Commission’s Voluntary CleanupProgram (the “Voluntary Cleanup Program”) to obtain regulatory approval for closureof this site and a release from liability to the State of Texas for subsequentlandowners and lenders. We have notified adjacent property owners affected bythe contamination of our participation in the Voluntary Cleanup Program. On May 20,2004, we received a demand from the owner of several adjacent lots for damagesin the amount of $1.3 million, as well as seeking an indemnity for thecontamination and a promise to remediate the contamination. On March 14,2006, the adjacent property owner filed suit in Probate Court No. 1, TravisCounty, Texas (*Anna B. Miller, Individually and asExecutrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.)*,seeking damages. We have not yet been served in this matter. Weare continuing to work on the remediation of the formerly leasedsite as well as the adjacent properties and intend to defend this lawsuitvigorously. As of June 30,2006, we had an accrual of $0.6 million for remediation costs, appraisal feesand other ongoing monitoring costs.

Under the indemnification provisions of the Company’sstandard sales contracts, the Company agrees to defend the customer againstthird party claims asserting infringement of certain intellectual propertyrights, which may include patents, copyrights, trademarks or trade secrets, andto pay any judgments entered on such claims against the reseller/customer. Theexposure to the Company under these indemnification provisions is generallylimited to the total amount paid by the customer under the agreement. However,certain agreements include indemnification provisions that could potentiallyexpose the Company to losses in excess of the amount received under theagreement. To date, there have been no claims under such indemnificationprovisions. As such, the Company believes the estimated fair value of theseindemnification agreements is not material.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

We are also a party tocertain other claims in the normal course of our operations. While the resultsof these claims cannot be predicted with any certainty, we believe that thefinal outcome of these matters will not have a material adverse effect on ourfinancial position and results of operations.

**Note K—RelatedParty Transactions**

In March 1998, we loaned an officer $500,000 inthe form of an interest-free full-recourse promissory note. The entireprincipal balance is due and payable on March 25, 2008. The note issecured by a deed of trust for the officer’s personal residence. As of June 30,2006, the entire principal balance is outstanding.

In February 2001, we loaned an officer $555,000in the form of a full-recourse promissory note. The note accrued interest at anannual rate of 7.75%. On December 2004, the entire principal balance was paid.

During fiscal 2006, 2005 and 2004, we paid a total of$7,500, $12,500 and $9,000, respectively, for consulting fees to four directorsof Symmetricom in addition to their regular director compensation forattendance at Board and Committee meetings.

During fiscal 2006, wesold products and services to Arris Group for a total of approximately$175,000, and acquired equipment for approximately $2,000. The CEO of ArrisGroup, Mr. Robert Stanzione, is a director of the Company.

**Note L—Long Term Obligations**

| ** **                             | ** ** | **June 30,**       | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Long-term obligations:                 |       |                    |       |   |   |
| Capital lease                          |       | $                       | 3,913      |   | $ | 4,953 |   |
| Less—current maturities           |       | (1,216                  | )          | (1,040 | ) |
| Lease loss accrual                     |       | 145                     |       | 279 |   |
| Lease accrual                          |       | 151                     |       | — |   |
| Bond payable                           |       | 2,405                   |       | 2,475 |   |
| Less—current maturities           |       | (70                     | )          | (70 | ) |
| Convertible subordinate notes          |       | 120,000                 |       | 120,000 |   |
| Post-retirement benefits (Note E), net |       | 292                     |       | 370 |   |
| Total                                  |       | $                       | 125,620    |   | $ | 126,967 |   |

 

On June 8, 2005, the Company sold $120 million ofcontingent convertible subordinated notes (the “Notes”), which mature on June 15,2025 and bear interest at the rate of 3.25 % per annum. Interest on the Notes ispayable semi-annually in June and December of each year beginning on December 15,2005. The Notes are unsecured obligations and are subordinated in right ofpayment to all of our existing and future senior debt, including ourindebtedness under our senior credit facilities. The Notes are structurallysubordinated to all indebtedness and liabilities of our subsidiaries.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Notes areconvertible, at the holder’s option, prior to the maturity date into cash and,if applicable, shares of our common stock in the following circumstances:

·       Priorto June 15, 2023, if the common stock price for a least 20 trading days inthe period of 30 consecutive days ending on the last trading day of thecalendar quarter preceding the quarter in which the conversion occurs is morethan 125% of the conversion price of the notes in effect on that 30th trading day;

·       Onor after June 15, 2023, at all times on or after any date on which thecommon stock price is more than 125% of the then current conversion price;

·       Duringthe five consecutive business-day period following any five consecutivetrading-day period in which the trading price for the notes for each suchtrading-day was less than 95% of the average of the sale price of our commonstock during such five trading-day period multiplied by the then currentconversion rate;

·       Ifwe have called the particular notes for redemption and the redemption has notyet occurred; or

·       Uponthe occurrence of specified corporate transactions.

Holders may convert any outstanding Notes into cashand, if applicable, shares of our common stock at an initial conversion priceper share of $12.49. On June 30, 2006, the reported closing bid price ofour common stock was $7.07 per share.

Also, on or after June 20, 2012, we may redeemsome or all of the Notes at any time or from time to time at a redemption priceof 100% of the principal amount of the Notes, plus accrued and unpaid interest,(including liquidated damages, if any) up to but not including the date ofredemption, payable in cash. Holders may require us to repurchase all or aportion of their Notes on June 15, 2012, 2015 and 2020 for a repurchaseprice equal to 100% of the principal amount of the Notes, plus accrued andunpaid interest (including liquidated damages, if any) up to but not includingthe date of repurchase, payable in cash, plus, in the event of certain changeof control events related to us.

We may from time to time repurchase or redeem all or aportion of the Notes, if necessary, to comply with NASDAQ marketplace rule 4350(i)(1)(D).We may undertake such repurchase from time to time through privately negotiatedor open-market transactions or other available means.

In connection with the issuance of these Notes,Symmetricom recorded bond fees of approximately $3.8 million, which will beamortized over a period of seven years until fiscal 2012.

On May 1, 2004, we entered into a creditagreement with Wells Fargo Bank, National Association to obtain a revolvingline of credit up to $5.0 million to be used as working capital. On June 1,2005 this agreement was amended to allow the Company to obtain a revolving lineof credit up to $10.0 million to be used as working capital. At the beginningof July 2006, the Company decided to reduce the credit note from $10million to $3 million. The line of credit contains certain financial covenantsand restrictions. The new line of credit expires on November 1, 2006. Noborrowings were outstanding as of June 30, 2006.

On June 1, 2001, theMassachusetts Development Finance Agency issued a $2.7 million industrialdevelopment bond on Datum’s behalf to finance the expansion of Datum’smanufacturing facility in Beverly, Massachusetts. The bond matures on May 1,2021. Interest on the bond is payable monthly at an adjustable rate ofinterest. The remarketing agent establishes the interest rate for each rateperiod at the lowest rate that in its judgment would permit the sale of thebonds at par value. The bond is collateralized 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

by theline of credit with Wells Fargo Bank described above. As of June 30, 2006,the bond balance was $2.4 million.

**Note M—BenefitPlans**

*401(k) Plan*

The Company has a 401(k) plan(the “Plan”) that allows eligible U.S. and Puerto Rico employees to contributeup to 50 percent of their annual compensation to the Plan, subject to certainlimitations. The employees’ funds are not directly invested in shares of theCompany’s common stock. Each employee directs the investment of the fundsacross a series of mutual funds. Effective in fiscal 2004, Symmetricom matchedup to $0.50 per $1.00 deferred up to 3% of eligible compensation. An additionalmatch of $1.00 per $1.00 deferred up to 1% of eligible compensation willbe made based upon achievement of company profit performance goals. Employeecontributions vest immediately. Employer matching contributions vest ratablyover three years. Symmetricom made matching contribution payments of $0.5 million,$0.7 million and $0.4 million in fiscal 2006, 2005 and 2004, respectively.

*DeferredCompensation Plan*

The Company has a deferredcompensation plan that allows outside directors and certain U.S. employeesto contribute up to 100% of their compensation, provided that theircontribution does not reduce their salary to an amount that is less than theamount necessary to pay applicable employment taxes and other withholdingobligations. The Board of Directors is authorized to make discretionarycontributions to the accounts of participants. No discretionary contributionswere made in fiscal 2006, 2005, and 2004.

**Note N—Stockholders’Equity**

*Stock Option Plans*

The Company has several equity benefit plans underwhich employees, directors and consultants may be granted non-qualified andincentive options to purchase shares of the Company’s common stock andrestricted stock. One of these plans was amended in fiscal 2003, in connectionwith the tender offer during the fourth quarter of fiscal 2003, to effectivelyprovide that restricted stock could be granted and repurchased for no cashpurchase price. Stock appreciation rights may also be granted under this plan;however, none have been granted to date. In addition, non-employee directorshave previously been granted options each January to purchase 10,000shares of Symmetricom’s common stock or a pro rata share based on the timeserved by a new director in the previous calendar year. All options have beengranted at the fair market value of our common stock on the date of grant and,except with respect to grants made with the changes described below, expire nolater than ten years from the date of grant. Options generally vest over threeyears.

EffectiveJanuary 1, 2007, each non-employee director will receive an annualnon-statutory stock option grant to purchase 7,500 shares of Symmetricom’scommon stock and a grant of 3,750 shares of restricted stock, each with 100%vesting at the end of one year or upon the occurrence of a change ofcontrol. This automatic grant of options and restricted stock replaces theautomatic annual grant of 10,000 options to purchase common stock that waspreviously in place for continuing non-employee directors. In addition, uponjoining the Board of Directors, each non-employee director will receive aone-time grant of a non-statutory stock option to purchase 20,000 shares of theCompany’s common stock.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Effective August 4, 2005, the Symmetricom Boardapproved a change in the terms for stock options granted on and afterAugust 4, 2005 under the employee stock option plans. In addition,effective December 28, 2005, the Symmetricom Board approved a change inthe terms for stock options granted on and after December 28, 2005 tonon-employee directors. These amendments provide that the life of a stockoption made under these plans is now 5 years instead of 10 years. Vesting termsare generally unchanged. The Company’s right to repurchase restricted sharesgenerally lapses over the same term as the vesting period applicable to theCompany’s stock options.

Stockoption activity for the three years ended June 30, 2006 is as follows:

| ** **                      | ** ** | ** **                                                            | ** ** | **Options Outstanding** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **Shares**                                                            | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | **Available**                                                         | ** ** | **Number of**           | ** ** | **Average** | ** ** |
| ** **                      | ** ** | **For Grant**                                                    | ** ** | **Shares**                   | ** ** | **Exercise Price** | ** ** |
| ** **                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Balances at  June 30, 2003 |       |                                                                  | 3,758      |                         |       |   | 6,294 |   |   |   | $ | 4.90 |   |   |
| Granted*                        |       |                                                                  | (952       | )                            |       |   | 918 |   |   |   | 9.44 |   |   |
| Exercised                       |       |                                                                  | —     |                         |       |   | (1,805 | ) |   |   | 4.20 |   |   |
| Canceled                        |       |                                                                  | 417        |                         |       |   | (417 | ) |   |   | 6.17 |   |   |
| Expired                         |       |                                                                  | (186       | )                            |       |   | — |   |   |   | — |   |   |
| Balances at  June 30, 2004 |       |                                                                  | 3,037      |                         |       |   | 4,990 |   |   |   | 5.88 |   |   |
| Granted                         |       |                                                                  | (1,259     | )                            |       |   | 1,259 |   |   |   | 8.04 |   |   |
| Exercised                       |       |                                                                  | —     |                         |       |   | (1,619 | ) |   |   | 4.95 |   |   |
| Canceled                        |       |                                                                  | 305        |                         |       |   | (305 | ) |   |   | 6.70 |   |   |
| Expired                         |       |                                                                  | (69        | )                            |       |   | — |   |   |   | — |   |   |
| Balances at  June 30, 2005 |       |                                                                  | 2,014      |                         |       |   | 4,325 |   |   |   | 6.81 |   |   |
| Granted*                        |       |                                                                  | (959       | )                            |       |   | 739 |   |   |   | 9.03 |   |   |
| Exercised                       |       |                                                                  | —     |                         |       |   | (402 | ) |   |   | 4.74 |   |   |
| Canceled                        |       |                                                                  | 263        |                         |       |   | (263 | ) |   |   | 9.30 |   |   |
| Expired                         |       |                                                                  | (1         | )                            |       |   | — |   |   |   | — |   |   |
| Balances at  June 30, 2006 |       |                                                                  | 1,317      |                         |       |   | 4,399 |   |   |   | $ | 7.22 |   |   |

----

*                    includedrestricted award

Thetotal number of in-the-money options outstanding and exercisable as of June 30,2006 was as follows:

| ** **                         | ** ** | ** **              | ** ** | **Weighted**        | ** ** | ** **   | ** ** | ** **              | ** ** | ** **    | ** ** | ** **              | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------|------------|-------------------------|------------|---------------|------------|-------------------------|------------|
| ** **                         | ** ** | ** **              | ** ** | **Average**         | ** ** | ** **   | ** ** | ** **              | ** ** | ** **    | ** ** | ** **              | ** ** |
| ** **                         | ** ** | ** **              | ** ** | **Remaining**       | ** ** | **Weighted** | ** ** | **6/30/2006**           | ** ** | **Intrinsic** | ** ** | **Aggregate**           | ** ** |
| ** **                         | ** ** | **Number of**      | ** ** | **Contractual**     | ** ** | **Average**  | ** ** | **Closing**             | ** ** | **Value**     | ** ** | **Intrinsic**           | ** ** |
| **Option**                         | ** ** | ** **              | ** ** | **Shares**          | ** ** | **Life**     | ** ** | **Exercise Price** | ** ** | **Price**     | ** ** | **Per Share**      | ** ** | **Value** | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** | **(In years)** | ** ** | ** **   | ** ** | ** **              | ** ** | ** **    | ** ** | **(In thousands)** | ** ** |
| Outstanding at June 30,  2006 |       |                    | 1,578      |                |       |         | 4.01       |                    |       |          | $          | 4.60                    |       |   |   | $ | 7.07 |   |   |   | $ | 2.47 |   |   |   | $ | 3,897 |   |   |
| Exercisable at June 30,  2006 |       |                    | 1,568      |                |       |         | 3.99       |                    |       |          | $          | 4.59                    |       |   |   | $ | 7.07 |   |   |   | $ | 2.48 |   |   |   | $ | 3,888 |   |   |
|                                    |            |                         |            |                     |            |              |            |                         |            |               |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsic value in the preceding tablerepresents the total pre-tax value of stock options outstanding as of June 30,2006, based on the Company’s common stock closing price of $7.07 on 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

June 30, 2006,which would have been received by the option holders had all option holdersexercised their options as of that date.

As of June 30, 2006, 2005 and 2004, the number ofshares and weighted average exercise prices of exercisable options were1,567,540 at $4.59, 2,387,119 at $5.75 and 3,112,002 at $5.26, respectively.

There were 2,361,169 shares of common stock subject toin-the-money options exercisable as of June 30, 2005, based on the Company’sclosing stock price of $10.37 at the end of the fiscal year ended June 30,2005.

The total intrinsic value of options exercised duringthe years ended June 30, 2006, 2005, and 2004, was $1.6 million, $8.4million, and $7.2 million, respectively.

Theweighted average grant-date fair value of options granted was $3.67 in 2006,$5.11 in 2005 and $6.07 in 2004. Our calculations were made using theBlack-Scholes option-pricing model. The fair value of the Company’s stock-basedawards to employees was estimated assuming no expected dividend and thefollowing weighted-average assumptions for fiscal 2006, 2005 and 2004:

| ** **                              | ** ** | **Stock Option Plans** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2006**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life  after vesting (in years) |       | 0.9                              |       | 1.6 |   | 2.3 |   |
| Expected  dividends                     |       | —                           |       | — |   | — |   |
| Risk-free  interest rate                |       | 4.6                              | %          | 4.2 | % | 3.6 | % |
| Volatility                              |       | 57.3                             | %          | 77.1 | % | 82.2 | % |

 

Prior to June 30,2005, the Company used its historical volatility as its basis to estimateexpected volatility. In light of recent accounting guidance related to stockoptions, the Company reevaluated the volatility assumptions used to estimatethe value of employee stock options granted in fiscal 2006. Managementdetermined that historical and implied volatility related to publicly tradedoptions is more reflective of market conditions and a better indicator ofexpected volatility than historical volatility only.

*Restricted StockAwards*

Our restricted stock awards are grants that entitlethe holder to acquire shares of restricted common stock with certain designatedprices or at no cost on a time or performance basis. The shares of restrictedstock cannot be sold, pledged, or otherwise disposed of until the award vestsand any unvested shares may be reacquired by us following the awardees’termination of service. The restricted stock awards typically vest on thefirst, second or third anniversary of the grant date or on a graded vestingschedule over the designated service period with certain conditions andrestrictions. A summary of our unvested restricted stock awards as of June 30,2006 and changes during the fiscal period then ended are presented below.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing tables summarize the activity for our restricted stock awards duringfiscal 2006, 2005 and 2004:

| ** **                               | ** ** | **Restricted Stock Awards  Outstanding** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                         | ** ** | **Weighted** | ** ** |
| ** **                               | ** ** | ** **                                         | ** ** | **Average** | ** ** |
| ** **                               | ** ** | **Number of**                                 | ** ** | **Grant-Date** | ** ** |
| ** **                               | ** ** | **Shares**                                         | ** ** | **Fair Value** | ** ** |
| ** **                               | ** ** | **(In thousands)**                            | ** ** | ** ** | ** ** |
| Nonvested balance  at June 30, 2003 |       |                                               | 256        |   |   |   | $ | 4.50 |   |   |
| Granted                                  |       |                                               | 34         |   |   |   | 6.98 |   |   |
| Vested                                   |       |                                               | (4         | ) |   |   | 2.62 |   |   |
| Forfeited                                |       |                                               | —     |   |   |   | — |   |   |
| Nonvested at  June 30, 2004         |       |                                               | 286        |   |   |   | $ | 4.82 |   |   |
| Granted                                  |       |                                               | —     |   |   |   | — |   |   |
| Vested                                   |       |                                               | (145       | ) |   |   | 4.79 |   |   |
| Forfeited                                |       |                                               | (19        | ) |   |   | 6.29 |   |   |
| Nonvested at  June 30, 2005         |       |                                               | 122        |   |   |   | $ | 4.63 |   |   |
| Granted                                  |       |                                               | 220        |   |   |   | 9.31 |   |   |
| Vested                                   |       |                                               | (122       | ) |   |   | 4.63 |   |   |
| Forfeited                                |       |                                               | (36        | ) |   |   | 9.42 |   |   |
| Nonvested at  June 30, 2006         |       |                                               | 184        |   |   |   | $ | 9.28 |   |   |

 

The intrinsic value of astock-based award is the amount by which its market value exceeds its exerciseprice. The intrinsic value of restricted awards granted during fiscal 2006,2005 and 2004 were $2.0 million, $0 and $0.2 million, respectively. Amortizationof stock compensation expenses for the restricted awards were $0.7 million, $1.0million and $0.3 million for fiscal 2006, 2005 and 2004, respectively.

*Stock RepurchaseProgram*

On August 11, 2005, the Board of Directorsauthorized management to repurchase up to approximately 2.6 million sharespursuant to a repurchase program established in fiscal 2002, adding 2.0 millionshares to the program previously authorized, of which approximately 0.6 millionshares remained available for repurchase as of June 30, 2005. As of June 30,2006, approximately 1.4 million shares remained eligible for repurchase. Therewere approximately 45.7 million shares of Symmetricom common stock outstandingas of June 30, 2006.

During fiscal 2006, werepurchased 1.2 million shares for an aggregate price of approximately $9.7million. Upon termination of some employees, 35,500 shares of restricted stockwere forfeited pursuant to existing agreements.

*Preferred Stock*

We have 500,000 shares of$0.0001 par value preferred stock authorized, of which 200,000 shares have beenreserved for issuance in connection with our preferred stock rights plan. Theright entitles the holder to purchase from the Company one one-thousandth of ashare of Series A Participating Preferred Stock at a price of $72.82.Therights were distributed at the rate of one right for each share of common stockas a 

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

non-taxabledividend and will expire August 2011. The rights will be exercisable onlyin the event that a person or group acquires 15% or more of our outstandingcommon stock.

*Option Repurchase*

On May 28, 2003, we offered to purchase for cashfrom our eligible employees all outstanding stock options with exercise pricesof $8.00 or greater that were granted under the Symmetricom 1999 Employee StockOption Plan (the Symmetricom 1999 Plan) or the Datum Inc. 1994 Incentive StockPlan (the Datum Plan).

Concurrently with this offer, we also offered to oureligible officers to exchange for shares of restricted stock all outstandingoptions with exercise prices equal to or greater than $8.00 granted undereither of the Plans.

At the end of the offer period in June 2003, atotal of 1,962,000 options were cancelled, 252,000 shares of restricted stockwere issued, and $1.3 million was paid in July 2003 and was recorded ascompensation expense during the fourth quarter of fiscal 2003. The sharesrelated to the cancelled options were returned to the pool of shares availablefor the grant of options.

The options exchanged forrestricted stock resulted in a deferred compensation charge of $1.1 million.This deferred charge was reflected on our consolidated financial statements asof June 30, 2004 and was initially amortized over the five-year vestingperiod of the restricted stock. However, the achievement of certain financialresults during fiscal 2005 accelerated the vesting of the restricted stock, andwe recorded a charge for all remaining deferred compensation.

**Note O—BusinessSegment Information**

The Company is organized into five reportablesegments. There are four reportable segments within the Telecom SolutionsDivision: Wireline Products, Wireless/OEM Products, Global Services andSpecialty Manufacturing/Other. The fifth reportable segment is the Timing, Testand Measurement Division. Wireline Products consist principally of DigitalClock Distributors, or DCDs, based on quartz, rubidium and Global PositioningSystem (GPS) technologies. Our Wireline Products provide highly accurate anduninterruptible timing to meet the synchronization requirements oftelecommunication networks. Our OEM base station timing products are designedto deliver stable timing to cellular/PCS base stations through a GPS receiverto capture cesium-based time signals produced by GPS satellites. Our BroadbandNetworking products, which include GoWide, a product that provides a high-bandwidthsolution for medium-sized businesses without access to optical networks, wasreported as a segment in prior periods and now is included in Wireless/OEMProducts due to changes in the management reporting structure. Through ourGlobal Services division, we offer a broad portfolio of services for ourcustomers around the world. The services we offer include system planning,network audits, network monitoring, maintenance, logistics, and installation.Transmission Products and Contract Manufacturing were reported as segments inprior periods, and are now included in Specialty Manufacturing/Other within theTelecom Solutions Division.

The Timing, Test and Measurement products areprecision time and frequency systems that are important to communicationssystems of wireline, wireless, satellite and computer network technologies, forgovernment, power utilities, aerospace, defense, and enterprise markets.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Foreach of our segments, we have separate financial information, including grossprofit amounts, which are evaluated regularly by management in deciding how toallocate resources and in assessing performance. We do not allocate assets orspecific operating expenses to these individual operating segments. Therefore,the segment information reported here includes only net revenue and grossprofit.
|                                                     | ** ** | **Year Ended June 30,**                | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Net revenue:                                        |       |                                                  |       |   |   |   |   |
| Telecom Solutions  Division:                        |       |                                                  |       |   |   |   |   |
| Wireline Products                                   |       | $                                                     | 80,635     |   | $ | 83,129 |   | $ | 71,467 |   |
| Wireless/OEM Products                               |       | 23,893                                                |       | 27,723 |   | 34,617 |   |
| Global Services                                     |       | 12,539                                                |       | 9,712 |   | 8,315 |   |
| Specialty Manufacturing/Other                       |       | 12,100                                                |       | 9,759 |   | 9,537 |   |
| Timing, Test and Measurement Division               |       | 59,044                                                |       | 58,824 |   | 48,911 |   |
| Total net revenue                                   |       | 188,211                                               |       | 189,147 |   | 172,847 |   |
| Cost of sales:                                      |       |                                                  |       |   |   |   |   |
| Telecom Solutions  Division:                        |       |                                                  |       |   |   |   |   |
| Wireline Products                                   |       | 35,427                                                |       | 35,848 |   | 37,084 |   |
| Wireless/OEM Products                               |       | 18,441                                                |       | 19,621 |   | 25,781 |   |
| Global Services                                     |       | 6,205                                                 |       | 5,547 |   | 4,832 |   |
| Specialty Manufacturing/Other                       |       | 9,726                                                 |       | 8,115 |   | 8,168 |   |
| Timing, Test and Measurement Division               |       | 30,354                                                |       | 27,589 |   | 25,545 |   |
| Other cost of sales*                                |       | 5,975                                                 |       | 3,899 |   | 9,773 |   |
| Total cost of sales                                 |       | 106,128                                               |       | 100,619 |   | 111,183 |   |
| Gross profit:                                       |       |                                                  |       |   |   |   |   |
| Telecom Solutions  Division:                        |       |                                                  |       |   |   |   |   |
| Wireline Products                                   |       | 45,208                                                |       | 47,281 |   | 34,383 |   |
| Wireless/OEM Products                               |       | 5,452                                                 |       | 8,102 |   | 8,836 |   |
| Global Services                                     |       | 6,334                                                 |       | 4,165 |   | 3,483 |   |
| Specialty Manufacturing/Other                       |       | 2,374                                                 |       | 1,644 |   | 1,369 |   |
| Timing, Test and Measurement Division               |       | 28,690                                                |       | 31,235 |   | 23,366 |   |
| Other cost of sales*                                |       | (5,975                                                | )          | (3,899 | ) | (9,773 | ) |
| Total gross profit                                  |       | $                                                     | 82,083     |   | $ | 88,528 |   | $ | 61,664 |   |
| Gross margin:                                       |       |                                                  |       |   |   |   |   |
| Telecom Solutions  Division:                        |       |                                                  |       |   |   |   |   |
| Wireline Products                                   |       | 56.1                                                  | %          | 56.9 | % | 48.1 | % |
| Wireless/OEM Products                               |       | 22.8                                                  | %          | 29.2 | % | 25.5 | % |
| Global Services                                     |       | 50.5                                                  | %          | 42.9 | % | 41.9 | % |
| Specialty Manufacturing/Other                       |       | 19.6                                                  | %          | 16.8 | % | 14.4 | % |
| Timing, Test and Measurement Division               |       | 48.6                                                  | %          | 53.1 | % | 47.8 | % |
| Other cost of sales as percentage of total revenue* |       | (3.2                                                  | )%         | (2.1 | )% | (5.7 | )% |
| Total gross  margin                                 |       | 43.6                                                  | %          | 46.8 | % | 35.7 | % |

----

*       Includesamortization of purchased technology, impairment of intangibles and applicableintegration, and restructuring charges.

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Ourexport sales accounted for 29.5%, 35.0%, and 32.0%, of our net revenue infiscal 2006, 2005, and 2004, respectively. The geographical components ofrevenue are as follows:

| ** **        | ** ** | **Year ended June 30,** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States     |       |                                   | 70         | % |   |   | 65 | % |   |   | 68 | % |   |
| International:    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Asia              |       |                                   | 10         | % |   |   | 11 | % |   |   | 12 | % |   |
| Europe            |       |                                   | 11         | % |   |   | 16 | % |   |   | 14 | % |   |
| Canada            |       |                                   | 3          | % |   |   | 2 | % |   |   | 2 | % |   |
| Latin America     |       |                                   | 4          | % |   |   | 5 | % |   |   | 3 | % |   |
| Rest of the world |       |                                   | 2          | % |   |   | 1 | % |   |   | 1 | % |   |

 

No customer accounted for10.0% or more of our net revenue in fiscal 2006, 2005, and 2004.

**Note P—Integrationand Restructuring Charges**

In connection with the acquisitions of AgilentTechnologies’ Frequency and Timing Standards product line, we incurred $1.2million integration charges under the other cost of sales in fiscal 2006. Thisacquisition is included in the Timing, Test, and Measurement division.Management does not expect significant revisions to the purchase priceallocations for the acquired businesses.

In connection with the acquisitions of Datum andTrueTime in fiscal 2003, we initiated an integration plan to consolidate andrestructure certain functions of the pre-acquisition Datum and TrueTimeoperations. During fiscal 2004, a majority of our manufacturing operations wereconsolidated into our facility in Aguadilla, Puerto Rico and we integrated ourIrvine, California manufacturing into our Beverly, Massachusetts facility.Internally, we have consolidated the Broadband Networking Division, which isnow part of our Wireless/OEM Products segment, into the Telecom SolutionsDivision and discontinued the Trusted Time Division. Related to theacquisitions, we accrued approximately $8.3 million of restructuring costs inconnection with loss on several facility leases and employee terminations.These costs have been recognized as a liability assumed in the purchasebusiness combination in accordance with EITF Issue No. 95-3, “Recognitionof Liabilities in Connection with Purchase Business Combinations,” andreflected as an increase to goodwill. In addition, we expensed $1.2 million foradditional lease loss accrual during the fourth quarter of fiscal 2003.

The facilities accruals from the integration planrepresent the lease loss accruals for the Toledo Way facility in Irvine,California, the Westwind Boulevard facility in Santa Rosa, California, and theVia Del Oro facility in San Jose, California. These accruals are presentednet of expected sublease income. The employee terminations were for personnelfrom manufacturing, engineering, sales, marketing and administration from theDatum and TrueTime sites in Beverly, Massachusetts; Austin, Texas; Santa Rosa,California; and Irvine, California.

During fiscal 2004, we had a restructuring plan toreduce headcount primarily in the Telecom Solution Division and to exit ourParker facility in Irvine, California, the Lindbergh Avenue facility inLivermore, California and the Brighton facility in the United Kingdom. Wereported integration and restructuring expenses of $8.2 million in fiscal 2004,of which $5.9 million is in cost of goods sold and $2.3 million is in operatingexpenses. The $8.2 million total expense consisted of  $2.3 million for facility costs,$3.7 million for severance and benefits, and $2.2 million for otherintegration and restructuring charges. The 

82

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

$5.9 million in grosscost of goods sold consists of $2.6 million in severance related costs for theterminated manufacturing employees when the Irvine plant was closed in December 2003and production relocated to Beverly Massachusetts, $2.3 million for lease lossfor the Irvine Parker facility and the Santa Rosa facility, a credit of $0.9million for a contract settlement payment from a major customer for Datumobsolete inventory, and $1.9 million for all other plant shutdown, move costs,and employee relocation. The $2.3 million in operating expenses consists of$1.6 million for severance and related costs for the Irvine shutdown and otherdivision integration, and $0.7 million for land remediation accruals for EPAissues related to a former Datum facility located in Austin, Texas.

In the second quarter of fiscal 2004, we recordedintegration and restructuring charges of $6.8 million in acquisition-relatedcosts, $5.2 million of which was recorded as cost of sales and the remaining$1.6 million as operating expenses. These $5.2 million of cost of goods chargesis primarily for the closure of the former Datum Irvine, Californiamanufacturing facility and move of production to Beverly, Massachusetts. The$1.6 million of operating expense charges relate to divisions restructuringafter the acquisition of Datum and TrueTime.

During fiscal 2006, we incurred and paid $1.2 millionin integration charges for the acquisition of Agilent Technologies’ Frequencyand Timing  Standards product line. Allof the accrued severance expenses from the integration plan have been paid out.The balance of the $0.3 million lease loss accrual for the facilities and $0.6million other liability accrual for the other integration and restructuringcharges as of June 30, 2006 will be paid over the next six years.

Thefollowing tables show the details of the restructuring cost accruals, whichconsist of facilities and severance costs, for the years ended June 30,2006 and 2005. The adjustments are for reclassifications of facility andbenefit accruals: 

| ** **                                                          | ** ** | **Balance at**     | ** ** | ** **    | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|--------------|------------|---------------------|------------|
| ** **                                                          | ** ** | **June 30,**       | ** ** | **Expenses**  | ** ** | ** **   | ** ** | **June 30,**   | ** ** |
| ** **                                                          | ** ** | **2003**                | ** ** | **Additions** | ** ** | **Payments** | ** ** | **2004**            | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Facilities  (October 2002 to June 2003)                   |       |                    | $          | 2,165         |       |         |       | $                   | 306        |   |   |   | $ | (1,208 | ) |   |   | $ | 1,624 |   |   |
| Facilities  (fiscal 2004)                                           |       |                    | —     |          |       |         | 1,643      |                |       |   | (315 | ) |   |   | 1,328 |   |   |
|                                                                |       |                    | 2,165      |          |       |         | 1,949      |                |       |   | (1,523 | ) |   |   | 2,952 |   |   |
| Severance and benefits (October 2002 to  June 2003)       |       |                    | 886        |          |       |         | —     |                |       |   | (924 | ) |   |   | — |   |   |
| Severance and  benefits (fiscal 2004)                               |       |                    | —     |          |       |         | 3,697      |                |       |   | (3,682 | ) |   |   | 15 |   |   |
|                                                                | ** ** |                    | 886        |          |       |         | 3,697      |                |       |   | (4,606 | ) |   |   | 15 |   |   |
| Total severance and facilities                                      |       |                    | 3,051      |          |       |         | 5,646      |                |       |   | (6,129 | ) |   |   | 2,967 |   |   |
| All other  integration and restructuring changes (fiscal 2004) |       |                    | —     |          |       |         | 2,143      |                |       |   | (1,443 | ) |   |   | 700 |   |   |
| Total                                                               |       |                    | $          | 3,051         |       |         |       | $                   | 7,789      |   |   |   | $ | (7,572 | ) |   |   | $ | 3,667 |   |   |

 

83

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**SYMMETRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                                     | ** ** | **Balance at**     | ** ** | ** **    | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|--------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **June 30,**       | ** ** | **Expense**   | ** ** | ** **   | ** ** | **June 30,**   | ** ** |
| ** **                                                     | ** ** | **2004**                | ** ** | **Additions** | ** ** | **Payments** | ** ** | **2005**            | ** ** |
| ** **                                                     | ** ** | **(in thousands)** | ** ** |
| Facilities  (October 2002 to June 2003)              |       |                    | $          | 1,624         |       |         |       | $                   | —     |   |   |   | $ | (1,080 | ) |   |   | $ | 544 |   |   |
| Facilities  (fiscal 2004)                                      |       |                    | 1,328      |          |       |         | —     |                |       |   | (926 | ) |   |   | 402 |   |   |
| Severance and  benefits (fiscal 2004)                          |       |                    | 15         |          |       |         | —     |                |       |   | (15 | ) |   |   | — |   |   |
| Total severance and facilities                                 |       |                    | 2,967      |          |       |         | —     |                |       |   | (2,021 | ) |   |   | 946 |   |   |
| All other  integration and restructuring changes (fiscal 2004) |       |                    | 700        |          |       |         | —     |                |       |   | — |   |   |   | 700 |   |   |
| Total                                                          |       |                    | $          | 3,667         |       |         |       | $                   | —     |   |   |   | $ | (2,021 | ) |   |   | $ | 1,646 |   |   |

 

| ** **                                                     | ** ** | **Balance at**     | ** ** | ** **    | ** ** | ** **   | ** ** | **Balance at** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|--------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **June 30,**       | ** ** | **Expense**   | ** ** | ** **   | ** ** | **June 30,**   | ** ** |
| ** **                                                     | ** ** | **2005**                | ** ** | **Additions** | ** ** | **Payments** | ** ** | **2006**            | ** ** |
| ** **                                                     | ** ** | **(in thousands)** | ** ** |
| Facilities  (October 2002 to June 2003)              |       |                    | $          | 544           |       |         |       | $                   | —     |   |   |   | $ | (544 | ) |   |   | $ | — |   |   |
| Facilities  (fiscal 2004)                                      |       |                    | 402        |          |       |         | —     |                |       |   | (148 | ) |   |   | 254 |   |   |
| Total facilities                                               |       |                    | 946        |          |       |         | —     |                |       |   | (692 | ) |   |   | 254 |   |   |
| All other  integration and restructuring changes (fiscal 2004) |       |                    | 700        |          |       |         | —     |                |       |   | (122 | ) |   |   | 578 |   |   |
| All other  integration and restructuring changes (fiscal 2006) |       |                    | —     |          |       |         | 1,154      |                |       |   | (1,154 | ) |   |   | — |   |   |
| Total                                                          |       |                    | $          | 1,646         |       |         |       | $                   | 1,154      |   |   |   | $ | (1,968 | ) |   |   | $ | 832 |   |   |

 

**Note Q—SubsequentEvents**

*Tax-Free Reorganizationof Symmetricom Puerto Rico Inc. into Symmetricom Puerto Rico Ltd. on July 11, 2006*

On July 2, 2006, the federal tax benefitsavailable to Symmetricom Puerto Rico Inc. under Section 936 of theInternal Revenue Code expired.

On July 11, 2006, Symmetricom Puerto Rico Inc.moved its place of legal organization from Delaware to Bermuda underthe name to Symmetricom Puerto Rico Ltd. in a tax-free reorganization.Symmetricom’s board of directors had previously approved a plan of indefinite reinvestment ofSymmetricom Puerto Rico Ltd.’s future earnings. Pursuant to theplan, Symmetricom Puerto Rico Ltd.’s future earnings will not berepatriated back to Symmetricom Inc., future earnings of SymmetricomPuerto Rico Ltd. will be available for international investment andexpansion, and Symmetricom will not be required to provide U.S. taxes onSymmetricom Puerto Rico Ltd.’s earnings.

The Company anticipates nosignificant changes to business operations stemming from the tax-free  reorganization of  Symmetricom Puerto Rico Ltd. However, if  Symmetricom’s management changes the plan ofindefinite reinvestment, U.S. taxes would need to be provided on theSymmetricom Puerto Rico Ltd. earnings that had been previously excluded fromU.S. tax. Symmetricom Puerto Rico Ltd. has applied to the Puerto Rico Treasuryfor a renewed tax exemption grant.

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**Item 9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure*

Not applicable.

**Item 9A.**                *Controls and Procedures*

*Evaluation ofDisclosure Controls and Procedures*

The Company’s management,with the participation of the Company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) as of the end of the period covered by this report. Based onsuch evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of such period, the Company’sdisclosure controls and procedures are effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act.

*Changes in InternalControl Over Financial Reporting*

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) during the most recent fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

*Management’s Reporton Internal Control Over Financial Reporting*

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act. Under the supervision and with the participation of theCompany’s management, including our principal executive officer and principalfinancial officer, the Company conducted an evaluation of the effectiveness ofits internal control over financial reporting based on criteria established inthe framework in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission. Based on thisevaluation, the Company’s management concluded that its internal control overfinancial reporting was effective as of June 30, 2006.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risks that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s independentregistered public accounting firm has audited management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as of June 30,2006 as stated in their report.

**Item 9B.**               *Other Information*

None.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofSymmetricom, Inc.San Jose, California

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that Symmetricom, Inc. and its subsidiaries(the “Company”) maintained effective internal control over financial reportingas of June 30, 2006, based on the criteria established in *Internal Control — Integrated Framework* issued by the Committeeof Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment, and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provide areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financial reportingto future periods are subject to the risk that the controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as of June 30,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of June 30, 2006,based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet and the related consolidated statements of operations,stockholders’ equity and comprehensive income and cash flows and financialstatement schedule as of and for the year ended June 30, 2006 of theCompany and our report dated September 12, 2006 expressed an unqualifiedopinion on those financial statements and the financial statement schedule andincluded an explanatory paragraph regarding the adoption of Statement ofFinancial Accounting Standards No. 123(R), *Share BasedPayment.*

/s/ DELOITTE & TOUCHE LLP

San Jose, CaliforniaSeptember 12, 2006

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**PART III**

**Item 10.**                 *Directors and Executive Officers of the Registrant*

(a)           Executive Officers

See the section entitled “Executive Officers ofSymmetricom” in Part I of this report.

(b)          Directors

The information required by this item is incorporatedby reference from the information under the caption “Election of Directors—Nominees”contained in the Company’s Proxy Statement to be filed with the Securities andExchange Commission (the “SEC”) in connection with the solicitation of proxiesfor the Company’s 2006 Annual Meeting of Shareholders to be held on October 26,2006 (the “Proxy Statement”).

(c)           Section 16(a) BeneficialOwnership Reporting Compliance

Section 16(a) of the Securities Exchange Actof 1934, as amended (the “Exchange Act”), requires a company’s directors,officers and beneficial owners of more than 10% of any class of equitysecurities of the company registered pursuant to section 12 of the Exchange Actto file with the SEC- initial reports of beneficial ownership and reports ofchanges in ownership of Common Stock and other equity securities of Symmetricomregistered pursuant to section 12 of the Exchange Act. This information iscontained in the section called “Section 16(A) Beneficial OwnershipReporting Compliance” in the Proxy Statement and is incorporated herein byreference.

(d)          Code of Ethics

We have adopted a writtencode of ethics that applies to all of our employees and to our Board ofDirectors. A copy of the code is available on our website at *http://www.symmetricom.com* and is attached as an exhibit tothis report.

**Item 11.**                 *Executive Compensation*

The information requiredby this item is incorporated by reference from the information under thecaptions “Election of Directors—Nominees,” “Executive Officer Compensation,” “Electionof Directors—Director Compensation,” and “Certain Transactions” contained inthe Proxy Statement.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholders Matters*

The information requiredby this item is incorporated by reference from the information under thecaption “Other Information—Share Ownership by Principal Stockholders andManagement” contained in the Proxy Statement.

**Item 13.**                 *Certain Relationships and Related Transactions*

The information requiredby this item is incorporated by reference from the information under thecaption “Certain Transactions” contained in the Proxy Statement.

**Item 14.**                 *Principal Accounting Fees and Services*

The information required by this item is included in “Ratificationof Appointment of Registered Public Accounting Firm of the Company” in ourProxy Statement.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)   *Financial Statements andFinancial Statement Schedule*

*1*.   FinancialStatements.*  *Referenceis made to the Index to Consolidated Statements of Symmetricom, Inc. underItem 8 of Part II hereof.

*2*.   Financial Statement Schedules.   Thefollowing financial statement schedule of Symmetricom for the years ended June 30,2006, 2005, and 2004, is filed as part of this report on Form 10-Kand should be read in conjunction with the financial statements: Schedule II—Valuationand Qualifying Accounts and Reserves. All other schedules have been omittedbecause they are not applicable, not required, or the required information isincluded in the Consolidated Financial Statements or notes thereto.

*3*.   Exhibits.*  *See Item 15(b) below. Eachmanagement contract or compensatory plan or arrangement required to be filedhas been identified.

(b)   *Exhibits*

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Description of Exhibits** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| 2.1         |       | Agreement and Plan of Merger dated May 22,  2002, among the Registrant, Datum Inc., a Delaware corporation, and Dublin  Acquisition Subsidiary, Inc., a Delaware corporation (incorporated by  reference from Exhibit 2.1 to the Registrant’s current report on  Form 8-K filed May 24, 2002).                                                                                                                                                                 |
|        |       | The following Exhibits and schedules to the  Agreement and Plan of Merger have been omitted. The Registrant will furnish  copies of the omitted schedules and Exhibits to the Commission upon request:                                                                                                                                                                                                                                                                                       |
|        |       | Company Disclosure Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |       | Parent Disclosure Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |       | Schedule 1.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       | Schedule 2.2(d) (if applicable)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       | Exhibit A-1 Form of Support  Agreement—Company                                                                                                                                                                                                                                                                                                                                                                                                                                |
|        |       | Exhibit A-2 Form of Support  Agreement—Parent                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       | Exhibit B Form of Lockup Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       | Exhibit C Form of Affiliate Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.2         |       | Agreement and Plan of  Merger, dated January 3, 2002, among the Registrant and  Symmetricom, Inc. a California corporation (incorporated by reference  from Exhibit 2.1 to the Registrant’s current report on Form 8-K  filed January 9, 2002).                                                                                                                                                                                                                |
| 2.3         |       | Agreement and Plan of  Merger, dated as of March 27, 2002, together with the First Amendment  thereto dated as of June 26, 2002, among the Registrant,  TrueTime, Inc. and Sco-TRT Acquisition, Inc. (incorporated by  reference from Exhibit 2.1 to the Registrant’s current report on  Form 8-K filed April 1, 2002 and Annex B to the Registrant’s  registration statement on Form S-4 (file no. 333-92392)  filed July 15, 2002). |
|        |       | The following Exhibits and schedules to the  Agreement and Plan of Merger have been omitted. The Registrant will furnish  copies of the omitted schedules and Exhibits to the Commission upon request:                                                                                                                                                                                                                                                                                       |
|        |       | Disclosure Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |       | Schedule 2.2(d) (if applicable)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       | Schedule 7.13(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|        |       | Exhibit C—Form of Extended Employment  Agreement                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |       | Exhibit D—Form of Three Month Employment  Agreement                                                                                                                                                                                                                                                                                                                                                                                                                           |

88

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| 3.1(i)  |   | Amended and Restated Certificate of Incorporation of  the Registrant (incorporated by reference from Exhibit 3.1 to the  Registrant’s current report on Form 8-K filed January 9, 2002).                                                                                                                                                 |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(ii) |   | Amended and Restated  Bylaws of the Registrant (incorporated by reference from Exhibit 3.1 to  the Registrant’s current report on Form 8-K filed August 10,  2005).                                                                                                                                                                           |
| 4.1     |   | Form of Common  Stock Certificate (incorporated by reference from Exhibit 4.1 to the  Registrant’s annual report on Form 10-K filed August 30,  2002).                                                                                                                                                                                   |
| 4.2     |   | Rights Agreement dated  as of August 9, 2001 between the Registrant and Mellon Investor Services  (incorporated by reference from Exhibit 4.1 to the Registrant’s  registration statement on Form 8-A filed August 9, 2001).                                                                                                             |
| 4.3     |   | Indenture, dated as of  June 8, 2005, between the Registrant and Wells Fargo Bank, National  Association, as Trustee (incorporated by reference from Exhibit 4.1 to  the Registrant’s current report on the Form 8-K filed June 8,  2005).                                                                                               |
| 4.4     |   | Form of 31⁄4%  Contingent Convertible Subordinated Notes due 2025 (incorporated by reference  to Exhibit A to Exhibit 4.3 hereof).                                                                                                                                                                                                              |
| 4.5     |   | Registration Rights  Agreement, dated as of June 8, 2005, between the Registrant and the  Initial Purchasers (incorporated by reference from Exhibit 4.3 to the  Registrant’s current report on the Form 8-K filed June 8,  2005).                                                                                                       |
| 10.1#   |   | 1994 Employee Stock  Purchase Plan, as amended through July 27, 1988 (incorporated by  reference from the Registrant’s 1998 proxy statement filed October 5,  1998).                                                                                                                                                                               |
| 10.2#   |   | 1999 Director Stock  Option Plan, as amended through December 28, 2005 and forms of  agreements thereunder (incorporated by reference from Exhibit 99.3 to  the Registrant’s 1999 proxy statement filed September 23, 1999 and  Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q  filed February 13, 2001). |
| 10.3#   |   | Amendment to the  Symmetricom, Inc. 1999 Director Stock Option Plan effective  December 28, 2005 and form of option agreement thereunder (incorporated  by reference from Exhibits 10.1 and 10.2 to the Registrant’s quarterly report  on Form 10-Q filed February 8, 2006).                                                             |
| 10.4#   |   | 1999 Employee Stock  Option Plan, as amended through October 23, 2001, and forms of  agreements thereunder (incorporated by reference from Exhibit 99.1 to  the Registrant’s proxy statement filed September 23, 1999 and  Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q  filed February 13, 2001).      |
| 10.5#   |   | Amendment to the  Symmetricom, Inc. 1999 Employee Stock Option Plan effective May 28,  2003 (incorporated by reference from Exhibit (d)(6) to the  Registrant’s tender offer statement on Schedule TO, filed May 28, 2003).                                                                                                         |
| 10.6#   |   | 2002 Employee Stock Plan  (incorporated by reference from Exhibit 4.1 to Registrant’s registration  statement on Form S-8 (file no. 333-97599) filed  August 2, 2002).                                                                                                                                                                        |
| 10.7    |   | Lease Agreement by and  between the Registrant and Nexus Equity, Inc. dated June 10, 1996  (incorporated by reference from Exhibit 10.14 to the Registrant’s annual  report on Form 10-K filed September 17, 1996).                                                                                                                 |

89

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| 10.8   |   | First Amendment to Lease  by and between the Registrant and Nexus Equity II LLC, as successor in  interest to Nexus Equity, Inc., dated November 18, 2005, effective  as of October 27, 2005 (incorporated by reference from Exhibit 10.2  to the Registrant’s current report on Form 8-K filed  November 22, 2005).       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9   |   | Form of Indemnification  Agreement (incorporated by reference from Exhibit 10.6 to the  Registrant’s annual report on Form 10-K filed August 30,  2002).                                                                                                                                                                             |
| 10.10# |   | Symmetricom, Inc.  Deferred Compensation Plan effective October 1, 1999 (incorporated by  reference from Exhibit 10.4 to the Registrant’s quarterly report on  Form 10-Q filed May 15, 2001).                                                                                                                              |
| 10.11# |   | Symmetricom, Inc.  Senior Executive Loan Plan as adopted January 19, 2001 (incorporated by  reference from Exhibit 10.1 to the Registrant’s quarterly report on  Form 10-Q filed May 15, 2001).                                                                                                                            |
| 10.12# |   | Promissory Note Secured  by Deed of Trust issued by Thomas W. Steipp to the Registrant dated  March 24, 1998 (incorporated by reference from Exhibit 10.22 to the  Registrant’s annual report on Form 10-K filed September 24,  1998).                                                                                               |
| 10.13# |   | Promissory Note issued  by Thomas W. Steipp to the Registrant dated January 25, 1999  (incorporated by reference from Exhibit 10.28 to the Registrant’s  quarterly report on Form 10-Q filed February 4, 1999).                                                                                                                      |
| 10.14# |   | Promissory Note Secured  by Deed of Trust issued by Thomas W. Steipp to the Registrant dated  January 25, 1999 (incorporated by reference from Exhibit 10.29 to  the Registrant’s quarterly report on Form 10-Q filed  February 4, 1999).                                                                                            |
| 10.15# |   | Rider to Deed of Trust  by Thomas W. Steipp and Debra L. Steipp, as Trustor, to First American Title  Insurance Company, as Trustee, for the benefit of Symmetricom, Inc., as  Beneficiary (incorporated by reference from Exhibit 10.30 to the  Registrant’s quarterly report on Form 10-Q filed February 4,  1999).                |
| 10.16# |   | Employment Agreement  between the Registrant and Thomas W. Steipp dated July 1, 2001  (incorporated by reference from Exhibit 10.18 to the Registrant’s annual  report on Form 10-K filed September 20, 2001).                                                                                                                       |
| 10.17# |   | Change of Control  Retention Agreement between the Registrant and Thomas W. Steipp dated  July 1, 2001 (incorporated by reference from Exhibit 10.19 to the  Registrant’s annual report on Form 10-K filed September 20,  2001).                                                                                                     |
| 10.18# |   | Executive Transition  Employment Agreement between the Company and Frederick B. Stroupe dated  June 9, 2005 (incorporated by reference from Exhibit 10.1 to the  Registrant’s current report on Form 8-K filed June 13, 2005).                                                                                                       |
| 10.19# |   | Form of Executive  Severance Benefits Agreement, dated May 22, 2006, between the Company and  each of William Slater, Nancy J. Shemwell, Dale A. Pelletier, Bruce K.  Bromage and William H. Minor, Jr. (incorporated by reference from  Exhibit 10.1 to the Registrant’s current report on Form 8-K  filed May 23, 2006). |
| 10.20# |   | Form of Restricted  Stock Award Agreement (incorporated by reference from Schedule A to  Exhibit (a)(1)(ii) to the Registrant’s tender offer statement on  Schedule TO, filed May 28, 2003).                                                                                                                                    |

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| 10.21# |   | Form of Restricted  Stock Award Agreement under Symmetricom, Inc. 1999 Employee Stock Option  Plan, amended effective August 4, 2005.                                                                                                                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22  |   | Standard Industrial  Lease between Manor Development Co. and TrueTime, Inc. (incorporated  herein by reference from Exhibit 10.9 to TrueTime, Inc.’s  Registration Statement on Form S-1, File No. 333-90269).                                                                                                                                                     |
| 10.23  |   | Standard  Industrial/Commercial Single-Tenant Lease—Net, dated as of January 24,  2000, by and between Cooperhill Development Corporation and  TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to  TrueTime, Inc.’s quarterly report on Form 10-Q for the  quarter ended March 30, 2000).                                                    |
| 10.24  |   | Amendment to the  Standard Industrial/Commercial Single-Tenant Lease—Net, dated as of  January 24, 2000, by and between Cooperhill Development Corporation and  TrueTime, Inc. (incorporated by reference from Exhibit 10.7 to  TrueTime, Inc.’s annual report on Form 10-K for the fiscal  year ended September 30, 2000).                              |
| 10.25  |   | Standard Industrial  Sublease dated as of December 11, 2000 by and between Innovadyne  Technologies, Inc. and TrueTime, Inc. (incorporated by reference  from Exhibit 10.1 to TrueTime, Inc.’s quarterly report on  Form 10-Q for the quarterly period ended December 31, 2000).                                                                    |
| 10.26  |   | Lease Intended as  Security dated as of April 30, 2001 by and between Bank of America and  TrueTime, Inc. (incorporated by reference from Exhibit 10.1 to  TrueTime, Inc.’s quarterly report on Form 10-Q for the  quarterly period ended June 30, 2001).                                                                                                     |
| 10.27# |   | Datum Inc.’s 1984 Stock  Option Plan, as amended to date (incorporated by reference from Datum Inc.’s  Registration Statement on Form S-8, File Nos. 2-96564, 33-10035  and 33-41709).                                                                                                                                                                                            |
| 10.28# |   | Datum Inc.’s Savings and  Retirement Plan, as amended to date (incorporated by reference from  Exhibit 10.19 to Datum Inc.’s annual report on Form 10-K for  the fiscal year ended December 31, 1991).                                                                                                                                                                  |
| 10.29# |   | Datum Inc.’s 1994 Stock  Incentive Plan (incorporated by reference from Datum Inc.’s Registration  Statement on Form S-8, File No. 33-79772).                                                                                                                                                                                                                                |
| 10.30# |   | Amendment to Datum  Inc.’s 1994 Stock Incentive Plan, effective March 17, 1995 (incorporated  by reference from Exhibit 10.29.1 to Datum Inc.’s annual report on  Form 10-K for the fiscal year ended December 31, 1994).                                                                                                                                          |
| 10.31# |   | Second Amendment to  Datum Inc.’s 1994 Stock Incentive Plan, effective June 5, 1997  (incorporated by reference to Datum Inc.’s Registration Statement on  Form S-8, File No. 33-79772).                                                                                                                                                                                |
| 10.32  |   | Lease Agreement dated  September 15, 1986 by and between the Irvine Company and Efratom  Division, Ball Corporation, for Efratom Time and Frequency  Products, Inc.’s facility at 3 Parker, Irvine, California  (incorporated by reference from Exhibit 10.32 to Datum Inc.’s annual  report on Form 10-K for the fiscal year ended December 31,  1994). |
| 10.33  |   | First Amendment to Lease  dated March 15, 1995, between the Irvine Company and Efratom Division,  Ball Corporation for Lease Agreement dated September 15, 1986  (incorporated by reference from Exhibit 10.32 to Datum Inc.’s annual  report on Form 10-K for the fiscal year ended December 31,  1994).                                                          |

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| 10.34  |   | Industrial Lease dated  May 11, 1995 between the Irvine Company and Datum Inc. (incorporated by  reference from Exhibit 10.34 to Datum Inc.’s quarterly report on  Form 10-Q for the quarterly period ended June 30, 1995).                                                                                                                                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.35  |   | Amendment to Lease dated  May 11, 1995 between the Irvine Company and Datum Inc. (incorporated by  reference from Exhibit 10.32 to Datum Inc.’s quarterly report on  Form 10-Q for the quarterly period ended June 30, 1995).                                                                                                                                                                                                                                                                         |
| 10.36  |   | Second Amendment to  Lease dated May 11, 1995 for 3 Parker (incorporated by reference from  Exhibit 10.32.3 to Datum Inc.’s quarterly report on Form 10-Q  for the quarterly period ended June 30, 1995).                                                                                                                                                                                                                                                                                             |
| 10.37# |   | Service Agreement, by  and between the Company and Eric van der Kaay (incorporated by reference from  Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q  for the quarterly period ended March 30, 2003).                                                                                                                                                                                                                                                                                      |
| 10.38  |   | Agreement with Lucent  Technologies, Inc., between Datum Inc. and Lucent  Technologies, Inc. signed July 2, 1998 (incorporated by reference  to Exhibit 10.45 to Datum Inc.’s quarterly report on Form 10-Q  for the quarterly period ended September 30, 1998; portions of this  exhibit are omitted and were filed separately with the Commission pursuant to  the company’s application requesting confidential treatment under  Rule 406 of the Securities Act of 1933). |
| 10.39  |   | Loan and Trust  Agreement, dated May 1, 2001, among Massachusetts Development Finance  Agency, Frequency and Time Systems, Inc. and Wells Fargo Brokerage  Services, LLC (incorporated by reference from Exhibit 10.57 to Datum  Inc.’s quarterly report on Form 10-Q for the quarterly period  ended June 30, 2001).                                                                                                                                                                            |
| 10.40  |   | Bond Purchase Agreement  dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency  and Time Systems, Inc. and Wells Fargo Bank Minnesota, National  Association, as trustee (incorporated by reference from Exhibit 10.58 to  Datum Inc.’s quarterly report on Form 10-Q for the quarterly  period ended June 30, 2001).                                                                                                                                                          |
| 10.41  |   | Remarketing Agreement,  dated May 1, 2001, among Wells Fargo Brokerage Services, LLC, Frequency  and Time Systems, Inc. and Wells Fargo Bank Minnesota, National  Association, as trustee (incorporated by reference to Exhibit 10.59 to  Datum Inc.’s quarterly report on Form 10-Q for the quarterly  period ended June 30, 2001).                                                                                                                                                             |
| 10.42  |   | Credit Agreement dated  May 1, 2004, between the Registrant and Wells Fargo Bank, National  Association (incorporated by reference from Exhibit 10.39 to the  Registrant’s annual report on Form 10-K filed September 12,  2005).                                                                                                                                                                                                                                                                     |
| 10.43  |   | Revolving Line of Credit  Note dated June 1, 2005, between the Registrant and Wells Fargo Bank,  National Association (incorporated by reference from Exhibit 10.40 to  the Registrant’s annual report on Form 10-K filed  September 12, 2005).                                                                                                                                                                                                                                                       |
| 10.44  |   | First Amendment to  Credit Agreement dated June 1, 2005, between the Registrant and Wells  Fargo Bank, National Association (incorporated by reference from  Exhibit 10.41 to the Registrant’s annual report on Form 10-K  filed September 12, 2005).                                                                                                                                                                                                                                                 |
| 10.45  |   | Second Amendment to  Credit Agreement dated August 19, 2005, between the Registrant and Wells  Fargo Bank, National Association.                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.46  |   | Third Amendment to  Credit Agreement dated July 3, 2006, between the Registrant and Wells  Fargo Bank, National Association.                                                                                                                                                                                                                                                                                                                                                                                              |

92

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| 14   |   | Code of Ethics (incorporated by reference to  Exhibit 14.1 of the Registrant’s current report on Form 8-K  filed August 10, 2005). |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1 |   | Subsidiaries of the  Registrant.                                                                                                                       |
| 23.1 |   | Consent of Independent  Registered Public Accounting Firm.                                                                                             |
| 24.1 |   | Power of Attorney (see  page 95 of this Form 10-K).                                                                                          |
| 31   |   | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                 |
| 32   |   | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                         |

----

#                 Managementcontract or compensatory plan or arrangement

*(c)**   *Financial Statement Schedules**

See Item 15(a)(2) above.

93

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**SCHEDULE IISYMMETRICOM, INC.VALUATION AND QUALIFYING ACCOUNTS AND RESERVES(In thousands)**

| ** **                                   | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **              | ** ** | ** **                | ** ** |
|----------------------------------------------|------------|-----------------------|------------|---------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** **              | ** ** | **Balance at**       | ** ** |
| ** **                                   | ** ** | **Year**              | ** ** | **Expenses**        | ** ** | **Deductions (1)** | ** ** | **End of Year** | ** ** |
| Year ended June 30,  2006:              |       |                  |       |                |       |                    |       |                      |       |   |   |   |   |   |   |   |   |
| Accrued warranty expense                     |       |                  | $          | 3,338               |       |                    |       | $                         | 2,886      |   |   |   | $ | 2,677 |   |   |   | $ | 3,547 |   |   |
| Allowance for doubtful accounts              |       |                  | 874        |                |       |                    | 173        |                      |       |   | 159 |   |   |   | 888 |   |   |
| Allowance for excess and obsolete inventory  |       |                  | 4,913      |                |       |                    | 1,743      |                      |       |   | 1,740 |   |   |   | 4,916 |   |   |
| Year ended June 30,  2005:              |       |                  |       |                |       |                    |       |                      |       |   |   |   |   |   |   |   |   |
| Accrued warranty expense                     |       |                  | 3,194      |                |       |                    | 2,546      |                      |       |   | 2,402 |   |   |   | 3,338 |   |   |
| Allowance for doubtful accounts              |       |                  | 763        |                |       |                    | 295        |                      |       |   | 184 |   |   |   | 874 |   |   |
| Allowance for excess and obsolete inventory  |       |                  | 5,617      |                |       |                    | 934        |                      |       |   | 1,638 |   |   |   | 4,913 |   |   |
| Year ended June 30,  2004:              |       |                  |       |                |       |                    |       |                      |       |   |   |   |   |   |   |   |   |
| Accrued warranty expense                     |       |                  | 4,021      |                |       |                    | 2,059      | (2)                       |       |   | 2,886 |   |   |   | 3,194 |   |   |
| Allowance for doubtful accounts              |       |                  | 974        |                |       |                    | 26         |                      |       |   | 237 |   |   |   | 763 |   |   |
| Allowance for  excess and obsolete inventory |       |                  | $          | 6,532               |       |                    |       | $                         | 909        |   |   |   | $ | 1,824 |   |   |   | $ | 5,617 |   |   |

----

(1)          Deductionsrepresent costs charged or amounts written off against the reserve orallowance.

(2)          Amountincludes balances from Datum and TrueTime at acquisition.

94

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                                |       | SYMMETRICOM, INC. |
|--------------------------------|------------|------------------------|
| Date: September 13,  2006 |       | By:                    |   | /S/ THOMAS W. STEIPP |
|                           | ** ** | ** **             | ** ** | **Thomas  W. Steipp  Chief Executive Officer  (Principal Executive Officer)** |

 

KNOW ALL MEN BY THESE PRESENTS, that each person whosesignature appears below constitutes and appoints Thomas W. Steipp and WilliamSlater, and each of them, his true and lawful attorneys-in-fact, each with fullpower of substitution, for him or her in any and all capacities, to sign anyamendments to this report on Form 10-K and to file the same, withexhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, hereby ratifying and confirming all thateach of said attorneys-in-fact or their substitute or substitutes may do orcause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

|                                    | **Signatures** | ** **                                                                                            | ** ** | ** **              | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------------------|----------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------|-----------|------------|------------|------------|----------|------------|
| /S/ THOMAS W. STEIPP          |           | Chief Executive  Officer (Principal                                                                   |       | September 13, 2006 |
| **Thomas W. Steipp**               |           | Executive  Officer) and Director                                                                      |       |                    |
| /S/ WILLIAM SLATER            |           | Executive Vice  President Finance and                                                                 |       | September 13, 2006 |
| **William Slater**                 |           | Administration,  Chief Financial Officer, and Secretary (Principal Financial and Accounting  Officer) |       |                    |
| /S/ ROBERT T. CLARKSON        |           | Chairman of the  Board                                                                                |       | September 13, 2006 |
| **Robert T. Clarkson**             |           |                                                                                                  |       |                    |
| /S/ ALFRED BOSCHULTE          |           | Director                                                                                              |       | September 13, 2006 |
| **Alfred Boschulte**               |           |                                                                                                  |       |                    |
| /S/ ELIZABETH A. FETTER       |           | Director                                                                                              |       | September 13, 2006 |
| **Elizabeth A. Fetter**            |           |                                                                                                  |       |                    |
| /S/ ROBERT M.  NEUMEISTER JR. |           | Director                                                                                              |       | September 13, 2006 |
| **Robert M. Neumeister Jr.**       |           |                                                                                                  |       |                    |
| /S/ RICHARD W. OLIVER         |           | Director                                                                                              |       | September 13, 2006 |
| **Richard W. Oliver**              |           |                                                                                                  |       |                    |
| /S/ RICHARD N. SNYDER         |           | Director                                                                                              |       | September 13, 2006 |
| **Richard N. Snyder**              |           |                                                                                                  |       |                    |
| /S/ ROBERT J. STANZIONE       |           | Director                                                                                              |       | September 13, 2006 |
| **Robert  J. Stanzione**           |           |                                                                                                  |       |                    |

 

 

95

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